I v0,
XIV No. 1
January-February1996
ISSN0115-9097I
O7-
P.,.p,no o.onomy I!otal II[actor llProductivity Phlppi n n ustri es* theperi째d 1981-92' farbel째w theM anu f actur igld
performed
poorly
over the last three
Dots. The Philippines grew at an decades c째mpared its Asian average of 1.5 percentt째 per annum neighover
[
of
I
n
e
.owth performance of Singapore, ._vuth Korea, Thailand, Malaysia, and Indonesia. One of the major reasons behind this poor economic performance is the deterioration in
productivity. The declining productivity over the years is borne out in a number of productivity studies done at the rrlacro level. For example, Williamson (1969) estimated a declining total factor
Caesar Cororaton, Benjamin Endriga, Derrick Ornedo and Consolacion Chua** productivity (TFP) from 55 percent in the period 1947-55 to 15 percent in 1955-65. The results of Sanchez (1983) and Patalinghug (1984) showed relatively constant TFP growth in the
establishments (or establishments which employ 20 or more workers). TheTFPmethodologyusedinthestudy was the traditional, neoclassical growth-accounting approach, which
the results of Austria showed a big drop 1960s up to the early TFP growth in the
and Martin (1992) of -11 percent in 1980s. However, period 1950-87.
on TFP, gives biased estimates of factor productivity. Hooley's study showed according to the theoretical literature that "over the period 1956-80, TFP
Ourfirst issuefor 1996kicksoffwith an evaluationof the totalfactor productivity of Philipphnemanufacturing conducted by Dr. CaesarCororatonand hisassociates.This is an all-import'antissue, one thatconsidering needs special attentionfrom ourpolicymakers that
According to the authors, this drop in productivity growth can be explained bytheinabilityofthecountrytoallocate its resources efficiently because of policieswhichintervenedintheprocess
decreased by 0.15 percent annually. Since 1975, TFP has been declining at
manufacturing is the lifeblood of indue-
of resource
trialization.Thestudy notedthe dramaticdrop inproduct_oityafthemanufacturingsector. This
Industry-level meanwhile, are rather TFP limited.estimates, The last
.
pa_r,:cJ
allocation.
is indeed disturbing, andbyeconomic needs consistent set of TFP growth estimates at the level assessment!and reassessment pundits withtheendinviewofputtingthemanufacturing ofPhilippinemanufacturingindustries sectorbackonitsfeetandraringtabecampetitive, wasdone by Healey (1985), covering The issue also containsDr. Alejandro the period 1956- 80 for 25 large Herrtn'sreviewofhealthcarefinancinginselected amntries with lessonsfor the Philippinesand ErikaJorg_nsen's commentary on Philippine *Thisis a condensation of thestudyentitled poverty,includingsometimely suggestionsfor improvingthesituation.
_
"Estimation of TotalFactorProductivity of Philippine Manufacturing Industries: TheEstimates," ajointresearch
___
J_t_
CJp _
Health
Care Financing:
SomeLessons from ,International ' Experience 4
Lastly,Dr. JesusEstanislao shareshie projectof thePolicyandDevelopment Foundation, Inc. viewsonhowthePhilippines canmaketheSubic andtheDepartment ofScience andTechnology. Summitoftl_Asia-Pactfic Economic Cooperation **Dr.Caesar Cororaton isresearch follow atPIDS, (orAPECforesaundingsuccessnowthatAPECBenjamin Endrigais currently pursuing a PhOat the Al ,l a isfinally raldy to _in offtradeliberalizationin University of the PhilippinesCollegeof Business I U theAsia-Pac_icregion. Administration, DerrickOmedoworksfortheUniversityof AsiaandthePacific, andConsolacion Chuaisresearch
,,
SO[IltiOIA_ //tat Work A Strategy
to Fight
Poverty
After Osaka, and into Subic
HeaIth Ca re Financirig" *
Some
Lessons
of the large majority of the population to basic health care services (access equity). User charges: efficiency
Jr0111hlterga/iogal l eriegce* Alejandro N. Herrin _nd
..
rawing out lessons from care financing system of
depending on particular situations, Thus, each country must design its
other countries, one should take note of Culyer's (1989) warning that there are "hazards lying in wait for those who try to learn lessons from the experience of others". These include the lack of professional consensus on cause and effect of various relations, e.g., the impact of fee-for-service mode ofpaymentonqualityandcostsrelative to other payment modes. Moreover, there are differences in social institutions including the traditions of medical practice. Hence, what might work in certain countries might not work in others. Despite this possible limits to learning, it is still useful to studytheexperiencesofothercountries for what insights they might provide to current health sector reforms in the Philippines. This review comes up with two general conclusions. First, health care financing is more than just raising funds to finance new or expanded health care or to simply reduce the financial pressure on public budgets, The health care financing system that is chosen affects the performance of the health sector in terms of efficiency and equity. Second, there is no perfect system from the standpoint of achieving the multiple objectives of efficiency, equity, free choice of providers, • quality, and cost containment. Each financing scheme and
own financing system based on its own objectives and priorities, its existing social institutions, the tradition of medical practice and the level of socioeconomic development, Among the major financing systems that have been used by other countries are: (1) tax financing, (2) user charges, (3) health insurance systems, and (4) community financing,
the health
the specific elements of its design have both advantages and disadvantages
Tax financing and equity Financial equity depends on the progressivity of the tax system, Canada and the United Kingdom are two developed countries that rely heavily on tax financing. Their tax systems are considered progressive and therefore, theirsystemoffinancing is relatively financially equitable. In developing countries where tax systems are regressive, thetax-financed health services will be financially inequitable, Moreover, in these countries, the limited amount of tax financing available for the health sector (due to low incomes, low tax effort and low priority given to health sector funding) coupled with traditionally heavier investments in urban-based hospital
Contraryaspects to what was once and equity believed that prices do not matter in developing countries (Akin et al. 1986), recent studies have shown that prices of health care services do matter in the reduce utilization. More importantly, sense that higher prices significantly thelowerincomepopulation, thetarget of the health sector to increase utilization of basic services, is mo,. sensitive to prices (Gertler and van deft Gaag 1990; Ching t995; Indradjaya 1995). Hence, increasing user fees of publicly provided health services designed principally to mobilize resources and to reduce the pressure on public budgets may lead to greater access inequities, unless effective income-based pricing(e.g., exemption from fees for the very poor) is instituted. However, income-based pricing has proventobeverydifficulttoimplement in a consistent manner due to lack of administrative capacity and the high costs of implementing a strict meanstesting program, as has been the= experience in severalAfrican countrie, I (see Kutzin 1995 for a review of studies). The effects of user charges on improvements in the quality of govemment servicesaremixed. At the. national level, •user fees have been found to have contributed only a small percentage of operating revenues for publicly provided services in several developing countries. This has been attributed to a number of factors such as " prices are set at low levels relative to the cost of services; • the low income level of the population limits the ability of people
"Partof a biggerstudyon "Baseline Studieson Health CareFinancing Reforms" oftheDepartment of to pay; and Health andPhilippine Institute forDevelopment Studies. **Professor. Schoolof Economics, University of = users who are able to pay avoid thePhillppines. payment because public user fee ......
1
schemes are poorly administered, These studies concluded that even if revenues can be further increased by raising fees (at a point that does not yet cause significant reductions in utilization) and improving the administration of the user-fee system, the potential share of total recurrent revenue for govemmenthealthservices that would be generated by user fees would probably be still modesL i.e., probably not more than 15 percent (Creese 1991 as cited in Kutzin 1995). The above conclusion should not be construed to suggest that user fees are an insignificant source of total
in government health facilities if the revenue collectedisretained and made available to the facility concerned to improve quality or to lower the total cost of care (i.e., greater availability of drugs in government facilities financed by user fees might actually reduce the total cost of health care by reducing the effective cost of drugs to the users), This requires, however, a certain level of managerial capacity to translate retained revenues into improvements in quality. Furthermore, in spite of this, there is still a need, related to this managerial or administrative capacity, to correctly identify the very poor who
in view of the high administrative cost of covering a large proportion of the population who are self-employed and unemployed. Provider Payment Modes. Much of the effects of the insurance system on efficiency and equity arise out of the way providers are paid for their services. There are different modes of paying providers with each mode having both advantages and disadvantages. Fee-for-service. In a fee-for-service method of payment, the provider's payment is closely linked to the level of effort or output. However, the method
notancing. It only means that it might be asignificantsourceofadditional funds to finance publicly-provided
will be exempted
Health insurance systems
is said to create incentives for excessive and unnecessary treatment, thus escalating costs unless there are
health services. Indeed, user fees constitute a significant part of total financing in developing countries but often, these are paid to private sector providers including traditional providers and for drugs, the latter arising partly from the inadequate supply in public sector facilities:While user fees might contribute little to national health budgets, they can be an important source of revenue at the level of individual facilities (Kutzin 1995 citing various sources).
Coverage. Universal coverage is not easy to accomplish. Although developed countries with insurance systems such as Germany and Japan have universal (or near universal) coverage, in the United States, some 14 percent of the population are reported to be still not covered by insurance (Reinhardt 1989). Moreover, universal ornearuniversalcoverageinGermany and Japan was achieved after a long period of time. A rare exception is South Korea which achieved universal
controls imposed, in the United States, physicians providing both ambulatory and inpatient care are generally reimbursed on a fee-for-service basis, where fees are setby the providers and payment rates vary among insurers. Such payment mode is said to be the majorfactorfortherapidlyrisinghealth care costs in that country compared to other developed countries. In South Korea, hospitals and physicians are reimbursed on a feefor-service basis according to a
In countries where government _llocations are severely constrahled, these are allocated largely for
coverage by 1989, only 12 years after introducing compulsory health insurance in 1977. This was achieved
schedule that is regulated by the government but are based on a costplus basis.
personnel, leaving little for the other inputs such as drugs. The use of revenues retained from user 'fees to purchase these inputs can have a major impact on the facility's productivity and quality of care. In some countries, it has been reported that when user fees were instituted and used to improve the quality of service including making drugs available, the utilization
under rapid economic growth and through some 400 insurance societies, Developing countries with small formalsectors willhave great difficulty inachievinguniversalcoveragequickly
There are other variants to the standard fee-for-service method of payment. One variant is the payment based on fixed fee schedule established " • through negotiation between thesmgle payor (the government) and the provider associations (with noextra billing) as in Canada; • by a central authority (with no extra billing) as in Japan; or
levels increased (Litvack and Bodart 1993 as cited by Kutzin 1995 for Cameroon; Samarasinghe 1995 for Sri Lanka; and Phommasak 1995 for Lao People's Democratic Republic). The experience in developing countries suggests that utilization of health services even among the poor can increase with increases in user fees
from user fees.
,_
II I . ''
differencesinsocial i tstitutiaHsindudiHgt11¢ traditlaHsa/ediealpraetice,
c_[lere are
dr[ell(e,
w_at
mi bt work
in
eel't6lil,l cote#triesmig/lt Hot work i//oH-/e/'K." ,,'_!_ ' ..... .........................
_: ......
• through negotiation between the payors (insurance societies) and provider associations as in Germany.
The fixed fee schedule adopted by these countries is said to have helped contain health care costs as compared to those in the United States. However, _
Paec ;"7
(_ehe World
Bank's commit-
getting better, our midst, statistics say that things are
tttttttt
AL
Labor structure
World Bank's country assistance strategy for the Philippines includes a more visible and intensive poverty alleviation effortwith the government, In a Pulong Saliksikan forum held last December 14, 1995, World Bank economist Erika Jorgensen shared her thoughts on the topic. Jorgensen believes the World Bank, with years of experience in poverty alleviation schemes in other countries, has a role
the economy, Jorgensen says the more productive sectors--industry and manufacturing--did not absorb much labor from the traditional sectors in the past. The pattern over time shows that the shift in employment has really been from agriculture to services and not fromagriculturetoindustry. Since the services sector has lower productivity compared to the industrial sector, this trend has not
to play in eliminating poverty in the Philippines particularlyas an unbiased source "from the outside looking in."
helped
raise wages, Another concern is the shift from formal to informal labor. Since the 1970s, the trend has been from self-
poverty reduction Still, what is that no matter who poor and who is
A failure of growth
employment in agriculture to informal employment in urban areas. However, this is not a pattern that provides for rising incomes. Differentaspectsofthe same problem in labor absorption would surface as a result of an economy whose structure is not robust enough to sustain growth,
target the worst off bottom or so of the population.
Jorgensen says the story of poverty in the Philippines is one of a failure of growth.. Growth in the 1970s did not accrue to the poor. In the 1980s, the tack of growth was particularly pronounced. In the 1990s, thanks to enlightened
S_/Ut/_HS
policy,
the
economy
t_at
_r_
Analyzing
"_4[t]'lOUg]'l/z_'crtH
is still itzour
ment to reduce poverty remains at the top of its agenda. In support of the government's socialreform agenda, the
the labor structure
of
is
II'lidGl, $l(ili$lfC$ $(ty l]'ial t]'ldll_$ (Ire getlill_
Illlll It lilt
It
moment, according to Jorgensen. One of the dilemmas is that the official crude poverty line for the Philippines is extremely liberal compared to other countries. Table l, however, showshow poorly the country has performed in over two decades. more important i government says is not, policy should 10 percent
Poverty across regions There are huge variations in poverty across regions. Urban poverty is seen to be worsened by urban migration while ruralpoverty is caused by the poor performance of the agricultural sector (which is partly the offshoot of the poor attention government hasgiven the agricultural sector).
•
A Strategy to F,ght Poverty
As gleaned
What statistics say Statistics on the trend in the numberofpoorpeopleandthepoverty gapshowthatsince1961,theheadcount of poor people has been declining modestly while the poverty gap (the shortfall between income of poor households and the poverty line) has steadily declined, Thus, as a general trend, the severity of poverty has diminished since 1961. Thereis difficultyinmakingcross country poverty studies to situate where the Philippines stands at the
in Table 24
rural the bigger p°vertystillc°ntributes_ share to total poverty, with a ratio that does not veer away
more open and there is greater potential for growth and equity at, the same time. One interesting point, according to Jorgensen, is that poverty incidence declined in the period 1991 to 1994 despite the fact that there was no per capita income growth in the domestic economy. In the same vein, poverty did not fall from 1985 to 1988 during a time of economic recovery, The seeming conclusion is that growth is not the only prerequisite for poverty alleviation, Nevertheless, growth is certainly fundamental in the struggle to fight poverty and although poverty is still in
belf_l'."
from
the 61-77 percent
range as compared with the 24-39 percent share of urbanpoverty to total poverty. Poverty and land ownership The concentration of land ownership in the country is not way off scale by international standards. Jorgensen says it is not worse off than that of Malaysia. The more imminent problemis the distribution of farm size and not the ownership. The crop where land ownership stands out as most grossly maldistributed is sugar. All other crops are weU below the regional average.
DEVELOPMENT RESEARCH NEWS \ _. _
'.... _
The comprehensive agrarian reform program (CARP) of government has laid the groundwork for equalizing access to land resources but it would take an estimated $4 billion to finish what CARP started and the
incentives. If government will reduce the tariff protection on sugar, for example, one will see these large sugar farmers more eager to sell their land at reasonable prices to small farmers,
wherewithal
Urban poverty
for this is not easy to come
by. The conclusion one can draw is that there are certain provinces and certain crops where land reform is still necessary. Although it has not been a total success and much is left hanging, this does not mean giving up on land
39 19
registering titles. The urban poor's plight is greatly laden by their lack of access to housing, a problem due in large part to sky high land prices, The urban land
the country is already extreme across regions and such variance may be expected to grow as the richer provinces accelerate their economic performance by investing more in everything, including education.
S
market situation is perhaps
Flat i: i(I,
Indonesia (1970-90)
07 9.0
52 58
Korea(1970-90)
09
23 37
14
Thailand (1962-88)
14
59
92
Malaysia(1973-1987)
16
legitimizes the squatters' stay. Of Metro Manila's total population, 60 percent have water connections and 40 percent have none. Of those without connections, about 30 percent buy vended water. Educational reforms Although overall levels of education in the Philippines are still good, the country, says Jorgensen, now simply logs average performance in education. The Philippines used to be way above the world average in terms of education indicators. The variance of resources within
iN TABLE POVERTYI INCIDENCE IN SELECTED ASIANCOUNTRIES
Philippines (1971_91)
1996
There is a strong need for urban land reform, meaning measures that would improve the workings of the urban land market, Currently, 20 percent of Metro Manila land is undeveloped while land prices are continually rising. Relatively low taxes are levied on land and there is a failure in
CHANGES
':
January-February
A bias for basic education
the biggest problem. Forty It is elementary education which percent of the population_ benefits the poor most due to the fact Note: P_y inede_e i, theo_rJal headc_nt index calculated in Metro Manila lives on that most of the poor only have, and _o_fa=__..... untitledland. The situation could only afford, a basic education. regarding the titling of lots Education in the elementary level is itself very confusing, should therefore be a priority because reform but merely prioritizing, the Government must act and of its pro-poor orientation. funds and resources to what will really provide its urban denizens help. Land distribution, to be with security of tenure. Building middle-class houses uccessful, should be complemented TABLE2 by support services such as access to for the poor is not a solution POVERTY INC,OENCE. 196_-,91 (,n PERCENT) infrastructure, credit, rural roads, to the problem (obviously, irrigation, postharvest facilities and thepoorcannotaffordthem organizational capability-building, and neither can the Under Philippine law, tenancy is government). 1961 59 51 64 30 70 1965 52 43 55 96 74 prohibited. Other countries have more Other interventions 1971 59 41 57 94 77 flexibility in their tenancy law and the mightprovidemoreimpact 1985 44 37 49 , 39 68 Philippines can draw lessons from for the urban poor 1988 4o 32 46 31 69 them. For instance, agriculture in most particularly giving the 1991 39 31 47 39 61 1991 " 37 23 53 = 35 65 of these countries is driven by urban poor security of productive small farms, credit is tenure and better environ*adjusted(I.... foodex_litu_ art us*dintl_ I_v_y line). accessible to small landowners, and mental condition. Table 3 n,_; iEom¢, Po_e,> _._d,_ _,the_,d _,t _,d,,_, e,,h_, _'_,sf,-_ the only pov4rty measureavailable for all y_a_. For 1961 -}' 1, infrastructure is available. These presents a picture of the itisc_lculatc0u_ingth¢1988po,,_tyllr_byresiooandu*ba./ provide the impetus for small farms to urban poor's access to clean ,_,,I ,rt,,,, ,,t by then,uo,,ISt,t_,t_ol C_0,_,,t_o, 8_,d 1993,adjusted forinflation. For1985-91,the pove_h, linei[ _. the be just as effective and even more water and sanitation, r,cwofficiallincasset_tkcNationalEconomica_Dc_opmcnt efficient than the larger farms. At present, there are ,_t_ in1993. A valid reason why large farms no water provision in continue to dominate in the Philippines squatter areas. Local water is because large farms enjoy favorable utilities servicing the metropolis do protection and are given more not bring in water because doing so _ page 19
DEVELOPMENT RESEARCH NEWS--
L
_ _" _0[al Fdc[0r P_0d0chul[y . •"_/_:_,_,_1
_
an alarming rate of 2 percent or more per year. For the manufacturing sector as a whole, the data paint a very clear picture--one of slow TFP growth during the late fifties and sixties, unmistakable retardation after 1970, with rates of advance after 1975 assuming significantly larger negative dimensions. When certain additional adjustrnentsforlaborqualityimprovements are made, the average rates are uniformly lower for the entire period as well as for all subperiods" (Hooley 1985). More recently, the Philippine Institute for Development Studies (PIDS), under the Development Incentives Assessment (DIA) project, estimated productivity of selected manufacturing industries. The analysis, however, did not focus on TFP growth but on a related concept known as technical efficiency (TE). Industries included in the study There are a total of 32 Philippine manufacturing industries in the 1988 Census of Establishments. Of the 32, 25 industries are included in the study sample, accounting for more than 90 percent of the total. These industries arem • [] • • = [] []
food and other food sugar milling and refining beverages tobacco textiles apparel excluding footwear leather and leather products
• footwear excluding rubber ,[] wood and cork products [] furniture / fixtures excluding metal [] paper and paper products [] printing and publishing • industrial chemicals other chemicals
', .
[] [] [] [] • • • • [] [] []
petroleum refineries rubber products plastic products, n.e.c, glass and glass products other nonmetallic mineral products iron and steel nonferrous metal fabricated metal products machinery excluding electric electrical machinery transport equipment
The Philippine
economy
January-February
1996
Industrial StructurelPolicy. The present industrial structure of the country remains dualistic. The manufacturing sector, which has enjoyed high effective protection since the 1950s, employs only a small fraction of the labor force. The bulk of the labor force is employed either in backward agricultural sector or in urban centers with very low productivity. Industry, which in principle is supposed toabsorbsurpluslaborfrom agriculture, failed to generate enough jobs to employ a labor force that has
Performance. The growth of the Philippine economy decelerated over the past 40 years. In the period 195670, real GDP grew an average of 4.7 percent per annum (see Table 1). This increased slightly to 5.9 percent per annum in the period1971-80. However, it dropped drastically to 1.5 percent per annum in the period 1981-92. Focusing on the last 15 years, the economy had performed poorly, with a prolonged recession experienced in the period 1984-85 when real per capita income contracted by -10.1 percent. The recession was caused mainly by two factors: political uncertainty and unstable macroeconomic fundamentals. At the same time, the economy also proved to be highly unstable, with inflation rate surging to 35.2 percent. During the first three years of the Aquino government, the economy recovered. Such recovery, however, was not sustained when political uncertainty and poor macroeconomic fundamentals once again plunged the economy into nearly zero growth in the early 1990s. This is when significant realignment and structural adjustments were installed, There are now indications that
grown at almost 4 percent annually over the last decade, in fact, the share of industrial employment, particularl3_ manufacturing, declined from 12.1 percent in 1960 to 9.7 percent in 1990. The decline in the share of agriculture in total employment has also •been significant. This development, together with the stagnant share of industrial employment, implies that "services, a largepartofwhichissocaUed'informal sector', served as the receptacle for labor shed by agriculture which industry failed to absorb. Therefore, the lack of employment opportunities in industry condemns the majority of the labor force to jobs with low productivity and poor pay" (de Dios 1992). The most important factor that contributed to this unfavorable economic structure is that most
the economy is starting to crawl up. In 1994 alone, for instance, the economy grew by five percent in real terms. It is however, too early to tell whether the economy is already moving along a sustained growth path or not since the process of readjustment has not yet been completed,
manufactured exports now contribute about 70 percent to total exports.
Philippine industries remain oriented toward a limited domestic market. This isespeciallytrue for the manufacturing sector which enjoys high effective protection. It is true, however, that exports of Philippinemanufacturedgoodshave grown both as a share of total exports and as a share of GDP. In fact,
One might come to think that this is the effect of a major restructuring effort of redirecting the economy away from import substitution and toward the world market. Although this has been the objective of some policy
DEVELOPMENT RESEARCH NEWS, ..,_
..
pronouncements, the direction towards this end hasbeen very modestin reality. This is because of the very high import content of Philippine manufactured exports. Most manufactured exports consist of electronics (primarily semiconductors) and garments. Inboth export goods, the Philippines adds a thin slice of value added to import components, and then re-export them. "Thus the manufactured export sector is in effect an enclave with surprisingly little linkage to the domestic economy" (Krugman et al. 1992). As a result, the overall performance of Philippine export relative
', _,_-,"
of the .items concentrated at around 3, 10, 20 and 50 percent tariff rates. More recently, there has been an acceleration of the tariff reduction on textiles, garments, and chemical inputs, One of the major changes in the fiscalsector is the tax reform program which was instituted starting the second half of the 1980s. Among the major objectives of the program are to improve the elasticity of the tax system, tax administration and compliance by tax simplification and to promote equity and growth by reducing highly distortive taxes. Furthermore, the
t,_ its ASEAN neighbors is poor. The r ailippines is fast losing its share in the | world market. The Philippine _(1956-1992).L_ share of total ASEAN export in Indicato,s 1970 was 17.7 percent. In 1985,
1971-'80
this dropped to 6.9 percent and in 1990, further declined to 5.9 percent. The present industrial structure is a result of a trade policy that generally provides strong incentives to importsubstituting activities and heavy
Realexports (g,owthinpercent) GDP (growthin percent) RatiooFbudgetdeficit _th GDP
disincentives to export-oriented production, Usually, countries that attempt to industrialize by
Source:NationalStatistical Coordination'Board andNationalStatisticsOfFice.
(in pcrccnt)
In_lati0n rate
roviding manufacturers with a rotecteddomesticmarketendupwith an overvalued exchange rate that discourages exports. The Philippines is one example. Although the Philippine peso depreciated, both in nominal and real terms, compared to many developing countries, the depreciations were far less. In fact, the Philippine peso is far out of line compared to other developing countries, Recent EconomicReforms. The government pursued a unilateral trade liberalization program in 1986-1993. The number of regulated items was reduced drastically from 1,924 to only 183 within the period. Moreover, in 1991, the government put in place a five-year tariff reduction program that simplifies the tariff structure and puts a nine-band tariff structure, with most
3.5 4.7
The old Central Bank (CB) was rehabilitated into the Bangko Sentral ng Pilipinas (BSP) which is "free" of thehugestockofnonperformingassets that almost crippled the old Central Bank. In principle, the BSP should now be able to perform its mandate of maintaining monetary stability in the economy. A substantial number of controls in the foreign exchange market were likewise removed in the hope of increasing the flow of funds between the country and the rest of the world. For instance, exporters are no longer required to surrender their export
proceeds and to seek prior BSP approval for their other forex-related transactions. Controls oncapital 1981-92 repatriation, dividend, and interest remittance were also
10.3
4.9
5.9
1.5
-0.2 14_8
-2.7 14.1
: -0.1 4.3
1996
] /
TAB'E 1 1956-10
January-February
government adopted the value added tax (VAT) system in the second half of the 1980s which replaced several sales taxes, To restructure the financial market, the government removed controls on interest rates, rationalized the credit programs of the government so as not to compete with the private financialinstitutions, privatized several government-controlled banks, and liberalizedbankentry'Theg째vernrnent also initiated the rehabilitation of the rural banking system and stopped the operation of weak private commercial banks through either closure or merger with stronger banks. Moreover, the Central Bank abandoned its selective credit control and instead imposed uniform rediscounting for all activities.
dismantled. There are, however, existing controls on foreign borrowing especially those guaranteed by the government. Fourmajorpolicyreforms were introduced that have a direct bearing on the development of capital. First, the double taxation of dividend income was eliminated through the abolition of the tax on intercorporate dividends and the gradual phase-out of the tax on shareholder's dividend income. Second, the Security and Exchange Commission formally issued the rules and regulations governing investment companies in October 1989, signalling the revival of mutual funds. Third, as part of the foreign exchange deregulation program, rules and regulations covering foreign investments in BSP-approved securities were relaxed. Fourth, the two stock exchanges in the Philippines were unified, thereby eliminating inefficiencies such as price arbitrage in a situation where two markets are allowed to list the sam e company. All these changes are deemed to facilitate the inflow of investment into the country. _ page s
OEVELOPMENT RESEARCH NEWS ....,
iH
Total factor Produc[IVlk.q.,, _/_-z_- 7
production functions. The index number approach requires only the formulation of index numbers (usually based on distance functions), while the growth-accounting approach makes use of either factor share calculations (i.e., production function parameters are calculated as factor shares, using a given set of data), or programming methods (i.e., the production parameters are estimated using programming techniques within a deterministic framework), Growth-accounting approach. In this approach, it is assumed that the observed output is obtained by using the given technology to its full potential. This means that the realized or observed output level is the frontier output, which is 100 percent technically
The Foreign Investment Act of 1991 liberalizes entry of foreign investors within the provisions of the Philippine Constitution. As a general rule, there are no restrictions on the extent of ownership of export enterprises (defined as those exporting 60 percent of their output). As for enterprises oriented to the domestic market, foreignersare allowed to invest as much as 100 percent, unless the participation is prohibited or limited to a smaller percentage by existing laws and/or the provisions of the Foreign Investment Act. To promote competition in the domestic economy, the government removed entry barriers in crucial industries such as telecommunications, transportation, banking and cement, At the same time, the government aggressively pursued its privatization . program. In 1993 alone, the Foodmanufacturing Sugar milling government sold to the 13evemges public 19 governmentTobaccoproducts owned or controlled Textiles corporations, including Wearingapparel Petron, Philippine Shipyard Leatherproducts
.... T^_L_'!:i_"i' i'
1957-70
1971-80
1.33
6.28
-3.-74 7.41 -0.77 4.18 -0.67 -6.17 1.27 -1.61 -0.41 3.44
-1'.21 4.19 9.29
and Engineering Corp., and Oriental Petroleum and Minerals Corp.
Footwear Wood products Furniture andfixtures
-9.54 2.52 0.75
Measuring TFP
Paperand paper products Printingand publishing Industrialchemicals
-0.19 6.04 -1,68
There are two major approaches to measuring total factor productivity (TFP): the determlnistic approach and stochastic approach. The deterministic approach may in turn be broken down into two branches:theindexnumber approach which does not require any explicit specification of production functions and the growthaccountingapproachwhich requires the specification of
Petroleum products Rubberproducts Plasticproducts Glassproducts Nonmetallic mineral products Ironandsteelbasicindustries Fabricatedmetalproducts Machinery Electricmachinery Transportequipment
efficient. In reality, however, an industry may not be operating along the production frontier. In cases where the industry operates below the frontier (this is also called the "best practice" frontier), the growth accounting method will give biased estimates of technical change. Moreover, in the growthaccounting approach,' factors of production are assumed to be paid accordingtothevaluesoftheirmarginal products. If this assumption does not hold, it can create another source of bias in estimating total factor productivity growth. Stochastic Frontier Production Function Approach. The majoll distinguishing feature of this approactTfrom the growth-accounting method is the assumption regarding the existence of an unobservable production frontier function. This function corresponds to the set of maximum attainable output levels for a given combination of inputs. Thus, TFP growth is the sum 1981-92 of technological progress and the change in technical -4_35 efficiency. 0.01 The distinction bet-4.49 1.45 weentechnicalprogressand -1.92 technical efficiency has very -1.06 important policy impli0.49 cations. "For a given tech-
0.84
1.01 O.80 3.75 5.587 3.89 0.99
-9.56 -o_05 4.58
1,32 3.9"27 5,04
1.47 1.91 -1,59
-5.89 -1.29_ -0.93 2.90 -0.33 -4.49 4_! 1 1.45 4.47 -0.00
No. of i.&_ _th &divas T_ _h 4 1_ Mlximum 6.28 7.41 Minimum -9,54 -6.17 I. ...._";; '"",.,_:_s_:._.,",.:,_ .... _,;_::'._:'_'. ,,_. '.
-4.18
2.57 -1.74 -4.86 -9.45 -9.27 9.75 -1.43 3.04 -1.09
.... 14 4.58 -4.86
i
nology, it may be interestin#l to know whether the gap between the 'best-practice' technologies and realized production functions is diminishing or widening over time. Technical efficiency change can be substantial and may outweigh gains from technical progress itself. It is therefore important to know how far a firm is off its frontier at any point in time, and how quickly it can reach the frontier. For instance, in the case of developing economies which borrow technology extensively from abroad, failures to acquire
TEC*
Rank
Foodmanufacturing 0.870 Sugar 0.809 Paperand paper products Glassproducts Plastic products Beverages Industrial chemicals Transport equipment Rubber products Tobacco products Textiles Nonmetallic mineral
I 2
0.769 0.759 0.740 0.738 O.739 0.798 0.713 0.708 0.707 0.689
3 4 5 6 7 8 9 10 11 19
Ironandsteel basicindustry0.665 Leatherproducts 0.655 Machinery 0.650 Woodproducts 0.647 Other chemicals 0.633 Fabricated metalproducts Printing andpublishing Footwear Electrical machine_y Wearingapparel Fumil_ure andfixtures
0.603 0.598 0.575 0.564 0.541 0.509
_"i:i'..,: i ,.:
1956-70 1971-80 1981-92 1.49 9_30 3.08 4.08
0.43 1.45 9.76 -0.24 0.63
9.41 -0.15 -0.47 -3.51 0.56
3.29 0.49 5.18 1.76 2_70 5-91 -0.28
-9.47 O.75 0.94 -0.10 9.51 0.58 2.57 5.17
-0.68 -4.74 3.61 0.88 2.58 1_65 1.16 -0.22 9.30 1.48 -1.75 2.06 -3.24 -1.59 2.59 " O.15 • 9.90 . -3.29
Wearing apparel
declining TFP growth increased through time. In the period 1957-70, there were only 4 industries with negative TFP growth
Leather products Footwear Woodproducts Furniture andfixtures Paperandpaper products Printing and publishing . Industrial chemicals
13 14 15 16 17
--beverages, footwear, paper and paper products, and industrial chemicals.
Otherchemicals Rubberproducts Plasticproducts Nonmetallic mineral products
-5.08
-1.94 -0.48 -7.25 9.50
18 19 20 91 22 23
Since then, there has been a significant increase in the humber of industries with negative TFP growth. In the period 1981-92,
Glassproducts Ironandsteelbasicindustries Fabricated metalproducts Machinery Electricmachinery Transport equipment
1.80 3.61 5.92 4.21 -0.34
-4_78 -0.87 ,3.63 3.08 4.52 -1.63
there were already 14 industries with contracting TFP growth. It is interesting to note that it was duringthesecondhalf.
No. of industries withdeclining TFPg,owthl 3 . Maximum 5.92 Minimum -5.08 I
"Technicel Efficiency Coefficient
_t:'r_ .'l,_l,,,,'; __fi_;_ .................... •.............. I_,, -.,, ,, ," ',",i;':;:71'] It
and adapt new technology
Research results TFP Using GrowthAccounting Approach. Table 2 presentstheindustryTFP growth estimates for theperiod 1957-'92 Foodmanufacturing using the growthSugarmilling Beverages accounting approach. Tobaccoproducts The number of indusTextiles tries which show
will
be
1.18
9 . 10 9.51 3.61 -9.47 -4_74 ........... '" .... ;. 1
eflected in the lack of shifts in the frontier over time. The movement of the frontier over time reflects the success of explicit policies to facilitate the acquisition of new technologies, Similarly, changes in technical efficiency over time and across individual firms will indicate the
of the 1980s and early 1990s when the TFP growth of the manufacturing industries deteriorated. It was also during this period when the government implemented a series of structuraland macroeconomic adjustment policies.to check the chronic macroeconomic imbalances of the
TFP growth are furniture and fixtures (4.6 percent per year), electrical machinery (3.0 percent), fabricated metal products (2.8 percent), and rubber products (2.6 percent). TFP Using Stochastic Frontier Approach. The technical efficiency shown in the results are ratios of the
success or failure of a number of important industrial or agricultural policies" (Kalirajan, ObwonaandZhao 1994). In the present study, different forms of the production function and technical efficiency were analyzed using the computer software FrOntier Version4.1 developed by Coelli (1994). The software computes for the maximum-likelihood estimates (MLEs) Of the parameters of the model and the predictors for technical efficiencies,
economy. Offhand, it maybe hard to tell whether the decline in productivity was due to these policies but it would certainly be an interesting research topic to pursue. In the period 1981-92, theindustries with the biggest drop in TFP growth are food manufacturing, beverages, petroleum products, and glass products. TFP of these industries shrunkby more than 4 percent per year in this period. On the other hand, industries with the largest increase in
actual industry output and the maximum possible output. Thus, the higher the ratio, the nearer the industry to the frontier or 'best practice' curve. In the extreme case, if the industry operates along the frontier, then it is 100 percent technically efficient. Table -3 shows the period averages of the technical efficiency coefficients of the industries. Based on the results, the most technically efficient industries are _' I',_,, 1;'
C (Asia-Pacific Economic Cooperation) has now gone through three leaders' meetings at three different locales: Blake Island, Bogor and Osaka, all with successful outcomes. With this, a vision for an Asia-Pacific economic community has been put forward. Political commitment to free and open trade and investment has been made, with
e,ep,o, mu,,be
comprehensive to encompass allsectors. Ideally, they should representbest-effort commitments which can
start a competitiye process of speeding all APEC economies unilaterally toward trade and investment liberalization, A herculean task this is for each
Osaka Jesus Estanislao a shared two-tiered timetable and, above all, a shared commitment. APEC
economy. A virtually impossible task it is for any chair to coordinate, and the responsibility for doing just that falls onthePhilippinesthisyear.Itisdifficult to devise a more surefire formula for potential failure. The Philippines must really believe in miracles to fail to be daunted by theenormity of the task
is all about goodwill and, therefore, about the freedom to take unilateral actions toward our Common goal We march not in martial'lockstep but in a diversity of styles that enriches a multistepped choreography.
contrasts in the manner of achieving results. Three different styles emerge: abrasive openness at Blake Island, strongleadership from the top in Bogor, and effective and efficient bureaucracy at Osaka. The diversity of styles has enriched the APEC process and has contributed to levels of success which were much higher than if only one approach was adopted all throughout,
ahead. We must bear in mind, however, that in APEC and through APEC, all member-economies are asked to go beyond their WTO commitments. We are all aiming at virtual free trade and investment in the Asia- Pacific region before the first quarter of the twentyfirst century,
At APEC, the pace is not to be set by the slowest. Indeed, the strategic question that each APEC economy will need to ask itself is: can it really afford to beleft behind? If thereis any economy that has had to grapple with this question, it is the Philippines. Considering also that more than threefourths of trade in tha Asia-Pacific region shall be completely liberalized
Lookin_ for our own comparative
Thinking o_::he to_j. _:erm 1996is the year, therefore, for all of us to think in the long term and with a different mindset. Each APEC member-economy commits itself to
by2010 at the latest, is itin the strategic interest of any developing APEC economy to shut itself off from the mainstream of free trade? If free investment flows follow free trade, does
definite target dates of 2010 and 2020 for developed and developing countries, respectively. An action agenda has been adopted, While there has been continuity in the APEC agenda, there are marked
advantage As the Philippines takes on the chair of APEC in 1996, it would be
Can we afford to be left behind?
prudent to look for our comparative bring down and remove barriers to advantage and contribute our peculiar free and open trade and investment, at strength to the diversity for which a least in the region, by 2010 and 2020. successful outcome for APEC can be We aim to do so not through give-anddrawn, it would not be wise to even try takebargaining nor through long, and imitate what the US, Indonesia tedious negotiations with fine and Japan did. Rather, we should all be calculations of what to give away in working toward Subic contributing in exchange for gains we receivein return, its own distinctive fashion. This will Rather, we are all starting from the best substantiate the vision for making conviction that the more we open our APEC a community of peaceful and economies to each other, the more we progressive economi'esengagedinfree all benefit. Furthermore, there is a and open trade in the Asia-Pacific widening consensus that those who region and promoting the same under " liberalize first and fast shall gain the the World Trade Organization in the most. world economy. This is what concerted unilateral liberalization implies: a voluntary Herculean task ahead commitment to do all we can, as fast as
any developing APEC economy tha_ seeks to attract investments serve itยงl development purpose by dragging its feet in pursuing its liberalization strategy? Ensuring that the liberalization programs will be in concert with and comparable with one another may well be APEC's gift to WTO. If APEC can promote and practice competitive liberalization, then it willhave shown a way,, very different from GATT to achieve effective and efficient results.. The APEC chair cannot preside as though APEC were a new round of GATT negotiations; this would be unwise. Rather, the APEC chair needs to focus the attention of everyone on
At Subic, each economy will submit its liberalization plan which can then be implemented by January 1,
how far and how fast each one's liberalization program can go ,in the light of new realities. Then, there can be
we can in removing trade and investment barriers across countries, Each of us starts with the shared vision,
breaking the divide betr sfer,BOW, agr0emeotsm ,weeo onor.nd
and
between developed and developing country, shall be initiated; where the
the meeting
of leaders.
Let a thousand
flowers
bloom
by example
APEC economies, drawing from their experience in promoting genuine people development, shall pledge to contribute to an open and all-inclusive framework for development; where governments shall proclaim that development workis not confined to a
The Philippines has comparative advantage in promoting people-topeople linkages. We believe inletting a thousand flowers bloom, we bank on the grassroots. We are very good in getting many people together from different sectors and fields.
The Philippines has the burden oftheAPEC leadership in 1996. It will havetobearthisburdenbyexample. It mustthenworkcloselywithitsASEAN
long list of programs in which only governmentscooperatewitheachother but where the business sector, private organizations, NGOs, and people's
For each item included in the APEC's agenda for development cooperation, private entities and NGOs in the Philippines can be asked to
rally so ASEAN us, Ifthen i lghbors they too behind will follow. we ASEAN's imprimatur in the progam implementation adopted at Subic would certainly carry clout. Thisisour opportunitytogivefleshandsubstance to ourdreamsputforwardatCanberra in 1989, that APEC should be founded upon ASEAN's commitment and capacity for action,
and expertise. organizations share their resources These principles have already beenarticulatedbytheeminentpersons group of APEC in its third report. The Philippines is the venue for assessing and putting them forward,
APEC*wide networks. the assume the leadership of Let starting networksbesetup.Letasmanypeople in APEC begin to get together, know each other better and agree on a program of work which they can pursue together. This is a vital component of the responsibility of community-building.
a ratcheting pressure, Leadership
up
and
positive
peer
An active sector
role for the business The Philippines should also steer APEC
Development cooperation: Philippine style ThePhilippinesmuststeerAPEC toward an open framework for development cooperation. Manila can
towardsubstantiatingthe APEC claim that the business sector should be the engine of economic growth. As we welcome the APEC Business Advisory Council, we should begin to feature a business summit which can be staged at the main APEC ministerial meeting prior to the meeting of leaders, The challenge to the private business sector is to showcase formal agreements which some of its members may forge as substantive counterparts to the government-to-government agreements that the Philippine president shall be signing with various governmentsinpursuitofdevelopment
be the site where ministers shall adopt the principles for development cooperation; where the process of
cooperation. In more specific terms, various agreements highlighting the different forms of build-operate-
A zone ofpea{:;e _onfhct:
i_ _ worlcJ cff
Finally, we can draw on an analogy between Subic and President Ramos. Subic was a military and naval base prior to becoming an industrial and commercial complex. President Ramos was a military officer prior to his role as an economic leader commited to reform and development. Clearly, the image and the message is that APEC, as an economic community, can,sustain and promote prosperity in the Asia-Pacific region if we all pledge to make it a region of peace. This is, after all, what ASEAN has tried to do: to stress economic cooperation so as to secure a zone of peace. Once again, ASEAN shows the way for APEC by Sharingits experience in tying peace and prosperity.
"Remarkson the occasion of 29,1995. two APEC conferences inManila onNovember 28and Dr. JesusEstanislao ispresident oftheUniversity ofAsiaand the Pacific.Dr.Estanislao representsthe Philippines at APEC'seminentpersonsgreup.
food manufacturing, and sugar, with technical effieiency of above 80 percent. Theleasttechnicallyefficientindustries are wearing apparel, and furniture and
• industries with negative TFP growth, In the period 1971-80, the number increased to 9 industries. In the period 1981-92, the number of industries with declin_ngTFPgrowthincreased further to 10. A Comparison of the Two Estimates. As discussed earlier, TFP growth estimates using the growth-
generally in the same direction. In fact, the correlation coefficient between the two sets is 0.625. In the period 197180, the correlation coefficient is somewhat lower, indicating that the two sets of estimates started to diverge in thisperiod. In the last period (1981-92), the correlation coefficient is much lower at 0.262.
