PHILIPPI NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
Vol. XXVI No.1
Editor's Notes 2007 is indeed a notable year for the Philippines in terms of economic growth. In fact, the GDP growth surpassed the 6.1–6.7 percent government economic growth target (DRN January-February 2007). But the question that remains to be answered is whether this performance can be sustained in 2008. PIDS President Dr. Josef T. Yap provides another forecast in this issue where his discussion on what’s in store for the Philippine economy in 2008, however, focuses more on key economic issues instead of the usual detailed discussion of performance and prospects. One such issue is the appreciation of the peso vis-à-vis the US dollar and its impact on remittances from overseas Filipino workers. Another is the phenomenon of rising profit shares and falling wage shares—despite increases in profits, more Filipinos are still unable to find work. This also relates to the poor record of investments which, as reported by the Asian Development Bank, is affected by governance issues, corruption, and crime and security concerns. Also in this issue, we feature a study conducted by the Asia Pacific Policy Center as part of the preparatory activities for the 6th Philippine Human Development Report. It stresses the need to further disaggregate the provincial-level data with respect to the promotion of human development (HD). The paper argues that since HD-related programs are being formulated and implemented at the municipality/city level, this is the level where it should be monitored. DRN
What's Inside 9
Achieving human development by mobilizing partners in the countryside: lessons learned
15 8th PIDS Corner opens in Cavite
DEVELOPMENT RESEARCH NEWS January - February 2008
ISSN 0115-9097
What's in store for the Philippine economy in 2008? Josef T. Yap*
P
hilippine GDP growth surged to its highest level in 31 years, recording 7.3 percent in 2007 (Table 1). The much anticipated breakthrough was achieved as economic growth crossed the 7 percent threshold. Election spending, government infrastructure projects, and personal consumption expenditure—underpinned by remittances from overseas Filipinos— were the primary sources of economic activity. However, it remains to be seen whether this performance can be sustained in 2008, not to mention the medium term. Several factors will lead to a likely economic downturn in 2008. One, the global economy will be buffeted by a drop in output growth of industrialized countries, the highlight of which is the pending US recession. Persistent high fuel prices, the fallout from the US subprime crisis, and jittery financial markets are the major contributors to the current global economic slowdown. Two, the stimulus from the 2007 elections and government infrastructure program will decline. And three, the low investment rate during the past decade will take its toll on production capacity. The format of this year’s Outlook will be slightly different. Instead of discussing economic performance and prospects in detail, some key economic issues will be highlighted. The potential impact of these issues on the 2008 forecast will be referred to when relevant. * President, Philippine Institute for Development Studies (PIDS). Mr. Michael R. Cabalfin contributed to the section on the global economy while Ms. Fatima Lourdes E. del Prado contributed to the section on trickling down of economic growth. The usual disclaimer applies.
DEVELOPMENT RESEARCH NEWS
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Economic highlights in 2007 Apart from aggregate GDP growth, the most notable development in 2007 is arguably the rise in the ratio of fixed investment to GDP after a continuous decline since 2000. From a low of 13.8 percent in 2006, the ratio recovered to 14.2 percent in 2007. However, this was largely due to an 18 percent surge in real construction expenditures, which in turn was dominated by public spending. Gross value added at constant prices in the public construction sector grew by 30.8 percent in 2007 compared to only 10.2 percent in the private sector. This reflects the ambitious infrastructure program of the government that was crafted in 2006. Investment in durable equipment grew by only 2.7 percent, indicating that businessmen and entrepreneurs are still reluctant to expand their production capacity. Sluggish investment has also resulted in a further fall in interest rates. The 91-day Treasury bill rate averaged only 3.4 percent in 2007, the third successive year of decline. The major downside to the robust economic growth in 2007 was the manufacturing sector. The latter grew by only 3.3 percent, marking the third consecutive year that the manufacturing sector growth experienced a deceleration. This is a clear manifestation of the “Dutch disease” phenomenon: a booming economy accompanied by a slowdown in the manufacturing sector.1 As argued in the Outlook piece last year, a vibrant manufacturing sector remains to be the lynchpin of sustainable economic growth and development. Hence, its disappointing performance should be a cause for concern for policymakers. 1
Dutch disease is an economic concept that tries to explain the seeming relationship between the exploitation of natural resources, e.g., minerals, and a decline in the manufacturing sector. The theory is that an increase in revenues from natural resources will de-industrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive. However, it is extremely difficult to definitively say that Dutch disease is the cause of the decelerating performance of the manufacturing sector, since there are many other factors at play in the economy. In the context of the Philippines, overseas Filipinos play the role of “natural resources” and their remittances are the “revenues”. However, the main culprit remains to be the sharply appreciating peso and Dutch disease is clearly manifested in 2007 because of the deceleration in manufacturing sector growth accompanied by high GDP growth.
