Summaries of Studies on Public Finance by Ronald Yacat

VOLUME II NOS. 1-12

JANUARY-DECEMBER

III

1984

ISSN 0115-9097

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PUBLIC FINANCE "PUBLIC FINANCE IN THE PHILIPPINES: A REVIEW OF THE LITERATURE" in PIDS SURVEY OF PHILIPPINE DEVELOPMENT RESEARCH II by Rosario G. Manasan, Research Fellow, PIDS

This study is organized into four main areas: (1) taxation, (2) government expenditure, (3) the budget process,and (4) public debt. Issues on taxation discussed in the literature include the following: tax performance, tax incidence, allocation effects of taxation, taxation and inflation, and tax forecasting. Tax performance is by far the most widely researchedtopic in the area of taxation, Inter-country studies indicate that the Philippine tax performance may be characterized as low. A study usingtime seriesdata did not only confirm this observation but also pointed out the deteriorating Philip_ pine tax performanceduring the period 1955-1970. On governmentexpenditures,the survey indicates that there is a dearth of studies in this area. The few studiestend to concentrate on: (1) the determinants of government expenditures, and (2) the incidence of government expenditures. It is observed that the expansionof the economy generatesagreater increase in governmental expenditures than in total taxes, Government expenditures are also found to be progressive in nature, that is, the ones benefitting most from government expenditures belong to the lower-

"EDITOR'S NOTE: Over' the years, PIDS has undertaken several studies touching on various aspects of public finance, notably on the Philippine tax system and the budget process. This special issue of the Development Research News (DRN) is devoted to_a review of some of these studies as well as studies conducted by other institutions. We wish to announce that thisp, ublication will now come -out............. every two months, although subscription rates will remain the same. This move is prompted by the increasing cost of printing. This special issue, however, covers the whole year of 1984. income groups. The surveytakes note of the study of Tan (1975) which, in general terms, concludes that the government sector, as a whole, hardly changed the distribution of incomeandthat "the regressiveness of taxes were (sic) just offset by the progressiveness of governmentspending." On the budget system, the issuesmay be divided into: (1) the budget and economic development and (2) administrative issues,in a study (Riha, 1975} which investigatesthe effect of budget changeson GNP, the author indicates that year-to-year changes in the budget exerted an upward push on GNP at a rate of 0.63 percent on the averagefor the period 1947-73. Regarding the administrative aspectof the budget, Fernandez (1975) points out that the delineation of

CONTENTS SUMMARIES FINANCE SEMINARS

OF STUDIES ..........................

PUBLIC 1-11

SMALL FARM MECHANIZATION ........ FOREST RESOURCES MANAGEMENT ... GOVERNMENT FINANCE STATISTICS ... FOOD AND EXPORT CROP INCOMES .... MONETARY AGGREGATES AND ECONOMIC ACTIVITY ....................... mlll

ii ii

ill I

....

ilL

PRODUCTIVITY CHANGE IN PHILIPPINE INDUSTRY .......................... PUBLIC POLICY AND THE PHILIPPINE HOUSING MARKET ................... FORECASTING MONTHLY INFLATION IN THE PHILIPPINES .................. DEVELOPMENT FINANCE AND STATE BANKING ........................... PIDS PUBLICATIONS .....................

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budget expenditures into current operating and capital outlays tends to be misleading inasmuch as current expenditures may contain a developmental element, The need for medium-term and long-term fiscal planning (rather than annually) is also stressed by somestudies(e.g.,Claudio, 1978). This isespecially critical if one considersthe time lagsinvolved, Existing literature on public debt in the Philippines have concentrated on two issues:(1) the level of debt, and (2) debt and inflation. For the period 1950-1972, the Philippine ratio of public debt to GNP was considered low compared to that of the United States and those of other Asian countries, With regard to public debt and inflation, it is claimed that since money supply expansion is not a principal factor in Philippine inflation as indicated by other studies, public borrowings which contribute to increasesin money supply do not have a significant bearingon Philippine inflation. Of course, this is not the best way to test the hypothesized relationship between public debtand inflation. In retrospect, it is observedthat taxation attracts the greatest amount of interest and work effort in the area of public finance, while the budget process and public debt are the least explored topics. Moreover, the bulk of the researchwork was conducted in the period of the sixties. In the 1970s, interest in the field appearedto be on the wane. Based on the review of existing literature on public finance, the following research projects are proposed by the study:

_-I JANUARYi_ III I

DECEMBER 1984 JllllIll

AN ECONOMETRIC MODEL FOR FORIECASTING NATIONALANDREGIONALTAX COL;LECTI_NS: A CONSOLIDATEDREPORT .... ,i=': ;''_ by Rosario G. Manasan,:;Re_earchFellow, PIDS '/0

Tax revenue forecasting is an essential input in the budgetaryprocess.The ability to project and forecast future tax collections is an important element in the identification of future budgetary gapsand in the planhingof new tax measuresthat may be needed to meet these needs. In addition, taxes play a major role in the financing of the country's economic and social development. The government'stax collection agenciesassumea pivotal role in this respect.A good tax forecasting model may therefore be usedasgauge against which to measure the government's tax collection efforts. It is the purpose of this paperto develop,specify and estimate a forecasting model for internal taxes (i.e., taxes collected by the Bureau of Internal Revenue). In particular, this paper attempts to estimate a tax forecasting model that has a higher level of disaggregation(both in the number of tax categoriesstudied and in terms of a regional breakdown), includes, in the specification, determinants other than tax bases, and considers various proxy variablesfor the tax bases. Total tax collections fall into four general care- I gories, namely: (1) income taxes, (2) license and businesstaxes, (3) specific taxes, and (4) other taxes. Some 70 sub-categories are divided into these four main groupings in the national level. 1. A more comprehensive study on fiscal incenThe study also attempts to do forecasting at the tives. This should consist of a critical review of the regional level. However, since specific taxes are assumptions made in the previous studies with regard collected by the BIR Central Office only, the same to the allocation of government expenditure benefits was not included in the forecasting work at the and tax burden to the various income groups as well regional level. Due to data unavailability, a more as quantification of the incidence of other fiscal aggregated grouping of taxes was used at the regional policies like price control on certain consumption effort. goods, price support on certain outputs, subsidies Structural single equation forecasting models are on some inputs, etc. specified and estimated for a selected number of these sub-categories for the period 1961-1978. The 2. Study on government revenue forecasting, rest are estimated through the useof identities. Previous efforts along this line made use of very In the regional level, however, the estimation limited information, period is: 1975-1981 for revenue regions (RR) 1, 2 3. Substantive work on long-term budgeting. This and 9, 1976-1981 for RR-5, 1974-1981 for RR-7, should include the development of an econometric and 1972-1.981 for RR-8. projection model or programming model. The determinants used to explain and forecast the movements of the tax variables may be classified into 4. Study on the incidence of fiscal policy on two groupings: (1) variables that reflect the tax bases; the different industrial sectors. This should include and (2) variables that reflect changes in the tax an investigation of the protective effects of internal structure and tax rates over time. A third group, taxes on the different industries. Almost all of the variables that reflect the collection effort of the i previous works on public finance are fragmented, revenue regions, is included in the regional level in the sensethat only one sub-sector, e.g. taxation, is estimation. considered. A model of the public sector should This study also deals with the concepts of tax provide the badly needed cohesivenessby accounting buoyancy and tax elasticity as measurements for for the interrelationship among the different subassessing the responsiveness of tax reforms. The sectors. â&#x20AC;˘ study relates these concepts to tax bases,and defines I II IIIII llllll IIIII I I IIII I

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tax buoyancy as the ratio of the proportional change in tax revenues to the proportional change in the tax base, with revenue change inclusive of the effects of the discretionary changes brought about by such things as the introduction of new tax measures. On the other hand, tax elasticity is defined as the ratio of the percentage change in the tax revenue to the percentage change in the tax base, with the revenue increase "cleaned" of the effects of discretionary factors (i.e., tax reforms). According to the study, the internal revenue system during the period 1961-1978 yielded a tax buoyancy estimate of 1.139, implying an increase of 1.139 percent in tax revenues for every one percent increase in GNP. It speaks well of the responsiveness of the overall tax system to economic growth, The study also presents elasticity estimates for each of the major categories of taxes. For income taxes, the elasticity estimate with respect to GNP was placed at 1.179 for the period 1961-1967, and 1.114 for 1968-1978. This meansthat for every one percent increase in GNP, tax revenuesfrom income increased by 1.179 percent during the period 1961-1967, and by 1.114 percent in 1968-1978. Likewise, statistical tests show that there is no significant difference between the elasticity estimates of the two periods, Moreover, the elasticity of the individual income ' tax with respect to personal income is in the vicinity of 1.30 - 1.46. In contrast, the elasticity of the corporate income tax with respect to corporate income is relatively lower ranging from 0.82 to 1.07. For license and business taxes, the study also gives buoyancy estimates (which, aside from looking into the responsiveness of these taxes to changes in their respective bases, also looks into their responsivenessaccording to changes in the tax rates imposed on them). As a whole, license and businesstaxes are buoyant with respect to grossvalue added in the nonagricultural sector, with a buoyancy estimate of 1.127. However, if one disaggregatesbusiness and license taxes into fixed and percentage types, there is a difference between them. Percentage taxes are less buoyant with regard to gross value added in the nonagricultural sector than fixed taxes (which were estimated to have a buoyancy rate of 1.1745). For specific taxes (i.e., those levied on tobacco and petroleum products), the elasticity with regard to their respective bases are considerably less than one. This evidence points to the inefficiency of the specific taxes in raising revenues. This is because an increase in the sales of the above products would not lead to a corresponding increase in the total revenues collected from the specific taxes levied on them. â&#x20AC;˘

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FINANCING THE BUDGETiDIEFICIT _' ' by Eli Remoiona, University ',ofthe Phllipl_es : /. School of Economics (UPSE) : _'"; ; j',,_';: While the government has been incurring heavy budgetary deficits, no well established guidelines on how to finance a budget deficit have beenformulated. One contribution to this area is this study by Eli M. Remolona of the University of the Philippines School of Economics (UPSE), entitled "Financing the Budget Deficit," which discusses a theory on the optimal mix of policy instruments for financing the deficit of less developed countries like the Philippines. The study discusses three different methods of financing a budget deficit, namely: (1) the creation of base money, (2)public borrowing either from domestic or foreign sources, and (3) the imposition of reserve requirements on financial institutions. Determining the optimal combination of these methods is critical becausethey have far-reachingimplications on resource allocation and the overallstability of the economy. Moreover, the government can also operationally resort to drawing on its cash deposits as a temporary measure. Normally, the government draws down on its deposit balances when it wishes to refrain from issuing too much debt to finance a budget deficit. In practice, however, the Philippine government's debt issue has usually exceeded the budget deficit, specially 16 times in the 12-year period under study (1970-81). During these times, the government issued more debt than the deficit required and used the excess funds to build up its deposits in the banking system. The study then further evaluates the three methods enumerated earlier, in the context of Philippine experience. Each of these methods is examined from the standpoint of second-best policy with regard to the presence of distortions in the Philippine capital market. These distortions take the form of financial repressions and tariff protection. The financial repression is caused by various banking regulations, particularly usury ceilings, which have fragmented financial markets and prevented interest rates from reflecting the real scarcity value of capital. In terms of tariff protection, meanwhile, the tariff structure of the country has resulted in widely varying effective rates of protection and in over-investment in certain capital intensive industries. Thus, for as long as these distortions exist, secondbest policies (or policies that do not discourage savings any further nor reinforce the distorted pattern of investment) are called for. This study further points out that since financial repression is imposed mainly through ceilings on nominal interest rates, base money creation (to the extent that it is inflationary) can only make matters worse. As such, inflation is a tax not only on real I III III IIII I I I

Figure

GROWTH OF GOVERNMENT

EXPENDITURES

( In Million

AND REVENUES,

1975-198:5

Pesos )

m7 :;0

LEGEND MILL|OK PESOS 70,000

GOVERNMENT EXPENDITURES

_OVER_IME_IT REVEPIUES

F" :i

60,O001L--

'_.

