PHILIPPI NE INSTITUTE FOR DEVELOPMENT STUDIES Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas
DEVELOPMENT RESEARCH NEWS November - December 2008
Vol. XXVI No.6
Editor's Notes Free Trade Agreements or FTAs are seen to boost a nation's competitiveness in the global trade arena. Asia, albeit a "late bloomer" in initiating FTAs compared to other regions, has been catching up as seen in the increasing number of agreements that are continuously being established. This has resulted in what experts call as the "Asian noodle bowl" which the Asian Development Bank Institute describes as trading arrangements characterized by complex and overlapping tariffs, standards, and rules of origin that
ISSN 0115-9097
“Asian noodle bowl” not yet serious in East Asia
can raise administrative and business costs. In the midst of the differing views on the impacts of the Asian noodle bowl on businesses in the region, this issue of the DRN features an Asian Development Bank study that was presented during a recently held Roundtable Discussion (RTD) sponsored by the PIDS at the Romulo Hall of the NEDA sa Makati
T
he western world has pasta, but in the eastern side of the globe, noodle is the star. Fried or with broth added with vegetables, meat, poultry, or seafoods; the fusion of its many interesting mixes helps enliven its taste for everyone and anyone.
Building. This issue's inside features likewise tackle equally timely and relevant studies on regional policy and
There is, however, a “noodle” not associated with the food people put on their tables to eat. This noodle, specifically, the “Asian noodle bowl,” refers to the multiple and overlapping Free Trade Agreements (FTAs) in East Asia today.
development, microinsurance, and the global financial crisis of 2008 as explained by economic seer and PIDS President Dr. Josef T. Yap.
DRN
What's Inside 6
Inequality in access to maternal and child health services cited
9
Insurance for the poor
12 Assessing national and regional policies using PRGEM 13 What caused the global financial crisis of 2008?
Compared to other regions, East Asia started late in initiating FTAs. In 2000, there were only three FTAs concluded in East Asia. However, eight years after, 42 FTAs have been concluded, 39 are under negotiation, and 28 are in the proposal stage. Proliferation of FTAs Three factors are cited in these recent developments, namely, deepening market-driven integration; European and North American economic integration; and the 1997–1998 Asian financial crisis. Further liberalization of trade and foreign direct investments (FDIs), and harmonization of policies and the rules and standards governing trade and FDIs are the effects of market-driven integration. FTAs can be a vital part of a supporting policy framework for intensifying production networks and supply chains formed by multinational corporations and rising East Asian firms.
DEVELOPMENT RESEARCH NEWS
2
November - December 2008 To answer pertinent questions that would confirm the seriousness of the Asian noodle bowl in East Asia, Dr. Masahiro Kawai, Dean of the Asian Development Bank Institute in Tokyo and Dr. Ganeshan Wignaraja, Principal Economist at the Asian Development Bank (ADB), spearheaded a survey of 489 manufacturing firms in Japan, Singapore, Thailand, and the Philippines. Their team's findings and results, as contained in the study titled "Asian Noodle Bowl: Is It Serious? Firm-Level Evidence from the Philippines and Other Asian Countries," were presented recently in a Round Table Discussion at the Philippine Institute for Development Studies (PIDS).
A survey of 489 manufacturing firms in Japan, Singapore, Thailand, and the Philippines revealed the opposite of what previous studies on FTA preference utliziation have established. Results of the said survey and their policy implications are discussed in the recently held roundtable discussion attended by (from left): Dr. David Green, director of Country Coordination and Regional Cooperation Division of the Asian Development Bank (ADB); Dr. Josef T. Yap, president of the Philippine Institute for Development Studies; Dr. Ganeshan Wignaraja, principal economist at the ADB; and Atty. Dorothea Lazaro, consultant at the ADB.
Governments of the nations in East Asia also fear that the European and North American economic regionalism might dominate rulesetting in the global trading system and thus marginalize Asia. At the same time, there is a realization for the need of a deeper integration in East Asia to improve international competitiveness, strengthen bargaining power, and raise the voice in global trade issues. The 1997–1998 crisis further made it clear that East Asia needed to work together in the area of trade and investment to continue the growth and stability of the region and address common challenges. The Asian noodle bowl, however, with its competing FTA provisions in the forms of tariffs, standards, and rules, is said to have become a concern as it posed questions on the use of its various preferences.1
The study is comprised of four countries, namely, Japan, Singapore, Thailand, and the Philippines2. The Philippines country report was conducted and prepared by Dr. Wignaraja, Dorothea Lazaro, and Genevieve deGuzman (ADB consultants). The results showed that firms are utilizing more FTAs than expected and are expressing more benefits than costs in using them. In addition, multiple rules of origins (ROOs) were shown to entail limited burden on firms vis-à-vis conventional knowledge that they create added transaction costs in business. The surveyed firms come from the electronics (44%), automotive (27%), and textile and garment sectors (18%). Small and medium enterprises (SMEs) comprised a large proportion of the surveyed firms. Findings According to Dr. Wignaraja, the use of FTA preferences in the four East Asian countries surveyed is higher than expected as opposed to previous studies that stated FTA preference utilization rates are low in East Asia. Results show that 110 firms (23%) use FTA preferences. The automotive firms emerged as the top users of FTAs compared to electronics and textile and garments. Japanese
1
In trade policy, this refers to special advantages, such as lower-than-MFN tariffs, accorded to another country’s exports, usually in order to promote that country’s development (http:/ /www-personal.umich.edu/~alandear/glossary/p.html).
2 The Kawai-Wignaraja study will be published shortly in the ADBI Working Paper Series and available online soon at http:/ /www.adbi.org.