January - February 2008
Meanwhile, the service sector remains to be the main driver of the Philippine economy. Value added in finance had the highest growth rate, recording 12.3 percent primarily as a result of the surge in stock prices. The trade sector experienced a hefty jump, from 6.1 to 9.8 percent, largely due to consumption spending. Telecommunications continued its steady pace, expanding by 9.8 percent in 2007. Surprisingly, the transport and storage sector expanded by 6.2 percent in 2007—compared to only 3.1 percent a year before—despite the surge in the international price of oil. The appreciation of the peso, which mitigated the rise in domestic prices, did have its advantages. Another benefit of the ‘stronger’ peso is the fall of the inflation rate to an average of 2.8 percent in 2007. Debt service also fell in peso terms but this was largely offset by the fall in tariff revenues. Key global developments: how will a US recession affect Philippine economic prospects? Global GDP growth is expected to fall in 2008 (Table 2). Apart from the factors mentioned earlier, industrialized countries face the spectre of rising inflation as a result of higher fuel and commodity prices. Specific conditions will also adversely impact industrialized economies. Despite the substantial cut in the official rate of the US Federal Reserve, the housing market downturn has severely limited growth prospects in the US. Euro zone financial markets were seriously affected by the US subprime mayhem because several European banks had direct exposure to US subprime mortgages. The strong euro is expected to have a net negative impact, mainly through export growth, and the region continues to grapple with structural problems related to labor market issues. Meanwhile, the Japanese economy is still contending with sluggish consumer demand and a volatile yen-dollar exchange rate. An important question is to what extent the Philippine economy will be affected by the slowdown in the industrialized countries, particularly a recession in the US. The issue of decoupling between the US economy, on the one hand, and emerging Asian econo-
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January - February 2008
TABLE 1. Selected macroeconomic indicators, Philippines Annual growth rates and share to GDP at constant 1985 prices, in percent unless otherwise stated 2001 Gross National Product Gross Domestic Product
2002
2003
2004
2005
2006
Forecast 2008
2007
2.26 2.96
4.31 3.12
5.82 5.04
6.91 6.38
5.33 4.87
6.10 5.45
7.80 7.33
6.4 5.9
3.69 19.92
3.80 20.05
3.92 19.84
5.18 19.62
2.02 19.08
3.83 18.79
5.08 18.39
3.8
3.92 19.82
3.97 19.99
3.85 19.76
4.98 19.50
2.01 18.97
3.87 18.69
5.04 18.29
(27.26) 0.10
(30.16) 0.07
24.10 0.08
53.29 0.11
4.15 0.11
(3.91) 0.10
12.13 0.11
0.91 34.76
0.15 33.75
4.25 33.50
5.21 33.13
3.78 32.79
4.55 32.51
6.61 32.29
5.2
Mining and quarrying
(6.54) 1.01
50.96 1.48
16.82 1.65
2.62 1.59
9.32 1.65
(6.09) 1.47
25.01 1.72
20.0
Manufacturing
2.87 24.37
3.47 24.45
4.24 24.26
5.84 24.14
5.28 24.23
4.60 24.04
3.34 23.14
3.0
Construction
(4.96) 6.11
(23.72) 4.52
0.96 4.34
3.41 4.22
(5.88) 3.79
7.33 3.86
19.49 4.29
10.0
0.67 3.27
4.26 3.31
3.19 3.25
4.23 3.18
2.48 3.11
6.39 3.14
7.21 3.14
6.5
4.25 45.32
5.10 46.19
6.11 46.66
7.73 47.25
6.81 48.13
6.70 48.70
8.68 49.32
7.2
8.81 7.41
8.93 7.82
8.59 8.09
11.23 8.46
7.34 8.65
6.34 8.73
8.23 8.80
7.5
5.61 16.12
5.76 16.53
5.66 16.63
6.78 16.69
5.64 16.82
6.10 16.92
9.80 17.31
8.0
1.23 4.72
3.44 4.74
5.88 4.77
9.88 4.93
13.61 5.34
11.36 5.64
12.26 5.90
8.5
(0.45) 4.80
1.72 4.74
4.10 4.70
5.30 4.65
5.32 4.67
5.71 4.68
6.02 4.62
5.5
Private services
4.40 7.38
5.49 7.55
8.12 7.78
10.65 8.09
7.52 8.29
6.92 8.41
8.76 8.52
7.5
Government services
0.94 4.88
1.46 4.81
2.70 4.70
0.49 4.44
2.96 4.36
4.71 4.33
3.29 4.16
2.5
Personal consumption expenditure (share to GDP)
3.58 77.77
4.07 78.49
5.28 78.67
5.88 78.30
4.84 78.28
5.45 78.28
6.03 77.33
5.50
Government consumption (share to GDP)
(5.32) 7.53
(3.72) 7.03
2.49 6.86
1.39 6.54
1.61 6.33
6.13 6.37
10.02 6.53
4.50
Capital formation (share to GDP)
(7.29) 22.12
(5.02) 20.38
3.77 20.13
7.17 20.28
(8.77) 17.64
2.69 17.18
9.29 17.49
6.50
(15.57) (4.16)
9.51 18.69
2.91 3.15
9.52 8.82
3.97 7.67
14.92 9.19
6.05* 6.84*
8.00 9.00
3.0
3.4
5.7
7
5.50
2.80
4.8-5.2
Agriculture, fishery, and forestry (share to GDP) Agriculture and fishery Forestry Industry sector (share to GDP)
Electricity, gas, and water Service sector (share to GDP) Transport, communication, and storage Trade Finance Ownership of dwellings and real estate
Exports (nominal $) Imports (nominal $) Inflation (2000=100) (average) 91-day Treasury bill rate (average) Nominal exchange rate (P/$ average)
6.8 9.9
5.4
6
7.3
6.4
5.4
3.4
4.00
50.99
51.60
54.20
56.04
55.08
51.31
46.15
40-41
Source: National accounts of the Philippines, National Statistical Coordination Board; selected Philippine economic indicators, Bangko Sentral ng Pilipinas; National Statistics Office; Forecasts of J.T. Yap; *preliminary.
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DEVELOPMENT RESEARCH NEWS
January - February 2008
Table 2. GDP growth for major industrialized countries and regions
World US Japan Euro zone
2005
2006
2007e
2008f
4.4 3.1 1.9 1.5
5.0 2.9 2.4 2.8
4.9 2.2 1.9 2.6
4.1 1.5 1.5 1.6
related. The only exception is when quarterly data are used and US GDP growth is lagged one period, but the correlation coefficient is only significant at the 10 percent level. Even then, the correlation is negative, indicating that US recession may even have a positive impact on the Philippine economy.
