Philippines Discussion Notes

i.Report No. 55655 - PH

ii.June 2011

iii.

Philippines Country Team, World Bank

East Asia and Pacific Region
The International Finance Corporation
East Asia and Pacific Department


Document of the World Bank
This document has a restricted distribution and may be used by recipients only in the performance of their official duties.


REPUBLIC OF THE PHILIPPINES

FISCAL YEAR

January 1 – December 31

PhP1.00 = US$0.023

US$1.00 = Error: Reference source not found PhP43.28

1. 
   With the global economy on the way to recovery from the financial crisis, the Asian economies appear poised to bounce back strongly. For most people in the Philippines, however, a return to the status quo ante would offer little consolation. That is because when economic growth accelerated during 2002-08, poverty did not decline as hoped. With a third of the population currently below the poverty line, and high and rising inequality in incomes, the country’s main development challenge is to achieve growth that is much more widely shared—to make growth work for the poor.
   

2. 
   The new administration that assumed office on June 30, 2010 faces significant opportunities as well as considerable challenges: an opportunity for new policy directions and new coalitions to push the development agenda forward with renewed vigor, but a need to overcome the inertial forces that slow down decision making and program implementation during a transition. These Discussion Notes have been prepared to help inform policy discussions in the period leading up to and following the 2010 elections. Their aim is to support the creating of a shared focus among government, civil society, business groups, and development partners on the key elements of a long-term development strategy focused on inclusive growth. Deliberately selective in their coverage, the Notes offer sectoral and thematic analyses to identify key challenges, and recommend a prioritized set of actions for consideration by the new government. The actions are consistent with the long-term strategy envisaged in the Notes and can in most cases be implemented immediately, building on successes. The analysis draws on extensive international experience and worldwide best practices, as well as past experience with what works well in the Philippines and what does not.
   

3. 
   The vision underlying the Notes is one of inclusive growth, characterized by improved income opportunities and enhanced abilities of households and communities, especially the poor, to participate in markets through strengthened human capital, reduced vulnerability to shocks, and increased economic empowerment. While there are difficult choices to be made, the proposed actions could evoke strong support from key stakeholders, particularly from beneficiaries and front-line implementing agencies, as well as from development partners.
   

4. 
   For the Philippines, the main building blocks for achieving more inclusive growth are continued macroeconomic stability, an improved investment climate, better public services for the poor, and stronger protection against income shocks. An overarching challenge in the pursuit of development in the Philippines is to achieve better governance. The quality of governance is a recognized constraint on sustained growth and poverty reduction, and its improvement is a development goal aspired to by Filipinos in its own right.
   

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  To maintain macroeconomic stability and cope with increased macroeconomic uncertainty, special attention is needed to:
  

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  Strengthen the fiscal revenue base,
  
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  Improve public expenditure efficiency and targeting, and
  
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  Develop institutions for better fiscal risk management.
  

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  To improve the investment climate it will be important to create an enabling business environment by:
  

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  Promoting competitiveness,
  
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  Developing better models of infrastructure finance and management, particularly in energy, transport, and information and communications technology (ICT) in unserved and under-served areas of the country, and
  
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  Enhancing productivity and employment, especially in sectors of particular importance to the poor, such as agriculture.
  

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  To increase the poor’s access to better public services it is important to:
  

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  Deepen the reform agendas in key public services sectors such as basic education, health, and early childhood development, and
  
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  Expand delivery of basic services such as water and sanitation, and urban services.
  

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  To reduce vulnerabilities, actions are needed to:
  

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  Expand and rationalize the country’s social safety net,
  
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  Engage in pro-active disaster risk reduction and management actions, and
  
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  Mainstream climate-change adaptation measures in policies, plans and programs and expand climate-change mitigation programs in key sectors where emissions are on the rise.
  

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  Good governance requires more capable and accountable government institutions at the national, local, and agency levels. To develop such institutions requires actions to:
  

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  Strengthen core governance systems in public financial management,
  
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  Mitigate binding constraints that weaken LGU performance, including addressing weak systems for LGU accountability, addressing hyper-fragmentation among LGUs, and improving LGUs’ resource bases, and
  
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  Improve statistics and strengthen capacity of statistical agencies.
  

5. 
   The 2006 household survey showed that though economic performance had improved since 2000, poverty reduction had not. Various factors explain the persistence of poverty, including slow economic growth and high inequality. Even though per capita GDP has been rising since 2000, real household incomes have been declining and considerable circumstantial evidence shows that income distribution has deteriorated, partly because of an unequal sectoral and regional distribution of growth, and partly because of barriers to factor mobility across sectors and regions.
   

6. 
   To reduce poverty, faster economic growth is essential. Recent diagnostic studies point to three key constraints on growth in the Philippines: (i) a vulnerable fiscal situation, due largely to weaknesses in tax collection, (ii) inadequate infrastructure, particularly in transport and energy, and (iii) a weak investment climate, largely because of governance concerns. Reforms in these areas have been pending for a long time and it is difficult to envisage a sustained resumption of growth without major improvements in all three.
   

7. 
   Eliminating these constraints is essential for restoring growth, but may not be enough for accelerating poverty reduction. Policymakers also need to be concerned about the distributional consequences of growth and ensure that it is sufficiently broad-based. This requires the removal of policy biases against low-skill labor employment and of barriers to factor mobility across regions and sectors. Such actions are needed to encourage the fastest growing sectors in the economy (such as manufacturing) to absorb more low-skilled labor (the poor’s main asset) and to encourage the most labor intensive sectors (such as agriculture) to grow faster and, thereby, generate more employment opportunities. These actions also are needed to allow workers to migrate from the slowest growing regions and sectors to the faster growing ones, thus maximizing their income earning opportunities. At the same time, actions are needed to upgrade workers’ human capital, enabling their participation in more productive activities.