DEVELOPMENT RESEARCH NEWS firms lead the use of FTA preferences with 29 percent followed by firms from Thailand with 24.9 percent. The Philippines is third with 20 percent and Singapore with 17.3 percent. Around 41.5 percent of the East Asian firms surveyed use or plan to use FTA preferences, which is nearly double the figure for FTA use. Patterns of utilization What accounts for the differing patterns of utilization? At the macro level, the moderately high FTA use in Japan is linked to a refined industrial structure based on giant, multinational corporations. Many Japanese firms are the center of regional production networks and are exporting through FTAs. Thai firms’ utilization is influenced by its emergence as a regional production hub particularly in the automotive sector; a magnet for export-oriented FDIs and strong emphasis on FTAs as a tool of trade policy. The Philippines’ utilization, for its part, is attributed to the country’s concentration in electronics and limited experience with bilateral FTAs. In Singapore, given the high export-orientation of industries, the large number of implemented FTAs, and extensive outreach programs conducted, its relatively low FTA utilization is quite a surprise. The paper, however, stated that this is due to the country’s open trading system and low tariff margins which lessen the need for using FTAs with major trading partners. Meanwhile, at the firm-level, employment marks a significant difference between FTA preference users and non-users. Japan stands out for its base of large multinational corporations and the average employment for Japanese FTA preference users is 30,104 workers. On the other hand, for FTA users in the Philippines, Singapore, and Thailand, the average employment is less than 1,200 workers. The average employment for non-users in Japan is 7,020; 291 in Thailand; 269 in the Philippines; and 142 in Singapore. Based on these, what does firm size have to do with FTA preference use? Using FTAs entails large fixed costs—learning FTA provisions, tailoring business plans
3 to complex tariff schedules, and obtaining certificates of origin—which larger firms are more capable to carry out than small firms due to their (large firms) higher levels of financial and human resources. Japan and Thailand FTA preference users also have higher foreign equity than nonusers. These firms’ knowledge of the marketing know-how of their parent companies makes them more knowledgeable users of FTAs than domestic firms. On the other hand, in Thailand and in the Philippines, older firms are more confident in using FTAs than those that are still considered as young firms. Awareness of FTA provisions affects the utilization of FTA preferences. FTA texts are legal documents and are complicated materials that are not easily understood by firms. Those that have used FTA provisions tend to hire legal experts to improve their understanding of the business implications of their agreements. Users of FTA preferences likewise change their business plans in response to FTAs. Interestingly, Thai firms generally have a high business response to FTAs, with 79.6 percent of users and 51 percent of non-users that have changed or may change business plans. Reasons for non-use of FTA preferences For non-users, lack of information is the most important hindrance to the use of FTA preference. Philippine firms provided the most complete data for the non-use of FTA preferences and this proves useful as the country is the lowest user of FTA preferences. Another reason for the non-use cited is related to ROO issues, specifically delays and administrative costs and confidentiality of information required by origin forms. Benefits and costs Preferential tariffs are the main benefits of FTAs. As mentioned, they create wider market access that result in higher export sales and easier-to-import intermediate inputs. Meanwhile, increased competition from imports (or the entry of foreign investors) is viewed as an important cost, among others.
November - December 2008
DEVELOPMENT RESEARCH NEWS
4
November - December 2008
www.pinoycentric.com
them because these did not agree to conventional wisdom about larger firms. With all their access and resources, they are not expected to be the ones to complain the most in relation to multiple ROOs.
Institutional support can come in the form of trade/investment promotions and events which provide strategic platform for exporters to establish their international presence.
The survey also noted that ASEAN FTAs and major bilateral FTAs are useful and showed the business importance of the different FTAs in the four countries surveyed. Multiple ROOs Often, it is said that FTAs in East Asia have complicated rules about the origin of goods that are eligible for lower tariffs. As such, FTAs have generated concerns about what the attendant rules and administrative procedures would imply for the cost of doing business. ROOs in overlapping FTAs are argued to cause rigorous burden on SMEs which have less capability to meet the costs. There are 118 firms (27.6%) out of the total 489 firms that stated multiple ROOs add to business costs. Among the four countries, Singapore posted the highest negative perception (37.5 %), followed by Japan (31%), the Philippines (27.6%), and Thailand (26.2%). However, according to Dr. Wignaraja, considering the level of concluded FTAs, multiple ROOs enforce limited burden on firms in Asia. Further, he added that in conducting the survey, they expected that SMEs with their less capacity to deal with multiple ROOs would complain the most. Survey results, however, showed that while firms of all sizes would complain about multiple ROOs, giant firms have the most negative perception. Dr. Wignaraja said that these results puzzled
To answer this question, the researchers conducted an econometric analysis on the factors that may influence additional costs of multiple ROOs. The findings of the analysis suggested that larger firms use more FTAs and change their business plan more often in response to FTAs. Thus, they complain more about multiple ROOs. On the other hand, SMEs do not use many FTAs and therefore do not have much to complain about. A harmonized set of ROOs and a choice of alternative ROOs is then a natural choice for East Asian FTAs to help them create larger benefits. Additionally, large and giant firms in East Asia recognized the benefits of harmonized ROOs more than SMEs. These firms likewise prefer ROOs that give them enough flexibility to choose between value added (VA) rule and a change in tariff classification (CTC) rule. Institutional support To be successful in the exporting business under FTAs, firms have to acquire information about specific provisions in agreements. These are tariff preferences, liberalization schedules, ROOs, and investment rules. They also need to upgrade their capabilities to take advantage of said provisions, including developing appropriate regional sourcing strategies and efficient systems in the administration of ROOs. Institutional support is then important in guiding the business environment. The four East Asian countries have institutional support systems consisting of government agencies and business associations that offer information, training, technical advice, and other services. The sources of support are from the public sector ministries, custom departments, and export/investment promotions agencies. As for the private sector, institutional support can be found in business associations, chambers of commerce, trade lawyers/private consultants, and business counterparts.