Note: e – estimate; f – forecast Source: IMF World economic outlook update, January 29, 2008. Downloaded from http://www.imf.org/external/pubs/ft/weo/2008/update/ 01/index.htm
Table 3. Indicators of decoupling between US and Philippine economy
Share of exports to US (%) Share of imports from US (%) Correlation of Annual, conoutput growth, temporaneous, US and Philip- 1951–2004 pines 0.03
1992
2006
39.3 18.3 Annual, US growth lagged, 1952– 2004 0.04
18.5 16.1 Quarterly, contemporaneous, 1981–2007 -0.10
Quarterly, US growth lagged, 1982–2007 -0.18*
Note: * - significant at 10% level Sources of data: NSO; NSCB; Heston A., R. Summers and B. Aten. 2006. Penn world table version 6.2. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania. United States: Bureau of Economic Analysis.
Table 4. Rate of change vs. US dollar (+ means appreciation)
Indonesian Rupiah Malaysian Ringgit Philippine Peso Singapore Dollar Thai Baht Korean Won Japanese Yen Euro vs. Dollar
2003–07
2003–05
2006–07
2007
-2.89 17.87 28.16 18.16 26.05 26.82 6.66 38.36
-8.97 0.38 1.05 4.15 5.30 16.20 0.79 12.79
6.10 14.14 28.42 15.03 21.89 9.84 4.74 24.38
-3.16 6.52 18.77 6.08 6.68 0.34 6.02 11.56
Source of basic data: www.oanda.com, except for end-2007 baht exchange rate, obtained from BOT
mies, on the other, becomes important in this context. Some analysts argue that the decoupling process is already underway since emerging market growth was not affected by the slowdown in US domestic demand in 2007 unlike the near-collapse in 2001. In the case of the Philippines, over the years, the US market has become a less important destination of its exports (Table 3). Simple correlations also indicate that US and Philippine GDP growth are not significantly cor-
The US economy experienced four recessions in the past three decades: 1980, 1981, 1990, and 2001. It is only in 1990 that there was a perceptible slowdown in the Philippine economy, lasting up to 1992. However, many factors contributed to the disappointing economic performance of the Philippines at that time, particularly the energy crisis. It would be difficult to attribute a significant part to the US economic recession. What should be emphasized, however, is that the principal reason for the benign impact of a global economic slowdown is the weak linkage between Philippine manufactured exports and the domestic manufacturing sector. For example, the ratio of value added of electrical machinery—which is the counterpart of exports of electronics—to GDP was only 2.7 percent in 2007. This is even lower than the figure in 2005, which was 3.1 percent. What is driving the exchange rate? One of the most controversial issues in recent years has been the sharp appreciation of many Asian currencies in nominal and real terms from 2004 up to the present (Table 4). The peso started appreciating consistently vis-à-vis the US dollar only in December 2005 and even then, it was the Asian currency with the most rapid appreciation during the period 2003–07. As a matter of fact, the peso had the fastest nominal appreciation in 2007.2 Based on conventional wisdom, the knee-jerk reaction would be to attribute this phenomenon to a surge in foreign ex2
A more comprehensive study of the effects of the peso appreciation is beyond the scope of this Outlook. Tuaño-Amador et al. (2007) allude to evidence of Dutch disease in the Philippines, which was discussed earlier in the context of the deceleration of the manufacturing sector. However, a more important result is the evidence that the peso was overvalued in 2007. The IMF (2007) estimated that the real effective exchange rate (REER) of the peso was in equilibrium in 2006. However, the REER appreciated by nearly 9 percent in 2007 while the equilibrium value was on a clear depreciating trend.
DEVELOPMENT RESEARCH NEWS
change inflows, particularly remittances from overseas Filipinos. Closer scrutiny of the data indicates, however, that foreign exchange inflows may have a less prominent role in the appreciation of Asian currencies than assumed. Data in Table 5 show the ratio of balance-of-payments components to GDP during the period 2004– 06 for various Asian countries. There is no indication of a surge in current transfers among them except for the Philippines. However, Singapore and Malaysia do have substantial current account surpluses but the Singapore dollar and ringgit have significantly lower rates of appreciation.3 Meanwhile, the balance in the capital and financial accounts were fairly moderate except for relatively large surpluses in the Philippines and Thailand in 2005. Moreover, there has been no jump in remittances into the Philippines compared to its historical trend and even then the resulting current account surplus was much lower than that of Malaysia and Singapore. Hence, while important, it would be incorrect to cite a surge in foreign exchange inflows as the primary cause of the peso’s recent sharp appreciation. Instead, the following factors can be considered in the context of the Philippines: 1) At the “lowest” points of the various regional currencies, the peso experienced the second largest depreciation in both nominal and real terms. Hence, it is but natural to expect it to have a faster appreciation during the recovery period after the crisis. This argument, however, is tempered by the experience of Indonesia, which had the sharpest depreciation as a result of the crisis, yet experienced a net nominal depreciation of the rupiah during the period 2003–07. 2) Instead of a drawn-out process, the peso’s recovery was bunched up 3
Current transfers are a component of the current account balance. Hence, despite the large amount of current transfers in the Philippines, what is of more relevance is the smaller current account balance compared, say, to Singapore and Malaysia.