fixtures with technical efficiency coefficient below 55 percent, The TFP growth estimates using the stochastic frontier approach are shown in Table 4, Generally, the same declining productivity appears in the results. Through time the number of industries which register negatiye or contracting TFP growth increased. In the period 1956-70, there were 3
accounting approach are biased because the method assumes that industries operate along theproduction frontier while the problem is well addressed in the stochastic frontier approach, Comparison of the two estimates was done on a per period basis. The TFP growth estimates for the period 1956-70 using both approaches move
The technical explanation for the divergence of the two sets of TFP growth estimates is the restrictive assumption used in the growthaccounting approach which requires that all industries operate along the frontier. This implies_that all industries are 100 percent technically efficier L This assumption• is indeed t( restrictive considering that tl + economy was highly unstable in the 1980s and early 19905. The foreign exchange crisis in the mid-i980s aimost puttoahaltanumberofheavilyimportdependent industries, a few car assembly companies, for example, closed shop during this period because of the shortage of foreign exchange. The foreign exchange crisis and the
T0talFact0rPp0dllCbUIky_., /_'_'-_'
TASL¢5 DECOMPOSITION
OF TOTAL
FACTOR
PRODUCTIVITY
GROWTH
USINGSTOCHASTIC-FRONTIER APPROACH: TFP, TP ANDTE 1956-'/0 1911+80 1981-92 TFP TP TE TFP TP TE TFP TP TE .............. .... _
"
Food manuFacturing,, :Sugarmilling
1',,49
-0,17
B_erag_ Tobaccoproduc!s,, '"
930
Textiles,,,,
4,08
Wearing apparel Leatheriproducts'
,' 31.20II-0,15',
2,62'
0,42
, I3,44
-1'.34"
,
1',76
,
-149
' 3._5
9.51
1.66 2.'41"'
Industrialchemicais Otherchemicals
9.9-0
Rubber products Plasticproducts Nonmetallic mijleralproducts Glass products iron and s|ed basicindu,trles,"
0.58 2.57
5.17 ,, ,1.24 1,18 -1,64,, 2.82', -0.48
-5,08 ',
-2,48
-7,18
,', 2:10
'1.'80 ", 0.87
,O.93
,_ 7.77 '
.1,83 ',0"3,1
'-0,87,
1_74
2,58
2.41 2,88
1,65 -0.64 1,16 -137
:
-0.18
, 2.76
2.29 2.74
3,36 1,81 -0,22 -3.20 2.98 .4,.5'2 3.34 , 2,30 -0.,51 2,81 -3.57, 3,09', 1,48 -0.83' 2.31
-7,25 -9.92 2,50 ,,, '-0,06 -4.78 -7,,4,1
'
Fabricated metalproducts tv_chineo/ Electric machinery
"4,'!O
9.67 2.57': 2.63
-1.75 2.06 -3.24
_4.65 -0.46' -6.43
2.90 2.52 3.19
3.23'
-1.52
-'4:38
2.85
3.61 069 .'5.92.' 3.23 4,21 2153 Tramport_uipm_t' '-0.34 -2.O2" ................. Numl_roflndust_i-, with d¢clinin!l TFPgrowth 3 Maximum 5,99 83.74
! 03,44 , 9 9.51 17 7.77
0 3.34
10 3.61 ,21 1.76 0 4,90
Minimum
0.93
1.71
_4.74
-5.08
-7.18
1
The succeeding based
3.6,3 1.96 "2.38 2.59 -0.41 , 2,99 3.08 "1.02.. 2,07 '2,69 4.52 2','7,9 ,,' '1,73, 0.15 2.90 -_.54 O,,58'_',2.32 1:68," -1.63 -3.36 ''_1.7.3 '_3,29,:-5.61 ' 2.32
-9.47
-11.79
i " _" , " _,_i,, ,,'_,' ,,, ,, ' ,
accounting approach is therefore unrealistic and presents a big bias against in the estimates Of industry TFP growth.
2,92 2.68 1'+68
-7.23
1.85
. ........... , _ TmT=-'Fa_ P_ TP.. T_,,t Pro_ '', tt-,T_r_.JtE_
"
import levyin the early 19905 also had adverse effect on a number of local industries. Generally, the economic constraints during this period had a negative impact on the productivity • performance of local industries. T' 100 percent technical efficien assumption under the growth-
035
"'2:3'9
1,76 1.44
Paper and paper products ',, ,2.70 ' 1,05 Printing and publishing ' ,, ', ,"5.91 330
:0.28
'9-.41 "-r0.'14,,= ,9.54 -0.15 :9/95 ,9.80
2.41 -0.47 -2.86 .....2,39 -0.24 -2,41 , ,2,,17 -3,51 -5.59, 2,08 0.63' -2.1'6 2'.79" 0.56 -2.11"' 2,60 -9,47, -11.79 2.32 -0,68 :5.59' 4.90 0.75" 3.14 I _4,74 -7.23 2.49 0.24"-2.85 3.0'9 3.61 1.76 1,85 _0.10 -2:91 2.80 0,88 -2.18 3:06 2.76
,1.46'
_'5'.d8 3,74
Wooaproducts
, 0.43'"'i,9,,19"', '9,'.63, 1.45 "-0'.2'6'", 1.71
1,71:
3,08 1,34 1.74
Footwear'
Furniture and fixtures
,1,59'
039
'
:
. ,',,,' ' ',,
..................
, ',,'
, , ,,, .. ,,
,i'
'
'
,,' , ,,
,_
,,
,, _',
,
'l
I
on the
estimates
discussion derived
is
using
the stochastic frontier approach. DecompositionAnalysis.Table5 presentsthedecompositionofindustry TFP growth. The growth of TFP is decomposed •into two growth components: technical progress (TP) and technical efficiency (TE). To reiterate, TP implies shifts in the frontier. The literature onproducUvity says that in the case of developing countries which borrow technology extensively
from abroad,
the lack of
shifts in the frontier
over time
TABL£
]
6
_electric machinery
(which
will indicate a failure to acquire PEmOODIFFERENCE OF TOTAL,FACTOR PRODUCTIVITY/includes semiconductor, another and adopt new techleading export item of the nology. (1980,71). (1956-70) (1981.92) - (1971-80) country at present) regisFurthermore, the ... TFP TP TE TFP .... TP TE tered positive TFP growth movement of the frontier Food rnanufactudng -0.98 -2.02 1.04 1.97 9.06 -0,08 over the years. However, over time reflects the Sugarrnilhng d.60-2,69 1.09 the growth has been success of explicit policies Be_era_ o.46 -0.25 0.71 _3.23 -3.21 .0O2 tapering off. This is shown to facilitate the acquisition Tob,ccoproducts ,3.39 -3.75 0.49 -3.96 -3.17 -0,09 in the negative period Textiles -3,45 -4.78 1,33 -0,07 0,05 -0.11' of new technology. On the Wearing apparel 8.79 6.21 9.58 difference of TFP growth, otherhand, changes in the Leather products -2.54 -2.94 -0.30 -5.49 -4.04 -0.65 and TP growth in the TE over time and across Foo_ea, _0.18 -1.51 1,33 3.37 4.61 -1.24 period 1971-1992 for the industries will indicate Wood products .5.29 -6.65 1.36 0,99 0.73 0.96 industry. Furnitureand fixtures 7,75 9.96 -1,51 _6.93 -7.9,5 1.09 the success or failure of Paperand paperproducts .9.19 -9.87 0.75 1.06 1.19 -0'.19 In the same period, important industrial Printing andpublishing -3.34 -3.89 0.48 -1.40 -1.26 -0.14 TFP growth decelerated by policies. In&'trial chemicals 5.44 5.84 -0.39 -5.39 -6,56 1,17 -1.6 percent per year, while One can observe from ' Other c hemicals " 3,54 4.06 -0.52 TP growth by -2.2 percent • Rubber products -1,66 .1 93 0,98 1.96 2,74 -0.78 results that in terms of 'Plasticproducts 5.50. 5.27 0.23 per year. _aDsolute TP growth, there NonmetalhcmineraJproducts 7.59 7,19 0,47 -0.44 _0.39 -0.O5 Decomposition of hasbeen a deterioration in Glassproducts 1,53 0,97 o.56 Output Growth. Table 7 technical progress. In the I_o_hteel basic industries-9.67 .4.97 9,30 -0.66 -0.98 shows the decomposition 'Fabricated metalproducts 0,03 0,57 '-0.54 -1.05 -1,66 ' -0.38 0.69 period 1956-70, therewere Ma&ine_ -9.83 -2,29 ...0.61 -9,93 -3,55 ' 0,69 of industry output growth 8 industries with negative 'Ele_tacmachinery , 0.31 0.96 .0.0S -1.6_, '.-9.91 . 0,S9 (also called sources of TP growth. In the period Transportequiprnent -1.99 d,34 0,o5 ,1.66 -9.95 0.59 growth) into five com_ 1971-80, the number increased to 17 industries, In the last period, 1981-92, the number of industries
Nurnber ofindustries wlthdecliningTFP growt_ 12 M,xlmu, 7.75 Minimo, -5.29
with deteriorating TP I growth further increased to 21. Overall, there has notbeen a shift in the frontier in the Philippine manufacturing sector. This set of suits implies that there has been a ilure, and a big gap to be filled, inthe approach to acquiring and adapting new technology or foreign technology, This could be the main reason why the Philippineshasconstantlybeenlagging behind the Asian "tigers" in terms of economic growth, The results on the absolute TE growth, on the other hand, state otherwise. All industries have registered positiveTEgrowththrough the years, Table 6 shows the period difference in the growth of TFP. The results in this table indicate how the growth of TFP, TP and TE changed over time. The declining productivity in the manufacturing sector again shows up in the results. However,
13 996 -6.65
5 9.30 -1.51
14 8.79 -6.93
13 12 6.91 9.58 _7.95 -1,24 I
three interesting points can be observed: • although all of the industries have registered positive TE growth through the years as shown in Table 5, their growth through time decelerated, For example, in the period 1956-80, there were 5 industries with decelerating TE growth. However, in the period 1971-92, the number of industries with decelerating TE growth increased to 12; [] wearing apparel (one of the country's leading exports) showed negative TFP growth over the years, Interestingly, in terms of the rate of change of TFP, TP and TE growth through the years, the wearing apparel is the top performer. This implies that although the productivity indices are still negative for the industry, there has been a drastic improvement in productivity over the years; and
ponents: (1) labor, (2) capital, (3) raw materials, (4) technical progress, and (5)technicalefficiency. The
period differences of these growth sources are interesting, especially the results for labor and capital. The differences are shown in Table 8. The period difference shows that under labor for the period 1956-80, there were 11 industries with negative values. This implies that there were 11. industries with declining labor contribution to output growth. The results under capital show that there were13industrieswithnegativevalues. However, when one compares these results with the succeeding period, 1971-92, one can see that the number for labor increased to 16 industries with negative values whereas for capital, it decreased to 12. Thus, over time, the contribution of labor to industry growth has declined whereas the contribution of capital increased. These results support the view that the manufacturing sector as a whole failed to absorb the growinglabor force. _'- Page 14
Mal facL0r Pr0duchulLy... Raw Output
Productivity versus Protection Rate. The level of protection is indicated by the effective rate of protection
(EPR).
