The Philippine Economy in 1999: Prospects and Key Issues

Vol. XVII No. 1

January - February 1999

The Philippine Economy in 1999: Prospects and Key Issues Josef T. Yap*

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n the aftermath of the 1997 Asian financial crisis, it has become apparent that the Philippines was one of the economies that was spared the harshest effects of the debacle (Table 1). Gross domestic product (GDP) growth would have even been positive if not for the

EDITOR'S NOTES It’s the start of another year and according to traditions, this issue of the DRN features yet another write-up on the prospects for the Philippine economy for 1999 by Dr. Josef T. Yap, Senior Research Fellow at the Institute, as our main story.

So, the question is: Was it good news or bad news that the Philippines was spared the worst effects of the regional financial crisis due to the direction and pace it has been following in the last several years? The answer depends on which way a spectator might look at things. It might have been good news since we did not feel the effects of the crisis as harshly as some of our neighboring countries did. But it might have been bad news since, according to some economists, we were simply spared the worst because there were less gains to lose, in effect confirming the not-so-good performance of

drought spawned by El Niño that caused the agriculture sector to contract by 6.6 percent. Exports in dollar terms expanded despite the turmoil in the global market. Interest rates have come down and may even reach precrisis levels. Judging from this evidence, it would seem that the Philippines is poised for a strong recovery as long as the world economy continues to stabilize.

———————— *Senior Research Fellow, Philippine Institute for Development Studies (PIDS).

the Philippine economy in the past few years vis-à-vis the other Asian countries. Whatever it was, it should perhaps be of some consolation to us at least since there is no telling what could have befallen our country had we experienced the same ordeal that our neighbors had gone through.

At any rate, the country’s predicament in 1998 was attributed by Dr. Yap to three factors, namely, the El Niño phenomenon, structural problems and the regional financial crisis. All these contributed to the slow growth in the economy especially in the manufacturing and agricultural sectors. And for 1999, while Dr. Yap concludes that a stable regional environment and weather can help ease up the burdens facing the country, his recommendation for the

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ISSN 0115-9097

Unfortunately, however, the prospects are not really that encouraging given that there are still many structural problems—most of which existed before the crisis—that constrain economic growth in the Philippines. Unless these are addressed, the economy has to settle for a mediocre growth in the next 3 to 5 years. Even the National Economic and Development Authority (NEDA) has scaled down its targets for the medium-term plan, perhaps in cognizance of these structural bottlenecks.

This brief paper looks closely into this predicament. The next section on Key Developments reviews the recent macroeconomic performance of the country. This would be the basis for the argument that the Asian crisis did not have as great an impact on the economy as is generally perceived.

Growth performance in the near future would thus depend less on the recovery of the region than on domestic factors. This section also makes reference to the external factors that would affect economic performance. Following this section is the part which discusses

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WHAT'S INSIDE 2 10

Governance at the Local Level: How it can be Measured Toward an Agenda for Asia-Pacific Agriculture in the Next Millennium

DEVELOPMENT RESEARCH NEWS

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s the government forges ahead in pursuing its decentralization policy and in empowering local governments to improve their delivery of basic services to the people, an accompanying concern arises: how will the performance of local governments in carrying out such mandate be monitored and assessed? Besides a rating system through perception surveys, is there a set of objective instruments and variables which may help indicate how far or how close local governments are in achieving their goals as per the mandate delegated to them?

These are precisely the questions in mind in the study by researchers Dr. Rosario G. Manasan, Dr. Eduardo T. Gonzales and Dr. Romualdo B. Gaffud* entitled “Indicators of Good Governance: Developing an Index of Governance Quality at the LGU Level” where they formulated a set of indicators of good governance to be used as an index of the quality of governance of local government units (LGUs).

Taking off from the basic definition of governance which looks not only at how government conducts business in its own sphere but also at how government interacts with civil society, the study by Manasan et al. aimed to: k develop measurable indicators of good governance at the local government level; k test how applicable good governance indicators are in evaluating and monitoring LGU peformance; and k find out how these indicators can be integrated in the monitoring and evaluation system within the framework of Sustainable Human Development.

———————— *The authors are Senior Research Fellow, PIDS; President, Development Academy of the Philippines (DAP); and former Project Consultant; respectively.

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January - February 1999

Governance at the Local Level: How it can be Measured How the indicators were developed In developing the indicators to measure governance, the authors initially set up a conceptual framework to define the key observable dimensions.

Their next step was to translate these dimensions into principal elements and then finally, to assign indicators that would represent the essence of these elements.

Using the objective tree approach of Gaffud (1997) as shown in Figures 1 and 2, the study identified the overall development goal of an LGU as improved performance in social or human development. To achieve this goal, three strategic objectives are deemed as essential. These are: k optimized resource support for human priority concerns which not only refers to raising and allocating money but also diversifying revenue sources and providing the policy and legal framework to ensure a steady source of income that can be programmed for productive use; k enhanced effectiveness or efficiency in social services delivery which involves the observation of standards and benchmarks for devolved social services, the increase of the level of satisfaction of the service beneficiaries, the use of nontraditional and innovative modes of service delivery, and the encouragement of active participation of private institutions in social service delivery; and k accountability which requires the presence of a proactive citizen feedback mechanism and the develop-

ment/implementation of good accounting and auditing procedures.

These three strategic objectives represent the observable dimensions of governance. In turn, each of these three is defined in terms of component elements or result packages (RPs).

For the first objective, three RPs or elements are specified, namely, revenue generation, revenue use and adoption of systems to sustain revenue generation and utilization. For the second objective, one RP is defined, that is, beneficiaries’ satisfaction with social services delivered. And for the last objective, two RPs are identified, namely, financial accountability systems developed and implemented, and microlevel accountability systems developed and implemented.

The indicators Going down to specifics after sifting through the objectives and elements, what performance indicators were proposed by Manasan et al.?

For revenue generation, the proposed indicators are k local revenue effort, and k cost recovery in key economic enterprises or relevant service sector of the LGU. For revenue utilization, they are k per capita social service expenditures, and k ratio of LGU expenditures on social services to total LGU expenditures.

DEVELOPMENT RESEARCH NEWS

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January - February 1999

Figure 1 Objective Tree for Good Governance Indicators, Version 1 Development Goal Improved LGU Performance in Social Development

Strategic Objective I

Strategic Objective II

Strategic Objective III

Optimized Resource Support for Human Priority Concerns

Enhanced Effectiveness in Service Delivery

Support Systems and Accountability Measures Installed

k Revenue Generation l Local revenue effort — per capita local source revenue l Cost recovery effort — ratio of

k Beneficiaries Satisfaction with Social Services Provided l Beneficiaries' net satisfaction rate with specific services provided

k Macrolevel Accountability Systems Developed and Implemented l Results of COA audit k Microlevel Accountability Measures in Place l Presence of voice mechanism — citizen participation in and empowerment of NGOs and barangays

revenue to expenditure from economic enterprise k Revenue Utilization l Per capita social service expenditure l Social service expenditure ratio —

l Presence of exit mechanism — use

ratio of social service expenditure to total LGU expenditure

of market-oriented mechanisms in service delivery

k Adoption of Systems for Increased Sustainability of Resource Generation and Utilization l Regularity in the conduct of general revision of schedule of market values l Annual Development Plan approved

by Sanggunian

And for the adoption of systems to sustain revenue generation and utilization, the indicators are k regularity in the conduct of the general revision of the schedule of market values, and k approval of the Annual Development Plan by the local Sanggunian.