DEVELOPMENT RESEARCH NEWS
Japan and Singapore firms rely more on private resources with 51 and 45.4 percent, respectively. One of the reasons cited is their higher level of per capita income that mirrors superior functioning markets for support services. Support from business associations and chambers of commerce also tend to be higher in high-income economies. The Philippines and Thailand have lower share results of 24.9 and 25.6 percent, respectively. Because these two lower middleincome economies have less functioning markets and weaker private institutions, firms here rely more on public sources. Government agencies and business associations also conduct periodic consultations on FTAs. While Thailand posted a high share of 49.3 percent participation in government consultations and 45.6 percent with business associations, the Philippines’ participation is much lower. Consultations with government agencies and business associations are at 18.7 percent and 22.6 percent, respectively. The survey results also showed that SMEs in Thailand and the Philippines ask for more support services and more information on the implications of FTAs on business as well as more awareness trainings on concluded FTAs. Financial support for upgrading technology and skills and enhanced consultations during FTA negotiations is likewise being emphasized. Conclusion and policy implications Dr. Wignaraja’s presentation highlights five policy implications that can help create a more SME-inclusive environment and optimistic business response to FTAs in the region. One, rationalization of ROOs should be encouraged. Widespread gains are possible in pursuing a simplified approach to ROOs in East Asia. Two is to upgrade ROO administration. The limitations in the administration of ROOs resulted in increased transactions costs, specifically to SMEs. Best practices among East Asian and international firms in terms of ROO administration should be shared with SMEs. As lower-income economies rely mostly on paper-based ROO systems, the increased use of IT-based system of ROO ad-
5
ministration and training programs for SMEs are crucial. Three, there should be heightened awareness on FTA use as this is associated with its utilization. This can be done through seminars with SMEs, television programs for business as well as dedicated websites and telephone hotlines. Four, an increased business participation in FTA consultations is warranted. While current participations are noteworthy, there is still a need to increase business participation, especially of SMEs, in consultations prior to negotiations to increase FTA usage. And five, improvement of institutional support systems, particularly for SMEs, is important. Significant public and private investment is required in East Asian countries to improve service coverage, upgrade service quality, and reduce bureaucratic impediments to service use. Business and industry associations should also play a huge role in delivering services to members who utilize FTAs. Dr. Wignaraja noted that to the best of his knowledge, the survey that his team conducted is the first comprehensive firm-level survey of the business impact of East Asian FTAs. This has provided empirical data that the “Asian noodle bowl” or multiple and overlapping FTAs is not yet a cause of concern in the East Asian region. He, however, qualifies that further research with more sample countries and an extended scope of survey would further deepen the results and insights. Finally, Dr. Wignaraja emphasized that as more FTAs are under negotiation, the complexity of the “Asian noodle bowl” as well as the intensity of the FTAs’ impact in business will also increase. Implementation of key policies will therefore help mitigate future negative effects and facilitate a more SME-inclusive business response to FTAs. In this regard, the “Asian noodle bowl” is therefore one noodle that can be put on the table. But not to be eaten; rather, to be discussed and disseminated to firms that utilize or plan to utilize FTAs.CSM
November - December 2008
6
DEVELOPMENT RESEARCH NEWS
November - December 2008
Inequality in access to maternal and child health services cited
T
he Philippines is a signatory to the United Nations’ pledge or commitment to achieve the Millennium Development Goals (MDGs). This commitment includes, among others, the reduction of the under-5 mortality rate by two-thirds and the reduction of the maternal mortality ratio by three-fourths by the year 2015. These goals and the strategies to reach them are further reiterated in the Medium Term Philippine Development Plan 2004–2010 and the National Objectives for Health 2005–2010. At present, reports on the status of attaining said goals show that the country has made some improvements. These improvements, however, have been so gradual that the goal to improve maternal health faces challenges and even threats of not being attained by 2015. In view of this, what then are the chances for the Philippines to accomplish the fourth and fifth MDGs specifically?
Table 1. Health expenditure as percent of GDP 2001
2002
2003
2004
2005
China
4.6
4.8
4.8
4.7
4.7
Indonesia
1.8
1.8
2.2
2.1
2.1
Malaysia
3.5
3.5
4.7
4.5
4.2
Philippines
3.2
3.0
3.3
3.3
3.2
Republic of Korea
5.4
5.3
5.4
5.5
5.9
Singapore
3.7
3.7
4.2
3.7
3.5
Thailand
3.3
3.7
3.9
3.5
3.5
Vietnam
5.7
5.2
5.3
5.7
6.0
In a recent study, “Are Maternal and Child Health Care Programs Reaching the Poorest Regions in the Philippines?,” Dr. Rouselle Lavado, research fellow at the Philippine Institute for Development Studies (PIDS), and Dr. Leizel Lagrada, medical officer at the Department of Health, assessed maternal and child health (MCH) programs in terms of their provision of access to MCH services across economic classes and regions. Drs. Lavado and Lagrada shared the findings of their study in a recent presentation at the PIDS Meeting Room attended by representatives from the United Nations Children’s Fund (UNICEF), Philippine Medical Association (PMA), Human Development Network (HDN), Population Institute, Demographic Research and Development Foundation, Inc. (DRDF), National Statistical Coordination Board (NSCB), Philippine NGO Council on Population, Health and Welfare, Institute for Reproductive Health (IRH), PhilHealth Insurance Corporation, Department of Interior and Local Government (DILG), and the National Economic and Development Authority (NEDA). Health outcomes Compared to other Asian countries, the Philippines is not faring so well in terms of health service expenditure. Health expenditure per gross domestic product (GDP) is consistently one of the lowest among Asian neighbors and below the World Health Organization (WHO) recommendation of 5 percent for developing countries. In 2005, the country lagged behind Vietnam, Republic of Korea, China, Malaysia, Singapore, and Thailand, and exceeded only Indonesia (Table 1).