The
EPR
is
Foodmanufactur_n_ Sugarmilling Be'verages Tobaccoproduds
the
proportionate increase in domestic value added over free trade value added, and as such it measures the
comparative advantage is measured by domestic resource cost (DRC) and shadow exchange rate (SER). DRC is a cost-benefit ratio representing the social valuation of domestic resources exchange export (or
foreign serves
exchange, the DRC/SER ratio as a measure of allocative
efficiency and comparative A DRC/SER ratio
0.72 -0.80 1.19 1.69
Materials
TP
TE
1.44 0.06 1,96 0.91
1.95 1.80 2,48 6-87
-0.70 :2i10 -0_57 -1,73:
2.19 2.48" 2.13 1.97
0.10 0,99 0.15 ' 6.27 1.59 0.49 1.46 0.63 2,36
2.70 5,76' 2.29 0.95, 0.62 1,11' 2,71 0.2'3 1,23
-0146' -8.43, -2,95 -0.82 0.02 ' 1,56 -0.26 0.78 -0.96
2.23 3.87" 3.04 2.16 2.36 2.67 9.08 2_65 2,35
'-2.07 _-1.96 -6.76 -9,38 -7.09 .1.86 0.45 0.90 1.8B -3,69
3.00* 2.79 2.81" 9;37' 2.97* 2.29 2.79 9.50 1.91 1.91
-0.02 0.891 ' 0.98 0.83 2.59 2.40 3.50 1.98' ' 0.06 , 8.34, 1.78 4.13 -0.64 0.24 2.16 0.55 1.31 3.3.4 2.98 3.8,9
"1w_,1992 TP=Techr, i.r.al Prog_ss TE_Techni_l EFficlency
import substitution) of a given product (Bautista and Power 1979). When exchange value of
Capital
7,91 i .2.63 3,84 1'.641 3,36 0.83 9,81 1.25: , 5.14 0.55 6.04 0191 7.07 1.09 4.18 -0.11 5.60 0,62 Otherchemicals 2.09 ' 0.27 Rubberproducts 2.52 0.65 Plasticproducts 2.39 1.35 Nonmletalic mineral products 5.49 0.79 Glass,'products 7.53 3.96 Ironandsteelbasicindustries 7.09 0.68 Fabricated metalproducts 3.17 0.32 Machinery 6.98 0.17 Flectricalmachinery 10.69 2.25 Transport equipment 5.41 1,10
tariff or quantitative trade barriers. A higher EPR thus means a higher level of protection. On the other hand, index of
compared with the shadow rate (SER), or the social
5.60 1.44 7.19 9.71
Textiles Wearinsapparel Leather products Footwear Wood products Furniture andfixture_ Paperandpaperproducts Printing andpublishing Industrial chemicals
extent to which protection policy raises domestic prices above free trade prices, i.e., through tariffs, advance sales taxes on imports, mark-ups, and other non-
used per unit of foreign earned (or saved) by the
Labor
.... I'"_..'_.;' ' products
had the highest
'
. '..._/".
'
EPR of 280.3.
- In terms of comparative advantage, it was the lowest, with a DRC/SER ratio
;
2.
:' "'i"."" The structure,
.';I however,
changed
drastically when the overall EPR level reduced significantly in 1988 from 1983.
advantage, less than or
of 6.6. On the other hand, footwear excluding rubber had a negative EPR
This could be the reforms. However,
equal to one means an industry has a comparative advantage in its economic activities; a value greater than one meansthatthepriceofforeignexchange is lower than the social value of foreign exchange saved (or earned) in producing the import-substitute (or export good), thus, the industry is at a comparative disadvantage. Some studies use 1.2 as the benchmark value
of -6.5 and was the most competitive among the industries. Based on Tecson's study, among the highly protected industries are tobacco (60.6%), metal furniture and fixtures (75.9%), printing and publishing (72.4%), petroleum refineries (59.6%), iron and steel (80.5%), and fabricated metal products (66.3%). The least protected industries
which are still competitive in terms' DRC/SERindex but penalized in t6rms of effective protection. One such industry is footwear excluding rubber. Thehypothesis thatindustrieswith highproductivityarealsoindustrieswith high comparative advantage or international competitiveness are not well reflected in the results. The relationship between productivity
to give errors.
are wearing apparel (3.9%), footwear O (-5.3 Yo),nonmetalfurniture and fixtures
performanceanddegreeofprotectionis not borne out in the estimates either. The
Tecson (1995) estimated the EPR, DRC and SER of Philippine manufacturing industries for two periods, 1983 and 1988. She observed that the industries which are least
(1.9%),leather (1.7%), wood (4.5%) and industrial chemicals (8.5%). Among the highly competitive industries (those with a high degree of comparative advantage) based on
correlation between industry productivity growth (TFP, TP and TE growth) with effective protection rate (EPR) and comparative advantage (DRC/SER) for both 1983 and 1988 is very low.
protected have the highest degree of comparative advantage. For example, in 1983, other nonmetallic mineral
DRC/SERare food, beverages, tobacco, apparel, footwear; other chemicals, productsofcoalandpetrol, andrubber,
Determinants of TFP. An attempt was made to relate industry productivityperformance(TFPandTP)
i .ll
allowance
L
i
to measurement
J
..
i u
ji
•
result of economic there are industri
•
:l
"
DEVELOPMENT RESEARCH NE_WS'I'I,,._/ ,
through
the years with some economic
15
Policy implicatio¢ls
adequately
variables. Regression runs were conducted torelate these productivity indices to the following variables: the ratioofbudgetbalancetoGDP, foreign direct investment, GDP growth, inflation, the ratio of research and
One of the major findings of the studyisthedeteriorationinthegrowth of technical progress (TP) in Philippine manufacturing through time. This means that there has not been a shift in the frontier of the
technology is highly imperfect. There are distortions in the market for technology mainly because of two reasons. First, there is asymmetric information. The suppliers of technology (usually, the developed
development expenditure to GDP, growth in real minimum wage rate, and growth in total exports. Industry dummy variables were included in the regression to account for the across industry differences of the impact of these explanatory variables on industry productivity, It was shown in the results that a " "lher budget deficit negatively pacts on the productivity performance of the industries. This is interesting because normally, developing countries suffering from large budget deficits are highly unstable, Economic instability thus impacts negatively on productivity perfor-
Philippine manufacturingsector.Inthe literature, this implies that there has been a general failure in the approach or strategy of acquiring and adapting new technology or foreign technology, Another important finding is that foreign direct investment has not generally been contributing to the technical progress of the manufacturing sector when, in fact, it is supposed to be a major vehicle for transferring foreign technology to the local economy, This finding supports the survey results of Lindsey (1989) on the manufacturing sector. His results showed that:
countries) know their products well butthebuyers(usually, the developing countries), because of insufficient capability to assess the technology, may end up getting equipment that are not totally appropriate to the local environment. Furthermore, because of inadequate technological capability, developing countries which attempt to directly borrow techniques employed in developed countries will end up distorting their own factor prices, employing an incorrect choice of technique, and therefore substituting capital for labor (Pack• 1992). T her e are a number of local industries which
mance while economic stabilization plays a major role in improving productivity. Meanwhile, the coefficient for
a mostoftheequipmentbrought in by investors are alreadyin use in the Philippines; _ research and activities are
are at present suffering from inappropriate foreign technology. Second, the price charged for the technology tends to be oligopoiistic
foreign positive nificant.
limited to quality control instead basic research; • there is minimal diffusion
of
and consequently, there is a considerable scope for abuseand rentseeking activities (Stewart 1979). Thus,
thatthus far, foreign direct investment technology to local firms; and to the Philippines has not been very • the processes used are very Lccessful in bringing foreign simple, leaving little room for skills _rechnology to the country. This is a development. He concluded that there very important issue because in the was little technology transfer by the literature, FDI is a major vehicle for transnational corporations to the transferring foreign technology. Philippines. However, the market for technology is These two findings are very highly imperfect because of important in the light of what hasbeen information asymmetry, happening in the policies on foreign Lastly, the coefficient for ..... direct investment (FDI) which have aggregate research and development been subjected to a number of changes isnotstatisticallysignificantalthough in the recent past. The FDI policies it has a positive sign. This might be have been liberalized, especially with due to the mispecification of R&D the Foreign Investment Act of 1991 expenditure in the regression equation which virtually opens the country to used in the study.It would have been foreign investors. Some analysts have more appropriate to specify in fact regarded these changes to be industry-specific R&D expenditure significant and too liberal, making the in the equation. Unfortunately, Philippines more open compared to its there are not enough information neighboring countries. Yet the available, liberalizationofFDIhasnotconsidered
developing countries end up paying exorbitant price for the acquired technology, making them uncompetitive in the international market. One positive effect of liberalizing FDI is that it can help bring in the much needed foreign exchange to the economy and therefore provide some degreeofstabilityintheexternalsector. But this is mostly a short-term consideration. The more important aspect in FDI is how to utilize it as a majorvehiclefortransferringforeign technology. OutrightFDIliberalization may not be totally productive. Transnational corporations (TNCs) may not have the incentives to transfer the right and appropriate technology to the local counterparts if the FDI policies are too relaxed. Thus, it may be true that local counterparts of TNCs may remain and stagnate as mere
direct investment (FDI) is but not statistically sigThis might be due to the fact
of
the fact that the market
for
_-",._:g._, .:_.j
' I
' '
'', ',
.
PERIOD' ' :
DIF,FERENC'E OF OUTPUT' ' ' " TABLE 8
GROWTH '"' ' '
(1971-80) - (1956-70)
TE
Foodmandactu,_ng , _7.09 ' _i.98 "4,90,: .9.23:1 '2.02, " 1.04 'S_gar,milling, : ','i,i'i' ,:, '. : ,, '" i ' ,',',,:i,,::, !,'Beveiag&,, ':, ,' ", ", ,1,09,' 0,2'0:1.36 " :0._9'::',-0.25 "0,71" : Tobac¢o'Products,i ' ', ,0.62, .1.61 q:,20 ,',: :,,5:'5:1,,i,-3.75 0,49 ,':Textes', :i" "" " ' 'I .12.10,' ,.4,03 -0.56 '""4',0_' ,:,-4.78 ,'i.313' ,"Wearlngapparel, ' ,, ", , ':,, , , ='', ........ ' .... ::Lcat,h¢ip,roducts, '..... '.0i7£,',',,"0,90 ':,i11_9"'".'0.5711:,:'._.24,-0.30 ,Footwear i : :Woodproduc(s;:: Fumitureandfixtur_: Paper andpa:per"prod,,cts Printing andpul_lishing Jndustrialchemical$, , ' I Otherchcmicals , :'::
.0,84 : :1,67, ;-0,77.... lJ79,1,i.51 t,33 -7.45 'i-0.£8 L2:,75 0:47 _6.65 1.36 10,91 : 0.31 0,65 1:50 : 9126 -_1.51 .1.54 ,',,-0,_,'0 ,£,.4.1, 3'.:39:" ':-£,.87 , 0.75 -3,00 i_0192' 0._1'5' 0:41:3.'82 0.48 4.84, -0;,12:i,-21.6'3':, ':2:i,4' ;1'5.84' _0.39' : ' ', ','I,:, '...... Rubber,produrt_ , , _0.£4 2.57 ',_£':61'::':I'1:4'6,,'-1.93 , 0.£8 P_stc:prod-'ct4',',,', :i,' ' '':;"':,; ,,'",,:'ii :,:: Nonmetallic ml'neral prodacts" -£.98 -1:00 ' ,_7171"-1.1'15 ::,7.!:2,'":,0.47 Oass,p;odu_t,"",:, ..... ;,,i , ' ,,,,:,',,, , "',.' "' "' ':':" ' ......... Iron',_nd _te¢l,loasic ind,,stiies ,q0;46 ,0:62, , -,574 ' '_£.67'" !4.97" ,£,30 ,:Fab_caied:metaf'proa_,:ts, :,,' ,, ,1_:4'6 ", 0.88' '0.£8' 0:27'"'0:,57' _0.54 i:' Machinery...... :-7]52 ' "-1.£1 -1.47" -£.00 -£,i"_2, -0.61 Electrical machihery,, ,' , , ' '-1,02 ::,,-0.84 -1.00 , 0.5£ ' ' 0.26' 0.05 Transportiicq_ipm¢nt' 10,73 3.'4,8 0.05 I
:
i
i3"47
I I:
" .... ,;:'"
H
:
II
IS
.06
1"1i
-
....,
'34
Raw Output Labor Capital Materials TP
TE
0.39 0.$7 :,.0.20 :£,06, .O_OB 1.69 -1.14 .......::,0,19,:,, 4,93 -2.69' " ,1_09,* -3',,94 -,1,26': :0,60' '1:.15 '-3.'2i"'i -0,02 -1.28 " 111'£"''_01'24 ,:'1.11 -3,i7, ' ":0,09 '0,05 0,.1'4' .0,22 ' ,0.20 0,05 , -0,,,11' 10.53 -2.,6'£_ .1'.58 '-1:5.32, 6.21 ": '21S_1" 3,62 0,18' 3.94 : 4.99.,' -4,84, -0,6S, 6.99 -2 70 _7.9£ -3.£8 0,04 -9.8'5,, 2.'14 ,2.24 -2,.93 -0.31
1.00:3.30 ',4.45 : 4.61 -1.24 : :='1,59 -0.37 _1.73: 0.73: 0.26 , 4107 :-2.04 ' £;12; -7.95: :1,0_ : 0.'35 "'0.04, ' -4,73:' ,1,19' :_0.i2 ' 0.2i :1.67: _0.43 :_'1.26 _0.14 '-0.60' .-0.,5,'£' :3.135': "6.56 1.17 -1.96 -0.05 0:61 : '4.06 -0.5_* .1.47 , 2.56 ,',,-0.80 , ,2.74 -0,7B , -1,88 -3.6£' ''2.92', " 5.£7 ,0,£3" : -0,20 '0.50 ' -0.,16':' ',0.39 -0,0=3 ' -'6.95'
19.59
1:37 -438, S.34, "!-8,4, ,6.08
I
I
:-0.117,'
_14.0'1',',:'
0.97
,0.'56",':
-1.43 1'.4£ , 9..04: -0.98 -1.40 ,-0.8'1'":'-11.1'3': -1.66 -0.17 &07, ' 238 .3.55 -0.21 ,:0,32, ','-0.32 _£.£1 -£.6£ q.,73 :i-0.07 .£.£5
/,; ' ::i:3_ ,,,
, ,,,L/I/:
" 7'10,59
'-3,6_ ' _15
de DiosandAssociates. Poverty,GrowthandtheFiscal I
I
, I
(198.1-92) - (1971-80)
Raw Output Labor Capital Matedals TP
I
'
>0138 ' 0,6it 0.62' 0.59' 0.5_
I
,: :
Lindsey,C. W, "Commodities, Technology andTrade:
.
Crisis.Makati:Philippine Institutefor Development Transnational Corporations Economic Studies,1992. Development." PhilippineRandPhilippine eviewofEconomics and "_ .,z_z,_./5 Fischer,S.TheRoleofMaoroeconomic FactorsinGrowth. Business 26, 1(1989):67-108. =HowDoNationalPoliciesAffectLong-RunGrowth," Pack,Howard."Technology GapsBetween Industrialand WorldBankConference, 1993. DevelopingCountries:Are There Dividendsfor Hooley,R.'Productivity GrowthinPhilippine Manufacturing Latecomers?" Proceedings oftheWorldBankAnnual "assemblers/' and therefore cannot go Retrospect andFutureProspects." PIDSMonograph Conferenceon Development Economics 1992. into ]-d._:_h.e]: va]ue-added. _roducti.on.(_) Series No. 9. Makati: Philippine Institute for Patalinghug, E."LabourQualityandGrowthAccounting: Development Studies,1985. ThePhilippines."PhilippineReviewofEconomicsand Kakazu,Hiroshi.=Industrial Technology Capabilities and Business21,3and4 (1984):201-17. Selected References Policiesin Asian DevelopingCountries.'Asian Sanchez,A. "PhilippineCapitalStockMeasurement and Austria,M.andW.Martin."Macroeconomic Instability and Development Review2. Manila:AsianDevelopment TotalFactorProductivityAnalysis.' Ph.D.dissertation. Growthin the Philippines:A DynamicApproach." Bank,1990. Universityofthe Philippines, Manila,1983. Economics DivisionWorkingPapers. Research School Kalirajan, K.P.=OnMeasuring Economic Efficieney.'Joumal Stewart,F."International TechnologyTransfer: Issuesand ofPacific Studies, Australian National University, 1992. ofAppliedEconometrics 5, 1(1990):77-85. PolicyOptions." WorldBankStaffWorkingPaperNo. Bautista, R.M.andJ. Power.lndustrialPromotion Policies Kalirajan, K.P., M.B.Obwona,and S. Zhao. On 344,1979. in the Philippines.Makati:PhilippineInstitutefor Decomposing TotalFactorProductivity. Australian- Tecson,G.Catching UpWithAsia'sTigers,Vol.II. Makati: Development Studies,1979. JapanResearch Center, Australian National University, PhilippineInstituteforDevelopment Studies,1995. Coelli,T.J.A Guideto FrontierVersion4.1"A Computer 1994. Williamson, J."Dimensions ofPostwar Philippine Economic ProgramforStochasticProduction andCostFunction Krugman,P. "Towarda Counter-Counterrevolution in Progress."QuarterlyJoumalofEconomics83,1 (1969): Estimation.Departmentof Econometrics,UNE DevelopmentTheory." ProceedingsoftheWorld Bank 93-109. Armidale,NSW,2351,Australia, 1994. Annual Conference onDevelopment Economics,1992. %kol
i,
__"'_c+.or" P_oGluc_lv,{_.
,,
,, ,u
)EVELOPMENT REJ_EARCHNEWS
_""
....
17
_.-;
Januar-February
996
the beginning of the year in exchange for health care that the person may require during the year. In one sense, this method is administratively simple
outside support, and amount of resources generated. In many cases, community financing requires a large amount of outside support to become
the negotiated fee method requires a lot of good information about medical practices and prices of inputs. These are often lacking in developing countries. Moreover, there are
in that there is no need to .determine the provider's inputs and costs. On the otherhand, itisdifficulttofirstestablish the appropriate capitation fee unless adequate information is available on
viable. Even the most well-known scheme, the Health Card System of Thailand, requires government support in organization, adminis-tration at the community level, and subsidies to
undesirable effects, foremost of which is the incentive to increase the number
the economic costs of medical services provided in specific facilities as well as
government health key issue in this
of patients seen. In the case of Japan, for example, since doctors are not allowed to deviate from the fee
the utilization rates by consumers. another vein, the method has advantage of giving providers
In the the
insuranceschemehasbeenthepossible adverse selection. Such issue is partly resolved by modifying the scheme to
schedule, they seek to maximize their income by seeing more patients (and otter consultation times) while I[._spitals respondby operating onvery low support staff4o-bed ratios. Both have potential adverse effects on quality of care (Ikegami 1989; Cheng 1992). Payment per Case as in Diagnostically Related Groups. In this method of payment, the provider's payment is tied to output, and there is an incentive for the provider to minimize on resource use per individual treated, The United States, for example, switched to a system of prospectively set fees per case in 1983 in its Medicare Program. The fees are set for some 500 "'agnostically related groupings RGs) of medical cases. The DRGrased compensation method of hospitals was believed to have helped constrain Medicare expenditures for hospitals, in part by reductions in average length of stay and in the use of ancillary services (Reinhardt 1989). However, it is often difficult to establish a standard list that would
incentive to minimize cost of treatment, However, the method gives providers incentive to under-provide services to patients. The providers might also select enrollees withlow risk and reject high riskenrollees. The compulsory insurance schemes for private sector employees in Thailand adopts a capitation mode of payment. Under the scheme, hospitals receive capitation payments for each insured person and arrange contracts with primary care clinics or for more specialized services with tertiary hospitals. Preliminary reports indicate that costs are kept firmly under control and providers have clear incentives to be economical in the use of resources. It has been reported that
introduce a certain amount of compulsion in the form of requiring a minimumpercentageofthehouseholds in the community to purchase health cardsbefore the scheme willtake effect. This issue is now related to the question ofwhatscaleofcoverageisappropriate not only to deal with potential adverse selectionbut also to achieve economies of scale in administration and management (Supachit 1995). The issue of government subsidy is considered one of the factors in the developmentofthescheme.Currently, the cost of providing medicalservices to health cardholders is partly paid by the revenues of provincial and district hospitals. This generates a negative incentive to a number of provincial
while there appears to be some underutilization, utilization of ambulatory care has increased where the contractinghospitalhas contracted aconsiderablenumberofprimarycare clinics. This is contrasted with the scheme for civil servants where providers are paid on a fee-for-service basis. Under this scheme, costs are
healthadministratorsinprovidingcare to cardholders. Moreover, the fact that even workers in the formal sector receive government subsidies up to one third of their social security fund further raises the question of equity between populations in the formal and agriculturalsectors. Thequestionbeing raised is whether voluntary health
capture all types of treatments, particularly in developing countries where data on costs and medical
reported to be high and constantly increasing and providers overcharge (World Health Organization 1995,
insurance schemes in the rural areas justify government subsidies and up to what extent (Supachit, 1995).
practice are limited. As a result, the potential disadvantage of the method in terms of mismatch between output and payment and the possibility for providers to misrepresent diagnosis in order to receive higher payment would be more difficult to control, Capitation. Under this payment mode, payment is made per person at
based on country reports presented in an interregional seminar sponsored by the WHO).
Health Care }'lnancin.q... "_/-'¢,'tc'-¢
Community financing A number of schemes have been identifiedinseveralcountriesincluding the Philippines, each one varying by purpose, organization, extent of
care providers. A voluntary health
Health sector reform Meanwhile, a review of recent experience in health sector reforms in some countries suggests that: • partial reforms might do more harm than good as is illustrated in the case of China; and _'- _'a_e is
DEVELOPMENT RESEARCH NEWS" "
18
Another
Health CaeeI_lndncln.q... decisions
was
made
in the
996
created
by the two-price system which allowed hospitals to charge a higher price to the insured than the uninsured. Under this
-_ Pdf_"/7 • certain
incentive
anuary-Februar
Support Research Support Philippines 2000
price system, a hospitalhasanincentive
early years of development of a country's health financing system are extremely difficult to change as in the case of Japan and South Korea. In China, it has been observed that the expenditures of the Social Health Insurance (both the scheme for civil servants and for the employees of state enterprises) have been escalating since the late 1970s. An attempt to
to provide more services to the insured. Several studies (reviewed by Liu 1995 and Hsiao 1992) show that the average length of stay of the insured is 1.6 times that of the uninsured; expenditures on drugs for the insured were as much as 3.5 times that of the uninsured, In short, a reform designed to reduce subsidies to hospitals has created incentives foroverprovisionof
impacts on the performance of the health sector in terms of efficiency and equity. Hence, as noted earlier, the concernforhealthcare financingshould notjustbeaboutraisingfundstofinance
moderate such increases was made throughtheintroductionofco-payment but the expenditures escalated. An analysis shows that reforms in the hospital system undertaken in the early 1980s with the objective of reducing the burden of central government budgetary support created incentives for hospitals to provide more services, prescribe more drugs and use costly technologies (Liu 1995 and Hsiao 1992). Under the hospital financing system reform, instead of fuUy funding the deficit incurred by hospitals, the government gave a fixed budget subsidy to each hospital and the hospitals had to assume the responsibility of any losses. The hospital charges for the services rendered were based on fee-for-service, In order to increase their revenue income where prices of services were regulated by the government, the hospitals increased the quantity of profitable services. For example, the regulated prices of modern technology services like CT scan, MRI and ultra sound arehigher than their costs. There was an incentive for hospitals to use the high-tech equipment frequently, especially for those insured patients who bear none of the cost of these
services, thus escalating costs and undermining the viability of the social insurance system. This gave hospitals the responsibility to raise revenues without correspondingly modifying the payment system to minimize, ifnot eliminate, incentives for overuse of (expensive and probably unnecessary) services, Reforms are not easy to undertake. Usually, decisions made in the past are difficult to change once a strong constituency has developed supporting the mechanisms. An exampleis the decision to use a fee-forservice payment in South Korea in the early years of the development of the nationalinsurancesystem. Now when in an attempt to control cost, alternative payment modes such as capitations are being explored and suggested, there arises strong providerresistance to any change in the payment system. This is because the fee-for-service payment system is attractive to providers who have now acquired strong political power and clout (Yang 1995). In Japan, universal coverage was achieved through the development of many insurance societies numbering more than 5,000. Many are small and reported to be not very efficient. It is, however, difficult now to merge these
neworexpandedhealthservices.Theree is also no perfect system from standpoint of achieving multip_ objectivesofefficiency, equity, freedom of choice, quality and cost control. Each country must design its own system taking into account its own objectives and priorities, its existing institutions and tradition of medical practice, and its level of development. Beyond these broad conclusions, there are a number of insights regarding each of the major financing schemes, namely, tax financing, user charges, health insurance and community financing. In the case of the different types of provider payment systems, it was found that each system has b0J,_ advantages and disadvantages. trying to adopt any one of the systems7 developing countries must first be clear about their objectives and priorities so that they can later properly weigh the advantages and disadvantages of each system according to their stated objectives and priorities. There are also insights from the recent experience in health sector reform or in discussions of reforms in a few countries. These insights include the need to adopt a comprehensive rather than a piecemeal approach to specific problems because the latter,
procedures. Moreover, hospitals were allowed to mark up the price of drugs to cover the cost of storage and distribution and a profit margin. Hence, hospitals have a clear incentive to overprescribe,
insurance sizes,
given the interrelatedness of many aspects of the health sector, might simply give rise to a host of other problems without adequately addressing the original problem. Moreover, in health sector reform, it is
........