For the element under the second objective, meanwhile, there are two alternative approaches in determining the indicators. One is to make use of public opinion surveys to mea-

sure the beneficiaries’ net satisfaction with specified social services delivered

by LGUs and two is to make use of administrative data to check on the k adequacy of services provided, and k presence of a strong vertical linkage with national government agencies.

Finally, for accountability, Manasan et al. break it down into macrolevel accountability and microlevel accountability. The study proposes

to measure macrolevel audit accountability by the relative size of Commission on Audit (COA) disallowances.

Microlevel accountability, on the other hand, will be defined by the presence of exit measures like the use of any one of various market-oriented innovative mechanisms in LGU service delivery as well as the presence of voice mechanisms such as citizens’ participation in NGOs and barangays and their perceptions of the empowerment of such en-

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DEVELOPMENT RESEARCH NEWS

Philippine Economy...

From page 1

the domestic structural problems.

Then this is followed by the presentation of the specific prospects and finally, by the conclusion.

Key developments The economy contracted in 1998, with GDP falling by half a percentage point. If the agriculture sector had grown at its historical norm of 2 percent, GDP growth would have been 1.5 percent. Counting multiplier effects, the economy would have expanded by close to 2.5 percent. Thus, if not for El Niño, the Asian financial crisis would not have resulted in an output decline in 1998.

The sector hardest hit by the Asian crisis was construction due to cutbacks in government capital outlays and the obvious need to scale down real estate projects. The construction sector contracted by 8 percent after increasing by 16 percent in 1997 (Table 2). Financial services were also adversely affected with growth rate falling from 13 to 4.5 percent. These two sectors, however, combine for only 11 percent of GDP. Looking at the data in Table 2, outside of meteorological factors, it was clearly the manufacturing sector that dragged down the economy. Buffeted by high interest rates, increased import costs resulting from the peso depreciation and lower demand, the manufacturing sector contracted by 1.1 percent, contributing heavily to the 1.7 percent decline of the industry sector. The manufacturing sector, however, was already on a downward trend beginning in the last quarter of 1995. In other words, economic performance was already hampered by structural problems two years before the crisis erupted.

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Estimates show that without the financial crisis and El Niño, the economy would have grown by only 4 percent. Thus, the decline of GDP from 5.2 percent growth in 1997 to a contraction of 0.5 percent in 1998 can be attributed to three factors with the following ranking: 1) El Niño; 2) structural problems; 3) financial crisis.

While this hierarchy is not hard and fast, the key point is that structural problems contributed significantly to the economic slowdown. Better weather conditions in 1999 would thus lead only to a modest recovery unless there is a dramatic improvement in the economic structure and/or the Asian region reverts to its pre-crisis performance.

External factors could be compressed into one variable: the yen-dollar exchange rate. Figure 1 shows the comparative movements of the pesodollar and the yen-dollar exchange rates. In general, there is no correlation between the two except for some isolated periods. One is between the period of late 1993 and late 1994 when both the yen and the peso appreciated vis-à-vis the dollar. 1 The other is after the onset of the financial crisis when the peso generally followed the movements of the yen except for a brief bout

Table 1: GDP Growth Rates in Selected Asian Economies 1996 1997 China Hong Kong Indonesia Korea, Republic of Malaysia Philippines Singapore Thailand

9.6 5.0 8.0 7.1 8.6 5.7 6.9 5.5

8.8 5.2 4.6 5.5 7.5 5.1 7.8 -0.4

Source: Asian Development Outlook

1998 7.8 -5.1 -13.7 -5.1 -6.2 -0.5 1.5 -8.0

of overshooting. Unless the Bangko Sentral intervenes heavily in the foreign exchange market—which is not likely given the recent experience of other central banks in the region—this trend will persist and the peso’s value will be determined by market forces as represented by the yen-dollar exchange rate.

The yen is expected to stabilize at the 115-125 range which means that the peso would hover in the 37.50 – 38.50 band. Several factors could disrupt the stability of the world economy.

One would be the deterioration of the Japanese economy from its present fragile state. Two would be a major political crisis in the East Asian region (e.g., Malaysia). Both factors would lead to a depreciation of the yen, dragging down the value of the currencies in the region. This could very well trigger the devaluation of the yuan, adding more pressure to the peso and other Asian currencies. Meanwhile, the U.S. economy could begin to slow down especially since the trough in the U.S. business cycle usually comes after presidential election years and this would force the Federal Reserve to cut interest rates. While this would strengthen the yen and the peso, it would directly impact on Philippine exports.

Fortunately, most of the risks are on the upside. Korea and Thailand have experienced a turnaround. Indonesia seems to have hit rockbottom and Malaysia has so far been steady. The U.S. Federal Reserve already applied a pre-emptive cut in interest rates making a U.S. recession unlikely. Japan has been packaging a set of measures to revive its ailing economy.

———————— 1 Thereafter, the yen depreciated sharply while the peso exchange rate was maintained at the P26.50 level. Many analysts attribute this as the primary cause of the peso’s overvaluation. The latter is one of the structural factors affecting the performance of the manufacturing sector.

DEVELOPMENT RESEARCH NEWS

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January - February 1999

Table 2: Selected Macroeconomic Indicators, Philippines, 1990-1998 (Annual growth rates and share to GDP, with the latter shown in italics)

Gross National Product Gross Domestic Product Agriculture, Fishery and Forestry Agriculture and fishery Forestry Industry Sector Mining and quarrying Manufacturing Construction Electricity, Gas and Water Service Sector Transport, communication and storage Trade Finance Ownership of dwellings and real estate Private services Government services Personal Consumption Expenditure Government Consumption Capital Formation Exports Imports Inflation (average) 91-Day Treasury Bill Rate (average) Nominal Exchange Rate (average)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999 Forecast

4.8 3.0 0.5 22.30 1.8 21.29 -21.0 1.02 2.6 35.46 -2.6 1.54 2.7 25.52 5.0 5.81 -0.4 2.59 4.9 42.24 2.1 5.70 4.6 14.91 9.9 4.16 2.7 5.57 3.8 6.85 8.8 5.05 5.4 73.8 6.8 7.9 15.8 24.0 4.7 17.2 14.1 23.7 24.3

