xxii.Improving decentralization

xxii.Improving decentralization

32. 
    The pace of progress on decentralization—in particular, strengthening local governance—needs to be hastened to address the enormous challenge of poverty reduction in the country. All LGUs, regardless of level or size, need to be able to provide minimum basic services to their citizens, while major cities and metropolitan areas need to assume more ambitious roles as engines of economic growth and development. Local government performance is held back by several binding constraints, among them weak systems for LGU accountability, a high level of fragmentation among LGUs, and inequities in the LGUs’ resource base. Several intermediate policy options could help make decentralization work better in the Philippines: (i) strengthening LGU accountability by clarifying service delivery responsibilities and by improving budget transparency and performance reporting, (ii) mitigating the excessive fragmentation by optimizing the role of provinces in inter-LGU coordination and by integrating barangays into the local councils, and (iii) improving LGUs’ resource base by considering options for utilizing additional fiscal transfers allocated based on objective criteria, such as LGU performance and equalization factors.
    

33. 
    Making growth work for the poor in the Philippines is a significant development challenge, but one that is worth pursuing vigorously. The new administration not only has the mandate but the historic opportunity to deliver on this goal as well as other election platforms on which it was voted to power. These include “the organized and widely-shared rapid expansion of the economy through a government dedicated to honing and mobilizing the people’s skills and energies as well as the responsible harnessing of natural resources; moving to well-considered programs that build capacity and create opportunity among the poor and the marginalized in the country; policies that create conditions conducive to the growth and competitiveness of private businesses, big, medium and small; and making education the central strategy for investing in people, reducing poverty and building national competitiveness.” In addition, the new administration is committed to fight corruption. These goals are fully echoed in the strategy and policy actions identified above and elaborated in the accompanying Discussion Notes.
    

1. 
   The global financial and economic crisis that erupted in 2008 paralyzed the world’s financial markets, triggered a dramatic deceleration of international trade and resulted in the greatest contraction in world GDP since the 1930s. Although the crisis had its epicenter in the developed economies, its tremors reverberated deeply across the developing world. The Philippines was not spared. Its exports dropped by almost 20 percent in 2009 and real GDP growth fell from 7 percent in 2007 to an estimated 1.0 percent in 2009; that is, growth became negative once again in per capita terms.
   

2. 
   The world economy has begun to recover and Asia appears poised to emerge from the recession both faster and stronger than other regions. Reestablishing the status quo ante, however, would provide little consolation for the Philippines. Even before the onset of the crisis, its per capita GDP had only been growing at a modest pace compared to the rapid expansion observed in neighboring countries, indicating the existence of important barriers to growth.
   

3. 
   There is also a risk that the post-crisis external environment facing the developing countries may be less hospitable than before. One major difference is that the general revaluation of financial risks triggered by the crisis will result in a reduction in the total amount of cross-border lending and costlier terms, even after financial markets have fully stabilized. The crisis also laid bare important imbalances in the world economy – epitomized by the huge trade deficits incurred by the United States, financed by equally huge trade surpluses in China and Germany – that no longer appear sustainable. Eliminating these imbalances will slow down the growth of world trade, as consumers in the United States begin to save more and governments everywhere phase out their countercyclical stimulus packages to prevent inflationary pressures from building.¹ Although the shape of the recovery from the global crisis (be it U, V, W or L) is still being debated, a consensus is emerging that the post-crisis world GDP will evolve along a more moderate trend line than before.
   

4. 
   The new post-crisis external environment poses a particular challenge for the Philippines, where the low economic growth has been a long-standing problem. The rate at which economies grow largely depends on their capacity to structurally transform themselves away from engaging in traditional, less productive activities toward modern, more productive activities, which largely involve tradable products. As discussed below, the Philippines already had been having difficulties in achieving this transformation long before the onset of the global crisis. The challenge facing Philippine policymakers now is to accelerate this transformation at a time when the world economy may be less capable or willing to absorb the increase in tradable products that would result from this transformation. The outward-oriented development model that has characterized the fastest-growing developing economies since the 1960s still offers the best prospects for faster development in the Philippines, even though the rewards from applying that approach may not be as high as before.
   

