After two years of slow growth — owing primarily to the repercussions of the 2008 global financial and economic crisis — the Philippine economy expanded by 7.5 per cent in the first three quarters of 2010. The growth rate in 2010 is nearly equal to that of 2007 which is not surprising since economic activity in both years was boosted by election spending. The new administration has therefore benefited from favourable economic conditions. The challenge is to sustain the momentum and make economic growth more inclusive and balanced.

In the short-term, the Philippines, like many other emerging market economies, has to deal with the surge in foreign capital inflows. The peso appreciated by 5.6 per cent in the first 11 months of the year. Meanwhile, stock prices surged by 42 per cent in the same period. Prudent management by the Bangko Sentral ng Pilipinas (the Philippine central bank) has helped contain inflation to an average of 3.8 per cent in the first eleven months of 2010 despite the increase in capital inflows and strong economic recovery.

In the medium-term, the Philippine government has to achieve fiscal consolidation. The national government deficit is expected to reach 3.9 percent of GDP in 2010 which is the same as last year. Improved tax administration is the most effective and efficient way to address the deficit. Another channel is streamlining or even abolishing the National Food Authority (NFA) which is the biggest single source of misused funds. Both strategies require a great deal of institutional strengthening and political will. The new President won handily on an election campaign anchored on anti-corruption and he should use the strong mandate to implement tough reform measures.

Greater fiscal space will allow the Government to address structural problems. These deal mainly with a relatively high incidence of poverty and supply-side constraints which affect the competitiveness of domestic firms. The most prominent example of a supply-side constraint is poor infrastructure. This includes not only roads, bridges, ports, and transportation, but also power and electricity. The Philippines has recently overtaken Japan as the economy with the highest cost of electricity in Asia. Supply-side constraints are reflected in the low investment-to-GDP ratio in the Philippines. In turn, lack of investment limits the number of employment opportunities which then leads to the high incidence of poverty.

Recently the Government launched the Public-Private Partnership (PPP) program. Through this contractual arrangement, the private sector can provide financial support and expertise in implementing government projects more efficiently, while the government can focus on its core responsibilities such as project prioritisation. However, supply side constraints cannot fully explain the lethargic investment rate in the Philippines during the past 12 years. There are countries with the same state of infrastructure and similar perceptions of corruption that have much higher investment rates.

An interesting issue would be whether institutional factors can partly explain the low investment rate. A World Bank study cited the dominance of corporate conglomerates in strategic sectors such as agriculture, maritime and air transport, power, cement, and banking. These corporate conglomerates do not have an incentive to invest and expand their operations since their main source of profitability is a captured market. In turn the resulting higher costs in these sectors discourage investment in sectors that have strong backward and forward linkages with them, particularly in manufacturing.

The corporate conglomerates are symptoms of an oligarchy in the Philippines. Weak institutions and an oligarchic private sector are actually two sides of the same coin. A gridlock has evolved wherein stronger institutions are required to loosen the grip of the oligarchs but at the same time the influence of oligarchs has to be reduced in order to strengthen institutions.

Crafting appropriate development policies in the Philippines requires a political economy framework supported by a variant of the new institutional economics. For example, some experts emphasise the need to nurture and reinforce existing groups and constituents that adhere strongly to democratic principles. This will strengthen these groups vis-à-vis the oligarchy.

Meanwhile, the Philippines can take advantage of the trend towards rebalancing economic growth in East Asia. For example, the development of the Western region of China and the likely increase in consumption expenditures in the whole country will provide export opportunities. Rebalancing will also involve reallocation of financial flows. Instead of accumulating foreign exchange reserves and purchasing US treasuries, resources in the region will be used to support infrastructure projects to ensure greater connectivity in Asia. Infrastructure projects in the Philippines can be financed through this mechanism.

Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one of the Philippine’s most prominent economists. Dr. Yap has acted as a member of the Committee on Social and Human Sciences to the UNESCO National Commission of the Philippines. The author gratefully acknowledges the excellent research assistance of Ms. Kris A. Francisco, Research Analysts II at PIDS.

This is part of a special feature: 2010 in review and the year ahead.

1. The Philippines: signs of economic improvement
2. Globalisation with weak institutions: Cambodia
3. The Philippines: resilience from a low base

The enactment in the nineties of the Urban Development and Housing Act (UDHA) of 1992 and the Comprehensive Shelter Finance Act (CISFA) of 1994, two pro-poor housing legislations, greatly changed the Philippines’ policy on housing the poor. From a highly centralised and heavily subsidised policy, the government moved to a market-oriented and participatory approach to housing. Despite these reforms, the problems with UDHA and CISFA have not delivered housing on the scale or of the quality that is required.