0.5 -0.6 1.4 22.74 3.1 22.08 -35.4 0.66 -2.7 34.71 -2.9 1.50 -0.4 25.56 -15.7 4.92 4.7 2.73 0.2 42.55 0.4 5.76 0.5 15.07 -2.8 4.06 0.2 5.62 -0.2 6.88 1.5 5.16 2.3 75.9 -2.1 7.8 -17.3 20.0 8.0 -1.3 18.7 21.5 27.5

1.6 0.3 0.4 22.75 0.7 22.17 -11.5 0.58 -0.5 34.41 6.7 1.60 -1.7 25.03 2.8 5.04 0.7 2.74 1.0 42.84 1.4 5.82 1.6 15.27 0.4 4.06 0.7 5.64 0.6 6.89 0.2 5.15 3.3 78.1 -0.9 7.7 7.8 21.5 11.1 20.5 9.0 16.0 25.5

2.1 2.1 2.1 22.75 2.6 22.28 -16.5 0.48 1.6 34.25 0.7 1.58 0.7 24.69 5.7 5.22 2.9 2.76 2.5 42.99 2.6 5.85 2.5 15.32 2.4 4.07 1.8 5.62 2.9 6.94 2.8 5.18 3.0 78.8 6.2 8.0 7.9 22.7 15.8 21.2 7.6 12.4 27.1

5.3 4.4 2.6 22.36 3.0 21.98 -15.0 0.39 5.8 34.71 -7.0 1.40 5.0 24.84 8.9 5.45 13.9 3.01 4.2 42.93 4.2 5.84 4.0 15.26 5.5 4.12 2.9 5.54 4.3 6.94 5.5 5.24 3.7 78.3 6.1 8.1 8.7 23.6 18.5 21.2 9.1 12.7 26.4

5.0 4.8 0.8 21.53 1.7 21.34 -48.6 0.19 7.0 35.44 -0.8 1.33 6.8 25.32 6.5 5.54 13.0 3.25 5.0 43.04 5.8 5.90 5.6 15.37 7.3 4.22 3.0 5.45 4.3 6.91 3.7 5.19 3.8 77.6 5.4 8.2 3.0 23.2 29.4 23.7 8.1 11.8 25.7

7.2 5.8 3.8 21.13 3.6 20.91 24.3 0.22 6.2 35.58 -4.8 1.20 5.6 25.27 10.9 5.81 7.5 3.30 6.4 43.29 7.4 5.99 5.5 15.34 13.8 4.54 4.1 5.37 5.0 6.86 5.9 5.19 4.6 76.8 4.3 8.1 13.0 24.8 17.7 20.8 8.4 12.3 26.2

5.3 5.2 2.9 20.68 3.4 20.56 -41.4 0.12 6.1 35.91 1.7 1.16 4.2 25.05 16.2 6.42 4.8 3.29 5.5 43.41 8.2 6.17 3.9 15.15 13.0 4.87 3.8 5.30 4.8 6.84 2.9 5.08 5.0 76.6 1.6 7.8 11.7 26.3 22.8a 14.0a 5.0 12.9 29.5

0.1 -0.5 -6.6 19.40 -6.6 19.30 -19.3 0.10 -1.7 35.46 1.8 1.18 -1.1 24.90 -8.1 5.92 4.4 3.45 3.5 45.14 6.4 6.59 2.4 15.60 4.5 5.12 1.6 5.41 4.9 7.21 2.2 5.22 3.5 79.7 0.8 7.9 -17.1 21.9 17.3 -18.2 9.0 15.0 40.9

3.0 2.4 1.5

0.6 2.0 0.0 2.0 4.5 4.2

3.0 0.0 5.0 18.0 15.0 7.0 10.5 38.1

November 1998 Source: National Accounts of the Philippines, National Statistical Coordination Board Selected Philippine Economic Indicators, Bangko Sentral ng Pilipinas a

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Philippine Economy...

From page 5

A surge in capital flows, however, is not to be expected until the region reverts to its original development path before the crisis. For reasons to be explained later, foreign direct investment is not likely to be a strong source of growth for the Philippines as it was for Thailand, Malaysia, Indonesia and China. Hence, while the current trends in global economic environment would be conducive to economic recovery in the Philippines, it is meant more in the “neutral” sense. External shocks, leading to contagion effects, will simply not be present and there will be no outside push to prop up economic growth.

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rience of Thailand, Indonesia, Malaysia, China and even Singapore, then policymakers have to grapple with the issue of how to attract more foreign direct investment (FDI) to the Philippines.

Table 3 shows that while there has been great improvement in recent years, the Philippines is still a laggard when compared to its neighbors.

Would greater openness as a result of economic reforms in the past 13 years change this trend? The answer is not quite straightforward. For one, while the surge in FDI flows into the Philippines after 1992 could be attributed to greater openness, it should also be

January - February 1999

Ironically, trade liberalization seems to have the opposite effect, at least at this stage of its evolution. A number of multinational corporations (MNCs) already transferred their production base elsewhere and merely retained a marketing office in the Philippines to handle imports. These developments do not augur well for the performance of the manufacturing sector over the next few years. Of course, it is a distinct possibility that there will be a dramatic turnaround once resources are allocated more efficiently. One positive sign is the doubling of the share of value added in electrical machinery—from 1 percent in 1990 to 2 percent in 1998. Electronic exports are

Figure 1: Monthly Nominal Exchange Rates, 1987-1998

Continuing structural problems In view of the above situation, policymakers must concentrate on domestic reforms to spur stronger economic growth. Besides showing that the financial crisis had a lesser negative effect on the Philippines vis-a-vis other Asian countries, Table 1 also shows that in 1996, the Philippines had one of the lowest growth rates in Southeast Asia.2 This is quite discouraging given that the 1996 rate was the highest achieved by the Philippines after the recession in the early 1990s. Another sign of continuing structural problems is the deceleration in the manufacturing sector for 13 consecutive quarters (1995Q41998Q4).

Policymakers in the Philippines must realize that the Philippines is embarking on a different development path from its East Asian neighbors.

Certainly, it cannot replicate the policies of Japan, Korea and Taiwan as many of the strategies adopted by these economies are not consistent with international agreements such as the World Trade Organization (WTO). If the alternative is mimicking the expe-

noted that these flows were dominated by proceeds from privatization and debt restructuring. Two, Malaysia, Thailand and Indonesia did not have liberal trade regimes when the first wave of FDI bolstered their economies.

Bringing China and Vietnam into the picture would severely downplay the role of trade liberalization in attracting FDI.

contributing more to the domestic economy but the impact is still quite small. The dichotomy between the export and domestic manufacturing sectors remains to be a problem. It is imperative, therefore, for policymakers to closely monitor the manufacturing sec———————— 2 Vietnam, Myanmar, Cambodia and Laos had higher growth rates than the Philippines in 1996.

Only Thailand had a lower growth rate but the figure was 6.7 percent before it was revised.

DEVELOPMENT RESEARCH NEWS

tor to ascertain that the disinvestment process is only temporary.