5. 
   In 1960, the Philippines was one of the most developed economies in Asia, with a per capita GDP that was roughly twice the per capita GDP of Thailand at the time.² Today this relation is reversed, with Philippine per capita GDP only one-half that of Thailand’s. Similar reversals also emerge in comparisons with other middle-income economies in East Asia, such as Indonesia, Malaysia and most notably, China. This pattern is explained, of course, by the differences in the speed of economic growth, which permitted per-capita GDP to increase since 1960 by a factor of 19 times in China, 8 times in Thailand, and 6 times in Malaysia and Indonesia, but only by 2 times in the Philippines. While the other East Asian economies were growing at annual rates between 3.6 and 6 percent in per capita terms over 1960-2008, the Philippines only managed to grow at an average rate of 1.4 percent over this period. This meant that living standards in the other large East Asian economies have been rapidly catching up with the living standards in the industrialized OECD economies (whose per capita GDP growth averaged 2 percent), while the Philippines was progressively falling further behind.
   

6. 
   This is also the main reason why the progress made in poverty reduction has been so slow in the Philippines. Using the $1.25-a-day income threshold measure of poverty, the Philippines succeeded in reducing poverty from around 30 percent in the early 1980s to just over 22 percent at the end of the 1990s. Though not negligible, this is modest compared to achievements elsewhere, with the result that the poverty rate for the East Asia and Pacific region as a whole is now below the Philippine rate, even though it was nearly twice as high just two decades ago.³
   

7. 
   Per capita growth had picked up in the Philippines in the decade leading up to the global crisis, averaging 2.8 percent per annum during 1999-2008. While this offers the prospect of eventually catching up with the developed economies, the pace of convergence would be excruciatingly slow: at this rate, it would take the Philippines over 200 years (or about 10 generations) to reach the average per capita GDP of the OECD countries. China and India, which have been growing at rates of 8 and 5 percent per capita during the last 10 years, have a chance to catch up within only 25 years to 50 years if they can keep this up.
   

8. 
   From a sector development perspective, there are basically two ways to increase per capita GDP: one is by raising the productivity of workers within sectors and the other is by reallocating workers (and other factors of production) across sectors, away from those exhibiting low productivity and toward those with higher productivity.⁴ In the post-World War II period, the sectors with high productivity worldwide have tended to be those that produce tradables, and within this category, it is generally the industrial goods – though tradable services are becoming increasingly more important. The least productive sectors, in turn, have tended to be associated with traditional agriculture and the informal services sectors. This sector ranking by labor productivity is also observed in the Philippines, where the Industry sector is the most productive, followed by Services and Agriculture as the least productive; Figure 1. Historically, the most rapidly growing developing economies have been those that were able to shift their labor force from the agriculture sector to the industry sector without sacrificing the latter’s labor productivity levels.⁵
   

9. 
   The Philippines has had difficulties achieving this structural transformation compared to the other East Asian countries. Although its share of total employment devoted to Agriculture has continued to decline over the last 20 years (Figure 2), the share of labor released from that sector has not been absorbed by industry. Rather, this labor was entirely absorbed by the Services sector, which displays significantly lower labor productivity levels than Industry. Had the labor that was released from Agriculture been absorbed by Industry, annual economic growth in the Philippines would have been around 0.7 percentage points faster; see Technical Annex (Scenario B). At the same time, the levels of labor productivity growth within each sector have remained largely unchanged (Figure 1), except for a surge after 2002, which largely reflects temporary increases in capacity utilization during the economic expansion of 2003-2007.⁶
   

10. 
    One manifestation of this uneven structural transformation is the slow growth of industry sector employment. The other East Asian economies were able to absorb the workers released from their primary sectors at a much faster pace than the Philippines; Figure 3. Between 1980 and 2005, the Philippines managed to double the size of its industrial labor force, but the other middle-income economies in the region almost tripled theirs. At the same time, the other economies were also able to increase labor productivity within manufacturing at a much faster pace than the Philippines; Figure 4. That is, they succeeded, both, in transferring more workers into the industry sector and in continually raising the level of productivity within the sector. In doing so, they have been able to achieve significantly higher rates of economic growth.
    