DEVELOPMENT RESEARCH NEWS
7
The Department of Health (DOH) has identified geographic factors, maldistribution of health facilities and health professionals as well as individual behavior and household socioeconomic factors as barriers to the access to health services. While national MCH services have been satisfactory, Drs. Lavado and Lagrada stressed, however, that health services still do not seem to reach the poor, especially the poorest Philippine regions. Data reveal that maternal and infant mortality rates, as well as child mortality rates have declined in the past 20 years but have remained stagnant since then. The Department of Health (DOH) has identified geographic factors, maldistribution of health facilities and health professionals as well as individual behavior and household socioeconomic factors as barriers to the access to health services. To address these barriers, the MCH program of the DOH has pursued innovative strategies in recent years. The two programs employing said strategies are the subjects of this study. MCH programs The Safe Motherhood Initiative (SMI) recommends that to ensure safe pregnancy, all pregnant women should at least have four prenatal visits during each pregnancy wherein the first prenatal checkup should occur in the first trimester of pregnancy to detect complications early. It is also essential that women have iron or folate supplementation to prevent anemia. Further, delivery should be conducted in a health facility or birthing center and attended to by a skilled medical professional. The Expanded Program on Immunization (EPI), on the other hand, requires full immunization of children to protect them against vaccine-preventable diseases such as tuberculosis, polio, measles, diphtheria, pertussis, and tetanus. Patterns of inequalities As anticipated, those in the richest group are able to make prenatal checkups, deliver their children in a medical facility attended to by a skilled medical professional, and have their children fully immunized. Iron supple-
mentation is, however, equally accessed by the rich and the poor. In terms of immunization services, it is alarming that across all wealth status, only 72.8 percent of households have their children immunized even if the service is offered for free by the government through the barangay health centers. This suggests that despite the subsidy, there remains some gap in the delivery of immunization services. As mentioned, the uptake of MCH services is satisfactory at the national level but when disaggregated according to wealth status and regions, data reveal that only the rich achieved improvements while the poor are left out. The 2003 regional poverty incidence in the Philippines showed that the National Capital Region (NCR) has the lowest poverty rate of 7.3 percent while the Autonomous Region of Muslim Mindanao (ARMM) has the highest with 53.1 percent. These numbers coincide with the prenatal and delivery care utilization in each region such that NCR tops the list where prenatal checkups, deliveries in a medical facility, and full immunization of children are utilized. ARMM ranked lowest in these aspects (Table 2). The authors recounted patterns that explain the inequality in regional utilization of MCH programs. Two patterns were seen in richer regions. One, it is observed that highly urbanized cities like the NCR, Cebu (Region VII), and Davao (Region XI) have high utilization rates of MCH programs but experience more inequality both in wealth distribution and access to services. Two, the outskirts of capitals such as Central Luzon (Region III) and Southern Tagalog (Region IV) experience high utilization too but have more equal wealth distribution and access to services, in contrast with the highly urbanized cities.
November - December 2008
8
DEVELOPMENT RESEARCH NEWS
November - December 2008
Table 2. Antenatal, delivery care, and immunization utilization, per region Checkup during
At least 4
Iron
Births with
Births in a
Children Fully
first trimester
Antenatal Visits
Supplementation
Skilled Attendant
Medical Facility
Immunized
NCR
64.58
81.44
78.82
87.68
73.89
81.19
CAR
47.62
54.17
62.5
65.22
52.17
72.73
Region 1
53.85
61.64
80.82
72.6
27.4
76.06
Region 2
63.04
58.82
68.52
63.46
33.33
75.83
Region 3
59.38
74.24
82.09
93.33
47.01
75.80
Region 4A
61.76
72.07
77.78
76.67
46.67
73.56
Region 4B
46.94
67.92
80
29.63
18.52
68.32
Region 5
27.17
54
73.27
54.55
28
61.98
Region 6
44.79
66.67
85.29
46
33.33
78.54
Region 7
43.86
73.73
90.6
70.94
47.01
73.98
Region 8
28.17
56.58
72
39.47
19.23
70.25
Region 9
58.82
62.07
72.41
40
20.34
60.28
Region 10
45.16
55.22
76.47
43.28
32.84
67.79
Region 11
51.67
68.75
78.13
51.61
46.77
68.18
Region 12
55.38
70.42
71.83
32.86
21.43
74.51
Region 13
46.51
76.74
84.78
46.67
29.55
76.53
ARMM
28.57
43.1
55.17
31.03
15.52
51.67
National Average
48.66
64.56
75.91
55.59
34.88
72.81
Region
SOURCE: Authors’ calculations based on the 2003 National Demographic and Health Survey
Patterns in poorer regions show that there is both low utilization of services and high inequality in access to services. These cases are evident in Bicol and the ARMM. The two regions differ in wealth distribution wherein the former has high inequality in wealth distribution while the latter has more equal wealth distribution. This suggests that exclusion from services may not only be due to lack of wealth but also due to geography, unavailability of accessible MCH services, and beliefs and cultural practices. The authors’ findings bring to the fore a need for unique MCH policies that would suit different regions and asset groups. In line with this, the authors identified barriers that prevent an individual from utilizing health services that could range from the individual’s health knowledge and financial capacity to availability of health facilities, personnel, and services in the area. They recommended possible policies or strategies that should be put in place or strengthened to reduce the inequalities in the utilization of MCH services.