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Table 5. Current transfers and net capital flows in selected Asian countries (percent of GDP) 2004
2005
2006
People’s Republic of China Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
3.6 1.2 5.7 2.8 0.7
7.2 1.1 2.8 3.5 0.9
9.4 1.1 0.4 3.0 1.6
Indonesia Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
0.6 0.4 (0.3) 0.7 1.6
0.1 1.7 (0.8) 2.9 1.8
2.7 1.3 (0.3) 1.5 1.7
Republic of Korea Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
4.1 (0.4) 1.1 1.4 2.7
1.9 (0.3) 0.6 0.8 1.8
0.7 (0.4) 2.1 0.4 0.9
Malaysia Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
12.7 (3.3) 4.3 3.9 7.3
15.3 (3.4) (7.5) 3.0 (2.3)
17.1 (3.1) (8.0) 4.1 3.8
Philippines Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
1.87 10.8 1.1 0.8 0.3
2.01 11.9 5.3 1.9 3.5
5.02 11.3 (1.3) 1.8 3.3
Singapore Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
20.1 (1.1) (6.9) 18.4 1.5
24.5 (1.0) (16.2) 12.9 4.7
27.5 (1.0) (15.7) 18.3 5.5
Thailand Current account Current transfers Capital and financial account Direct investment (non-resident) Portfolio investments (non-resident)
1.71 1.3 2.3 3.6 1.2
(4.46) 1.7 7.1 5.1 4.3
1.57 1.6 3.8 5.2 2.8
Sources: IMF International Financial Statistics, November 2007; For the Philippines: Bangko Sentral ng Pilipinas
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DEVELOPMENT RESEARCH NEWS
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over the period December 2005 to the present. This is largely explained by the prevailing fiscal difficulties up to that time, which was reflected in a higher risk premium for Philippine bonds. The Philippine government implemented stringent and decisive fiscal reforms beginning in 2005 and their success boosted investor confidence that was reflected in the peso’s strong appreciation in 2006–07. 3) Compared to other central banks in the region, the Bangko Sentral ng Pilipinas (BSP) did not intervene as much in terms of accumulating foreign exchange reserves (Ho and McCauley 2007). However, this argument is also tempered by Indonesia’s experience where the degree of intervention was even lower. 4) A prevailing current account surplus since 2003 has also pushed up the value of the peso. From a current account deficit equal to 5.3 percent of GDP in 1998, the Philippine economy recorded a
surplus of 5 percent of GDP in 2006. This is largely due to a fall in the investment rate and reflected in a drop in the ratio of imports to GDP from 63 percent in 1997 to only 45 percent in 2007. Rather than surges in foreign exchange inflows, the strength of Asian currencies vis-àvis the US dollar is largely attributable to the latter’s overall weakness. Data in Table 4 show that the US dollar depreciated by 38 percent against the euro during the period 2003– 07. This is about 10 percentage points higher than the peso’s appreciation against the dollar. However, the concept of “dollar weakness” has to be translated into foreign exchange flows that affect the region’s exchange rates. One possible explanation relates to the concepts of “dollarization” and “dedollarization.” Dollar-denominated assets held by residents have been increasing over time consistent with the liberalization of the economy. The relative magnitude of these assets reflects the degree of dollarization, which increased between 1990 and 2000 following the surge of foreign exchange inflows (Table 6). Using
Table 6. Ratio of FCDs to broad money aggregates, foreign exchange reserves and FCD withdrawals FCD Withdrawals FCD/M3 FCD/Reserves FCDs FCD/M4 (million US $) % % (million P) % 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Oct
43.85 63.81 77.23 94.46 136.16 158.79 206.69 317.56 433.43 477.94 521.66 585.99 599.19 643.65 695.45 786.61 787.72 849.13 772.924
Source of basic data: BSP
17.27 21.23 22.25 24.51 28.35 26.13 27.15 36.03 40.66 41.76 38.21 41.05 35.48 34.87 36.17 37.12 33.69 29.92 26.38
14.73 17.51 18.20 19.69 22.09 20.72 21.35 26.49 28.91 29.46 27.65 29.10 26.19 25.86 26.56 27.07 25.20 23.03 20.87
40.64 42.74 26.11 54.89 28.57 29.12 25.25 25.35 29.60 37.23
142.37 283.95 86.58 84.08 107.38 99.55 125.66 120.43 201.54 126.02 100.57 101.30 87.19 93.57 93.96 107.02 89.79 82.63 61.39
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DEVELOPMENT RESEARCH NEWS
the International Monetary Fund standard, an economy is considered highly dollarized if the ratio of foreign currency deposits (FCDs) to money supply is greater than 30 percent. The data show that the Philippines was on its way to becoming a highly dollarized economy, but after reaching 41 percent in 2000, the ratio fell to 29.9 percent in 2006 and 26.4 percent in October 2007. The trend toward de-dollarization can be partly explained by the general decline in capital inflows after the crisis. However, at a certain point, the fall in the FCD/M3 ratio is driven largely by the peso appreciation. In this context, making FCD/M3 an indicator of de-dollarization becomes an exercise in tautology. Data show that in 2006 and 2007, there was a jump in withdrawals in FCDs (Table 6), which is a more reliable indicator of de-dollarization. The jump can be attributed to expectations of a peso appreciation, which become self-fulfilling. Another indication of de-dollarization is the ratio of FCDs to foreign exchange reserves, which has fallen sharply between 2004 and 2007. The logic is that perceptions of weakness in the US dollar have prompted economic agents to withdraw from their FCDs and convert their dollar holdings to peso in anticipation of its appreciation. This action in itself has contributed to the appreciation of the peso. Has economic growth trickled down? Results of the 2006 Family and Income Expenditure Survey (FIES) show some disturbing trends. Total family income in real terms rose from P2,437 billion in 2003 to P2,501 billion in 2006. However, real average family income declined from P148,000 to P144,000 during the same period. One explanation is that there are now more families sharing in the “economic pie” and the number has grown much faster than the rate by which the pie grew. But this is still inconsistent with the steady growth in the country’s per capita GDP (Table 7).4 What appears to be a dissonance in macro and micro data can actually be explained to 4 If per capita GDP increases, then GDP per family should also increase unless there is a drastic increase in average family size between years. The latter condition does not hold.