50,000

o.ooo '째째째:LN IililNI)Iii)I/tJflIINIlillMIII!I )IIN .

40pO00 i

i975

SOURCE : |9e4

1976

I_IEDA sTAr[sTiGAL YEARBO0{<

_.97T

197(I

1979

1980

t98 [

|982

1983

rib.

PIDSDEVELOPMENTRESEAR, INEWS 5 IIII II III money balances but also on savings deposits. And it is a cruel tax because,as it lowers the real interest rates, it raisesthe subsidy on the already privileged classof borrowers; while making the burden on small savers even more oppressive. Meanwhile, with regardto public borrowing, the study differentiates between domestic and foreign borrowing becauseof the importance to the country of balance of payments. By undertaking a public debt, it must in one way or the other be servicedby taxes in the future. This will be equivalent to a tax on saving. In a regime of trade and financial repression, sucha tax would only aggravatethe situation, Furthermore, the "crowding out" effect of public domestic borrowing on private investment must be considered.In a repressedeconomy, the crowding out is not necessarily in the form of higher interest rates (since those rates are largely controlled), but through reduction in the amount of rationed credit available to private investors. This amount is reduced not only because of what the government appropriates for itself but also because the flow of savings is reduced in anticipation of future tax liabilities. Therefore, financing the budget by means of domestic borrowing should be avoided, And, more so with foreign debt1 Servicing foreign debt somehow entails more burdensome taxes, and hence more discouraging perverse tendency of a repressed to incurbetween current-account defined aseconomy the difference domesticdeficits, investment and domestic saving. The study states that the more the government borrows from abroad, the greater the current-account deficit, The study then points out that for a lessdeveloped country, the last resort in financing a budget deficit is the imposition of reserve requirements on financial institutions. The reserve requirement serves as a tax on financial intermediations so long as forms of government debt used as reserve assetsyield lower rates of return than the rates that prevail in the market. The study notes that when the government borrows by requiring financial institutions to hold its debt as reserves,the effect is not to tax savings but to tax loans. By raising loan rates, the reservetax serves to soak up the rents accruing to the privileged classof borrowers who have accessto cheap credit. The study expresses concern, though, that the reserve tax be exercised with care. Furthermore, t reserve requirement should be phased out as soon as liberalization is achieved. At this point, money creation and public borrowing become the preferred instruments to finance a budget deficit. â&#x20AC;˘

")JANUARY-DECEMBER 1984 IIIII I II II III I ECTIVE PROTECTION RATES AND [RNAL IND|RECTTAXES IN THEPHILIPPINE SE_T|NG (Staff Paper Series No. 83@4) by;_=_eG.: Manasan, Research FelIow;PIDS The objective of this study is to examine the importance of indirect taxes in the measurement of effective protection rates under various schemes,and consequently to provide some guidelines on which the government can base its action regardingthe soCalled"realignment" issue. The present thrust of the government on realignment is to remove the protective effects arising from the indirect tax system, and leave the "protecting" function to the tariff structure. The paper describes the operation of the existing indirect tax system and expounds on its protective nature. A theoretical framework is also presented in which the protective effects of indirect taxes are separated from that o_ the tariff system. For the purposes of the study, four types of indirect-taxes are considered: the specific tax, the local sales tax, the advance salestax, and the compensating tax. The specific tax is a tax equal to a_specified amount per unit produced and applies to selected articles notably tobacco, petroleum and alcoholic products. The rest are taxes levied on an ad valorem basis. The local sales tax applies to domestically produced goods. The advance sales tax applies to imported goods that will be subjected to further processing and/or those which will be resold. The compensating tax applies to imported goods for personal use and which does not form part of another good for sale. Among others, it applies on imported capital equipment. The protective effect of the Philippine indirect tax system, according to the study, is due to one or a combination of some of the following features: 1. differential tax rates for imported and domestically produced goods; 2. timing of the tax payments for imported and domestically produced goods; 3, the valuation of the tax base of imported and domestically producedgoods; 4. the markup that applies to the tax base of imported goods; and 5. the extent to which tax credits can be availed of. To measure the protection arising from differential sales tax rates that apply on imported and domestically produced goods, the study utilizes the concept of effective protection rate or EPR. In contrast to the nominal protection rate which measures in relative terms the excess of the domestic price of a product over its border.price, the EPR is defined as the percentage excess of domestic value added over the free trade value added of a given activity resulting from the imposition of tariffs and other protective measures. fill IIII

PIDSDEVELOPMENTRESEARI I NEWS 6 JANUARY--DECEMBER 1984 I IIII III III 11111 II Under a value added tax system that operates up valorem tax on property which includes land, buildto the manufacturer's level (like that which is currentings, machinery and other improvements attached i y being enforced in the Philippines) where sales and or affixed to real property. specific taxes actually paid on intermediate inputs It is observed that the potential of the real pro_ used are allowed as tax credits against sales tax due perry tax to meet fund requirements and operational on the end product, EPR estimation should take needs of local units has not been fully tapped. Thereaccount of said tax credit on inputs, fore, there is a need to administer this fund more Four different EPR estimates are made based on efficiently, it being the second most important rethe 237 x 237 I-0 tables for 1974. The first estimate venue source of local governments. An improvement (EPRI) takes into account both the existing tax credit in its administration cou[d substantially lessen local (i.e,, a non-holding cost arising from advance paygovernment dependence on the national authority. ments of sales tax on imports. The second estimate Real property is classified into residential, agri(EPR2) considers the existing tax credit system but cultural, commercial and industrial. In the case of assumes that the tax credit is obtained immediately land, the category of mineral land is also added, and costlessly in all cases. The third estimate (EPR3) Based on the classification, the appropriate appraisal assumes a uniform value added system and no addior assessment of the property is made to effect a tional capital costs. The fourth estimate assumesa differential tax treatment in consideration of the hypothetical situation where the 1985 tariff rates and sharing of the tax burden. the 1983 internal tax rates are operative but where The study then proceeds to explain the actual no tax credit is allowed for taxes on imports, basis of assessment of the real property, the rate of This analysis shows that (1) in general, the value the tax, the manner of computing for the tax, and the added system has no protective effect if it treats collection process. imports and locally produced goods uniformly and if The literature on real property taxation, is also one abstracts from capital holding costs, (2) in the reviewed, starting off with the claim that the criteria case of intermediate goods, a non-uniform value used for assessingreal property tax in less developed added tax system has no protective effect regardless countries like the Philippines are based on consideraof the inclusion or non-inclusion of capital holding tions imposed on other policies like allocative ofcosts, (3) in the caseof final goods, a discriminatory ficiency, distributive equity, economic stability (not value added tax scheme could have some protective that important here, though, as the other considereffect regardless of the inclusion or non-inclusion of ations) and growth. capital holding costs. The literature normally touches on two aspects: Finally, the study provides the following conclu(a) the economic aspects of the real property tax, and sions on the protective effects of the different in(b) the collection and administration of taxes as well direct taxes: as the legal ramifications of various tax designs and (1) the protective effect of the additional capital hop costs of administering different tax packages. ding costs is slight, In terms of the literature on economic aspects, (2) ignoring capital costs, the existing internal inmost of the studies on real property tax are pre= direct tax system has no protective effect in the occupied with the question of allocative efficiency case of intermediate goods, and goods which are and the incidence of tax and therefore the equity subject to a uniform salestax rate, consideration. The question of altocative efficiency (3) the protective effect of the value added tax sysenters the discussions primarily because the final tem in cases where a good is subject to nonpayor of the tax depends on how much of the tax can uniform rates is considerable, be shifted through adjustments in prices and quan(4) the protective effect of the mark-up provision, if titles. This in turn depends on the different supply, in fact a source of discrimination, is not negligible demand and substitution elasticities so that shifting although it is lessthan (3), and of taxes implies rearrangements in resource alloca(5) the protective effect of the shift from a singletion. stage sales tax to a value added tax system is not The studies on the incidence of real property small. â&#x20AC;˘ taxes, meanwhile, can be divided into the "tradiR,EAL,,PROPERTY TAXATION IN THE PHiL|_PiN,ES: ISSUES AND RESEARCH DIRE_T.IONS (Staft_perSeries No, 84-01) W. Paderanga, Jr., University of the SChool of Economics (UPSE) This study starts with a description of the real property tax. It defines real property tax as an ad |1

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tional" and "new" schools of thought or views. The "traditional" view holds that the property tax would be divided into that imposed on land (site value) and that imposed on improvements. The tax on site values would be paid by the land-owners through lowered assets value ("capitalized") while that on improvements would be passed on to consumers of the final product, The "'new" view, on the other hand, holds that the tax is borne by owners of property (land and improvements). According to this view, the main I

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PIDS DEVELOPMENT RESEA_ tNEWS 7 "-- _JANUARY - DECEMBER 1984 ...... IIII IIII I1[ I effect of the property tax is to reduce the rate of capacity of local governments while, on the other return on capital -- both reproducible and non-reprohand, there is an absence of adequate tools for the ducible. Thus the current owners of all capital bear assessor like tax maps and appropriate training. In the tax in the form of a reduced income in their addition, there is confusion surrounding jurisdic_ssets. tions and questions of ownership. With regard to the literature on the collection and administration of taxes, the emphasis of the studies is on the legality, equity and efficiency of methods and procedures. Among the topics of specific interest are: efficiency and costs of administration; quality of assessmentand assessors;tools of real property taxation like tax maps; and the administrative implications of tax laws. The study observes that most of the studies on the Philippine real property tax system are of the latter type. There are four groups which have been main centers of this type of research in the Philippines, namely: (a) National Tax Research Center; (b) University of the Philippines Law Center; (c) Syracuse University Study Group commissioned by the United States Agency for International Development to do a study of local government finance in the Philippines; and (d) Business Research Foundation of the College of BusinessAdministration of the University of the Philippines. Providing a preliminary analysis of the incidence and allocative effects of real property tax, the study says that at first, it may be concluded that the real property tax burden distribution is progressive since income from ownership of property is more important to high-income than to low-income groups, However, it says that it mav also be regressive since it may be shifted forward to final consumersof businessservicesand occupantsof housing. Thus, property values may increaseor decrease and the tax burden may be progressiveor regressive with the imposition of real property taxes, depending on the counterbalancingof the taxand benefit effect and on the kinds of real property taxed, The study brings out the following issues and points that may be raised in future research as well as in discussing policies and programs for real property tax improvements: 1. Different levels of assessmentare used depending on the type of use, resulting in the retardation of the conversion of real property from some uses to others, e.g., from agricultural to commercial property as well as in the distortion of the combination of reproducible capital (buildings and machinery) and land away from the former, 2. The standard of "actual use" instead of "best use" for purposes of assessmentof real property may artificially prolong the devotion of real property to one use even if conditions warrant its transformation _o a better use. 3. Regarding administration, there seems to be the presence of numerous special levieswith funds earmarked for specific purposeswhich erodesthe taxing _ I IIII [ II JII