Since FDI is a critical factor that would enable the Philippines to catch up with its neighbors, the country should therefore give top priority to infrastructure, macroeconomic stability and political stability. These are the common factors underlying the success of the other economies in attracting FDI. Weak capital formation results in low labor productivity. The latter, along with social cohesion and environmental protection, is an area at the microeconomic level that has lagged relative to the achievements at the macroeconomic level. This inconsistency between microeconomic and macroeconomic factors has prevented potential gains from being realized.

Low labor productivity is also related to inadequate technology policy and a poor record in human resource development. And although improvements in these areas as well as in environmental management are medium to long-term considerations, policymakers must tackle them head-on. Recommendations to resolve some of the problems are discussed in the integrative report of the PIDS assessment of and prospects for the Philippine economy (Yap 1998).

Social cohesion covers the areas of poverty alleviation and improvement of bureaucratic efficiency. The record of the Philippines in terms of poverty reduction has been dismal when compared to other East Asian countries. In fact, between 1985 and 1997, the num-

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Table 3: Foreign Direct Investment, 1986-1997 (In US$ million) 1986-1991

1992

1993

1994

1995

1996

1997

27515 33787 1667 2000 2004 2109 588 809

35849 2100 4348 1776

40800 2500 6194 2325

45300 2600 5350 2341

4132 1459 8210 1559 2002 2000

4672 1520 9440 1864 2268 2156

3754 1253 10000 2248 3600 1200

China Hong Kong Indonesia Korea, Republic of

3105 1711 746 863

11156 2051 1777 727

Malaysia Philippines Singapore Taiwan Thailand Vietnam

1605 501 3592 1034 1325 68

5183 228 2204 879 2114 385

4342 1591 8368 1375 1322 742

Source: World Investment Report 1998

ber of families considered poor actually increased. Part of the problem is directly related to the slow pace in implementing the agrarian reform program. Despite the pro-poor pronouncements by the new administration, this issue will likely drag on since the Social Reform Agenda is limited by hard budget constraints.

The issue of bureaucratic efficiency, 3 meanwhile, gained prominence after the 1993 World Bank study on the East Asian miracle. The ineffective and inefficient Philippine bureaucracy is traced to the existence of a patrimonial state that is dominated by an oligarchy. 4 The particularistic interests of the elite had led to rent-seeking behavior that greatly weakened the production base of the economy. Political instability in the past had resulted from tensions within the elite class and the struggle against their dominance.

Despite the euphoria generated after the end of the Marcos regime, it

———————— 3 This factor lost some of its luster after the recent financial crisis wherein behest loans were blamed for the weaknesses in the domestic financial systems which triggered the crisis. Fortunately, the emphasis is now shifting towards the need to reform the international financial architecture (e.g., Radelet and Sachs 1998) and away from domestic factors such as crony capitalism.

See Hutchcroft (1998) for an excellent discussion on this topic.

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5006 1238 4686 917 1804 523

has become increasingly clear that there has been no clean break from past political configurations. President Aquino is a member of the Cojuangco clan which is part of the oligarchy; President Ramos was a key player under martial law; and President Estrada is known for his ties with the Marcos family. The reemergence of Marcos cronies early in the Estrada administration—not to mention the Marcoses themselves—does not bode well for improvements in bureaucratic performance.

The number of structural problems that exist is enough to shun an optimistic outlook on Philippine economic recovery from the crisis. Despite the numerous economic reforms that have already been implemented, the response has been relatively lethargic.

While the more prudent course of action is to push ahead with the economic agenda initiated by Presidents Aquino and Ramos, the social and political aspects certainly deserve more attention.

Prospects for 1999 Improvements in weather conditions and a more stable regional environment would be sufficient to propel

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Governance at the Local Level...

From page 3

tities or the participation of NGO representatives in local special bodies.

Selection criteria In the course of the pilot testing and consultative workshops, the number of initially-defined indicators was trimmed down to a manageable num-

8

ber. The final list was determined on the basis of the following criteria: specificity, quantifiability, universality, credibility, simplicity and acceptability.

The specificity and universality criteria are opposing concepts and somehow involve some trade-offs with each other. For instance, specificity demands that the information provided by the indicators are disaggregated enough across functions or levels of government and therefore cannot be

January - February 1999

the “one-size-fits-all” type while universality implies that the indicators can be standardized to fit all levels of government or functions. With regards quantifiability, meanwhile, indicators may be ranked either ordinally or cardinally. Credibility, on the other hand, requires the absence of any systematic built-in bias in measuring the indicators. Simplicity denotes consistency of the indicators with the development goal while the final criterion, acceptability, emphasizes the need for the

Figure 2 Objective Tree for Good Governance Indicators, Version 2 Development Goal Improved LGU Performance in Social Development

Strategic Objective I

Strategic Objective II

Strategic Objective III

Optimized Resource Support for Human Priority Concerns

Enhanced Effectiveness in Service Delivery

Support Systems and Accountability Measures Installed

k Revenue Generation l Local revenue effort — per capita local source revenue l Cost recovery effort — ratio of

revenue to expenditure from economic enterprise k Revenue Utilization l Per capita social service expenditure l Social service expenditure ratio —

ratio of social service expenditure to total LGU expenditure k Adoption of Systems for Increased Sustainability of Resource Generation and Utilization l Regularity in the conduct of general revision of schedule of market values l Annual Development Plan approved

by Sanggunian

k Adequacy of Services Provided l Programming of service delivery inputs in compliance with national benchmarks k Strong LGU-NGA Cooperation l Presence/absence of NG-LGU cooperative agreements

k Macrolevel Accountability Systems Developed and Implemented l Results of COA audit k Microlevel Accountability Measures in Place l Presence of voice mechanism — participation of NGO representatives in local special bodies l Presence of exit mechanism — use

of market-oriented mechanisms in service delivery

DEVELOPMENT RESEARCH NEWS

indicators to be acceptable to the various stakeholders as validated in the workshops.

Constructing the composite indices For each of the strategic objectives, a composite index was constructed. Then the composite indices were consolidated into an overall governance index. The different indicators (and different result packages) were initially given weights and then subjected to validation during the subnational and national consultation workshops conducted during the course of the study.

The pilot LGUs The indicators and composite indices were pilot tested in three preselected LGU clusters, with each cluster consisting of three jurisdictions, that is, one provincial government, one city government and one municipal government. The clusters were chosen on the basis of their provincial level human development index (HDI). For instance, for the high HDI, the pilot LGUs included Cavite for provincial government, Trece Martirez City for city government, and Noveleta for municipal government. Then the medium HDI and low HDI LGUs were likewise selected.

The need to measure governance: Some issues Uses Manasan et al. cited the advantages of having quantifiable indicators of good governance in that these indicators “serve as an important yardstick in evaluating the performance of governments in general, and LGUs in particular, as they pursue the goals of sustainable human development.” In this way, LGUs have a concrete basis on what directions to pursue and how to achieve such objectives. The indicators may be a part of the development

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"Knowing the real score of things in the government can further encourage the people to participate actively in finding solutions to some of the problems in their town or city." framework that will chart the path of the LGUs toward human development at the local level and will take into consideration the various opportunities and limitations that are facing them.

The indicators may likewise be used to weigh the performance of one LGU against another to evaluate the differences and similarities in their targets or standards as well as to identify their problem areas and best practices.

Performances may be tracked over time to measure the rate of progress of LGUs as well as verify the trends they follow. The point here is to have a “periodic measurement of progress toward the attainment of explicit objectives and goals.”

Aside from evaluating the performance of LGUs, Manasan et al. also suggested various ways of utilizing the indicators. One way is that they can help in clarifying LGU goals and objectives and may bring focus to some of the critical components of good governance. Some of these components include the budgetary process, service delivery, access to information, and improvement of the morale of the LGU personnel.

In addition, these indicators may be used to call the attention of LGU officials to "potential implementation problems as well as the need for new policy directions” while providing the national agencies with the necessary information in providing technical assistance to their target clientele. On the part of the public, the indicators will

January - February 1999

be able to provide them with information that will give them a starting point for any future collective action.

Who should take on the task?

Manasan et al. suggested a collaborative agreement between key national government agencies (the National Economic and Development Authority, the Department of Interior and Local Government, and the Commission on Audit), the Leagues of LGUs, NGOs and the academe to undertake the measurement of the governance quality index. The crucial factors that allowed the selection of these institutions include their individual credibility and their capabilities to undertake a nationwide task. The mentioned institutions can benefit from each other’s strengths and weaknesses so as to come up with a most objective measurement of governance. It was further suggested—based on the various workshops conducted throughout the course of the study—that the governance quality index be measured regularly at every three-year interval at the middle of the term of the local LGU officials.

Conclusion At a time when information is such a necessity and people are becoming aware of how information can be used in their everyday living as well as provide answers to most of their questions, the formulation of governance quality indicators may just offer a worthy solution. Knowing the real score of things in the government can further encourage the people to participate actively in finding solutions to some of the problems in their town or city.

Ultimately, the future may look brighter when there is transparency in the government, when people may be coopted in the process of governance, and when government officials have a focused look toward sustainable human development. DRN

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January - February 1999

Toward an Agenda for Asia-Pacific Agriculture in the Next Millennium A first step: Exchange and sharing of experiences The Food and Agriculture Organization (FAO), in collaboration with the Philippine Institute for Development Studies (PIDS), held a consultative workshop entitled “Asian Crisis, Reform Measures and Agricultural Response” last January 22 to discuss country reports in the Asia-Pacific area on food and agriculture and the adjustments being made in the sector in the face of the still looming and regionwide financial crisis.

The workshop, which was held in Manila, was attended by experts1 from eight Asian countries, namely, Indonesia, Malaysia, Thailand, South Korea, China, Pakistan, Myanmar and the Philippines.

Inasmuch as little is known about the adjustments being undertaken by various countries in the region to address the present crisis especially in terms of the agriculture sector’s and rural areas’ response, the FAO aims to play a catalytic role in facilitating the exchange of information and the sharing of experiences and new develop-

ments among several countries specifically as they affect agricultural and rural developments.

The workshop served as an initial step toward facilitating such exchange and sharing. It provided a venue for experts to discuss country progress reports on agricultural adjustment measures and analyze policy implications.

The outcome of the discussions and the finalization of the reports will be presented and discussed with select policymakers in a consultative policy meeting tentatively set this May in Thailand.

The lessons learned from the country experiences and adjustment measures to the crisis as discussed in the meeting will help in formulating a development agenda for Asia-Pacific agriculture in the next century.

Philippine agriculture: At the crossroad of change Keynoting the workshop was Philippine Agriculture Secretary William Dar who expressed his appreciation to the FAO and PIDS for collaborating to bring together experts from the Asia-

———————— 1 Paper presentors in the workshop included Dr. Abdul Aziz Abdul Rahman of the Universiti Putra in Malaysia; Dr. Kyeong-Duk Kim of the Korea Rural Economic Institute in South Korea; Dr. Sarfaz Khan Qureshi of the Pakistan Institute of Development Economics; Dr. Delima Hasri Azahari Darmawan of the Office of the Coordinating Minister for Economy, Finance and Development Supervision of Indonesia; Mr. Intravitak Chedtha of the Thailand Development Research Institute; Dr. Mya Than of the Institute of Southeast Asian Studies in Myanmar; Dr. Feng Lu of the Center for Chinese Agricultural Policy, Chinese Academy of Agricultural Sciences; and Dr. Linxiu Zhang of the China Center for Economic Research, Peking University. Dr. Cristina C. David of PIDS presented the Philippine country paper. Unfortunately, due to certain technical reasons, excerpts from her paper are not included here. Also present during the workshop were Dir. Romeo S. Recide of the Bureau of Agricultural Statistics, Department of Agriculture, who represented Agriculture Secretary William Dar; Prof. Arsenio M. Balisacan of the University of the Philippines School of Economics; Mr. Vrander K. Sibal, FAO Representative; Dr. Mario B. Lamberte, Acting President of PIDS; and Dr. Donato B. Antiporta, Chief of the Policy Assistance Branch of the FAO Regional Office for Asia and the Pacific.

Pacific region to look more closely into this "open-ended phenomenon called the Asian crisis" and its impact on agriculture.

In his speech (read on his behalf

by Bureau of Agricultural Statistics Director Romeo Recide), Secretary Dar said that the Philippines' agriculture sector is currently at the crossroad of change—caught in the mire of a negative growth due to the Asian financial crisis and the El Niño/La Niña effects—as it anticipates the effects of the various instituted reforms that would "hopefully strengthen the sector as a jump-off point for national recovery and continued growth."

Dar expounded on the features and objectives of the newly-legislated Agriculture and Fisheries Modernization Act (AFMA) which aims to transform the agricultural landscape in the country. This would be done through the bottom-up planning and implementation of programs concept where all stakeholders led principally by local government units are involved, and through the concept of strategic agriculture and fisheries zones or "food baskets" where the most productive agricultural areas and most viable products and production systems are identified.

Country experiences Apart from the Philippines, how did individual countries respond to the Asian financial crisis insofar as adjustment measures in the agriculture and rural sector are concerned? What further measures need to be done? The following are some of the highlights presented by the country experts in terms of the responses made in their respective countries.

DEVELOPMENT RESEARCH NEWS

Malaysia The financial and economic crisis has revealed a number of structural policy weaknesses in the country’s agriculture sector. Its performance had not been impressive over the last two decades and the crisis further accentuated its low capability to deal with the issues and challenges posed by the crisis.

To be sure, the government has insituted a number of adjustment measures. In fact, the National Economic Action Council (NEAC) was set up in late 1997 precisely to find solutions to the crisis and come up with recommendations for the improvement of the agriculture sector. Some of these recommendations include the improvement of food production through the setting up of permanent food production zones and urban food centers, the setting up of special incentive schemes to entice the private sector to indulge in food production, and the promotion of special campaigns to encourage increased food production. Plantations were also encouraged to go into food production by setting aside at least 10 percent of their land for such purpose.