The poor should be the target group in the highly urbanized cities to lessen inequality in wealth distribution and to bridge the gap on access to services. On the other hand, promotion of health programs should be the policy focus for Regions III and IV A. For a poor region like Bicol, the poor up to the middle-income groups should be targeted to increase utilization of MCH programs. For the ARMM, health facilities and workers should be increased along with the conduct of a massive campaign on health programs to increase utilization rate. Lastly, policies for all other regions should emphasize delivery in a medical facility and attendance by a skilled worker. While our country’s commitments to the MDGs act as catalyst for stakeholders to improve delivery of healthcare services and be able to achieve the specified goals, a more important reason for us to work on it is to have a healthy population that translates to development. And it starts from the day that a mother conceives a child in her womb. APQ
DEVELOPMENT RESEARCH NEWS
9
Insurance for the poor
I
llness or injury, death of a family member, man-made calamities, and natural disasters have a devastating effect on poor families’ cash flow, liquidity, and earning capacities, and thus, on household welfare. The continuing risks to household welfare have therefore created a demand for microinsurance products. The development of the microfinance industry is proof that provision of financial services to the poor is a viable and sustainable business activity. For the providers of these products, “a business that focuses on the poor is always the best business,” said Deputy Commissioner Vida Chiong of the Insurance Commission (IC), which acts as the regulator for insurance business in the Philippines, during the recently held dissemination workshop on “Developing Principles for the Regulation of Microinsurance.” The workshop, sponsored by the RIMANSI Organization for Asia and the Pacific, Inc. (RIMANSI), a regional resource center based in the Philippines to help professionalize the management of mutual benefit associations (MBAs) and microinsurance programs that provide affordable, comprehensive, and quality risk protection to millions of poor people in Southeast Asia, in coordination with the Philippine Institute for Development Studies (PIDS), took place at the Romulo Hall of the NEDA sa Makati Building. In her keynote address, Ms. Chiong reminded the key participants—representatives from the microfinance and insurance industry, rural banks, Asian Development Bank (ADB), Bangko Sentral ng Pilipinas
(BSP), Insurance Commission (IC), National Economic and Development Authority (NEDA), Microfinance Council of the Philippines, and the media—that insurance is a business of trust. She added that the industry faces a challenge of having a balance between profit and consumer protection and security. Still, the primary objective is to give service to all Filipinos. More importantly, PIDS President Dr. Josef Yap articulated that access to insurance, especially by the poor, is an important strategy for reducing poverty. Memorandum Circular No. 9-2006 characterizes microinsurance as an insurance business activity of providing specific insurance products that meet the needs of the disadvantaged for risk protection and relief against distress or misfortune. As it is geared for the low-income group, its premium is affordable (not more than $0.85/day) and easily collected, and its terms are easily understood and need simple documentation requirements. However, findings of the study Developing Principles for the Regulation of Microinsurance: Philippine Case Study by PIDS Senior Research Fellow Dr. Gliberto M. Llanto, RIMANSI Consultant Dr. Ma. Piedad Geron, and National Credit Council Director Mr. Joselito S. Almario, show that insurance services are generally out of reach for the poor. Moreover, the emerging “microinsurance” schemes are small in coverage, informal, and operate outside the regulatory framework. In this regard, the study underscored the need for an effective insurance regulation. Market overview In his presentation, Dr. Llanto said that the
November - December 2008
10
DEVELOPMENT RESEARCH NEWS
November - December 2008
Table 1. Features of microinsurance productsa
Coverage
Credit
Life (e.g. PBC)
Medical/Health
Retirement
Outstanding loan (of all
Member and his/her
Hospital / Maternity
members/depositors) /
spouse & children
allowance
to family; cash of
Natural death /
Member & spouse –
Total amount of
P1000-P10000 (NGO) /
accidental death
P200/day, child –
retirement less
P5000 / P20000
(P60k): 50k-life, 5k-
P150/day (2x
outstanding loan (if
(Coops)
burial, 5k-medical
admission per year
any)
Employed members
P3000 and below not covered (NGO) No outstanding loan left Benefits
max of 15 days) / first 3 children – P1000 per child Age/Health limitations 18 – 60 / 65 yrs. old
18 – 60 yrs. old
Child 18 & below
60 yrs old & below
Premium
P820 / year
P10 / week
P5 / week
1 year
None
None
6-10% of outstanding loan (RB, NGO) / P100 per year (Coops) / P2P10/week (NGO)
Contestability
None; 1 mo. / 6 mos.
Source: RIMANSI Survey, 2007 a Table 8 of original paper.
microinsurance market in the Philippines is of low insurance penetration wherein premiums represent only 1.2 percent of gross domestic product (GDP) on the average from 2002–2006. In 2005, per capita expenditure on insurance was reported to be only less than a thousand pesos. Total market estimate of microinsurance is estimated to be at least PhP 2.9 million. The different types of microinsurance products that have been introduced in the market in the last 2–5 years include loan, life, mortuary/burial, accident, medical, retirement/pension, and savings. The common features of these products are outlined in Table 1.
sociations (MBAs), and cooperative service providers. Dr. Llanto shared that informal “in-house” insurance is very common within the cooperative sector. Of the 22,000 estimated operational cooperatives in the Philippines (80% of which are financial cooperatives), about half are estimated to provide some form of “insurance” to their members.