4. For future research, studies on quantitative magnitudes of parameters which determine the extent of shifting should be encouraged. Studies dealing with the supply of caloital - whether it is elastic or inelastic - should likewise be promoted. Also, empirical estimates on the economic effects of the real property tax. More specifically, the scope for research in the immediate future may be envisioned in two phases, to wit: Phase I -- Empirical estimates of coefficients including: (a) factor intensities of different industries (b) elasticities of substitution in production of the affected commodities (c) elasticities of supply and demand (d) lags in adjustment Phase II - Implications of coefficients - coefficients can be used in a simulation model to answer questions on: (a) the incidence of the property tax and its effect on equity (b) land development (c) capital intensity of production, and other topicse ENTERPRISE:IN THE PHILIPPINES IN A DEFINITIONAL AND TAXONOMICAL ClSE (Staff Paper Series No. 84-02) Manasan, ResearchFellow, PIDS The purpose of this study is three fold: (1) to attempt to have a working definition of the term "public enterprise"; (2) to establish and delimit the perimeters of the existing Philippine public enterprise set based on the working definition adopted and consequently to provide a listing of public enterprises in the Philippines in 1982; and (3) to classify and categorize the said set into smaller partitions meaningful for purposes of economic activity. The significance of this study can be viewed in the context of the role of public enterprises in a developing economy. In the Philippines, there has been a rapid expansion in the number of government owned and/or controlled corporations. Citing various sources, the study reports that from only 13 state enterprises in 1951, the number grew to 37 in 1964. Figures from the Commission on Audit (COA 1973, 1982, 1983) show an increase from 70 in 1973 to 131 in 1982. The latter does not include the 53 state universities and approximately 141 subsidiary corporations of the government. With regardto the definition of the term "public I II IIII I IIII

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enterprise", the study reviews various definitions of the term "public enterprise" and from the review, suggests that the following dimensions and elements are essential, A. Dimensions of "Publicness" 1. Public ownership - This can either be direct (i.e., when the entity is set up by government funds) or indirect (i.e., when the entity is owned by one or more entities partly or wholly owned by the government). 2. Control - This implies that the government has the power to appoint top management or that the government directly exercises top managerial functions like the formulation of investment, capital financing, pricing, and wage policies, 3. Purpose and intent -- This refers to the motives with which public enterprises are established (i.e., regulatory, developmem tal/promotional, infrastructural and commercial), 4. Autonomy - This relates to the question of whether or not departmental/ministerial agencies engaged in some business undertaking should be excluded from the public enterprise set, separate from public organizations and public corporations of other independent legal form. B. Dimensions of Enterprise (i.e., business characteristics)

5. Nature of good or service provided - This refers to the distinction between public and private goods. Public goodsare characterized by non-excludability (i.e., the cost of the good should not prevent the possibility of others from consuming the good) and non-rivalry (i.e., an individual's consumption of the good does not reduce the benefits simultaneously accruing to all other individuals from the same good), A private good is one characterized by rivalry in consumption and excludability in distribution, 6. Field of activity - Some authors take the view that public enterprises should engage in someeconomic activity like agriculture, mining, manufacturing, utilities, construction, finance, trade, communication and services. Activities such as public administration, national defense, cultural and social services are deemed to have no businessflavor and thus are not included, 7. "Marketedness" of output - This implies that a price is placed on the output of the enterprise, 8. Cost recovery - This may be partial or cornplete. Current revenue may cover, either II I LI ili I

JANUARY - DECEMBER 1984 partially or fully, any one of the following cost measures: current cost (i.e., variable costs), current costs plus capital costs, or all costs including implicit and explicit subsidies. 9. Profitability and Return on Investment- This implies expected return on the use of capital. However, this does not imply that all public enterprises have positive returns comparable to private enterprises. 10. Separate management and account - This refers to the recording of businessactivities in balance sheetsand profit and lossstatements. Based on the above mentioned characteristics, the study presents two alternative definitions of "public enterprise". One, public enterprise may be defined as a productive entity engaged in the production of a private good without consumption externality whose output is actually marketed and which is owned and/or controlled by the government. Consumption externality exists when there are consumers who benefit from the enterprise (the so-called "free riders") without paying the necessary cost. Two, public enterprise may be defined as a productive entity engaged in the production and/or marketing of a private good with or without consumption externality whose output is actually marketed and which is owned and/or controlled by the government. This second definition is broader

than the first. The first excludes such private goods subject to consumption externality like education, sewagedisposal and public health. Based on the broader definition, the study notes that the listing of public enterprises in the Philippines in 1982 would come up to 202 while the narrower or more limited definition would yield a figure of 174. In connection with the classification objective, the study presents a taxonomy of the Philippine public enterprise set. The framework is derived from a scheme suggested by Diokno (1981) which presents public enterprise cases with their corresponding stated motives and the Pareto efficiency conditions violated. The motives may be grouped on the basisof (1) allocative efficiency, (2) equity, and (3) public sector revenue raising condition. "Market failures" or violations of the Pareto optimum criterion (that is, the best program of distributing income through the market is in the form of factor payments which tend to increase the welfare of one group without necessarily decreasing the welfare of another group) give rise to the allocative efficiency rationale for public enterprises. These violations include increasing returns to scale resulting in the existence of natural monopolies, consumption and production externalities, absence of a full set of markets, excesscapacity and labor unemployment. I II liil I ill I

PIDS DEVELOPMENT RESEAI_-- NEWS 9 JANUARY - DECEMBER 1984 III I II I I I I The study recommends that the following topics that the government corporation asa concept is rapidbe encouraged for future research on public enterly ce,,asing to exist. prises: The study also distinguishes the government 1. measurement and analysis of the profitability and efficiency of Philippine public enterprises; 2. an analysis of internal control in Philippine public enterprises, 3. an analysis of external control in Philippine public enterprises; 4. measurementand analysisof the contribution of Philippine public enterprises to economic growth in terms of value added, employment effects and the like.e

._ _. _._. ,_.,_.. , i_,;:.: _.., , .;.Lq, In this paper prepared for the Presidential Cornmittee to Study Government Corporations in 1976, the late Abelardo Samonte attempts to define and characterize the government corporation as a concept and as a specialized form of administrative organization, and likewise presents the rationale for the creation and disposal of government corporations, The paper notes that the rapid expansion of governmental activity in the economic sphere has led to a corresponding growth of the government corporation. This especially true in the developing o_ newly-emerging nations which generally lack private capital and technical knowhow, and thus look upon government as the prime mover of development, According to the study, the government corporation, as a concept and a specialized form of administrative organization, is imbued with the following characteristics: (a) separate legal personality which enables it to enter into contracts, to acquire and dispose of properties, to sueand be sued,and generally to transact business; (b) financial autonomy which gives it independence as far as annual government appropriations or subsidies are concerned in view of its fluid capital as well as makes it enjoy less restrictions of government auditing and accounting since it keeps cost records in the manner of a private business; (c) administrative flexibility which frees it from regular _ivil service restrictions in personnel selection, cornpensation and conditions of service and places it under a pattern of overhead organization with a governing board; and (d)public accountability which enables the public corporation to pursue its mandate with minimum outside supervision but holds it publicly accountable for its policy and overall performance, The paper, however, claims that today, many of these characteristics are totally or partially lacking in many government enterprises here and abroad. It says that government corporations of late have assumed a great diversity ofform and observers claim

corporation from other governmental bodies or instrumentalities which may exhibit corporate form or are endowed with some corporate powers. It distinguishes it from municipal corporation, from chartered universities, colleges or schools with their own governing boards, from corporate agenciesperforming technical and specialist functions as well as those concernedwith cultural activities. Likewise, the paper observes that the term "government corporation" should not be extended to include a corporate enterprise of recent vintage -the government-sponsored enterprises - which have their board directors appointed by the President but are nevertheless designated by law as "not an agency and instrumentality of the government." According to this study, there is a tendency to include all or almost all public instrumentalities with corporate form within the category of government corporation so that confusion has risen. Also, the proliferation of the government corporate form was accompanied by an indiscriminate application of civil service rules and administrative controls usually applied to regular bureaus and offices. The paper also enumerates the various ways by which government corporations are classified: (a) those exercising governmental functions and those exercising proprietary functions; (b)as quasi-public corporations and as private government corporations; (c) by functional classification;and (d) by the primary purpose for which they were established and as to whether they are transitional or permanent. The study claims that the generalizedtreatment of government corporations and the failure to differentiate the various types has led to further confusion and inconsistency in public enterprise policy and administration. In the context of contemporary Philippine situation, the government may find it necessary or desirable to create or take over the following enterprises: (a) Basic public utilities; (b) Enterprises which are pioneers or pace-setters in the national economy; (c) Enterprises which provide vital activities and services to lay foundation for accelerated economic development; (d) Enterprises which are essential to national defense or security; (e) Enterprises which are necesseary to meet urgent economic or social needs; and (f) Enterprises which government must take over to protect its public investments. Government should take overthe above mentioned enterprises only when private business is unable or unwilling to undertake them at magnitudes and level of effectivenessas dictated by public interest, national welfare and security. The study, however, cautions that entry into these enterprises should not mean the automatic adoption of the corporate form. The government corporation should be adopted

PIDS DEVELOPMENT RESEARI IIIII I I I IIIIIII1|1

tNEWS

if the following conditions are present: (a) when the enterprise is revenue-producing and potentially self-supporting; (b) when the venture involves a large number of business-type transactions with the public; (c) when strict calculations and comparability of costs can feasibly be made; and (d) when the activity of the enterprises does not require close political and administrative control, and thus amenable to general public accountability consistent with corporate autonomy, The paper also spells out the criteria to consider when a government corporation is being considered for disposal or for sale to a private enterprise, namely: 1. The corporation does not or no longer meet any of the foregoing conditions for which an enterprise should be retained by the government, 2. Private enterprise is willing and able to take over. 3. The price and terms of sale are satisfactory, The government should avoid selling at "bargain prices", 4. The personnel of the corporation prior to the sale should be assured of equitable treatment, 5. Safeguards are provided against private monopolistic or unfair business practices after sale. If circumstances later warrant the disposal of a governmerit corporation, there must be reasonable assurance that it will not lead to private monopoly or similar abuses. 6. The sale will not contribute to alien domination of the business or industry. The paper concludes that the functions, programs and objectives of each existing corporation as well as conditions, circumstances and other questions of fact regarding each enterprise should be related and evaluated in terms of the criteria mentioned. It notes that for some, the sale or disposal need not be for an entire corporation. Moreover, some alternatives to selling may be more feasible under certain circumstances. The paper points out that there are a number of enterprises that the Philippine government must continue to operate in keeping with national development, security or public interest. It is particularly in these latter areas of public enterprise where more competence, integrity, responsiveness, and effectivehess of administration must be instituted if the nation's political aspiration and socioeconomic goals are to be achieved. â&#x20AC;˘

-- UANUARY--

This study, submitted as a doctoral thesis to the Department of Economics at Harvard University, III II

1984

was prompted by a perceived lack of a practical operational approach to making tax policy choices on the basis of their equity and efficiency impacts, and more particularly, the lack of a general equilibrium framework for assessing Philippine tax policies. A multisectoral computable general equilibrium (CGE) model of the Philippine economy is constructed to permit simulation of alternative tax policies, with emphasis on indirect taxation. This follows from the observation that most developing countries are constrained to rely more heavily on indirect taxes for raising government revenue, despite their general tendency to be regressive. Because of this, the need to determine the exact nature of the equityefficiency tradeoffs that are usually associated with indirect taxation becomes necessary. The study's model includes 18 producing sectors/ goods and 11 income groups, from which an equityefficiency locus defining a "frontier" for a fixed level of real government revenues is derived. This trade-off frontier represents alternative sales tax structures of varying degrees of progressivity/regressivity and its derivation can make the tax policymaker's task more straightforward, requiring only a choice among a menu of tax structures as against the usual theoretical approaches requiring prior determination of appropriate parameters of the perceived social welfare function. The study then examines three of the major tax changes provided for in the amended National Internal Revenue Code (NIRC) of 1977 for the Philippines, within the framework of this equity-efficiency tradeoff analysis. The observations/conclusions include: 1) The recent changes in the sales tax structure worsened the economy's position relative to the equity-efficiency frontier. The distributional impact of the sales tax system does not seem to be appreciably affected, but there is a clear efficiency cost. This has apparently been caused by the further increase in the rate of petroleum product taxation, which had already sustained a disproportionately large share of indirect taxation prior to the tax reforms. 2)

EO_',!,TY ANDJ PHILIPPINE ...... A,GEN, ERAL,,EQUIL,IBRIUM

, :',,,,_, APPROACH ,,_,,,,,___' ,,, :by.Cielito F,Iores Habito, College E_onOmic$ artd Management (CDEM), af,,,i_e,_Philipptnes at Los Bathos ,; ...._ -_._ ",'_;

DECEMBER

III

Value added taxes provide a more effective means for using indirect taxes to promote distributional objectives than sales taxes. The NI RC provision for a standby value added tax to augment existing sales taxes when revenue needs arise affords a good instrument for improving the distributional effects of the tax, system, by means of a value added tax (VAT) structure designed to be progressive in effect. The recent shift to gross income taxation has increased the collectible revenues from the income tax with little change in the efficiency and equity impacts of the tax system. Thus, the change represents a positive reform, IIIIIIIIII

PIDS DEVELOPMENT RESEAR klEWS 11 --_JANUARYDECEMBER 1984 I.._ II II I III IIIII II II IIII . especially becauseit permits an increase in the o Machines reduce overall labor requirements, role of the income tax without substantially principally family labor, but the use of hired changing perceived individual tax burdens, labor has remained constant or has increased. This has been accomplished mainly through o The incomes of landless households, repthe improvement of administrative efficiency resenting up to 15 percent of the rural popuand collection rates that the gross income tax lation, have not yet been de.gradedby mechsystem permits, anization, although there Is concern that The study stressesthat within the present frame of further use of machines may erode an already analysis, there is much scope for improvement of the declining real wage. Philippine tax system. Even within the constraint Q Tractors, power tillers and threshers appear to imposed by the inability to depend more heavily on be only marginally profitable, yet the number direct taxation, substantial gains in either equity, of machines has grown rapidly in the past efficiency or both can be made simply by restructurdecade. ing the country's indirect tax system. By explicitly At the macro level, an assessment of the direct deriving the alternatives defining an equity-efficiency and indirect impact of mechanization indicates that: frontier, the approach presented in the study can o There are significant multiplier effects on provide government policymakers with the alternative income and employment achieved from local directions tax policy can take to effect such an manufacturing which are not normally incluimprovement. â&#x20AC;˘ ded in evaluating mechanization. o Improved techniques are badly needed to ,, _,.,..... properly assessthe impact of mechanization _,:,:::_i: i_,:_ii_! at the regional and national levels and to harmonize these with development goals. c Credit programs for mechanization aimed at the small farmers have largely been ineffective in improving equity, employment or output SEMINAR ON SMALL FARM MECHANIZATION objectives. A seminar-workshop on "The Consequences of Small FarmIncomes Mechanization on Production, Employment, and in the Philippines" was sponsored by PIDS, together with the National Economic and Development Authority (NEDA), the Ministry of Agriculture (MA) andthe International Rice Research Institute (IRRI). The seminar was held last December at the Development Academy of the Philippines in Tagaytay. With participants from government, the private sector, and the research community, the workshop focused on four major issues: 1) a review of empirical research on the impact of farm mechanization on small rice farmers and landless workers, 2) the economy-wide methods for evaluating the direct and indirect impact of mechanization on employment and income opportunities in the economy, 3) a historical review of the impact of government policies and programs on agricultural mechanization, and 4) the proper role of government in the identification of plan, policy and program directions for p agricultural mechanization, A large body of empirical evidence was presented with the following major findings: o

Mechanization of land preparation does not increase yields or cropping intensity in rice production, I II I II

Distortions created through exchange rate controls, tariffs and pricing policies have generally resulted in an inefficient allocation of resources in the use and ownership of agricultural equipment. Government should not participate directly in the provision of credit to farmers for farm machinery. Alternatives such as lending to manufacturers or distributors through the

commercial banking sector at market rates of interest should be explored. Conflicting views emerged on the role of government in the promotion of farm mechanization. Attention was called however on the following program and policy statements outlined in the 1983-1987 Philippine Development Plan which provide that (1) "farm mechanization will be applied on a selective basis and will be adopted to local conditions and availableresources;(2)thedevelopmentandutilization of farm implements to augment the farmer's productivity will be encouraged and (3) mechanization will likewisu be adopted as a measure to minimize post-harvest losseswhenever possible." There is a need to specify the implementing details of these statements by concerned sectors and agencies. However, avenues for government participation and constructive contribution appeared to be favorable in the following areas: o c

Training of farmers, mechanics, drivers. Technical assistance in the selection of appropriate designs, testing and infrastructure II â&#x20AC;˘ IIII I

PIDS DEVELOPMENT RESEAR I in III I

JEWS

development, Fostering an environment for innovation in the design of equipment which can be manufactured domestically, o Providing needed incentives for local manufacturers of agricultural machineries, e Ensuring that the beneficiaries of farm equipment are farmers and consumers, o Supporting additional research to clearly identify the needs of farmers by region, crop and operation, o A careful review of existing policies affecting mechanization to ascertain requirements for elimination.,modificationoradjustments, The appropriate mechanism for institutionalizing the use of agricultural machinery in government planning and policy development, including incorporation in regional agricultural development strategies, is currently under review. â&#x20AC;˘ o

SEMINAR MENT

aliBi

FOREST RESOURCES MANAGE-

A seminar on "Economic Policies for Forest Resources Management" was sponsored by the PIDS

IIII

lJANUARY - DECEMBER 1984 II I I I

should be intensified. Studies on the system's implementation should be conducted. o The country's selective logging system (SLS) of timber harvesting incorporates a timber stand improvement (TSI) phase which is difficult to implement due to current restrictions on removing the products from logged-over forests. Research on improving the feasibility of the SLS through the modification of such restrictions, as well as on alternative systems of management, including clearcutting with immediate replanting schemes, should be pursued. o Systems of including small-scale contract workers or allowing community concerns to manage concessions should be evaluated in view of evidence that these can be as efficient as largescale concessions. o The requirements for concessionaires to establish wood processing plants in the concession and for wood processors to establish tie-ups with concessionaires should be studied in terms of marketing efficiency. On forest administration, some issuesdiscussed were: o

in February 1984 and was attended by representatives from various government, academic and private institutions involved in forest resources management, The seminar aimed to bring together specialists in different aspects of forestry development, for them to discuss critical issues for policy research. Specifically, the seminar came up with the following: 1) a consolidation of the issues from the literature and from policy experience, 2) ah identification of exist-

III

Forest renewal projects are long term and are highly affected by seasonal changes. Thus, the schedule of release of financial resources vis-a'-vis climate conditions significantly affect the viability of seedling survival and consequently, the success of reforestation and afforestation projects. For more effective forest renewal and watershed projects, longer budgetary periodsdevelopment and improvements in fund allocation

seminar will be used as the basis for a two-year research program on forest policy and economic development. The specific areasof forest resourcesmanagement which were discussedin the seminar are:

and disbursements are recommended. The need to pay equal attention to botl_ the prevention of forest destruction and to forest renewal was reiterated. There is a need to explore means of generating more funds for forest renewal; potential sources which need to be studied include the special deposits required of concessionaires under Forestry Administrative Order No. 64 in 1972. On land-use allocation, the following discussions ensued:

1. The Commercial Logging Sector

ing studies, approaches, and data sources which may be used for further research, and 3) suggestions on areas needing further research. The output of the

To limit the scope of the discussion, the commercial forest firms were defined only as those firms actually engaged in logging activities. Discussions focused on: the optimal sustainable yield of the forest resource, the pattern of resource useimplied by the management program, and the amount of land that should be reservedfor forest use. The recommendations for this sector include: o Current charges for forest exploitation are too low and the effort to pilot the stumpage appraisal system as the basis for concession fees by the Natural Resources Development Corporation Ill ...................

While the sustainability of timber output will be of increasing concern in the next two to three decades, the major problem for the future will be fuelwood supply. Projected requirements of both household and industrial users are 63 and 106 million cubic meters in 1990 and 2000, respectively. Current figures of ipil-ipil based agro-forestry technologies which are potential fuelwood suppliers need to be evaluated. Recent research findings indicate that ipil-ipil yields, which were measured from actual plantation conditions, are only 35-50 percent of earlier official estimates.

