Transcript Prospects for the Philippines (Phase 1)- Dr

Federalism:
Prospects for the Philippines
Romulo E. M. Miral, Jr.
November 8, 2016
Major Research Questions
 What are the Philippines’ development issues and challenges?
 How has the government responded to these issues and
challenges in the field of governance in general and intergovernmental relations in particular?
 How successful were these policy responses, notably the
decentralization reforms of the government?
 What does federalism have to offer?
 Is a shift from unitary to a federal form of government for the
Philippines warranted?
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Poverty has remained a formidable development challenge for
the Philippines.
Note: $1.9 a day (PPP) is about P40 a day per person; the PSA national poverty line is
about P60 a day per person.
3
Asian Development Bank (2007). Philippines: Critical Development Constraints
The Philippines’ economic growth performance has paled in comparison with
its peers in the region in the last 40 years, except in the last four years.
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Governance Matters
The evidence suggests that both low-income and middle-income
countries are at risk of growth stagnation.
With a few exceptions, policy advice for these countries has focused on
the proximate causes of transition, such as the efficiency of resource
allocation or industrial upgrading.
The real problem, however, may have political roots: powerful actors
who gained during an earlier or current growth phase (such as the
factor-intensive growth phase) may resist the switch to another growth
model (such as one based on firm entry, competition, and innovation, in
the process of “creative destruction”). These actors may exert influence
to capture policies to serve their own interests.
The World Bank (2017). World Development Report 2017, p11
Two governance outcomes that have significantly affected
economic growth trajectory of the Philippines:
1. Political instability and violence
• The most evident and dramatic manifestation of the effect of
institutions on Philippine economic performance has been the impact of
political instability on growth, particularly as it affects investment.
• For the years 1985-2006, De Dios (2008) estimated that the difference
in political stability between the Philippines and its neighboring ASEAN
countries explains as much as 20 percent of the variation in their
relative shares of foreign direct investment.
• Political instability variables have also been found to significantly affect
interest rates and hence investment in general.
Emmanuel S. de Dios (2008) Institutional Constraints on Philippine Growth
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Two governance outcomes that have significantly affected
economic growth trajectory of the Philippines:
2. Corruption
“Corruption is the second institutionally-rooted governance-outcome that has
most palpably influenced Philippine economic performance.”
• It increases the cost of investment,
• increases the risk of investment due to unpredictable magnitude of payoffs
asked and unreliable (illegal) delivery of the contract to the briber
• pre-empts competition and new investments
• introduces distortion in the choice of investments (esp. in public investments)
De Dios (2008) estimated that perceived corruption ratings explain easily from a
quarter to a half of the variation in the investment to GDP ratio of the
Philippines for the period 1985-2006.
Emmanuel S. de Dios (2008) Institutional Constraints on Philippine Growth
Corruption and Inefficiency
•World Bank (2008) estimates that about P30 billion annually or an average of
20-30 percent of the every government contract is lost to corruption or
inefficiency.
•The Executive Opinion Survey of the World Economic Forum consistently
ranked corruption as one of the most problematic factors for doing business
in the Philippines.
•Others are inefficient government bureaucracy and inadequate
infrastructure. There are serious concerns about diversion of public funds and
wastefulness of government spending.
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10
COMMISSION ON AUDIT, AUDIT PERFORMANCE SUMMARY REPORT
For Calendar Year 2011
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Bases of the recurring problem of political instability and corruption
• The concentration of political power at the center that allows access to
state resources as a common pool and as means of wealth accumulation
provides substantial inducement for intense rivalry among factions of the
elite that test and occasionally spill beyond constitutional bounds.
• Extra-constitutional elite adventurisms are possible because the formal
institutions do not command strong allegiance from the vast majority of
the population as the persistent social inequities put these institutions
beyond their reach. More accessible to them are informal relationships
based on personal ties and kinship, making them vulnerable to the
biddings of rival elite factions.
• Absent intervening factors, such circumstances render current political
institutions vulnerable to capture by narrow elite interests or to prolonged
social conflict that paralyses social decision-making.
Emmanuel S. de Dios (2008) Institutional Constraints on Philippine Growth
Bases of the recurring problem of instability and corruption:
Concentration of power
“A central inducement to corruption and political instability in the
Philippines stems from the centralization of power in the executive branch
(de Dios and Esfahani 2001)”
“One of the major challenges for the country in the coming decades is
changing the balance of power in government, away from the executive and
mainly towards congress and the local governments.” p35
Emmanuel S. de Dios (2008) Institutional Constraints on Philippine Growth
Why nations fail
Rich countries are rich because they have inclusive economic and political
institutions, while poor countries are poor because they have extractive
economic and political institutions (p.1).