These “informal” products are not regulated by the IC; thus, the unregulated large-scale informal market operations leave the consumers vulnerable, as there is a risk of not delivering the promised benefits to consumers. Moreover, cooperatives’ large informal market activity implies that little innovation In the Philippines, microinsurance is pro- takes place in the formal sector for low-invided by both formal (those that have the come market expansion. necessary license from and are regulated by the IC) and informal (those that may or may Challenges to regulation not be legally registered and do not have any In this regard, Dr. Geron underscored the license to sell insurance policies from the need to formulate a policy on the developIC) sources. Formal providers of insurance ment of microinsurance that is backed with in the Philippines consist of the commer- proper consultation from both the formal cial insurance companies, mutual benefit as- and nonformal market players and abides
11
with strict law supervision and enforcement. She added the importance of reviewing the definition of microinsurance as a product to be able to create an environment that ensures simplicity of terms that can be easily communicated to low-income clients. Meanwhile, effective insurance regulation should also establish a formalization path for informal providers, mostly cooperatives. This, Dr. Geron added, can be done through awareness campaigns, capacity building, and engagement of support from industry organizations and market rating agencies. There is also a need to coordinate with other regulatory agencies to develop appropriate rules for cooperative insurance societies that are necessary to protect the cooperative members’ interests. Countrywide coverage of microinsurance remains extremely low, with only 5.4 percent of the low-income population covered. This implies that majority of the poor do not have an effective means of mitigating risk and are vulnerable to shock. One way to overcome this, according to Dr. Geron, is to clear the ambiguity that present pre-need and healthcare plans bring. They are considered as “insurance� products that fall outside the jurisdiction of the IC and thus apply a different set of rules and regulations. This scenario creates confusion in the market, especially hesitation among the poor to get insurance. The failure of some companies to provide pre-need and healthcare plans is said to have left a widespread impression that all insurance companies are unsafe and unreliable. Aside from government efforts to regulate microinsurance in the country, several institutions have extended support for the industry. Asian Development Bank (ADB) Financial Sector Specialist Mr. Eiichi Sasaki reported that the government of Japan and the ADB made a $1 million grant to improve access to insurance for millions of impoverished Filipinos, most of whom have no financial protection. The said grant, Mr. Sasaki added, will aid the Philippine government in reviewing microinsurance regulation, create standards in operation, and conduct capacitybuilding activities.
November - December 2008
www.worldvision.org
DEVELOPMENT RESEARCH NEWS
Majority of the poor do not have an effective means of mitigating risk and are vulnerable to shock.
Despite the encouraging call for a regulated microinsurance in the country, its success largely depends on the actions of insurers, most especially the commercial insurers, to be able to reach and sustain more low-income clients. Mr. Raymund Bautista of the National Reinsurance Corporation of the Philippines (NRCP) said during the open forum that there is a high degree of uncertainty on the part of the insurers to create products essentially for the low-income group. The economic valuation of clients is important in designing insurance specifically for the poor. Moreover, he said that there is a need for a paradigm shift on the poor's perspective on availing insurance. In return, an increase in the demand for insurance will make efforts to regulate microinsurance more valuable. Efforts to enhance and strengthen the microinsurance industry are underway as this undertaking has provided a better understanding of the policies, legal, regulatory, and supervisory framework in providing insurance services to the poor. The government already has set the tone but it is of utmost importance that performance standards and good corporate governance are enforced to safeguard the interest of customers and the stability of institutions providing microinsurance services. This way, the poor will be empowered to protect themselves from risks and find a way out of poverty while the insurance providers will enjoy the benefits of a good business environment.APQ
DEVELOPMENT RESEARCH NEWS
12
November - December 2008
Assessing national and regional policies using PRGEM
L
arge economic disparities exist among regions in the country. In Mindanao, poverty incidence is 45.5 percent; in the Visayas, it is 39.8 percent while in Luzon, poverty incidence is only 25.3 percent. The NCR and CALABARZON alone account for 45 percent of national GDP, although they represent only 28 percent of the country’s population. Per capita GDP in the national capital is twice that of the country as a whole; it also has the lowest incidence of poverty. The economic structure across regions may vary depending on the level of economic development. Regions in which agriculture accounts for a greater share in GDP tend to have lower per capita GDP. Nationwide, agriculture exhibits lower labor productivity compared to the other sectors, which is consistent with the poor’s high dependence on agriculture. This suggests that a pro-poor regional growth strategy should focus on agricultural development. Regional development must also contend with the country’s harsh geography, which makes it difficult to form linkages across regions. Poor roads, insufficient transportation system, and inadequate storage and warehousing facilities exacerbate the fragmentation, particularly for the transport of farm produce. Clearly, a regional perspective is essential to formulating the national development strategy. There is however a dearth of studies quantifying the regional-specific impacts of national policies, or the national impacts of regional policies. A new policy simulation tool has been recently unveiled to help bridge this gap. The
tool is described and applied in a paper entitled, “Impact Assessment of National and Regional Policies using the Philippine Regional General Equilibrium Model (PRGEM)�, authored by Dr. Roehlano M. Briones, senior research fellow at the Philippine Institute for Development Studies. The PRGEM is the first of its kind to take a regional bottom-up approach, using recent (2000) data, but otherwise adopting standard features typical of CGEs. Construction of the model data also showed how to creatively combine and process several official data sets to arrive at a set of intra- and interregional trade and industry flows. Dr. Briones applied the model to analyze several scenarios, namely: reducing agricultural tariffs to a uniform (5%) structure; investing in market and logistics infrastructure in the lagging regions (regions outside NCR and Southern Luzon); investing in market and logistics infrastructure in the leading regions (NCR and Southern Luzon); and combining tariff reduction and investment in lagging regions. These scenarios highlight several critical issues animating policy debates, i.e., continued trade liberalization in the agricultural sector, regional bias in infrastructure investment, and the alleged need to complement trade liberalization with investments in the agricultural competitiveness of the poorer regions. To summarize the salient findings: first, according to the scenario analysis, the economy in general and even the agriculture-dependent lagging regions would benefit from tariff reforms. 16
DEVELOPMENT RESEARCH NEWS
13
November - December 2008
What caused the global financial crisis of 2008?*
O
n September 15, 2008, the global investment bank Lehman Brothers filed for bankruptcy protection, sending shock waves across the international financial system. This was soon followed by other bankruptcies, bailouts and takeovers of financial institutions in the US and Europe. The high point was reached when Iceland declared itself bankrupt following the meltdown of its financial system. What caused the systemic failure of the global financial system and the subsequent credit crunch? The underlying reasons are a combination of overzealous ideology, financial innovation, faulty policy, perverse incentives, and in some cases, outright deception. These factors are highlighted in the following description of events leading to the current crisis. It should be noted that all these factors are inter-related. For example, faulty policy encouraged financial innovation that led to perverse incentives. Understanding how it happened A typical bank makes loans to customers or borrowers. Before 1999, US commercial banks were restricted in investment activities. The restrictions on commercial banks were embodied in the Glass-Stegall Act of 1933 which essentially put a firewall between investment and commercial banking activities. This was intended primarily to prevent the use of bank deposits to finance speculative capital market activity, e.g. betting on stocks, a practice that contributed to the crisis of the early 1930s.