PIDS DEVELOPMENT RESEARw_NEWS

__ JANUARY - DECEMBER 1984

2. Upland Development

4. Watershed Management

The discussion here dealt on forest occupants or dwellers who practice some form of shifting cultivation (including limited agriculture and animal husbandry) and who, in some cases,are involved in joint activities with the commercial sector. Currently considered a priority for research, these dwellers may have numbered as many as 11 million families, Some of the recommendations are: o The challenge of upland development should deal with the egerJncreasing population becoming dependent on forest resources. Although up to one-third of all households might be directly dependent on the uplands for their livelihood, detailed upland population and migration studies are lacking and should therefore be a priority for research, o In conjunction with agro-forestry technology improvements, the allocation of tenure or rights of accessto and use of upland resources need to be facilitated not only for the cultural minorities but also for migrant communities which have permanently resided in the uplands. Care needsto be exercised, however, so that land speculation and land rights conflicts and inequities in allocation are minimized, The marketing component of upland based technologies has not been adequately addressed to by early upland development project imple_

Apart from being a source of timber, forest resources also perform the role of watershed protection. Logging activities therefore have important implications in the quality of watershed. Increased incidence of floods, siltation of dams for irrigation and power generation, soil erosion, and diminished domestic water supply are the major consequences of forest degradation. For analytical purposes, the discussions centered on effects of irrigation. Some of the highlights of the discussions were: o The experience with the Pantabangan and Magat Watershed Program shows that reforestation and soil conservation projects can be very costly (up to t_15,000 per hectare). On the other hand, the environmental costs of not properly managing watersheds are much greater. o Less expensive reforestation schemes are feasible and should be evaluated for implementation; but, they require special long-term budget allocation_ from the government to succeed. o Since data on several Philippine cases(and from the experience of other countries) are already available, a comprehensive benefit-cost evaluation of watershed management is required to set standards for such projects. Such an analysis should concentrate on the external effects of watershed management on hydroelectric generation and on irrigation/flooding problems.

mentors. Since this is an important factor of the economic feasibility cropping more research need toofbeupland conducted on it.systems,

(The next issue of the Development Research News will focus on specific studies relating to forest resources management.) â&#x20AC;˘

3. Macroeconomic Environment of Forest Use Since a major source of demand for the products )f the forest sector arises from international trade, ]overnment regulation of trade also affects the _ctor significantly. For this reason, efficient forest 'esource management requires a tie-up with an ,_valuationof policy on this macro level. Some ofthediscussionscentered on the following: National policy must continuously recognize that the overriding goals in forestry management include not only the efficiency and equity in production but also conservation because of the major environmental effects of soil erosion. Ecological stability and the quality of environment, in general, need to be more explicitly addressed in Philippine development planning, A rational pricing and taxation package isrequired and should include: a) removing the export tax on processed wood; b) rescinding the log export quota and imposing, instead, higher export taxes on logs, and c) assessingforest concession charges including more local government participation in taxation, I_1lII I

IIII

SEMINAR-WORKSHOP NANCE STATISTICS

GOVERNMENT

FI-

A seminar-workshop on "Government Finance Statistics" was jointly sponsored by the Development Budget Coordinating Committee (DBCC) and the Philippine Institute for Development Studies (PIDS) last December at the Central Bank Institute. The seminar-workshop aimed to acquaint the participants on the organization, analysis and linkages of government transactions with the economy as a whole and its parts, and to elucidate the International Monetary Fund (IMF) government finance classification system. The participants came from government agencies involved in government accounting, financial transactions and public finance statistics like the Office of Budget and Management, Commission on Audit, Bureau of Treasury, Central Bank, the National Economic and Development Authority, etc. The participants raised some issues which they feel must be attended to in order to ensure a more consistent, timely, and relevant set of government

PIDS DEVELOPMENT RESEAF "L NEWS L IIllll I IIIII financestatistics. Among the following:

14 I

the issuesraisedinclude

A. On the Coverage of Government *Regarding government finance statistics (GFS), income and expenditures of national government agencies from small-scale business ventures that are incidental to the exercise of their respective functions should be deducted from the national government data. There is a need to look more closely into the operations of several agencies performing venture-like functions such as governmerit printing, computer programming, and mass media activities. *The GFS conceptual framework classifies the Bureau of Post as a non-financial public enterprise and not as part of the central government, *State colleges and universities function as separate organizations. However, they derive income primarily from government appropriations since their incomes only average about five percent of their expenses. *There is confusion about the coverage of governTent public enterprises, particularly concerning the treatment of various authorities and commissions which have been provided with a legal personality separate and distinct from that of the national government. These enterprises are in effect not engaged in business-like ventures or marketactivities. In addition, several government corporations, particularly financial enterprises, are either owners or part-owners of subsidiaries and distressed companies. *The inclusion of the Metro Manila Commission under the national government was questioned particularly since it is essentially a local government entity, B. On the Derivation of the Main Central GovernmentAggregates *Suggestions were put forward to consider governTent capitalizations in public corporations as expenditure and not as part of net lending since they are not meant to be paid back by such enterprises except

JANUARY-

DECEMBER 1984

I with nationalgovernmentfinancial operations. Each of these bodies of statistics has its own conceptual framework, estimation methodologies and data sources. Therefore, a need exists for closer coordination among the agencies responsible for these accounts to achieve a more effective financial programming. *Lastly, it was pointed out that the deficiency in the compilation of government financial information is due to the implementation of the coding system in the various accounting and statistical units which leaves something to be desired. D. On Non-financial Public Enterprises *The problem of how to properly treat the equity contributions of the national government to governTent corporations was also raised. *At present, some corporations are reporting consolidated statements and some are not. For corporations whose major operations are being undertaken by the subsidiaries, it is particularly important that the subsidiary operations be consolidated with the parent companies for more comprehensive reporting. After the discussion of the issues,a set of recommendations was listed to be brought to theattention of the authorities. These include, among others, the: *Proposal to set up a core group composed of the Ministry of Finance (MOF), Bureau of Treasury, Office of Budget and Management (OBM), Commission on Audit (COA), Central Bank (CB), and the National Economic and Development Authority (NEDA) either under the DBCC or the Statistical Advisory Board (SAB) of the NEDAto: 1) formulate the follow-up seminars for an extensive familiarization with the various aspects of the GFS system; and 2)

look into the existing classification system and pending proposals for classification improvements, and recommend necessary realignments that would be useful for economic, financial and accounting purposes.

in terms of dividend. * It was emphasized that travel taxes, the coconut levy, and similar receipts should be considered part of tax revenues in spite of the legal provision that these are not directly controlled by the natiol]al government budget, *Loans to public corporations coursed through the national government under the consolidated foreign borrowings program of the Central Bank should not be part of national government expen-

*Inclusion of tax collections directly accruing to government corporations but which are currently not incorporated in national government accounts, in the tax revenues of the national government. This would enable the national government to take account of all tax impositions for economic purposes.

ditures, although under the IMF concept, they could be considered as national government expenditure, C. On ApplicationandAnalysis *The GFS relates the balance of payments, monetary survey, and the national income accounts

*Declassification of government corporations which undertake substantial lending activities incidental to their primary function as financial institutions, o

*Disaggregation of the cash operations of government agencies considered as departmental enterprises for government finance statistics purposes.

PIDS DEVELOPMENT RESEARq"- NEWS I

II ill

IDle

Ill

nil

15 iiii

SEMINAR -ON FOOD AND EXPORT CROP IN- COMES A lecture-seminaron the "Instability in Food and Export Crop Incomes: The Philippine Case" was held at the University of the Philippines School of Economics (UPSE) last January, with Dr. Romeo M. Bautista (UPSE professor) presentingthe findings of a paper (with the same title) he prepared for the International Food Policy ResearchInstitute. According to Bautista, the purpose of his paper is to provide a systematic examination or framework for analyzing relative income instability in food and export crop production, and to use such framework for investigating the variability of total crop income in Philippine agriculture and the manner by which it has been affected by the marked increase in the shareof export cropsover the postwar period, Bautista observes that in developing countries, there is a common perceptionabout the vulnerability of agricultural exports to the inherent volatility of world commodity markets. Becauseof this, there is a prevalent apprehension among policymakers of less-developedcountries (LDCs)that a greaterexport orientation of agricultural production or an increasing share of export crops in agricultural production may result in increased instability in agricultural income and, hence, rural food insecurity, This concern representsone facet of the so<ailed food-export crop tradeoffs indicating a conflict between the likely gains in efficiency and income from exploiting comparative advantagein export crop production and the greater instability in agricultural income that may result from an increasingshare of export crops, Noting the fact that very few studieshave given explicit attention to the linkage of export earnings instability in primary-producing LDCs with agricultural income variability, and hence, rural food insecurity, Bautista presents an analytical discussion - describing the conditions under which a rise in export share will increasetotal income instability and examining how the variabilities of and correlations among nominal food and export crop incomes and the general price level affect real income instability - and examines the caseof Philippine agriculture, Bautista tries to assessthe extent of the effect of the marked increase in the share of export crops in the Philippines in the 1950s and 1960s on real agri* cultural crop income instability by applying the variables considered in his analytical framework, i.e., relative variability of food and export crop incomes, their correlation and the initial crop value shares. His general finding/conclusion is that while export crop income has indeed been more unstable than food crop income, the rise in total income instability resulting from the increased export orientation of Philippine crop production is remarkably small IIIli IIIIIIII III

--_IANUARY-

DECEMBER 1984

This finding illustrates the possibility of a relatively small cost, in terms of rural income instability, of agricultural export expansion in developingcountries. The implications of this for agricultural development strategy, according to Bautista,should not be lost to policymakers both in the Philippinesand other LDCs. Among the more specific observationsand suggestionspresented by Bautista, based on the results of his empirical analysis,are: 1. In the 1970s, the variability of both food and export crop incomes decreased significantly in contrast with the increasedinstability in the country's foreign sector, particularly export earningsfrom agricultural crops.This is related to the greaterdegreeof governmentintervention in the seventies,especially in the export sector, which apparently provided a partial offset to the foreign price fluctuations of primary product exports during the decade. 2. The decline in export crop income instability was not accompanied by a continuation of increasing export share in total crop income. The reason for this is that export crop production presumably became lessattractive relative to food crop production as a result of the changed policy environment (actively promoting food crop production at the sametime that gainsto agricultural export producers from exchangerate liberalization and boom in world commodity prices were being siphoned off through various"stabilization" tax measures). In short, the reduction in export crop income instability in the 1970s was achieved due to heavier export taxation in times of improved earnings, effectively reducing the average profitability of export crop production. 3. As regard the general finding that in terms of rural income instability, the cost of agricultural export expansion in LDCs is relatively small, Bautista suggeststhat ,fJJrtherstudy should be made to investigatethe broader applicability of suchhypothesis. He suggeststhe inclusionof non=cropsourcesof rural income and the examination of causalrelationships, say, between price and quality of production and between policy instruments and various components of rural income, in the analysis. â&#x20AC;˘ SEMINAR ON MONETARY AGGREGATES AND ECONOMIC ACTIVITY A seminar on "Monetary Aggregatesand Economic Activity" was held at the NEDA-Pasig, wherein Mario B. Lamberte, PIDS research fellow, presented the findings and recommendations of his study with the same title. The following summarizes the highlights of the seminar. *Monetary management in the Philippines can more effectively support development objectives through closer study and control of the growth rates

PIDS DEVELOPMENT RESEAF I

III

NEWS T

16 ill

monetary aggregates.Specifically, there is a need to determine whether a monetary aggregatecan serve as an intermediate target of monetary policy. To do this, two criteria may be used: (1) the aggregatemust bear a close and predictable relationship to economicactivity, and (2) the aggregate must be controllable to a large extent by the Central Bank. *The existing monetary aggregatescurrently usedand recognized by the Central Bank are M1, M2, and M3. M1 is currency in circulation, meaning the currency issued by the Central Bank and the peso deposits subject to check by the monetary system, unused over-draft lines, and managers'and cashier'schecks, M1 excludes cash held in vaults of the national treasury and the commercial banking system. M2 is M1 plus savings and time deposits of deposit money banks, excluding national government deposits, and M3 is the sum of M2 plus deposit substitutes of deposit money banks. The growth rates of these aggregateshave diverged from each other, thus there is a need to determine which among them can serveasintermediate target of monetary policy, of