Inclusive economic institutions create incentives and opportunities necessary
to harness the energy, creativity and entrepreneurship in society.
Extractive economic institutions are the consequence of extractive political
institutions.
Extractive political institutions are made up of two important dimensions.
First, they allocate political power narrowly. Second, they feature a central
state that is not strong in the sense that it can provide key public goods.
James A. Robinson (2013). Why Regions Fail: The Mexican Case
Economic growth and poverty in the Philippines are highly uneven across regions.
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Regional growth and globalization
•Regions better connected to the global economy grow more
rapidly, and this process may result in increased regional
inequality.
•NCR, CALABARZON, and Central Luzon, account for 62% of
the country’s GDP.
•These are enclaves that better connected to the global
economy than with the rest of the domestic economy.
~ Balisacan, Hill, and Piza, 2006
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Regional development and infrastructure
•National growth and regional development depend on investments in key
public goods, physical infrastructure, and human capital.
•Due to scarcity of infrastructure funds, the Philippine government invested
more in internationally oriented infrastructure (ports, harbors) and less in
domestic transport networks and corridors.
•This reinforces the globally connected enclaves with little connection to
the hinterlands.
~Balisacan, Hill, and Piza, 2006
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Poor regions of Mindanao
•The Philippine economic geography has remained almost
the same in the past 3 decades, with very little changes in
regional socioeconomic ranking.
•The traditionally poor regions of western Mindanao
slipped further behind because of prolonged state of
conflict and local mismanagement.
~Balisacan, Hill and Piza, 2006
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Studies show that differences in income and poverty
across localities can be explained by geographic
factors, access to key public services such as
infrastructure, education and health services, peace
and order, government policies (e.g. agrarian reform,
change in terms of trade) and quality of governance
(dynasties).
These studies include: Mapa, et al. (2013); Mendoza et al. (2013);
Balisacan (2007); Mapa, Balisacan and Briones (2006); Balisacan and
Fuwa (2004; 2002); Monsod and Monsod (2003); Balisacan and Pernia
(2002); Lim (2003); Lamberte, Manasan and Llanto (1993)
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Variation in provincial indicators explained by geography* (in percent)
Human Development Network (2013). 2012/2013 Philippine Human Development Report
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Decentralization and Local Autonomy
•The 1987 Constitution adopted local autonomy as a principle and
policy of the state.
•Government decentralization was viewed as a means to improve
public sector governance.
•Decentralization can promote greater people participation and
effective representation, which lead to a more democratic and
accountable government.
•Decentralization can promote the dispersion of economic
development to the regions and countryside.
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Government Decentralization:
1.Administrative decentralization or
Deconcentration
2.Political decentralization or Devolution
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Administrative Decentralization
• Deconcentration of national planning and administration function to
regional level (14 to 18 administrative regions)
• Created a regional development council in each region (except NCR)
to coordinate planning, implementation and monitoring of programs
and projects of the national government in the region
• Adopted integrated area development (IAD) projects focused on a
specific area within a region; each IAD project office has corporate
powers and has the authority to call for assistance on any NGA and
LGU, although it has no control or power over them
• Instituted regional budgeting system requiring NGA to have a
breakdown of their budgets by region. RDC approved regional agency
budgets are submitted to their respective central office for evaluation
and integration to the department or agency budgets.
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Administrative Decentralization
• Appointed Cabinet Officers for Regional Development who were
given the task of articulating the concern of their respective region in
the cabinet
• Reinstituted regional development fund to support RDCs and to
finance operating requirements and capital outlays of regional and
local development projects
• Adopted a synchronized plannning, programming and budgeting
system (SPPBS) designed to properly coordinate these activities at
the subnational and national levels
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Administrative Decentralization
Observations:
• Regional development policies and approaches change from one
administration to the other.
• Central offices still exercise strong influence in the prioritization of
regional projects and their funding allocation and releases.
• Regional offices are forced to adopt the projects that are regarded as
priority of their central offices rather than those favored at the region
• Though regionalized, the budgeting system is in essence more
agency-based than area-based.
• The regional development councils perform largely coordinating
functions since they have no line authority over their members.