The NEAC also stressed the rationality for Malaysia to shift into value added agricultural activity for the export crops and strategize to become a regional processing center utilizing its strength in research and development and its long expertise in downstream processing and manufacturing.

The government also introduced the Fund for Food or 3F with an allocation of RM1 billion to encourage entrepreneurs to take up investment in food industry. It also put up a fund for small- and medium-scale enterprises to encourage them to venture into downstream food processing.

The above measures, however, are more of short-term nature. Without doubt, if the growth of the agricul-

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ture sector is to be sustained, there is a need for long-term structural adjustment and reform measures to be put in place. Among these would be the strengthening of the small holder subsector which will have to play a more dominant role since plantations are moving on to nonagricultural activities.

Relatedly, the land ownership and tenure system will have to be amended in support of reform measures for development.

The outmigration of labor from the rural areas therefore drained the supply of useful labor force in the agriculture sector and led to less investment in the sector. However, this development also resulted in the shift of farmers’ activities to high value-added areas so that the structure of the agriculture sector transformed into a more commercialized and high value-added nature, albeit the fact that its share in GDP went down.

A shift into high-technology and capital-intensive agriculture also becomes inevitable now for Malaysia as it continues to lose its comparative advantage in primary production. This will have to be supported by a new corps of agricultural entrepreneurs and commercial operators thereby requiring an intensive human resource development program.

The change in the sectoral shares in GDP, with agriculture, forestry and fishery going down and manufacturing, mining and services going up resulted in an imbalance between and among regions and classes. This led to increased social costs. To help address this especially in terms of promoting rural economies and conserving rural societies, the government undertook a huge project called the “42 trillion won project.”

Finally, a more favorable environment for private sector investment is required if foreign agribusiness companies are to be enticed to invest in large-scale agricultural projects in Malaysia.

Korea The last two and a half decades have witnessed a dramatic decline in the share of Korea’s agriculture sector to GDP. The reason behind this may be traced to the various policies adopted by the government.

In its early stage of economic development, the Korean government adopted the industrialization-led development policy, followed by the exportoriented policy. This brought about an excess demand for labor in the industrial sector. Since industry was largely located in the urban areas, the government promoted a migration policy where workers moved from rural to urban areas and simultaneously controlled the prices of agricultural products.

Launched in 1992, the project aimed to change the structure of the agriculture sector and reduce the negative impact of the WTO regime on the farmers. Basically, the project, which focused on structural adjustments, consisted of securing government investment and expenditure for the agriculture sector, improving the central government mechanism for subsidies and loans based on a bottom-up approach, promoting greater transparency, increasing farmers’ creativity, and activating the financial markets for agricultural loans and subsidies.

The onset of the regional financial crisis in 1997, however, disrupted the program. With big Korean companies going bankrupt, the Korean won badly affected, and the country facing a shortage of foreign exchange reserves, the government had to ask the International Monetary Fund (IMF)

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Agriculture Agenda...

From page 11

for special loans for its foreign debts.

Being under the IMF bailout program, though, had certain negative impacts.

These were quite pronounced in the agriculture sector as consumption for high value-added agriculture products like beef and cheese declined, high interest rates pushed the farm house economy down, and the volume of government investments in the sector went down.

Other issues, meanwhile, also have to be tackled especially in the face of the IMF bailout program. These include, among others, the uncertainty in securing funds in the future for agriculture and the need to set up a market-friendly monitoring mechanism.

Pakistan Although there are structural weaknesses in Pakistan’s financial system a la East Asia, the nature and magnitude are not as severe. As such, Pakistan was largely insulated from the forces which led to the economic and financial downfall of East and Southeast Asia in 1997-1998. Still, there was a mild adverse impact on the trade prospects of Pakistan as well as on the access that Pakistan had to the international capital market for the financing of its current account imbalance.

Certainly, Pakistan’s short-term foreign exchange problem was made worse by the regional crisis since international funds had been funneled to the countries affected by the crisis.

What aggravated the situation, though, was the series of sanctions on Pakistan by some bilateral and multilateral donors in view of Pakistan’s nuclear test explosion in May 1998.

This reduced inflow of external re-

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sources, accompanied by the adverse impact of the East Asian crisis, completely changed the development prospects of the Pakistan economy, including its agricultural sector.

The most glaring setback that resulted is the backsliding in overall policy decisions by the Pakistani government. The macroeconomic reform program that had been ongoing since the 1980s as a means to decrease the bias against agriculture was put to a halt and in fact was reversed by the set of recent policy measures adopted by the policymakers in response to the Asian financial crisis.

Thus, instead of deepening the reform process as had been done by the Asian crisis countries, Pakistan reverted back to the older policies of multiple exchange rates, and import and export controls to manage their current account deficits.

To tackle the crisis situation and manage the balance of payments as well as avert a default on sovereign debt, the Pakistani government prepared a plan of self-reliance where it expanded exports and curbed imports by using import controls. This strategy resulted in the reduction of trade deficits as imports were compressed. It, however, did not succeed in expanding exports in view of the slack economic conditions in the East Asian countries and the narrow base of export commodities of Pakistan. It also adopted a dual exchange rate system in July 1998. Six essential imports, namely, wheat, edible oils, POL products, pulses, fertilizers and

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pesticides, and pharmaceuticals were to be financed at the official rate while all other tradables used a composite rate that is a simple average of the official and the floating interbank rate (FIBR).

In effect, this dual exchange rate passes on the advantages of devaluation to exporters, overseas workers who remit money to Pakistan, foreign direct investors and portfolio investors while the disadvantages to importers of nonessential items. Thus, it tries to contain the cost of devaluation in terms of controlling the price increase of essential imports and repayments on their external debts. Said dual exchange rate system, though, goes against the muchneeded trade reforms.

The East Asian crisis has forced the attention of policymakers in the crisis-affected countries to issues of short-term stabilization and adjustment. For Pakistan, in particular, the short-term impact of the crisis is likely to worsen its task of stabilization. Thus, unless it is able to resolve its structural weaknesses, Pakistan will not be able to attract foreign capital and solve its problems of growth and widespread poverty.

Indonesia Prior to mid-1997 when it was hit by a currency crisis, Indonesia was considered a very stable country with strong economic fundamentals. Indonesia has been undertaking a process of economic reform and adjustment since 1966. These reforms have undoubtedly changed the overall struc-

"The East Asian crisis has forced the attention of policymakers in the crisis-affected countries to issues of short-term stabilization and adjustment. For Pakistan, in particular, the short-term impact of the crisis is likely to worsen its task of stabilization."

DEVELOPMENT RESEARCH NEWS

ture of the Indonesian economy and helped in effecting a virtually uninterrupted record of rapid growth for 30 years. Inflation was low, foreign exchange reserves were plentiful and the government budget was in a surplus.