January - February 2008
Table 7. Per capita GDP 1994–2006 Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
GDP per capita in current prices (pesos)
GDP per capita in constant 1985 prices (pesos)
24,671 27,129 30,208 33,003 35,458 38,772 43,687 46,208 49,450 52,716 58,148 63,557 68,989
Source: National Income Accounts
some extent by the steady increase in corporate profits and the persistent decline in wages as components of GDP. It should be noted that the FIES does not include income and expenditures of private and government corporations. A study by Felipe and Sipin (2004) shows a declining share accruing to labor in total income between 1980 and the early 2000s. This was accompanied by a steady profit rate as more Filipinos were unable to find work despite increases in profits and investments. The phenomenon of rising profit shares and falling wage shares during the past decade or so is true for many countries. For example, after-tax corporate profits in the US in 2006 climbed to their highest levels as a share of national income (Aron-Dine and Shapiro 2007). A similar trend can be observed in Canada (Russel and Dufour 2007). Globalization of production is the main reason for this phenomenon as multinational firms relocate to lower-wage economies putting a lid on the growth of wages. What is more troublesome for the Philippines is that despite the rising share of profits and the steady profit rate, investment has failed to keep pace. This is another major reason why the benefits of higher economic growth have not been shared more equitably. Some analysts attribute the poor investment record to increased uncertainty. The
11,168 11,425 11,810 12,147 11,815 11,958 12,670 12,598 12,900 13,252 13,789 14,186 14,653
DEVELOPMENT RESEARCH NEWS
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Asian Development Bank (2007), for example, argues: “For Indonesia and the Philippines, where improvements have already taken place in the macroeconomic policy environment, the key to sustaining growth is likely to lie in improving the quality and performance of key institutions that influence investor perceptions about uncertainties, risks, and the costs of doing business‌In the Philippines (too), governance issues are to the fore. Contract enforcement, corruption, and crime and security are of particular concern‌Poor infrastructure, particularly in power and transportation, add most to costs. Generally, the institutions of government are weak and this has slowed the pace of progress. Complex rules and regulations do not adequately address competition issues and continue to create fertile ground for rent seeking. In a variety of dimensions, prospects for raising investment and accelerated growth will depend on the capacity of institutions to move ahead and implement the changes that are required to reduce uncertainty and risk.â€? Other analysts focus on the rent-seeking activities of the traditional corporate conglomerates that lead to inflated costs of strategic inputs (e.g., power and shipping).5 The added cost has taken its toll on investment. All these sentiments have been expressed in other studies and in earlier issues of this Outlook. It is clear that structural problems underpin the weak investment performance in the Philippines and therefore there is no short-term improvement in the horizon. Prognosis for 2008 The previous discussion makes it clear that a deceleration is in store for the Philippine economy in 2008. The main reason would be the dissipation of the economic stimulus provided by the May 2007 elections and the government infrastructure program. Remittances from overseas Filipinos will have a
5
A recent World Bank Study (Bocchi 2008) directly addresses the dilemma of rising economic growth and declining investment and attributes it partly to these corporate conglomerates. However, the phenomenon of rent seeking in the Philippine economy has been extensively studied by local experts over the past three decades or so.
January - February 2008
smaller impact primarily because of the appreciation of the peso. While it remains an important consideration, the slowdown in global economic growth will not be a significant factor. Economic deceleration will be across the board but the momentum generated by the 2007 surge in output will be enough to maintain the 2008 GDP growth at a respectable 5.9 percent (Table 1). Growth in personal consumption expenditure will ease to 5.5 percent. Despite the structural constraints, investment growth will be a moderate 6.5 percent since several government projects still need to be completed. This is reflected in the 10 percent growth in construction value added. The service sector is expected to remain as the main driver of economic growth while manufacturing will continue to struggle. The finance subsector will likely experience less than double-digit growth after four consecutive years due to unfavorable global conditions. Meanwhile, agriculture will continue to grow strongly at 3.8 percent as a result of the boost from infrastructure spending in 2007. Global inflationary pressure should result in higher inflation this year, which is likely to be in the high end of the BSP’s target of 3–5 percent. Average inflation in 2008 will be in the vicinity of 5 percent. As a result, interest rates are expected to inch higher. The average peso-dollar exchange rate should be between 40 and 41. DRN References Aron-Dine, A. and I. Shapiro. 2007. Share of national income going to wages and salaries at record low in 2006: share of income going to corporate profits at record high [online]. http://www.cbpp.org/831-06inc.htm
Asian Development Bank. 2007. Ten years after the crisis: the facts about investment and growth. In Beyond the crisis: emerging trends and challenges. Manila: Asian Development Bank. 16
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Photo: www.napc.gov.ph
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January - February 2008
Achieving human development by mobilizing partners in the countryside: lessons learned* By: Asia Pacific Policy Center
H
uman development (HD) is about enlarging people’s choices and opportunities “to be and to do.” HD is about much more than economic growth, it is about expanding choices and equalizing opportunities to act on this choice (http:// hdr.undp.org/en/humandev/). Looking beyond incomes as the central yardstick of development, the HD framework focuses instead on the degree to which people are in an environment where they can develop their full potential and lead productive, creative lives in accord with their needs and interests. Fundamental to enlarging people’s choices is building human capabilities. The most basic capabilities for HD are to lead long and healthy lives, be knowledgeable, have access to the resources needed for a decent standard of living, and be able to participate in the life of the community. Without these, many choices are simply not available, and many opportunities in life remain inaccessible. The human development index (HDI) is a tool devised to measure overall achievements
in three basic dimensions of HD, namely: longevity, knowledge, and a decent standard of living. The HD framework presents an alternative to the usual national income accounting framework in gauging the level of development of a country. The Philippine Human Development Report (PHDR)1 provides provincial-level HDI measures, among others, which help monitor the performance of provinces with respect to promoting HD. However, further disaggregation is desirable. More and more, it is at the municipality/city level that HD-related programs are being formulated and implemented, and thus, where it should be monitored. During the dissemination of the last PHDR, some participants expressed concern that since the HDIs are computed at the provincial level, its utility for local government units (LGUs) remains limited. Since much of the responsibility to help improve the Filipinos’ quality of life has been delegated to the LGUs, relevant information, particularly on issues affecting HD, will greatly help local chief executives in planning and implementing ef-
*
Condensed by Dr. Clarissa C. David of the Philippine Human Development Network Foundation Inc. (HDN) for the project "Advocacy for the 5th PHDR and Preparatory Activities for the 6th PHDR." In relation to the preparatory activities for the 6th PHDR, HDN commissioned the production of two Provincial Human Development Reports. Three consultants were commissioned and one of these is an NCR-based consultant with proven track record in research and, in particular, in related work of generating municipal-level based indicators. The NCRbased consultant was the Asia-Pacific Policy Center (APPC), headed by Ms. Rose Edillon, with the assistance of Erwin Bañez and Sharon Fangonon. Complete final paper of APPC will be made available upon request from the HDN Secretariat.