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“
Human development costs arise from a national
organization that is arranged as vertical silos by sector or
agency and, within each agency, by program. The
arrangement is incompatible with the integrated,
ecosystem-based governance that local geography
demands.
“
Human Development Network (2013). 2012/2013 Philippine Human Development Report
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Political Decentralization: Devolution
Major Laws:
• Republic Act 6734, Organic Act for the Autonomous Region in Muslim
Mindanao (August 1, 1989), as amended
• Republic Act No. 7160, The Local Government Code of 1991
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Decentralization program: neither a success nor a failure
•Has not delivered what some of its proponents might have expected: a
decisive shift of power and resources out of the center, a vibrant,
efficient and responsive system of local government, and a general shift
in the quality of governance through the competitive “voice and exit”
accountability mechanisms.
•Still, cannot be termed a failure because some administrative and
political authority have been transferred to the regions, and some local
governments have performed well.
~Balisacan, Hill and Piza, 2006
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Poor execution
•The decentralization program (as embodied in the
LGC) follows generally accepted principles of assigning
functions to different levels of government.
•However, it is poorly executed: the central
government continues to be directly involved in the
provision of devolved services resulting in ambiguity
and lack of coordination.
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Still highly centralized
• LGUs remain relatively small actors in the Philippine
economy:
‒ expenditures amounts to just 2.75% of GDP
‒ own-source revenues amount to only 1.20% of GDP
• Government expenditures and revenues have
remained highly centralized even after the
decentralization program.
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Shares in Expenditure, by Government Level
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Composition of Government Revenues, by Government Level
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Vertical Fiscal Imbalance
•Fiscal decentralization in the Philippines was carried out
by devolving expenditure functions to local governments
without commensurate enhancement of their taxing
powers.
•The expenditure-revenue imbalance or fiscal imbalance is
addressed primarily through national government transfers
and direct provision or augmentation of local services by
the national government.
34
Horizontal Fiscal Imbalance
•Fiscal decentralization can increase regional and local
inequality due to the inherently unequal distribution of tax
bases and expenditure requirements among the regions and
LGUs.
•IRA allocation
–does not appear to promote equity,
–tends to favor cities over provinces and cities, and
–does not systematically take into account the varying
revenue capacities and expenditure needs ofLGUs.
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Common Pool Resource Problem
The centralization of revenues created a common
pool resource with its attendant problems:
• Weakening of fiscal discipline
• Weakening of allocative and operational efficiency
(“Divide by N”)
• Increasing tolerance of corruption
• Patronage politics and political dynasties
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Societal Goals
National Government
Agencies/Departments
PAPs
Sectoral Outcomes
Key Result Areas
Provinces
Major Final outputs
Cities
Municipalities
Problem: Fragmented
government services
Barangays
Weak government coordination
•Coordination between and among different levels of
government is weak.
•The requirements for strong coordination are lacking: clear
division of responsibilities, adequate funding, and
bureaucratic capacity (Balisacan, Hill and Piza, 2006).
•Moreover, the Philippines local government system is highly
fragmented with no strong middle level government.
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Highly fragmented local government system
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National Government
Number of LGUs
Provinces
Highly
Urbanized
Cities
Barangays
Provinces:
81
Cities:
145
Municipalities: 1,489
Barangays: 42,036
Component Cities Municipalities
Barangays
Barangays
Population/voters
Notes:
Provinces are fiscally,
the weakest.
Cities are fiscally, the
strongest.
Cities have the
combined powers of
provinces and
municipalities.
Fragmented local government units + patronage politics = Fragmented government services
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Importance of Middle-level Governments
• It is important to recognize the critical role of middle-level
governments. In countries with unitary government like the
Philippines, there are usually no strong middle-level
governments.
• However, the federal form that serves as model for government
decentralization reforms is built on the presence of strong
fiscally autonomous middle-level governments (e.g. states) that
deal with the central government on even ground.
• Ultimately, the issue is not decentralization versus centralization,
but of achieving the right balance and better coordination
among different levels and units of government.
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What can federalism offer?
•Fiscal federalism deals with the division of governmental
functions and financial relations among levels of
government—which are constitutionally defined in a federal
form of government.
•In more general terms, fiscal federalism is a subfield of public
economics that is concerned with "understanding which
functions and instruments are best centralized and which are
best placed in the sphere of decentralized levels of
government" (Oates, 1999).