Everything changed, however, when the 1997 financial crisis struck.

Today, the Indonesian economy is in near collapse. Accompanied by the worst drought experienced in over 50 years and by severe forest fires, this event caused confidence to erode and the GDP to plunge. According to the Indonesian Central Bureau of Statistics, the economic growth rate registered a contraction of 12.2 percent in the first semester of 1998, the first time Indonesia ever recorded a negative growth rate in 30 years.

The events of 1997 and 1998 have propelled agriculture into the spotlight as Indonesia tries to combat food shortages and to search for new sources of economic growth. In terms of economic structure, the industrial sector has played a more dominant role than agriculture in Indonesia in the 1990s.

Its growth rates of 9 to 11 percent easily outpaced agriculture on a per year basis. The low agricultural growth rate had thus affected the food grain security.

With the crisis, Indonesia had to take a number of actions to ensure food security. The immediate concern was to give food relief to nutritionally vulnerable groups—women, children and the elderly.

In recognition of the seriousness of the food situation, Indonesia’s recent food security policy changed from low prices and extensive subsidies to creating an agricultural environment that is more market-oriented such as phasing out of subsidies and price controls; more competitive environment in agricultural trade and distribution; and

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more accessible credit loans. The BULOG or the state-owned trading agency will be made to operate like a commercial enterprise instead of a monopoly.

The Indonesian government committed itself to transforming the cooperatives or KUD into modern, business organizations capable of advancing farmer interest and able to compete with the private sector and other farm and nongovernmental organizations as they play a major role in the distribution of agro-inputs and marketing farmer output.

The government also vows to restructure the corporate overhang; reform and strengthen the banking system; improve governance; and maintain macroeconomic stability through compatible fiscal and monetary policy in order to create a stable economic environment and restore the confidence of the international community.

In short, policy reform in agriculture will help enhance food security and restore agriculture growth and development. These reforms, however, must be complemented by a stable macroeconomic environment and by reforms in other sectors like in infrastructure, human resource development and public institutions.

Thailand As the financial crisis began to hit the real economic sector, the effects were gradually felt by the poor. The effects reached the poor through three major channels or pathways, namely, k the impact of the exchange rate changes, k the fall in production and employment, and k the decline in government revenue.

The direct effect of the baht depreciation was a jump in most farm

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product prices. In a way, this benefitted the farmers and temporarily put a halt on the declining trend of Thai agriculture. The question, however, is how long the positive effect will last. Moreover, while the increase in the agricultural products’ prices served as a windfall to the farmers, it gave, on the other hand, a tremendous burden to the other poor who are food buyers.

With the contraction of the Thai economy, demand for labor fell. Many of the major industries had to lay off workers. Contrary to general expectation, agriculture did not help in absorbing laid off industrial workers as it was also releasing a fair amount of workers into the ranks of unemployed. What’s more, a large portion of the unemployed were craftsmen and laborers, posing a potential mismatch of skills problem if these unemployed workers were to move back to agriculture.

The limitation of the agriculture sector to absorb laid-off workers is related to the notion of irreversibility and sunk cost associated with the movement of labor out of agriculture in an attempt to find better job opportunities in other sectors. While the direction of labor movement from agriculture to the other sectors may have been easy and rapid, the opposite may not be true since urban wages exceed those in the agricultural rural sector.

The fall in government expenditures, accompanied by a decline in government revenues, meanwhile, definitely cut into the budgets for priority social programs like health, education and other welfare services. Agriculture was not exempted either.

Traditionally, Thai agricultural policy has been based on the philosophy that the government is in a better position to understand current and

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Agriculture Agenda...

From page 13

future Thai comparative advantage and the developments in the market. The recent financial crisis disproved this.

As such, an overall redirection of agricultural policy is being proposed.

This is to leave all decisions on production to the farmers.

To address the two problematic areas of production that the farmers will face—price risk and increased productivity—the government should assist in developing a futures market for Thailand’s major products and put more investment in R&D activities through improved communication between research scientists and extension workers.

One policy measure that needs to be immediately implemented in the short run is the creation of more employment opportunities in rural areas especially in nonagricultural sectors. In the long run, the government should put emphasis on productivity improvement through mechanization, development of a water market, capital investments by farmers, application of new technology and development of a processing industry in the domestic market.

Myanmar and Indochina Among the Southeast Asian countries, the Transitional Economies of the Mainland Southeast Asia (TEMSEA) composed of Cambodia, Laos, Myanmar and Vietnam have been the least affected by the regional currency crisis. Still, this is not to say that they have not been affected. Directly and indirectly, they, too, feel the pinch of the crisis. And their prospects for a more improved situation depend on one common development—the recov-

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ery of Thailand’s economy. The earlier Thailand recovers, the better is the prospect for TEMSEA. Each, though, has its own response to the crisis.

Cambodia’s response is to increase the tariff on a number of products facing competition particularly from Thailand.

Laos, meanwhile, imposed price controls on some staple items in order to curb the rising inflation. The Laos government introduced the first ever retail government bonds in order to tap domestic personal savings to help fund government expenditure in 1998. The government is also taking measures to regain momentum on the privatization of the state-owned enterprises (SOEs) and to consolidate the fragile domestic banking sector.

Myanmar resorted to ad-hoc measures to address the crisis. Such measures like establishing an exchange market for foreign exchange certificates, issuing licenses to nine private banks to conduct foreign exchange operations, raising customs valuation and reducing export taxes were among its responses. In January 1998, the Myanmar government allowed the liberalization of procurement prices for paddy, a step considered as positive in increasing agricultural productivity and improving competitiveness in the country’s external trade.

On the other hand, one of the initial steps of Vietnam to address the crisis was to devalue the dong against the U.S. dollar by 16.2 percent incrementally between October 1997 and August 1998. To address the impact of the crisis on the poor, the government adopted a six-point reform agenda which includes the following: k improve competitiveness and raise productivity; k strengthen the financial system;

January - February 1999

k prises; k ment; k k

reform state-owned enteraccelerate rural developpromote social equity; and reform public administration.

The main challenge for TEMSEA countries in the new millennium is to commit and strengthen more comprehensive reforms. One of the issues here is these countries’ commitment to become more open. In the process, they have to restructure their economic, social and political institutions to meet the demands of wider political participation, greater financial transparency, and the needs of the international markets.

China The Chinese reform policy has been extraordinarily successful in raising agricultural GDP output of major agricultural products, per capita income and the living standard of the rural population. Apart from the implementation of the market-oriented reform policies, there have been four other major driving forces behind the historical transformation in the Chinese agricultural and rural sector over the last two decades. These are: k agricultural science and technology process, k rapid growth of town and village enterprises (TVEs), k the large-scale rural-urban labor migration, and k gradual internationalization of the Chinese agricultural system.