*Because of recent financial innovations, the rapid emergence of other financial intermediaries and changesin regulations which may haveexerted a significant impact on the payments process and obscured the link between monetary aggregatesand economic activity, there is a need to construct additional and broader monetary aggregatessuch as M1A, M2A, M3A and M4A. M1A is currency in circulation plus demand deposits of all financial institutions, M2A is M1A plus savings and time deposits of all financial institutions. M3A is M2A plus deposit substitutes of commercial banks and non-bank financial intermediaries. M4A is M3A plus marginal depositsof commercial banks. *The semestral growth rates of these seven monetary aggregatesshowa perceptible upward trend although their growth rates markedly diverged from each other. To determine the relationship between GNP growth rate and the growth rates of the monetary aggregates, regressionanalysis was performed, The analysis showed that the broader monetary aggregates (M3, M3A and M4A) predict future economic activity more accurately and have better forecastingcapability over narrowly defined monetary aggregates, *Controllability is interpreted here to mean closer relationship between the monetary base, which in essence constitutes Central Bank actions, and the monetary aggregate. In this respect, M3 bears a close and predictable relationship with economic activity and is found to be controllable to a large extent. Although M3 has lessimpact on economic activity compared with aggregatesM3A and M4A, it neverthelesscould serveasan intermediate target of monetary policy. However, the movements of M3A and M4A 1111 II I

JANUARY - DECEMBER 1984 ,

need to be monitored closely in View of the growing importance of non-deposit money banks and the policy to encourage mergers among financial institutions. *The Central Bank, to be able to exercisegreater control over monetary aggregates, can avail of at least two alternatives. One alternative is to stabilize money multipliers through (a) uniform reserveratio for all types of depositsregardlessof financial institutions and (b) prescription of a ceiling on foreign exchange holdings of commercial banks. Another alternative for greater control would be for the Central Bank to predict variations of money multiplier, which would initiate offsetting actionsthrough the monetary baseto achieve desired growth rates of the aggregate. However, this alternative can only be pursued if the monetary multiplier is accurately predicted. *Finally, there is a need to determine whether management of the monetary base is governed by considerations other than monetary control, i.e., Central Bank's provision of adequate funds for priority areas determined by government and sales or purchase of foreign exchange not intended for control but stabilization of the exchangerate. Also, there are a number of influencesupon GNP excluded from the model which may or may not alter the value of the coefficients of the growth rates of the monetary variables.Still, results of the study remain instructive for policymakers and planners in moneCarymanagement.â&#x20AC;˘ SEMINAR ON PRODUCTIVITY PHILIPPINE INDUSTRY

CHANGE IN

A seminar on "Productivity Changein Philippine Industry: Implications for Development Strategy" sponsored by the Philippine Institute for Develolm ment Studies (PIDS) was held last July 25 at the NEDA Operations Room in Makati. The seminar focused on the results/findings of a staff paper entitled "Productivity Growth in Philippine Manufacturing: Retrospectand Future Prospects" prepared and presented by Dr. Richard Hooley, research consultant atPIDS. Among the objectivesof the seminarare: 1. To measure productivity change over the period 1956-1980, both for the manufactuirng sector as a whole and for two dozen individual industries at the three-digit level; 2. To analyze causal factors behind productivity change;and 3. To analyze the process of diffusion on pro, ductivity gains. The following are some of the significantfindings: *Total Factor Productivity (TFP) --- or the ratio of real production to the factor input --- grew by 0.3 percent per annum for the aggregatemanufacturing IIIII lill

PIDSDEVELOPMENTRESEAR, _IEWS 17 ANU RY-DECEMBER 1984 J III I II J ..... II IIIII I sector between 1956 and 1980. The sub-periods *A policy of "laissez-faire" alone is not sufficient reflected a higher rate of TFP growth in the late to improve the productivity performance of the fifties and sixties. During the seventies, there was a manufacturing sector to that required for sustained significant decline .... from about 1.3 percent per development. Had interventionist economic policies annum before 1970 to -1.3 percent per annum not existed, the productivity performance of the after 1970. manufacturing sector would have improved. But the *The broad decline can be traced to a number of degreeof improvement would not have been sufficient factors, including the centralization of economic to attain a significant development thrust. decision-making in the economy, the shift in energy * A corrective strategy for declining productivity costs after 1971, the failure of government policies in Philippine industry must touch on several levels: to stimulate "research and development", and the macro policy, industry policy and firm behavior. weakening of productivity growth in may western Analysis of inter-industry performance shows that a countries after 1970. more aggressive research and development program, * In terms of inter-industry performance, there was the removal and/or restructuring of tariffs and other considerable dispersion in the productivity record fiscal tools are necessary, along with efforts at the among industries. Food, beverages,tobacco, apparel industry and firm level. and electric machinery all had averageannual rates of _L growth of TFP of one percent or more per year. SEMINAR ON PUBLIC POLICY AND THE Wood products, footwear, other chemicals, and PHILIPPINE HOUSlNGMARKET plastics recorded rates of about one-half of one percent or less.The rest, however, which include over A staff seminar was held last July 31 at the PIDS one-half of the industries, registered negative rates of on "Public Policy and the Philippine Housing MarTFP growth, ket" which was presented by Dr. Edna S. Angeles, a *There were some import-substitution and some research fellow of the Institute. export-oriented industries that were included among The objectives of the seminar are: those whose productivity-performance was better than average. Yet there were also some industries of both 1. To analyze the major aspects of supply and types which performed poorly, demand for housing and identify specific housing problems and their underlying causes; *The distribution of productivity gains occurs 2. To review the national shelter program and through the price system in the form of lower prices other housing programs and policies underto consumers. However, in the primary exports and taken by government; and highly protected industries of the country, this did 3. To recommend alternative policies and pronot occur. The tariffs imposed caused the TFP gains grams to better meet housing needsand pro(when they do occur) to be passed on mostly to blems. entrepreneurs, in the form of windfall profits. EntreThe study's findings and recommendations inpreneurs, therefore, in the protected industries were in effect allowed to retain the TFP dividend, clude the following: *The resulting windfall was not accompanied by * Over the years, investment in housing have any incentives that would encourage the proceeds to increased tremendously, amounting to t=4.765 million be directed to research and development which would in 1983 and constituting about 4.8 percent of GNP. in turn help raise productivity in the next period. * There have also been significant increases in *The Philippine tariff structure gave the entre_ the housing stock which grew from 4,790,954 dwellpreneurs wrong signals. The results of this can be ing units in 1960 to 8,767,694 in 1983 (an increase gleaned from: (a) the higher prices consumers have to of about 83 percent). There are more dwelling units pay as well as the restricted output; (b) the slower in the rural areas (62.5 percent) than in urban areas. growth of employment's real wage rates; and (c) the Housing problems seem to be more acute in urban weak backward linkage effects of the manufacturing areas. sector. * There is a need to differentiate approaches to *Little relationship was found between real wage public policy on housing between rural and urban secrate changes and TFP. Hence, changes in money wage tors in view of the differing housing conditions of rates will bring little improvement in the distribution each sector. of productivity gains. * The housing market is categorized into three: *Productivity change is shown to impact on the owner-occupied, the rent-free, and the rented. The balance of payments, both through the trade account last one is the most predominant type, increasing by and the capital account. Recent negative TFP perabout 257.8 percent from 1960 to 1980. In 1980, the forrnance has significantly damaged the country's occupancy rate of households per dwelling unit was balance of payments performance and has also been estimated to be 1,012 HH/DU. an important factor in weakening the domestic * The cost of housing has gone up by 142.5 financial system, percent over the last decade making it more difficult IIII I III II III II lUll I nail m_

PIDS DEVELOPMENT RESEA NEWS !8 .I IIII1|11 for low and-middle income groups to afford I_ouse construction. Rental prices have also increasedat an average rate of 11.8 percent from 1972 to 1983. However, the rate of increasein the cost of housing construction is much higher than rental increases. * There is a need to review the provisionsof the rent control law and how this hasaffected available housing for rent. Should the rent control law be lifted, there should be a ready policy or mechanism to deal with those sectorswhich may be displaced by such lifting, * There is a long history of government intervention in the Philippine housing market which is evident not only in terms of the number of agencies involved in this area through the years but also in the expendituresincurred by government in the industry, * At present, there is a need to reassessthe national shelter program in terms of its overall impact on the housing industry and the economy. The following components of the program need further scrutiny: • The production and marketing of housing, There is a need to evaluate public and private sector participation in these areas. Also, there is a need to reassessthe effectiveness of private-public sector tie-ups in meeting housing needsand quality standards, The shelter finance system, There is a pressing need to reform the present lending system to more equitably distribute financial resources among homeowners and buyers. For example, the Pag-ibig Fund which is a main source of finance for housing has been found to have an inequitable allocation of housing finance. A big proportion of its members (82.43 percent) earn incomes f=l,000.00 or below which incapacitates them from getting the appropriate amount of loan needed to build a house, considering the amount of loan allowed for members in this income group and the exorbitant cost of house construction. Thus, their contributions to the fund virtually support those earning above P1,000.00 and who can afford higher amounts of loan. * In the final analysis, it is the people's low incomes that is the source of failure to adequately meet housing needs. Therefore, the long-run solution to the problem lies in the ability to raise the real income of families. The following are considered vital to plan and policy formulation in the housing sector: • A more systematic mechanism for evaluation of existing housing programs and policies to orient these to housing needs and problems, • A more efficient and equitable intrasectoral allocation of resourcescurrently devoted to housing, • A regular housing survey undertaken to generate better and more accurate information on housing, I lllll Ill IIIIIII •

JANUARY -- DECEMBER 1984 I I IIIIIIII • Production of local housing models using I indigenous materials and generation of self-helpacti* i vities, i.e., "sweat equity" to bring down the cost of houseconstruction. •

SEMINAR ON FORECASTING MONTHLY INFLATION IN THE PHILIPPINES A seminar on "Forecasting Monthly Inflation in the Philippines" was sponsored last August 7, 1984 by the Philippine Institute for Development Studies (PIDS) with Dr. Roberto S. Mariano, PIDSconsultant, as paper presentor. The discussionwas based on the initial findings of a research project on short-term forecasting model for inflation undertaken by Mariano and his associates. Before commencing to discuss the forecasting model that he and his associates developed, Mariano first traced the movements of the country's inflation rate since 1983. He observed that the record high inflation rates experienced in 1984 had its beginnings in November 1983 and were spawned by the economic crisis. After hovering in the 6 - 10 percent range for the first ten months of 1983, Mariano noted that the domestic prices (based on a comparison with levels a year before) rose by 17 percent in November and 26 percent in December. For the first six months of 1984, the monthly inflation rates continued to climb progressively to higher and higher values: 33 percent in January, 37 percent in February, 39 percent in March, 41 percent :in April and 42 percent in May. Further inflationary pressures, he said, would continue to persist for the rest of 1984 and these would come partly from the latest round of devaluation undertaken in June 1984 as well as from the succeeding adjustments in prices, the continuing balance of payments difficulties, uncertainties concerning the country's exchange rate, and the recent unavoidable rise in the money supply. Mariano pointed out that as new developments occur, such as the realignment of the peso, the contraction or expansion of money supply, or adjustmerits in the prices of foodstuffs, oil products, and non-fuel raw materials, an adequate monitor on the likely consequent movements in domestic prices would be of particular interest to policy makers and ordinary laymen alike. During the seminar, the author presented a statistical procedure for forecasting inflation rates, on a monthly basis, as measured from fluctuations in the consumer price index (CPI) for the entire Philippines. The procedure centers around a statistically estimated price equation which explains the dynamic behavior of monthly CPI levels in terms of its own past values and, as economic theory suggests, cost-push and demand-pull factors. More specifically, the price equation relates monthly CPIs to the following explanatory variables: IIIIIIII I

PIDS DEVELOPMENT 1. 2.

4. 5.

6. 7.

RESEARI

NEWS 19 A_3ANUARYDECEMBER 1984 | I the values of CPI itself in the two immediately arising if total liquidity is to expand faster than real preceding months, output. One would expect this variable to have lagged the average wholesale posted price of petroeffects on prices. The choice of the particular lag leum products as determined by government structure - a four-month moving average, with equal policymakers, weights up to the current month - is settled at the a black market premium for the US dollar, empirical level and is based on the various regressions measured in terms of the Hongkong pesoand lag structures that the author and his associates dollar banknote rate relative to the official experimented with. exchange rate, The price equation is estimated by ordinary least a peso-denominated import price index for squares over the period January 1972 to December non-fuels, adjusted for tariffs, 1983. The estimated equation shows a very close fit total domestic liquidity relative to real outover the sample period and most of the regression put, with lagged effects extending up to three coefficients are statistically significant. (The excepmonths, tions are the price-control and legislated wage variaprice ceilings imposed by the Price Stabiliables which have t-values of around 1.4) When zation Council, and subjected to a series of validation tests, the equation legislated minimum wage and cost-of-living adequately tracked the monthly CPI levels and the allowance, annualized monthly inflation rates including those

This price equation parallels earlier models for Philippine inflation in that it incorporates standard cost-pushand demand-pull variables as item 2, 4 and 5. The novel features of this equation comefrom the short-term nature of the equation, the incorporation of institutional realities, and the presence of the dollar black market premium. The equation deals with inflation on a monthly basis whereas most studies, except for the National Economic and Devepment Authority's (NEDA) Input-Output Price Model, are more concerned with the long-term annual price movements, Official exchange rate fluctuations enter the equation indirectly through the peso-dominated import price index for non-fuel imports and the posted petroleum product price. The black market premium for the dollar serves to reflect the rising costs of imports sourced through pre-paid letters of credit as well asto capture inflationary expectations fueled by recent political and financial developments, In an attempt to incorporate the inflationary effects of fuel price changes,the author considered two alternative variables - the import price of crude oil and the average wholesale posted price of petroleum products asset by the Board of Energy. Given the Philippines' price control system, one would expect the latter variable to have a more significant effect on price changes. Higher costs of importing crude oil would impact on consumer prices only to the extent that government authorities would allow these increases to filter down to the domestic prices of petroleum products. Moreover, in the absence of any fluctuations in the import price of crude oil, domestic prices can still increaseas a consequenceof changesin the exchange rate or in the tax (for example, note the oil price increaselast May) or special fund componentsof the wholesale postedprice. Total liquidity relative to real output, meanwhile, is usedas a proxy for excessdemand in the economy - with additional inflationary pressureson prices , I I I lillll

over the critical period of November 1983 to June 1984. In terms of inflationary effects (measuredby the elasticity of inflation with respect to the variable - i.e., the percentage change in the inflation rate due to a one-percent change in the variable), the authors' estimated equation shows that changes in petroleum product prices have the biggest immediate impact followed (in descending order of elasticity magnitude) by the dollar black market premium, then by the import index for non-fuels, then by the liquidity variable, and finally by the price ceiling and the legislated wagevariables. In the long-run, however, liquidity assumes a more prominent role. In fact, together with petroleum prices, the liquidity variable shows the highest longrun elasticity. For the remaining variables, the rankordering of long-run elasticities follows that for the short-run: the variable with the next highestlong-run elasticity isthe dollar black market premium, followed by the import price index for non-fuelsand then by the price ceiling and legislatedminimum wage. The forecasting equation yields estimated annual inflation rates for 1984 ranging from a low of 45 percent to a high of 53 percent under alternative assump= tions about the behavior of the study's explanatory variables for the second semester of 1984.e

SEMINAR ON DEVELOPMENT STATE BANKING

FINANCE AND

A seminar on "Development Finance and State Banking: A Survey of Experience" was sponsored on October 30 by the Philippine Institute for Development Studies (PIDS). During the seminar, Dr. Edita Tan of the University of the Philippines School of Economics (UPSE) presented a paper with the same title. The reactors/discussantswere Bienvenido M. Noriega Jr. of the Philippine National Bank (PNB), Ben Hur Manalo of the Development Bank of the ill iilllili I .

PIDS DEVELOPMENT RESEA[ NEWS 20 JANUARY - DECEMBER 1984 I II I I II IIII II II Philippines (DBP) and Jesus Estanislao of the rates, how it has permitted or encouraged loose or Bankers' Association of the Philippines (BAP). lax management of credit, and how it has permitted The following summarizes the findings and recomthe availment of excess funds from artificial sources. mendations of the study as well as of the seminar Given such a facility, there is also a need to evaluate discussions: the successand viability of projects financed through *Among the developing countries, government the rediscounting window of the Central Bank. finance institutions (GFIs) have been established to *There is a need to reassessthe financial interexpand the banking system and enhance the developmediation function of GFIs, i.e., whether savings ment of the financial market and its intermediary mobilization is still a priority activity or whether the function. GFIs help in savings mobilization and in the thrust has shifted to lending activities. implementation of a selective credit policy to finance *There is need to ascertain the effect of interest priority areasfordevelopment, rates on overall bank portfolio. Do increases in *Selective credit controls (SCCs) as a policy are interest rates contribute to higher savings and time utilized by GFIs becauseof externalities, indivisibilities deposits, thereby enhancing the savings mobilization and imperfections in the capital market. As a general function of banks? Likewise, do these increases cope rule, GFIs, in implementing the SCCs, provide credit with inflation rates? to private activities which have obvious externalities *There is a need to identify the particular exteror projects with high social returns, nalities, indivisibilities and imperfections in the *There are generally two types of SCCs: Type I capital market to ascertain the rationality of GFI which consists of interest rebates given to borrowers decisions in the use of SCCsover the years. • at low interest rates and tax incentives, transfers, technical assistance. Type I SCCs do not generally interfere with the intermediation function of banks. development infrastructure build-up and Type II SCCssupport consist for of supply intervening controls like interest rate control on loans and deposits, differentiated rediscounting, reserve requirement and loan targets and ceilings. Type II SCCs inhibit financial intermediation or savings mobilization; yet despite this, they are unfortunately used by most developing countries including the Philippines. *A comparative study of financial development among developing countries shows the performance of the Philippines paling in comparison with those of Korea and Thailand. This is reflected in the low M2/GNP ratio which is 22.0 per cent for 1982, about half of those of Thailand which had an M2/GNP ratio of 45.5 percent for 1982, and Korea which had a ratio of 41.2 percent for 1982. *In the Philippines, SCCs are implemented via preferential loan rates and rediscounting facilities extensively burro loosely undelineatedloan categories, *Philippine GFIs composed of the Development Bank of the Philippines (DBP), the Philippine National Bank (PNB), the Land Bank of the Philippines (LBP), and the Philippine Amanah Bank (PAB) have the following characteristics: ©

They comprise a fairly lal'ge segment of the financial market and own about 40 percent of the total assetsof the financial system, © They never took savings mobilization as a major objective of credit policy, © They have easily availed of rediscounting facilities of the Central Bank at low cost or low-deposit rates, *There is a need to reexamine the rediscounting policy of the Central Bank on the following: how the policy ..... has contributed to the accelerated inflation III II II

I_DS i P_i

i_-Lm

mA-_ a-pm_-_.,

_._

_1I

ENERGY AND STRUCTURAL CHANGE IN THE ASIA-PACIFIC REGION (PAPERS AND PROCEEDINGS OF THE THIRTEENTH PACIFIC TRADE AND DEVELOPMENT CONFERENCE) Romeo M. Bautista and Seiji Naya (editors), This book summarizes the proceedings of and contains the papers presented during the 13th Pacific Trade and Development Copference (PAFTAD), held in Manila last January 24-28, 1983. Twenty-one papers were presented in this conference dealing with the following topics: the relationships among energy prices, economic growth and comparative advantage; the economics of energy resources; country case studies; and international energy and financing issues. Since the quadrupling of oil prices administered by the Organization of Petroleum Exporting Countries (OPEC) in 1973-74, energy issues have become an important, if not a dominant, concern of policymakers in both developed and less developed countries. This would seem attributable in part to government perception of the intensity and pervasiveness of the effects of increased oil prices on the national economy and in part to the recognition that strucrural adjustments need to be undertaken to cope with the new circumstances. The second oil price shock of 1978-80 (which was triggered by the Iranian revolution) only served to give added urgency to the required structural changesand the adoption of policies to bring these changes into action. I I II I

PIDSDEVELOPMENTRESEAR_I

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21 III

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-_JANUARY-DECEMBER

1984

li"

mill

ECONOMIC EVALUATION OF THE PHILIPPI N E ALCOGAS AND COCODI ESEL PROGRAMS (PIDS MONOGRAPH SERIES NO. 3)

1960s with recent industrial promotion policies and manufacturing performance is presented. On the basis of this comparative analysis, the

Armando Armas Jr., and Denise Joyce Cryde

study recommends more permanent industrial promotion policies in the country, among which are tariff reforms that would bring about a strong correlation between domestic resourcecostsand effective rates of protection. Fiscal incentives to encourage investmentswithout a bias on employment, favorable financial policies, encouragement of small-scale enterprises and regional-basedindustries,and in-depth studies on industries and shadow prices are also recommended. This is the secondprinting of the book.

This study is an attempt to look into the economic viability of the alcogasand cocodiesel programsof the government which were officially launched in 1982 with very optimistic prospects but which were, in the immediate year after, shelveddue to exogenous factors. It is also an attempt to see how these programs fit into the overall energy development plan of the country. In particular, the study aims to identify scenarios that would make cost of implementing the programs competitive and socially profitable. Moreover, it tries to determine the threshold prices of petroleum, foreign exchange, and domestic indigenous resources required for the program's social effectiveness.

JOURNAL OF PHILIPPINE DEVELOPMENT, ume X, No. 1, First Semester, 1983

Vol-

This issue of the Journal features articles on secTHE CONSEQUENCES OF SMALL RICE FARM MECHANIZATION IN THE PHILIPPINES: WORKSHOP PAPERS This volume contains the papers presented in a workshop of the same title which was jointly sponsored by the International Rice Research Institute (IRRI), the Philippine Institute for Development Studies (PIDS), the National Economic and Development Authority (NEDA), and the Ministry of Agriculture (MA). The objectives of this workshop were: (1) to evaluate the available evidence relating to the use of mechanization (what has its impact been on employment, income and income distribution? Has it produced a measurable change in the level or composition of output?); (2) based on a review of evidence, to evaluate the strategies adopted in the introduction and use of machines which maximize potential benefits and at the same time minimize the costs to the country and to the people; and (3) to explore the public and private sector initiatives that are needed to meet the requirements of an efficient national mechanization strategy, INDUSTRIAL PHILIPPINES.

PROMOTION POLICIES IN THE Second Printing 1984

Romeo M. Bautista, John H. Power andAssociates

This study deals with a quantitative description of recent economic policies affecting the performance of the Philippine manufacturing industries and recommends certain modifications in the country's industrial promotion policies. A comparative study of economic policies and industrial development in the 1950s through the mill

tor sources of Philippine postwar economic growth; the role of trade and industrial statistics in policy formulation; the identification of major determinants of oil exploration drilling costs; outputs and inputs of Philippine commercial banks; proposals for effecting a major revamp in the system of establishment enquiries;and family income and expenditures. Among the contributors are Professor Harry T. Oshima, Commissioner Chulia Azarcon of the Tariff Commission, Mr. Gary Makasiar of the Ministry of Energy, and Dr. Mario B. Lamberte of the Philippine Institute for Development Studies. JOURNAL OF PHILIPPINE DEVELOPMENT Volume X, No. 2, Second semester, 1983

This special issue of the Journal presents the proceedings of the NEDA-PIDS Seminar- Workshop on the Philippine System of National Accounts. This seminar is already the third of a series since 1971 and 1976. The series of seminars are being held to review and improve the Philippine system of national accounts, which captures and monitors the changes in the economy. The objectives of the third seminar were: 1. To review and assess the system of national accounts in the context of the emerging needs of planning and policymaking, with special focus on government and foreign transactions; 2. To identify and prepare short- and long-term improvements in data inputs, estimation methodology, and presentation of the national accounts; and 3. To bring about a strong linkage among the data producers, national accounts statisticians, and national accounts users. II

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PIDSDEVELOPMENTRESEAF

NEWS

This volume contains the four papers presented during the seminar, namely: "Towards a More Articulated and Relevant System of National Accounts" by P.Q. Samson andd T.P. Africa; "National Accounts Linkages" by M. Ono; "The Reconciliation of Government Transaction Statistics:

---

JANUARY-DECEMBER IIIIIIIIII

National Accounts, Commission on Audit and Office of Budget and Management Reports" by J. Amatong; and "The Reconciliation of Foreign Transaction Statistics: National Accounts and Balance of PayTents" by A.M. Tetangco Jr. and C.M. Arenas.

IIIIIIII

Jl ii

IIIIII

PIDS PUBLiCATiONS

Ililil II

AVAILABLE Price

1. INDUSTRIAL PROMOTION POLICIES IN THE PHILIPPINES Romeo Bautista, John Power and Associates 2. SURVEY OF PHILIPPINE DEVELOPMENT RESEARCH I 3. SURVEY OF PHILIPPINE DEVELOPMENT RESEARCH II 4. SUMMARIES OF COMPLETED RESEARCH PROJECTS, VOL. I 5. INTEGRATION, PARTICIPATION AND EFFECTIVENESS; AN ANALYSIS OF THE OPERATIONS AND EFFECTS OF FIVE RURAL HEALTH DELIVERY MECHANISMS Ledivina Carifio and Associates 6, ESSAYS IN DEVELOPMENT ECONOMICS IN HONOR OF HARRY T. OSHIMA

1984

HOW PARTICIPATORY IS PARTICIPATORY DEVELOPMENT? Celia T. Castillo 8. THE SPATIAL AND URBAN DIMENSIONS OF DEVELOPMENT IN THE PHILIPPINES Ernesto Pernia, Cayetano W. Paderanga, Vietorina Hermoso and Associates 9. ENERGY AND STRUCTURAL CHANGE IN THE ASIA-PACIFIC REGION (PAPERS AND PROCEEDINGS OF THE THIRTEENTH PACIFIC TRADE AND DEVELOPMENT CONFERENCE) 10. PHILIPPINE EMPLOYMENT IN THE SEVENTIES Rosa Linda P. Tidalgo and Emmanuel F. Esguerra 11, MONOGRAPH NO. I: A STUDY OF ENERGY-ECONOMY INTERACTION IN THE PHILIPPINES Leander Alejo 12, MONOGRAPH NO I1: INDUSTRIAL POLICY AND DEVELOPMENT IN THE ASEAN COUNTRIES Romeo Bautista 13, MONOGRAPH NO, II1: ECONOMIC EVALUATION OF THE PHILIPPINE ALCOGAS AND COCODIESEL PROGRAMS Armando Armas and Dennis Joyce Cryde 14. MONOGRAPH NO. IV: A SURVEY OF MATERIALS IN INTRODUCTORY ECONOMIC EDUCATION Gerardo P. Sicat 15, JOURNAL OF PHILIPPINE DEVELOPMENT

1_125/$17.50 1_313_00/$8.00 f_30.00/$8.00 _'20.00/$7_00

1_2B.00/$7,50 _'55.00/$18.50 (Paperbound) I_125.00/$22_50 (Bookbound) 1_86_25/$19,00 t_125.00/$18.50

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illli I lilli

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PIDS DEVELOPMENT II

RESEAR( III11

qEWS

23 IL

"_ANUARYIII II

DECEMBER III I III I

1984

PIDS WORKING PAPERS 1. W,P. # 8301

Studies on the Wood-Based Furniture, Leather Products and Footwear Manufacturing Industries in the Philippines. by: Niceto Poblador, Adriano Soils, Roy Ybaffez, and 8ienvenido Aragon. Economic Policies and Philippine Agriculture. by Cristina C, David, Changing Comparative Advantage in Philippine Rice Production, Laurian J. Unnevehr and Arsehie M. Balisacan. The Impact of Government Policies on Philippine Sugar. Gerald Nelson and Mercedita Ageaoili. Comparative Advantage and Government Price Intervention Policies in Forestry, John H_ Power and Teresita Turnaneng.

2. W.P. # 8302 3. W.P. # 8303

4, W.P. _ 8304 5. W.P. # 8305

6. W.P, # 8306

7. W,P. # 8307 8, W,P. # 8308

W,P. # 8402

12.

W,P. '-- 8403

13,

W.P. # 8404

14.

W,P, _=8405

15.

W.P. #8406

16.

W.P. #8407

17.

W.P. _8408

18. W.P. # 8409 "19.

W.P. # 8501

2. S.P. #, 8202 3. S,P. #8203 4. S.P. #8204 5. S.P. # 8205 6. S.P. # 8301

An Analysis of Fertilizer Policies in the Philippines. Cristina C. David and Arsenio M, Balisacan. (Printed also in J,P.D, 1981) Credit andPrice Policies in Philippine Agriculture. Cristina C. David, Government Policies and Farm Mechanization in the Philippines, Cristina C. David. Shadow Prices of Goods and Resources in the Philippines An Assessment, Erlinda M. Medalla, An Analysis of the Behavior of the Commercial Banks, Marie B. Lamberte Exchange Rate Flexibility and Intervention Policy in the Philippines, 1973-1981, Filologo Pan:e, Jr.,

Government Expenditures of Agricultural Pollcies in the Philippines 1955-1980. Manuel S.J. de

7_ S,P, # 8302

On the Use of the DRC Criterion Projects, Erlinda M. Medalla.

Leon. Economic Incentives and Comparative Advantage in the Livestock Industry. Liborio S, Cabanilla. An Analysis of the Economic Policies Affecting the Philippine Coconut Industry. Ramon Clarete and J. Roumasset. Economic Incentives and Comparative Advantage in the Philippine Cotton Industry. Arsenio Balisacan. Intersectoral Capital Flows and Balanced AgroIndustrial Development in the Philippine_ Manuel S.J. de Leon.

8. S,P. #8303

Monetary Aggregates and Economic Activity. Marie B. Lamberte. Effective Protection Rates and Internal Indirect Taxes in the Philippine Setting_ Rosario G. Manasan. Response to Balance of Payments Crises in the 1970s Korea and the Philippines, John H, Power. A Study of Philippine Real Property Taxation Cayetano W. Paderanga, Jr., Public Enterprise in the Philippines in 1982 A Definition and Taxonomical Exercise_ Rosario G Manasan.

9. S.P. # 8304

S.P. # 8305

11.

S.P. # 8401

12.

S.P. # 8402

Forest Land Management in the Context of NationalLand Use. AdolfoV. Revilla, Jr. Policy Issues on Commercial Forest Management. Cerenilla A, Cruz and Marian Segura-delos Angeles. The Impact of Government Policies on Forest Resources Utilization, Gerald C, Nelson.

13.

S,P. # 8403

14.

S.P. #8404

15.

S.P. # 8405

Population Pressure, Migration and Markets: Implica[ions for Upland Development. Ma, Concepcion Cruz. Tenure, Technology and Productivity of Agroforestry Scheme& Ana Doris Capistrano and Sam Fujisaka. Environmental Effects of Watershed Modifica. :ion& Wilfredo P. David. Management and Cost of Watershed Reforestation: The Pantabangan and Magat. .JoseA. Galvez.

16,

S.P. #8406

17.

S.P, #8407

18.

S.P. #8501

Workshop Papers on "The Consequences of Small Rice Farm Mechanization in the Philippines'; A Review of Welfare in the Coconut' Industry, Sylvia N. Guerrero.

19.

S.P. # 8502

20.

S.P. # 8503

21.

S.P, # 8504

*22.

S.P. # 8505

W.P. _ 8401

11.

1. S.P. # 8201

10.

9. W.P, # 8309

'10.

PIDS STAFF PAPERS

Estimating the Shadow Exchange Rate, the Shadow Wage Rate and the Social Rate of Discount for the PhHippinc& Erlinda M. Medalla. Development Finance and State Banking: A Survey of Experience. Edita A, Tan. Derived Protection for Nontraded Primary Product_ Erlinda M, Medalla. Modelling the Effects of Devaluation on Prices, Output and the Trade Balance: The Philippine Experience_ Ma. Cecilia Gonzales. The Development Bank of the Philippines and the Financial Crisis, A Descriptive Analysis, Marie B. Lamberte. The Protection Structure, Resource Flows and the Capital-Labor Ratio in Philippine Manufacturing: A Short Empirical Note. Erlinda M. Medalla. A Decomposition Analysis of Philippine Export and Import Performance, 1974-1982. Ponciano S. Intal, Jr., Philippine Export and Terms of Trade Instability, 1965-1982 Ponciano S_Intal, Jr., Methodology for Measuring Protection and Comparative Advantage. Erlinda M_ Medalla and John H. Power. Food, Fuel and Urbanization in the Philippines, Alejandro N Herrin, Manuel F. Montes, Rodolfo F. Florentine,

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PIDS DEVELOPMENT

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I NEWS

JANUARY

DECEMBER

DEVELOPMENT RESEARCH NEWS is a publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights research findings and recommendations, seminars, publications, on.going and forthcoming projects which are of interest to policymakers, planners, administrators and researchers. This publication is part of the Institute's program to promote the utilization of research findings and recommendations. PIDS is a non-stock, non-profit government research institution engaged in longterm policy-oriented research. The views and facts published here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies discussed in this publication may be addressed to the following: RESEARCH INFORMATION DEPARTMENT (RID) PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES ROOM 515, NEDA SA MAKATI BUILDING 106 AMORSOLO STREET, LEGASPI VILLAGE, MAKATI, METRO MANILA Entered as Second-Class Mail at the MIA Post Office on October 13, 1983. Private fLrms and individuals are charged for delivery and mailing services at an annual rate of I_35.00 (local) or $5.00 (foreign).

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1984