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Conceptual Basis of Expenditure Assignment
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Conceptual Basis of Expenditure Assignment
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Intergovernmental Mechanisms in Federal Systems
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Fiscal Equivalence: Vertical Fiscal Balance
• Correspondence between those who receive the
benefits of a public good and those who pay for it
• Links cost to benefit
• Leads to congruence between deciding on
expenditure and financing
• Prevents free riding
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Conceptual Basis of Tax Assignment
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Conceptual Basis of Tax Assignment
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Conceptual Basis of Tax Assignment
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Tax Assignment in Switzerland
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Respective Shares in Expenditures & Taxes
Switzerland, 2005
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Joint direct taxation: Personal Income Tax & Corporate Income Tax
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Fiscal Equalization: Horizontal Fiscal
Balance
•Each unit within a particular level of government (or
each state in a federal system) has the capacity to
provide services at a comparable standard.
•Horizontal fiscal imbalance does not imply
uniformity of service provision or uniformity of
revenue-raising.
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Factors that can cause
horizontal fiscal imbalance (HFI)
• On the revenue side, government units may have varying levels of fiscal
capacities due to differences in resources, which usually include
advantages of transportation, ports, climate, soil, location, mineral
deposits, as well as possession of a stock of capital goods and the head
offices of financial corporations.
• On the expenditure side, government units may face varying expenditure
needs due to different socioeconomic, geographic, and demographic
factors (e.g. ratios of school-age children and the elderly)
• HFI can be accentuated by central government activities which have
uneven effects on different local jurisdictions.
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Fiscal Equalization in Switzerland
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Suggested Federalism Design for the Philippines
Pimentel Proposal:
• 11 Federal States to be created basically out of the administrative
regions already existing. By doing so, the identities of every federal
state are already known by and large by the people.
• Metro Manila will be converted into a Federal Administrative Region
like Washington D.C., or New Delhi or Kuala Lumpur
• Luzon will have 4 States: Northern Luzon, Central Luzon, Southern
Tagalog, and Bicol
• Visayas will have 4 States: Eastern Visayas, Central Visayas, Western
Visayas, Minparom (MIMAROPA)
• Mindanao will have 3 States: Northern Mindanao, Southern
Mindanao, Bangsamoro
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Suggested Federalism Design for the Philippines
Pimentel Proposal:
• LGUs Intact
The powers and structures of provinces, cities, municipalities, and barangays
are untouched.
It is up to the Federal States to change LGU structures and powers subject to
the approval of voters in the areas affected
• LGU shares, increased
All revenues shall be the basis, not only taxes collected by the BIR, in the
allocation of funds to the different government levels.
The sharing percentages shall be as follows: Federal – 20%; States – 80%
Sharing of 80% between States and LGUs: State Govt – 30%; PCMB – 70%
• Equalization Fund administered by the Federal Government
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Suggested Federalism Design for the Philippines
Sicat Proposal:
• Four autonomous states: Luzon, Visayas, Mindanao, and
Bangsamoro
• Luzon and Mindanao are not as big as the Indonesian islands
of Java and Sumatra, but favorably compares with Taiwan
and South Korea
• Geographically, each grouping represents a compact group
of regions that could serve as bastions for new political
entities
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Suggested Federalism Design for the Philippines
Sicat Proposal:
• The administrative regions do not provide a sound basis for
creating the new states:
Not intended as founding nucleus for autonomous states
Meant to help strengthen the economic planning process among
similarly situated provinces and cities within a unitary state
Have been set up as specific groupings of provinces and cities to
strengthen their claim on national government economic
resources
Instability of regional groupings: 14 to 19 regions
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Suggested Federalism Design for the Philippines
Sicat Proposal:
• A four state federal union would be cheaper to run and would
achieve as much decentralization of political power compared to 12state federation.
• With fewer states, there are likely to be fewer agencies and
institutions to set up and operate.
• A four state federation has greater potential to produce economic
synergy in terms of its economic operations (e.g. investment in infra
like roads, ports, telecom, and all form of land improvements.
• A big state would be more conducive to competition for leadership
among political groups. Political dynasties are more likely to thrive in
small sized self-governing states than in the big state.
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Suggested Federalism Design for the Philippines
Based on the literature review
National Government
Provinces
Highly
Urbanized
Cities
Barangays
Component Cities Municipalities
Barangays
Barangays
Population/voters
Thank you and Good day.
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