! i
t
societies
into more efficient
Summary Any health care financing system that is chosen will have profound i
im
,ill i
. i
L
|l
important that choices be made on the basis of good information and careful
Symposiumon Health Care Systems,Taipei, Phommasack, Bounlay. "Action Research onStrengthening December 18-19,1989. the DistrictHealth Systemin Ventiane."Paper Gertler,P.andJ.vanderGaeg.TheWillingness toPayfor presented attheConference onHealthSectorReform analysis. Once a decision has been Medical Care: Evidencefrom Two Developing inAsia,sponsored by University of the Philippines' made and constituencies are Countries.Baltimore, Maryland: TheJohnsHopkins Schoolof Economics, International HealthPolicy developed around this decision, UniversityPress,1990. Programandthe AsianDevelopmentBank,Metro whether it is about the mode of Hsiao,W. C."ComparingHealthCareSystems:What Manila,May22-25,1995, NationsCan LearnfromOneAnother."Journalof Reinhardt,U. E. "The U.S.HealthCareFinancingand provider payment or the provision of HealthPolitics,PolicyandLaw17,4 (1992):613-36. DeliverySystem:Its ExperienceandLessonsfor subsidies to certain providers, it will Ikegami,Naoki.'The Japanese HealthCareFinancing and OtherNations." PaperpreparedfortheInternational be difficult to change this in the future DeliverySystem:ItsExperiences andLessonsfor Symposium ron Health Care Systems,Taipei, when a change is-needed to further OtherNations."Paperprepared forthe international December 18-19,1989. Symposiumon Health Care Systems,Taipei, Samarasinghe, Daya.'HealthSectorFinancinginSdLanka: improve the system. @ December 18-19,1989. Issuesand Options." Paper presentedat the Indradjaya,Stephanus."TheEffectsof User Feesand Conferenceon Health Sector Reformin Asia, Selected References FacilityCharactedstics on the Utilizationof Health sponsored byUniversityofthe Philippines Schoolof Centers inWestNusaTenggara andEastKalimantan." Economics, International HealthPolicyProgram and Akin,J.S.,C.C.Griffin,D.K.GuilkeyandB.M.Popkin,"The Paperpresented atthe Conference onHealthSector theAsianDevelopment Bank,MetroManila,May22Demand forPrimaryHealth CareServices intheBicol Reformin Asia, sponsoredby Universityof the 25,1995. Regionof the Philippines." EconomicDevelopment Philippines'SchoolofEconomics, lnternationalHealth Supachit, Manopimoko.=Voluntary HealthInsurancein andCulturalChange34(1986):755-82. PolicyProgramandthe AsianDevelopment Bank, Thailand:Development and Achievements," Paper Cbing,P."UserFees,Demand forChildren'sHealthCare MetroManila,May22-25,1995. presented attheConference onHealthSectorReform andAccessAcrossIncomeGroups:The Philippine Kutzin,Joseph."Experience withOrganizational and in Asia,sponsored byUniversity of thePhilippines' Case."SocialScience andMedicine41,1 (1995):37FinancingReformof the HealthSector.'Current Schoolof Economics, international HealthPolicy 46. ConcernsSHS Paper Number8. Divisionof Programandthe AsianDevelopment Bank,Metro Creese,A.andJ. Kutzin. "Lessons fromCost.Recovery in Strengthening of HealthServices,WorldHealth Manila,May22-25,1995. Health." DiscussionPaperNo. 2. Divisionof Organization, 1995. Yang,Bong-min.'HealthCareSystemofKoraa:WhatNow Strengthening of HealthServices,WorldHealth Liu,Xingzhu?Cost Escalation of SocialHealthInsurance andWhatin the Future?" Paperpresentedat the Organization, 1995, PlansinChina."PaperprasentedattheConferencaon Conferenceon HealthSectorReformin Asia, Culyer, Anthony J."WhattheNewly Industrialised Countries Health SectorReform inAsia,sponsored byUniversity sponsored byUniversity ofthePhilippines' School of CanLearnfromtheExperiences oftheHealthCare ofthePhilippines' School ofEconomics, international Economics, Intemational HealthPolicyProgram and Systemsin Developed Countries: A Viewfromthe HealthPolicyProgram andtheAsianDevelopment theAsianDevelopment Bank,MetroManila, May22UnitedKingdom." Paperprepared fortheInternational Bank,MetroManila,May22-25,1995. 25, 1995.
/J_/'_l_"
SOLID
WASTE
School enrolment in the country is high, very high in fact, but the completion rate is not. There should therefore be more emphasis given on the quality of education. At present, high amounts are spent on administrative and teacher salaries but having in mind the principle that concentrating on elementary education is probably the policy with a decided pro-poor bent, investment in primary education is probably the best way of putting the generation
out of poverty,
intergovernmental fund sharing The national government's current revenue sharing scheme with the local governments is not conducive
DISPOSAL
(| 992)
All._a Ua,,. _,_r 0._,_..t) V/=t= indoor_ ,hardcommunity
46 38
wlthoutwat'r
16
_2 52 26
84 16
63 37
"'_e_, .,i_ non_nltaty $oild_ _ul=_= no_¢ :_':_:_''_"_'_"
31 69 '_
'
perpetuates
regional
inequality.
URBAN ACCESS TO WATER, SANITARY FACILITIES AND
next
situation
TA,LE 3
n5trateggto hght...
9 91 _:;_:: _ :_
to bailing the poorer provinces out of their poverty. This is because the sharing scheme is not related to need so that the poorer provinces do not necessarily receive greater revenue shares out of the economic pie. Such a
Solutions that work The overwhelming government in poverty must be to sustain and high rates of economic
priority of alleviation increase the growth. The
quality of growth itself matters as well. Moreover, government should focus on a selected number of poverty alleviation strategies that work: [] continue the strong focus on economic growth, but with emphasis on equity. [] improve access to opportunity for the rural poor by focusing rural land reform on the "doable," promoting tenancy reforms and market-assisted land reform, and ensuring essential investments in rural infrastructure and improvements
of agricultural
exten-
_" Pae_ __o
DEVELOPMENT RESEARCH NEW,
20
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January-February
1996
PhilippineInstituteForDevelopment Studies
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106 AmonoloStreet,.LegaspiVillage 1229 MakatlCity, Philippines
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necessary
to
raise
productivity and incomes, • address the scarcity affordable housing and threats
\
investment
transferring
resources
in
government
livelihood creation programs to capacity building of microfinance institutions with successful track records in reaching the poor and by ceasing general food price subsidies in favor of targeted income subsidies or food stamps and supplementary feeding programs. _
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pIDSisanonstock, nonprofit government research.".
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Directorfor Resear¢._/nfon'n#tion
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institution'engagedin Jong-term,.policy-orient'ed' research.,', This'publicatiO n ispa_tiDfthe institute,_s ,
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Atty. ROClUe A. Sorioso
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s'raFe
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"JenniferP.T+Liguton
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Editor-in-Chief
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Wilbert R. SanPedro ' ' , IssueEditor . , LeedC--I,,,, 'CorazonP. Desuasido,'/via. LourdesM. Salced, 'Euratom :, P. Desuas , do, Ma. LourdesM. Salcedo, ' '" ' andGennaE. Manaog andGennaE. Manaog Contd6utineEditof$
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ValentinaV Tolentino ValentinaV. Tolentino
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' Circw/ation andSu_rlption ' . JaneC: ^]cantara
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Tileviewsand opinions expressed herearethose 'ottheauthors a'nd do no'tnecessarily reflect tho.=e of' the ins'titUte.'In.quiii.es regarding+m/.of the'studies' i .Contained in this publi'catlon, or.._y of the'pIDS' papers,as well'as suggesti0ns of 'comm'eni's are welcome."Pleaseaddressall corr¢+pon'dence 'and.. ,'Jnqoiries to: ,',, "
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106Amorsolo Street, Lega_iVlllage " ' ..', |i|i Room 304, NEDA saMakatiBuilding,' 1229Makati City,Phll_ptnes' "
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DeliaS,Romero,GallcanoA. God+; NecltaZ. AquinoandFedericoD+Ulzame
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program useOf'iesearc'_' to.die+seminars'information Findings: ',.' .' to promote . the_
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Ms.Andrea S_Agcaoili
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'_(PIDS). it, highlights the findings and ' recommendaiions.of PIDSresearchpr0jects...and'
I Mr,,Mario C, Feranil ' ' I I_ ' D;,_o, fo,p.+.,,s.,_;.....dD.._o.--,I
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DE-'VELOPMENTRESE^RCH mEY_isabl-
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Ms+Jennifer P.T.IJguton
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important policyissuesdiscu_d dudngPIDS semlnais_ , _
to
capital by improving the quality of primary education across the country, help rural children to get to school and stay in school, and strengthen primary health services (especially immunization and prevention of waterborne and respiratory diseases). • rationalize and better target "social safety net" programs by
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'monthly"'publtcatlon .of the PHILIPP.INE INSTITUTE FOR DEVELOPMENT STUDIES
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in human
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" p_.._, " Dr, _v_ar;o B.Lambcrt¢
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health in urban areas a program of urban land reform and extending water and Sanitation services to poor areas, increase
Dr Ponciano S Imal,Jr
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of
environmental by considering
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services
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Fx IV'...... _ No, 1 , Jan_rt-Fcl:_sry 1996 II i ' " _rrom,,a..o_¢o ' I
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AStrategg t.oFm.qhf...+
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DEVELOPMEN ] ' F'ESEARCH RESEARCH NEW_ NE_
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