11. 
    What makes tradables or industrial production, in particular, so special for growth? Empirically, the expansion of such activities is closely associated with faster economic growth; see, e.g., Rodrik (2009). There are at least two schools of thought on why tradables are important for growth: one focuses on the act of trading and the other focuses on the act of producing tradable goods and services. The first viewpoint holds that there are learning or other spill-over effects from exporting because of technological or marketing externalities that are created when exporters have to compete abroad. This makes tradables special, of course, since non-tradables cannot be exported. The second viewpoint holds that the production of tradables is special, independent of whether the products are exported or displace imports. The starting premise here is that a number of different activities with different marginal productivities coexist within developing economies at any given time. In this context, as more workers shift from low-productivity to high-productivity activities, GDP increases independent of whether the goods produced are sold domestically or abroad.⁷ Even in the absence of technological externalities from export activities, however, it is difficult to envisage a significant expansion of tradables production in the absence of export markets, given the limited size of the Philippine domestic market for achieving economies of scale.
    

12. 
    From a factor accumulation perspective, the slow growth exhibited by the Philippines relative to other economies in the region is explained both by a low rate of physical capital accumulation and a low rate of total factor productivity growth. As shown in the last row of Table 1, the average annual growth of output per worker in Indonesia, Malaysia and Thailand over the period 1990-2003 was 2.3 percent higher than in the Philippines. About two-thirds of that difference (1.6 percent) was due to faster physical capital accumulation and the remainder (0.7 percent) was to due higher total factor productivity growth.⁸ Differences in human capital accumulation, on the other hand, do not appear to have played a significant role.
    

13. 
    The factor accumulation approach draws attention to the low level of investment in physical capital as a key difference in the rapid growth observed in other countries in East Asia compared to the Philippines. This suggests that the problem of slow growth may be due to inadequate public investment and a poor investment climate for the private sector. The sector development approach, in turn, draws attention to the slow pace of structural transformation in the economy. This suggests that there may be barriers to factor mobility across sectors, either in the form of labor market rigidities, capital market distortions or anti-competitive practices that are preventing a more fluid market entry and exit of firms.
    

14. 
    To help identify the most binding constraints on growth, consider the assessment of the Philippine economy prepared by a team of economists led by Paul Krugman in the early 1990s; Krugman et al (1992). It noted significant problems in several areas, especially the presence of high protectionist barriers in manufacturing, a low public revenue base and inadequate investment in public infrastructure.⁹ Such an economy, the Krugman team concluded, could only count on a very low growth rate – perhaps as low as three percent – barely keeping up with population growth. This turned out to be a prescient observation, as annual GDP growth averaged 3.3 percent over the decade that followed; Table 1.
    

15. 
    A review of economic developments in the Philippines since the early 1990s reveals that some progress has been made in a few problem areas identified by the Krugman et al (1992) report, but many others remain as relevant today as they were two decades ago. A number of recent diagnostic studies¹⁰ have identified the following key constraints on growth in the Philippines: (i) a very vulnerable fiscal situation due largely to a very low public revenue base, (ii) inadequate infrastructure, particularly in transport and electricity, and (iii) a weak investment climate due largely to governance concerns. A number of other constraints also have been variously mentioned as potentially serious obstacles, including shortcomings in the financial sector, labor market rigidities, market failures in certain sectors and an inadequate composition of skills. But there appears to be a broad consensus that the first three constraints mentioned above are the most critical.
    

16. 
    
    Directory: curated
    curated -> Concept stage
    curated -> Concept stage
    curated -> Republic of Côte d'Ivoire Urbanization Review
    curated -> Report No: aus11011 Central America
    curated -> Report No. 94474-pk fiscal Disaster Risk Assessment Options for Consideration
    curated -> Environmental and Social Management Framework for the Costa Rica Telecommunications Sector Modernization Project
    curated -> Environment Impact Assessment For Jiangxi Shangrao Sanqingshan Airport Beijing Guohuantiandi Environmental Technology Development Center. Ltd. Oct. 2012 Content
    curated -> Growth through Innovation An Industrial Strategy for Shanghai By Shahid Yusuf Kaoru Nabeshima April 22nd, 2009
    curated -> Report No: 70178. People's Republic of China
    
    
    
    Download 2.19 Mb.
    
    Share with your friends: