The vulnerable fiscal situation constitutes a threat to macroeconomic stability and undercuts the government’s capacity to intervene in the economy and provide essential public services. The East Asian Crisis triggered a precipitous decline in public revenues, particularly tax revenues, resulting in widening fiscal deficits and a rapidly rising public debt ratio; Figure 5. A series of tax reforms in 2004-05 succeeded in temporarily reversing the decline in tax revenues and halting the rise in the public debt ratio, but these efforts began to weaken again in 2007, putting renewed pressure on the fiscal balances. The government was able to maintain macroeconomic stability in the face of weakening revenues, in part through prudent monetary management, but also in part through a decline in public expenditures on account of falling interest payments on the public debt (Figure 6). The economic slowdown associated with the current global crisis and various tax-eroding legislative responses11 have exacerbated the decline in the taxation ratio and resulted in a renewed build-up of public debt. Restoring the stability and integrity of the tax system in the Philippines is essential for removing the fears of macroeconomic instability that periodically impair the investment climate and for providing a sustainable basis for public services.
Figure 5: Public Revenues (% of GDP)
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Figure 6: Public Expenditures (% of GDP)
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Infrastructure shortcomings in the Philippines are particularly pronounced in the Transport and Power sectors. The Global Competitiveness Report for 2009 ranks the Philippines 98th out of 133 countries in terms of the quality of its overall infrastructure; ahead of only Vietnam among the countries in the region.12 In the Transport sector, it ranks last in the region. As pointed out in the most recent transport sector expenditure review (World Bank, 2009), the Philippines scores lowest on the Logistics Performance Index in the East Asian Region. Even though the quantity of transport infrastructure in network and facility density in the Philippines compares well with other countries in the region, capacity and quality do not. While the Philippines ranks somewhat better in the region in terms of electricity quality, it still falls far below the world average, and is an area highlighted in the 2005 investment climate assessment as a major negative influence on firms’ productivity and investment decisions.
Table 2:
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Ranking the Quality of Infrastructure in Selected East Asian Countries
|
Overall
|
|
Transport
|
|
Electricity
|
|
Rank
|
|
(Roads)
|
Rank
|
|
(Ports)
|
Rank
|
|
|
Rank
|
Malaysia
|
27
|
|
Malaysia
|
24
|
|
Malaysia
|
19
|
|
Malaysia
|
39
|
Thailand
|
41
|
|
Thailand
|
35
|
|
Thailand
|
47
|
|
Thailand
|
41
|
China
|
66
|
|
China
|
50
|
|
China
|
61
|
|
China
|
61
|
Cambodia
|
82
|
|
Cambodia
|
77
|
|
Cambodia
|
89
|
|
Philippines__98'>Philippines__87'>Philippines
|
87
|
Indonesia
|
96
|
|
Indonesia
|
94
|
|
Indonesia
|
95
|
|
Indonesia
|
96
|
Philippines
|
98
|
|
Vietnam
|
102
|
|
Vietnam
|
99
|
|
Vietnam
|
103
|
Vietnam
|
111
|
|
Philippines
|
104
|
|
Philippines
|
112
|
|
Cambodia
|
121
|
Source: World Economic Forum, The Global Competitiveness Report 2009-2010
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Note: The rankings refer to a total of 133 countries.
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The lack of adequate infrastructure in the Philippines is indicative of a poor investment climate that reflects a weak public investment effort and contributes to a poor private investment effort. The Philippines has relied more on the private sector than the other countries in the region for its capital investment needs. Most noteworthy, however, is that the amount of total spending on fixed capital formation is significantly less in the Philippines than in East Asia & Pacific on average. Furthermore, this gap has been increasing since the East Asia financial crisis, raising further questions about the sustainability of economic growth.
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Governance-related factors ranked as the main impediment to firms’ productivity and investment decisions in the 2005 investment climate assessment. Payments of administrative bribes and the threat of civil unrest, crime and disorder were reported among the most important barriers to a good investment climate. As indicated in Figure 8, the Philippines ranks below the world mean in four out of the six categories that make up the World Bank’s governance indicators. Moreover, the Philippines ranks particularly poorly in the categories of political stability and control of corruption, both of which report declining scores between 2000 and 2008.
Figure 8:
The Philippines: Governance Indicators; 2000 vs. 2008
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