* Written by Dr. Josef T. Yap, President, Philippine Institute for Development Studies. This article was alo published as Economic Issue of the Day Vol. VIII Nos. 2 and 3 (November 2008).
Commercial banks, however, circumvented these restrictions by partnering with investment banks (e.g., Citibank and Citicorp) and by creating new instruments that were not covered by regulations. These restrictions were also eased over time until the GlassSteagall Act was eventually superseded by the Gramm-Leach-Bliley Act in 1999. The latter deregulated the financial sector thereby allowing commercial and investment banks to consolidate, and opened up competition among banks, securities companies, and insurance companies. The sharp reduction in regulation—largely driven by free-market ideology—can be seen in the financial innovation that created mechanisms for banks to convert large number of loans into asset-backed securities and sell them via capital markets to institutional and individual investors around the world (Figure 1). These asset-backed securities are part of the “derivatives” that were created during the past 35 years mainly to avoid regulation. Derivatives are financial contracts or instruments whose values are derived from the value of something else known as the underlying. The underlying on which a derivative is based can be an asset, e.g., commodities, equities or stocks, residential mortgages, commercial real estate, loans, bonds; or an index, e.g., interest rates, exchange rates, stock market indices, consumer price index; or other items, e.g., weather conditions; or even other derivatives. Credit derivatives are based on loans, bonds or other forms of credit. An important example is the credit default swap, which had a crucial role in the global financial crisis. A credit default swap (CDS)—which was conceptualized in 1994 by JPMorgan— is a credit
DEVELOPMENT RESEARCH NEWS
14
November - December 2008
Figure 1. Anatomy of a vulnerable financial system 2007. The notional value of credit default swap derivatives, meanwhile, rose from about $6 trillion in December 2004 to $62 trillion three years later.1 Because of the surge in loanable funds, good or “prime” borrowers eventually became scarce. Thus, financial institutions turned to subprime borrowers. A subprime loan is a loan given to borrowers who are considered more risky, or less likely to be able to make their loan payments, in relation to high quality borrowers. Apart from the increase in their loanable funds, banks were encouraged to lend more between 2003 and mid-2007 because of the situation in the financial markets: interest rates, risk spreads, volatility and corporate default rates were exceptionally low and corporate profits were high. derivative contract between two parties. The buyer makes periodic payments (premium leg) to the seller, and in return, receives a payoff (protection or default leg) if an underlying financial instrument defaults. CDS contracts have been compared to insurance, because the buyer pays a premium and in return receives a sum of money from the seller if a specified event occurs. Under normal circumstances, a bank is supposed to hold in reserve an amount of money to protect itself against bad loans. However, the CDS substituted for this arrangement. In Figure 1, for example, Bank A purchases a CDS from Bank B. The former pays premium to Bank B. In case a borrower of Bank A defaults, Bank B has to cover the loss by virtue of the CDS. Interestingly, many financial institutions were tied to one another through these deals. One can imagine Bank B buying a CDS from a Bank C and the latter buying a CDS from Bank A! The CDS and asset-backed securities freed up bank capital that would have been held in reserve, thereby creating more loans that led to the rise in the absolute and relative size of financial markets. For example, US credit market debt rose from 168 percent of GDP in 1981 to over 350 percent of GDP in 2007. The notional value of all derivative contracts rose from about three times of global GDP in 1999 to over 11 times of GDP in
Moreover, the subprime loans could be securitized and combined with less-risky assets in order to conceal the former’s riskiness. Other investors therefore unwittingly assumed the high risk involved. Some analysts even contend that banks purchased each other’s asset-backed securities to create an atmosphere of a bull market, thereby encouraging other investors to jump in. Most of the subprime loans were channeled to the housing market because of the favorable conditions at that time. Rising real estate prices and low interest rates made it relatively easy for subprime borrowers to make payments on their loans.2 If they ran into financial trouble, they could tap the equity in their home—the higher price of their homes increased the value of the collateral—to refinance at more favorable terms or to make their mortgage payment. Unfortunately, real estate prices came tumbling down, triggered by an oversupply in the housing market and rising interest rates. This caused many borrowers to default on their loans. In 2007, nearly 1.3 million U.S. 1 These figures are obtained from an article by James Crotty (2008): “Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’” downloaded from http://www.networkideas.org/ featart/oct2008/Financial_Architecture.pdf. 2 The value of USA subprime mortgages was estimated at $1.3 trillion in March 2007. Between 1997 and 2006, the price of the typical American house increased by 124 percent. Since then, however, prices have fallen and as of November 2008, they have fallen by 22 percent on average.
DEVELOPMENT RESEARCH NEWS
housing properties were subject to foreclosure activity. Several banks started to dispose of real estate in their balance sheets to cover bad loans causing housing prices to drop further. The slump in the housing market triggered a US recession in 2007 which likely caused loan defaults in other sectors. Some banks like Lehman Brothers were more heavily exposed to subprime loans and securities backed by subprime loans and had no choice but to declare bankruptcy.3 However, since many US banks were tied together because of the credit default swaps, the entire financial system was dragged down by the subprime mortgage crisis and US recession. Many banks and individuals abroad had also invested in securitized assets backed by subprime mortgages. Their investments thus turned sour because the assets on which they were based became worthless. Addressing the crisis The critical question is how to address the current global financial crisis. Details are not covered in this present write-up but the general approach in the short term is a bailout by the government. The primary beneficiaries of the proposed bailouts are the financial institutions in order to assure the continued flow of credit. One approach is for government to extend loans to the distressed 3
As of August 2008, financial firms around the globe have written down their holdings of subprime-related securities by US$501 billion. Data for footnotes [2] and [3] obtained fromhttp://en.wikipedia.org/wiki/ Subprime_mortgage_crisis.
15
financial institution in exchange for a degree of corporate control. For example, the insurance firm American International Group (AIG) was given assistance by the US government because it was a linchpin in the CDS market. It is estimated that at the time of its bailout, AIG held $440 billion of credit default swaps. Other analysts have proposed that borrowers be direct beneficiaries of the bailout. It should, however, be recognized that the present financial crisis is related to many past crises. The root cause is the unipolar global financial system, the main features of which are that most of the international trade is denominated in US dollars, most of the international reserves are held in US dollars, and the US can pay for its external deficits by printing dollars which it does not expect to be redeemed in the foreseeable future. The misuse of this privilege by the US has led to an excess of global liquidity that has resulted in overlending, overborrowing, and asset price volatility. Developing countries, including the Philippines, could be considered one of the first subprime borrowers. During the international debt crisis of the 1980s creditors got away virtually unscathed with the debt being socialized and absorbed by the citizens of the borrowing countries. The long-term solution therefore calls for a fundamental reform of the International Financial Architecture, a topic that has been discussed extensively in other fora. D R N
November - December 2008
16
DEVELOPMENT RESEARCH NEWS
November - December 2008
DEVELOPMENT RESEARCH NEWS is a bimonthly
STAFF BOX
DEVELOPMENT RESEARCH NEWS
publication of the PHILIPPINE INSTITUTE FOR
Vol. XXVI No. 6
DEVELOPMENT STUDIES (PIDS). It highlights the findings
November - December 2008
and recommendations of PIDS research projects and important
ISSN 0115 - 9097
policy issues discussed during PIDS seminars. PIDS is a nonstock,
Editorial Board: Dr. Josef T. Yap, President; Mr. Mario C. Feranil, OIC Vice-President and Director for Project
nonprofit government research institution engaged in long-term,
Services and Development; Ms. Jennifer P.T. Liguton, Director for Research Information; Ms. Andrea S. Agcaoili, Director for Operations and Finance; Atty. Roque A. Sorioso, Legal Consultant.
policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute or any of the studies' sponsors. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff
Staff: Jennifer P.T. Liguton, Editor-in-
Philippine Institute for Development Studies
Chief; Ma.Aileen A. Garcia, Issue Edi-
Fifth floor, NEDA sa Makati Bldg., 106 Amorsolo Street, Legaspi Village
tor and Layout Artist; Claudette S.
1229 Makati City, Philippines
Malana and Analia P. Quion, Writers;
Telephone numbers 894-2584 and 893-9585 to 893-9592
Jane Alcantara, Ma. Gizelle Gutierrez
Telefax numbers (632) 893-9589 and 816-1091
and Edwin S. Martin, Contributors;
E-mail address: publications@pidsnet.pids.gov.ph
Valentina V. Tolentino and Rossana P. Cleofas, Exchange; Delia S. Romero, Gerald Jay S. Libiran, Necita Z.Aquino and Michael Caturan, Circulation and Subscription.
Reentered as second class mail at the Makati Central Post Office under Permit No. PS-570-04 NCR. Valid until December 31, 2008. Annual subscription rates are: P200.00 for local subscribers and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice. ○
○
○
○
○
○
○
○
○
○
○
○
○
Assessing.....from p. 12 ○
POLICY NOTES 2008: PN 2008-01 PN 2008-02 PN 2008-03 PN 2008-04 PN 2008-05 PN 2008-06 PN 2008-07 PN 2008-08 PN 2008-09 PN 2008-10 PN 2008-11 PN 2008-12
Fishpen and Fishcage Culture in Laguna de Bay: Its Importance and Problems The Autobus Is Leaving...Can the Philippines Catch It? Ensuring a More Evidence-based Policy for Basic Education Regional Cooperation in East Asia Amid Global Economic Turmoil Dealing with the Soaring Price of Rice Microinsurance: Does Traditional Regulation Apply? Are Recent Gains in BIR Tax Effort Sustainable? Restructuring the Philippine Statistical System in Response to New Challenges Make 'Deliberate' Haste in Rolling Out the 4Ps Lessons for the Philippines from the US Financial Crisis Issues on Counting the Poor Addressing Policy Issues and Constraints in Agricultural Diversification: the Potential Contribution of the Fruits and Vegetables Subsector
Visit: http://publication.pids.gov.ph/pnotes.phtml
○
○
○
○
○
○
○
○
○
○
○
○
Second, reforms in agricultural trade may not deliver a substantial scope of benefits as compared to what improvements in marketing infrastructure would bring. Third, concentrating infrastructure investments in the leading regions might benefit the economy as a whole, more than investments biased to the lagging regions; however, the distribution of economic benefits would be skewed in favor of the already affluent regions. Lastly, tariff reform and regional investment are not complementary, in the sense that there is no additional social gain or welfare synergy from simultaneous implementation. However, such investments may assist some agricultural sectors to adjust better to competition from cheap imports. Much work needs to be done in the area of regional policy and impact assessment. The PRGEM is one important step in this broader research thrust. This thrust offers valuable support for informing decisions, policies, and advocacies of various stakeholders, both in government and in civil society, at the national and local levels.CSM