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The Philippine Human Development Report (PHDR), produced with financial and technical assistance from UNDP, is HDN’s main vehicle for advocating people-centered development, and generating discussion and consensus on human development issues in the country. The Philippine Human Development Network Foundation Inc. or HDN is a nonstock, nonprofit organization whose mission is to propagate and mainstream the concept of sustainable human development through research and advocacy in the country. The Network is comprised of close to 150 development practitioners from national government agencies, international organizations, nongovernmental organizations, and research institutions.
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fective programs or projects that will improve the lives of their constituencies. The challenge is whether and how a simple and practical methodology can be designed so that the HDI technology can be transferred and used at the local level to collect and use municipal-level data. Ultimately, the goal is to provide tools for a well-improved and informed citizenry that is equipped and enabled to judge existing local government based on HD outcomes. The HDN initiated a program for producing provincial-level HD reports in the hope of eventually mobilizing multiple local partners in the production of provincial development reports. This paper describes the challenges and issues faced in the effort to find suitable and complete data to estimate municipal-level HDIs in two provinces, La Union and Misamis Oriental. The local collaborators, with the guidance of APPC, produced the provincial HDRs with the environment and sustainable development as theme for Misamis Oriental, and poverty for La Union. APPC, while providing guidance to partner institutions, estimated municipal-level HDIs. Estimation required the following steps: (1) setting criteria for variables that may be included in the computations; (2) exploring available data; (3) estimating the municipal HDIs; and (4) validating the municipal HDIs. The criteria for variables to be considered in the computation are: (1) they must be outcome variables measured at the beneficiary level and correlated with HD indicators of physical survival and health, knowledge, livelihood, and income; (2) they must be available at the level of the municipality; (3) the data should be collected with regularity; and (4) they should be collected with uniform reliability across municipalities. Given these criteria, all of which must be met, the types and quality of data that may be included as measures in computing provincial HDIs thus became limited. Thereupon, problems and challenges inevitably appeared. Problems and challenges Level of disaggregation and regularity of data collection The regularity criterion ascribes more weight
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to secondary data. However, many such data sources do not provide the necessary level of disaggregation. Among the official data collected by the National Statistics Office (NSO), the only data that can be disaggregated to the municipal level are those obtained from the Census of Population and Housing (CPH). The CPH has five forms and the more detailed questionnaire is the Sample Household Questionnaire or Form 3, which is administered to a 10 percent sample in every municipality. This enables municipal disaggregation of the data. The next best possible available data source is the set of administrative data that LGUs collect when they produce their socioeconomic profiles and update their provincial development plans. Uniformity of data collection procedures Once all the data are at hand, one can ascertain whether these correlate with the HDI. Such a procedure requires only “desk work,� so to speak. However, assessment of uniform reliability requires comprehensive documentation of data collection and validation procedures. If such documentation is unavailable, information on the said procedures should be obtained first hand. This is not a problem in the case of NSO-produced data. Their field and office procedures aim at reducing, if not eliminating, nonsampling error. There is also extensive documentation of the sampling procedures used in order to guide the analyst on the proper use of data. There is no such documentation available for administrative data. To obtain this information, a component was added to the study, where questionnaires were sent to Misamis Oriental, La Union, and Bulacan. The province of Bulacan was added to the two pilot provinces to represent an LGU that has a more developed management information system (MIS). The questionnaire asked for definitions of usual indicators (e.g., cohort survival rate, completion rate, infant mortality rate, etc.) and how they are being reported and validated. It also asked for the actual figures for 2003 to 2005. Data quality Data quality was evaluated in terms of com-
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pleteness of data, uniformity of definitions, and data validation procedures followed. The following discussion is based on the returns from Bulacan and Misamis Oriental. Completeness of data An analysis of the number of municipalities with available data for the necessary variables for the years 2003 through 2005 was conducted. Data collected by the municipalities were found to be incomplete. In general, there are no data on variables pertaining to those outside the direct clientele of public institutions, e.g., students in private schools, adults, working age, etc. In particular, they do not have data on adult literacy rate, per capita income, poverty incidence, and education data from the private schools, to name a few. Surprisingly, there are data on the proportion of families with access to safe drinking water and sanitary toilet. In Bulacan, some of the respondent municipalities cited the community-based monitoring system (CBMS) as their data source. Uniformity of definitions There are differences in the definition of usual indicators. With respect to educationrelated indicators, the basic difference is in the denominator—what age group or population to use. In fact, even when the definition of the age group is resolved, the more basic problem is where to source the forecast data. NSO forecasts population by 5-year age interval only down to the regional level. A protocol should be developed to generate forecasts at the municipal level, whether by synthetic estimation or in combination with primary validation. Data validation Respondents are not aware of any data validation procedure being followed for administrative data e.g., school data, health, and hospital data. Health data are also accepted from the usual source. Data on births and deaths can be cross-checked with the Local Civil Registrar but their data also come from the same source as the Municipal Health Office (MHO). Data coming from CBMS follow an exit protocol where results are presented before a barangay and municipal forum for validation.
Sometimes, the data are referred back to the municipality when department heads and/ or the Provincial Planning and Development Council (PPDC) spot an unusual trend. However, the protocol is unclear and this is revealed when municipal data on the same variables are compared with data obtained from the Provincial Planning and Development Office (PPDO). This latter set of data is found in the socioeconomic profile report of the province. The crude death rate statistics of selected municipalities of Misamis Oriental as obtained from the municipal and provincial LGU show that some of the data do not match. Based on the findings on the quality of administrative data, it is therefore recommended that the data to be used in the computation of municipal HDI be limited to counts. Translation of the counts to rates or ratios should be done using a uniform protocol for estimating the denominator. If there are existing NSO data on the variable, these will be preferred. Recommendations Municipal-level data collection There is an urgent need for reliable municipal-level data collection. Without such an effort, the production of provincial HD reports would be very difficult. Measuring HD at the municipal level will require capacity building and training of LGU personnel. Two things urgently need attention: first, there is a need to standardize variable definitions and to implement a uniform time of collection; second, a point person must be identified and tasked to process and consolidate the data. The municipal planning and development coordinator is usually overwhelmed with duties and only collects data as needed. The Local Government Code (LGC) provides three possible offices/officers: 1)
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Barangay Secretary - according to the LGC, the barangay secretary shall: assist the Municipal Civil Registrar in the registration of births, deaths, and marriages; keep an updated record of all inhabitants of the barangay contain-
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Table 1. Percentage of barangays that conducted local census Year conducted % 2006 2005 2000–2004 1999
25.6 53.4 21.0 0.8
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ing the following items of information: name, address, place and date of birth, sex, civil status, citizenship, occupation, and such other items of information as may be prescribed by law or ordinances; and submit a report on the actual number of barangay residents as often as may be required by the Sangguniang Barangay.
APPC recently conducted a survey of the barangays in the poorest of the poor municipalities and found that barangay LGUs conduct censuses. The data were collected from September to November 2006. Table 1 shows that about a quarter of barangays conducted their latest census in September 2006 while more than 50 percent did so in 2005. Twentyone percent of barangays did their last census between 2000 and 2004 and the balance have not had a census since 1999. This shows that some LGUs collect data but they need a system for collecting, reporting, and archiving the data that they have on hand. 2)
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Information Officer - Article 16 of the LGC says that the information officer shall take charge of the office of public information and shall: formulate measures for the consideration of the Sanggunian and provide technical assistance and support to the governor or mayor, as the case may be, in providing the information and research data required for the delivery of basic services and provision of adequate facilities so that the public becomes aware of said services and may fully avail of the same; develop plans and strategies and, upon approval thereof by the gov-
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ernor or mayor, as the case may be, implement the same, particularly those which have to do with public information and research data to support programs and projects which the governor or mayor is empowered to implement and which the Sanggunian is empowered to provide for under this Code; provide relevant, adequate, and timely information to the LGU and its residents; furnish information and data on LGUs to government agencies or offices as may be required by law or ordinance and on nongovernment organizations to be furnished to said agencies and organizations; maintain effective liaison with the various sectors of the community on matters and issues that affect the livelihood and the quality of life of the inhabitants and encourage support for programs of the local and national government; be at the frontline in providing information during and in the aftermath of manmade and natural calamities and disasters, with special attention to the victims thereof, to help minimize injuries and casualties during and after the emergency, and to accelerate relief and rehabilitation; and recommend to the Sanggunian and advise the governor or mayor, as the case may be, on all other matters relative to public information and research data as they relate to the total socioeconomic development of the LGU.
Unfortunately, the position of information officer is optional and co-terminus with the appointing authority. In the two provinces that APPC worked with, the information comes from the PPDO so they do not see the need for an information officer. 3) Civil Registrar - another possibility is the civil registrar who the LGC describes as being responsible for the following tasks:
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responsible for the civil registration program in the LGU concerned, pursuant to the Civil Registry Law, the Civil Code, and other pertinent laws, rules, and regulations issued to implement them; accept all registrable documents and judicial decrees affecting the civil status of persons; file, keep, and preserve in a secure place the books required by law; transcribe and enter immediately upon receipt all registrable documents and judicial decrees affecting the civil status of persons in the appropriate civil registry books; and coordinate with the NSO in conducting educational campaigns for vital registration and assist in the preparation of demographic and other statistics for the LGU concerned.
The civil registrar is actually employed by the LGU. The missing link is the coordination with the Civil Registrar General, the administrator of the NSO, with respect to reporting of data. It has been proposed that life expectancy at birth can best be proxied by using age at death. At the moment, it is only possible to calculate life expectancy at birth through the process of conducting a census, a National Demographic and Health Survey (NDHS), and a special study. What is being used in the national HDIs is the updated model by Cabigon and Flieger (1994 and 1999). It would be very useful if data on ages at death in municipalities are reported.
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Data from the 2000 CPH show that 36 percent of high school students study outside of their home municipalities.
There are several problems to contend with in recognizing achievement in HD. First is the issue of transient migration. Data from the 2000 CPH show that 36 percent of high school students study outside of their home municipalities. Disaggregated by municipality, the proportion ranges from a low of 2 percent to a high of 82.5 percent. This was observed in Pugo, a small municipality with five secondary schools, where many students residing in a neighboring municipality actually belong to another province. In terms of data, the neighboring municipality may exhibit poor educational outcomes when in reality, its student residents are able to go to school and even afford the additional transport cost.
A number of indicators are computed as proportions where the denominator is the population of interest, say, the entire population, the school-age population, the under-5-yearold group, and others. As mentioned earlier, a protocol should be developed to bring down the forecast to the level of the municipality, whether by synthetic estimation or in combination with primary validation for the population of school-age children.
Outcomes vs. responsibility Table 2 shows the amounts of social expenditures by level of governance and by subsector in 2003. It is evident that the bulk of resources for education, culture, and manpower rest with the national government. With respect to health, the provincial LGU gets a greater share. For social security, welfare and employment, it is again the national government that has the greatest share. It is therefore important to calibrate expectations about outcomes with resource and responsibility.
Recognizing achievements development Actual vs. reported outcomes
It is thus recommended that in lieu of giving out awards in terms of HD, it might be better to recognize “Distinguished Contri-
in
human
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Table 2. Social expenditures by level of governance and sub-sector (2003) (in PhP millions) Item Classification Education, culture, and manpower dev’t Health Social security, welfare and employment Housing and community development
National Govt 129,931 13,179 33,824 229
Provincial LGU 1,667 7,065 695 621
Municipal LGU 2,207 4,909 1,807 838
City LGU 6,832 4,985 1,684 2,292
Source: Department of Budget and Management (DBM)
butions to Human Development.” Each dimension would be considered—knowledge, survival and health, livelihood and income— along with a fourth component: political freedom and people’s right to participate in social decisions. This is not considered in our national or in international HD because of measurement issues, but perhaps for municipal-level HDI, it can be taken into account. Here, one may look for innovative practices and initiatives to involve, say, the research community and civil society in decisionmaking. It is also important to properly credit the ones responsible for achievements in human development. Our public administration system is such that the responsibility to provide health services rests more with municipal http://lgrc.lga.gov.ph/greenstone/collect/serviced/tmp/health.html
and city LGUs, and to a lesser extent on the provincial LGUs and national government; education service is primarily the responsibility of national government and to some extent, the municipal and city LGUs; standard of living and political freedom are a shared burden between national government and all LGUs; and engagement of people’s participation in governance is largely through the initiative of LGUs, especially the municipality and city. Capacity building The HDN’s program to promote the use of the HD framework as a guide for planning at the local level is a large endeavor. This pilot project of generating provincial-level HDRs demonstrated the challenges and highlighted opportunities ahead. Of note is the need to provide technical assistance, training and capacity-building in local-level data collection and analysis. The HDN will continue its efforts to engage and enable partners in the countryside by providing support toward local-level research and planning in the hope of furthering HD goals. DRN References Cabigon, J.V. and W. Flieger. 1994. Life table estimates for the Philippines, its regions, and provinces, by sex: 1970, 1980, 1990. Health Finance Development Monograph No. 5. Manila: National Statistics Office with the assistance of UNFPA.
With the devolution, the responsibility to provide health services rests more with municipal and city LGUs, and to a lesser extent, on the provincial LGUs and national government
———. 1999. 1995 gender-specific life tables for the Philippines, its regions and provinces. Monograph N0. 17. Manila: National Statistics Office with the assistance of UNFPA.
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8th PIDS Corner opens in Cavite
n February 6, 2008, the Philippine Institute for Development Studies (PIDS) and De La Salle University– Dasmariñas (DLSU-D) in Cavite officially launched the eighth and newest addition to the growing number of PIDS Corners around the country.
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The PIDS Corners are set up in various college/university libraries outside Metro Manila and cater to students, faculty members, and researchers. It is envisioned that through the PIDS Corners, more research on socioeconomic issues will be made accessible and available to the local community.
The program opened with the ceremonial ribbon cutting led by Dr. Josef Yap, PIDS president, and Dr. Veronidia L. De Leon, DLSU-D’s vice chancellor for academics and research. Other attendees were Dr. Emmanuel Franco Calairo, dean of the College of Liberal Arts, Jan Philip Mallari, faculty from the Social Sciences Department, Mr. Mario C. Feranil, OIC-vice president of PIDS, and Ms. Jennifer Liguton, director of the research information department of PIDS. Faculty staff of DLSU-D, students, and other invited guests also graced the event.
Other PIDS Corners are also housed at the Bohol Provincial Library, University of Rizal System – Antipolo Campus Library, NEDA Region 10 office in Cagayan de Oro City, Bukidnon State University Library, Silliman University Library, University of Southeastern Philippines Library in Davao City and Central Philippines University Library in Iloilo City. CSM
In her welcome remarks, Dr. de Leon expressed her appreciation to the Institute and stated that the launching of the PIDS Corner will help strengthen their vision for a more productive research and extension services. Dr. Josef T. Yap, for his part, reiterated the need for closer integration among regions in the country alongside the economic integration of the ASEAN region. In this regard, the PIDS Corner can serve as a venue to learn of the varied research geared for better local and regional development planning. The program was capped by the signing of the Memorandum of Agreement between the two parties.
PIDS President Dr. Josef T. Yap and De La Salle University-Dasmariñas ViceChancellor for Academics and Research Dr. Veronidia L. De Leon lead the ribbon cutting ceremony signalling the opening of the 8th PIDS Corner.
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Bocchi, A.M. 2008. Rising growth, declining investment: the puzzle of the Philippines [online]. Policy Research Working Paper No. 4472. East Asia and Pacific Region. World Bank. http://wwwwds.worldbank.org/external/default/ WDSContentServer/IW3P/IB/2008/ 01/09/000158349_20080109144527/ Rendered/PDF/wps4472.pdf.
Felipe, J. and G.C. Sipin. 2004. Competitiveness, income distribution, and growth in the Philippines: what does the longrun evidence show? ERD Working Paper No. 53. Manila: Asian Development Bank
Ho, C. and R. N. McCauley. 2007. Resisting appreciation and accumulating reserves in Asia: examining the domestic financial consequences. Basel, Switzerland: Bank of International Settlements.
International Monetary Fund. 2007. Philippines: 2006 article IV consultation; staff report; public information notice; statements by the authorities of the Philippines; IMF country report 07/62 (January 5). http://www.imf.org/external/ pubs/ft/scr/2007/cr0762.pdf.
Russel, E. and M. Dufour. 2007. Rising profit shares, falling wages shares [online] Ottawa: Canadian Centre for Policy Alternatives.http://www.policyalternatives.ca/ documents/National_Office_Pubs/2007/ Rising_Profit_Shares_Falling_Wage.
Tuaño-Amador, M.C.N., R.A. Claveria, V.K. Delloro and F.S. Co. 2007. Philippine overseas workers and migrants’ remittances: the Dutch disease phenomenon and the cyclicality issue. Paper presented at the 45th Philippine Economic Society (PES) Meeting, 14 November.