Despite the remarkable achievements, however, the Chinese agriculture sector still faces mounting problems. For instance, many unnecessary administrative interventions still remain especially in the area of distribution of bulk agricultural produces such as grain and cotton. The land tenure system has yet to be flexible enough to reap the potential efficiency gains.

DEVELOPMENT RESEARCH NEWS

Moreover, for an economy where shortage has been a dominant feature of life, the surplus and overproduction of most agricultural products experienced in recent years indicate an urgent need to adjust the rural economic structure and government policies in accordance to the new environment and changing demand pattern.

Meanwhile, the impact of the Asian financial crisis on the Chinese agricultural sector has been quite severe. In terms of the response, the Chinese government succeeded in its policy not to devalue the Chinese currency in 1998. It instead adopted expansionary fiscal and monetary policies in order to raise domestic demand and maintain the relatively high growth rate of the economy. Indeed, the impact of the Asian crisis provides another dimension of challenge to be faced by the Chinese agricultural sector in an increasingly open economy.

Food self-sufficiency nonetheless will continue to be the central goal of China’s agricultural policy. The Ninth Five-Year Plan for 1996-2000 and the National Long-Term Economic Plan both call for continued agricultural production growth, rising rural income, continued high levels of food security, and the elimination of absolute poverty. The strategies to achieve the above targets include improvement of incentives for both public and private investments to enhance agricultural productivity (investments in land, irrigation, research, crop extension, and others), raising of farmers’ income through the promotion of rural industrial development and off-farm employment, strengthening of antipoverty programs by raising poverty alleviation funds and emphasizing economic as well as infrastructure development, and the development of the state grain reserve system as a major government intervention to stabilize food supply and market prices.

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Conclusion As shown in the various country experiences, each one has its own set of responses to address the impact of the regional financial crisis on its economy in general and on the agricultural sector in particular. Most, if not all, are short term in nature.

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is, if the growth of the agriculture sector—and the economy as a whole—is to be sustained, these countries' policymakers have to make sure that the necessary long-term structural adjustment and reform measures are put in place. DRN

One common lesson, though, may be gleaned from the accounts: that

EDITOR'S NOTES ...From page 1 policymakers is to push the policy and structural reform measures forward so that the economy can move ahead toward a sustainable growth and development.

On page 2 is an article that outlines a set of objective instruments and variables developed by a group of researchers led by PIDS Senior Research Fellow Dr. Rosario G. Manasan to measure the level of governance in the local government units (LGUs) as a response to the decentralization policy implemented in 1991 through the Local Government Code. It is with much hope and expectation that the government will be able to utilize this set of indicators in the future— just as soon as they are polished to the maximum satisfaction—since these indicators will help in the evaluation of the performance of LGUs as they work their way toward sustainable human development.

Moreover, said indicators may be used to compare the performance of one LGU with another as well as place attention to some of the aspects of local governance which need regular and constant monitoring.

The third article in this issue tackles the country experiences of eight Asian countries with regard to the situation and responses of their respective agricultural sectors in the face of the current Asian financial crisis. The papers were presented by experts in a discussion-workshop initiated by the Food and Agriculture Organization (FAO), in collaboration with the PIDS, in an effort to facilitate the sharing of information and new developments among Asian countries on agricultural and rural developments.

Vol. XVII No. 1

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Editorial Board Dr. Ponciano S. Intal, Jr. President (on leave) Dr. Mario B. Lamberte Vice-President and Acting President Mr. Mario C. Feranil Director for Project Services and Development and Acting Vice-President Ms. Jennifer P.T. Liguton Director for Research Information Ms. Andrea S. Agcaoili Director for Operations and Finance Atty. Roque A. Sorioso Legal Consultant

Staff Jennifer P.T. Liguton Editor-in-Chief Genna J. Estrabon Issue Editor Corazon P. Desuasido, Joel C. Cruz Barbara F. Gualvez, Edwin S. Martin and Liza P. Sonico Contributing Editors Valentina V. Tolentino and Rossana P. Cleofas Exchange Delia S. Romero, Galicano A. Godes, Necita Z. Aquino, Lilet L. Lamayo and Federico D. Ulzame Circulation and Subscription Jane C. Alcantara Lay-out and Design

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Philippine Economy...

From page 7

the Philippine economy to modest growth in 1999. This would be in the vicinity of a 2.4 percent increase in GDP as noted earlier in Table 2. Agriculture will recover and expand at 1.5 percent while the services sector will continue its steady pace, with value added growing by 4.2 percent. The industry sector will continue to struggle, with output growing by less than a percentage point. Meanwhile, the manufacturing sector will continue to bear the brunt of the adjustment process—both to the Asian crisis and the globalization phenomenon—and will thus remain flat in 1999.

The forecasts already incorporate government pump-priming activities which should only be limited in scope.

Prudent domestic borrowing would allow interest rates to be maintained at pre-crisis levels. Lower inflationary expectations would also allow interest rates to go down.

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"...The crisis should not be the excuse for the low growth that we have had for many years. The truth of the matter is that there are still many challenges to hurdle before the Philippines can qualify to become a real tiger economy. "

A more stable exchange rate is the primary consideration in predicting lower inflation. The downside risk, however, is higher crude oil prices. The likely increase in fuel prices, however, should not be enough to make inflation reach a level of over 7.0 percent (Table 2).

The more stable macroeconomic environment should allow investment to expand by 5 percent but the ongoing adjustment process in the manufacturing sector will constrain growth in capital formation. It may take sometime before investment reaches an annual growth rate of 15 percent, the rule-of-thumb threshold level to achieve strong economic growth.

Import demand should recover

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

PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research.

This publication is part of the Institute's program to disseminate information to promote the use of research findings.

The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: publications@pidsnet.pids.gov.ph Re-entered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P150.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.

following the sharp decline in 1998. Exports, meanwhile, will continue their remarkable expansion unless, of course, there is a marked slowdown in the U.S. economy.

Concluding remarks The Asian financial crisis has served as a convenient “scapegoat” for the economic malaise that the Philippines suffered in 1998. But the crisis should not be the excuse for the low growth that we have had for many years. The truth of the matter is that there are still many challenges to hurdle before the Philippines can qualify to become a real tiger economy.

And these will have to be tackled, with or without the presence of the crisis. It would be of little consolation if we are able to equal the development level of our neighbors only because they have regressed as a result of the Asian crisis.

The goal is to move forward, achieving sustainable development in the process, and not to wait for one's competitor to match one's mediocrity. DRN

References Hutchcroft, P. D. Booty Capitalism: The Politics of Banking in the Philippines. Manila: Ateneo University Press, 1998.

Radelet, S. and J. Sachs. “The East Asian Financial Crisis: Diagnosis, Remedies, Prospects.”

Brookings Papers on Economic Activity 1, 1998.

Yap, J. T. “Beyond 2000: Assessment of Economic Performance and an Agenda for Sustainable Growth.” PIDS Discussion Paper Series No. 98-28. Makati City: Philippine Institute for Development Studies, 1998.