The National Shelter Program (NSP), which regulates housing production, regulation and financing, is the Philippines’ banner program for low-income housing provision. The NSP divides housing into ‘socialized’ (valued at less than USD 6,000, targeted at households up to the 30^th income percentile) and ‘economic’ housing units (valued at up to USD 40,000, targeted at households up to the 50^th income percentile).

Current housing efforts remain inadequate, with figures showing an acute housing shortage estimated at over one million units – still probably a gross underestimate. On average, the NSP has only delivered 26 per cent of its target, or less than 10 per cent of total housing need. Moreover, the housing backlog is likely to worsen,, due to worsening poverty and increasing urbanisation.

Several factors have contributed to hindering the outreach and sustainability of the NSP programs.

First, following the Philippines’ general decentralisation trend, the UDHA makes local government units (LGUs) responsible for being the UDHA’s main implementer. But most LGUs lack the capacity and resources for shelter and urban management. Moreover, LGUs are not often keen to accept low-income migrants for relocation, due to limited social services and economic opportunities, and housing maintenance costs.

Second, resettlement costs are increasing, increasing LGUs’ dependence on national subsidies. Lack of coordination between the lead national agency on resettlement – the National Housing Authority (NHA), LGUs and other national agencies further hinders the success of resettlement projects. Another problem is beneficiaries abandoning or transferring the home-lots they are awarded, due to a lack of opportunities and services.

Third, identifying suitable beneficiaries of government housing programs is difficult. LGUs lack incentives to develop databases for beneficiary registration, so the awarding of home-lots is often ad hoc and politically dependent. Tracking down the awardees of housing units has also proven difficult, due to lack of a monitoring system.

Fourth, under the UDHA, both the government and the community must eradicate professional squatters and squatting syndicates. But actual enforcement – arrests and prosecutions, has been sloppy, partly because of weak coordination between authorities and communities.

Fifth, the awarding of home-lots is often delayed by bureaucratic legalism and valuation issues. The establishment of eviction guidelines for urban poor settlements has been one of the highlights of the UDHA, providing informal settlers with some legal rights to the land they occupy. But these rights are sometimes disregarded, specifically in private lands, and monitoring has been weak, because no central agency or quasi-judicial body exists to ensure compliance.

Sixth, housing finance programs have limited outreach. For example, the Social Housing Finance Corporation‘s ‘Community Mortgage Program’ has been helpful, but lacks sufficient funding to expand operations. On the other hand, the Home Development Mutual Fund’s ‘Socialized Loan Program’, geared towards salaried workers, has not greatly benefited the poor

Not only does the Philippines have one of the lowest mortgage penetration ratios, but public expenditure on housing is one of the lowest in Asia, at less than 0.1 per cent of GDP on average,  The aim of CISFA was to strengthen the NSP through regular and higher annual budget appropriations between 1995-2002, but only 52 per cent of this  allotted increase in NSP funding was actually released. The entry of housing microfinance has been limited

Moreover, private sector funds remain considerably untapped. The UDHA intends to entice private investment in socialised housing through tax exemptions and regulation, but the incentives’s benefits are not clear. The UDHA also requires developers without socialised housing projects to set aside 20 per cent for low-income housing programs, but compliance has not been adequately monitored.

For the housing sector to be more responsive to the needs of the poor, several key reforms are required.

First, a reliable and sustainable poverty database system is needed at the local level. with clear and measurable parameters to identify suitable beneficiaries. The Department Of Interior and Local Government is currently working on a monitoring system to generate baseline information on poverty; this system could also be adopted for shelter programs.

Related to this, establishing a national resettlement policy will ensure a common framework for resettlement approaches, housing packages, and entitlement. NHA’s role as lead agency should be strengthened, with funds from the various resettlement agencies integrated into a common fund.

Second, a system of incentives should encourage and capacitate LGUs to perform their roles in shelter as identified in the UDHA. LGUs and the national police should also be empowered to more effectively curtail squatting syndicates.

Third, the Philippine government should develop a public-private partnership as a key strategy to resettlement projects. The tax incentive scheme for shelter needs to rationalised and made more responsive. At the same time, the government must increase public expenditure on housing, ensuring that the subsidy scheme is transparent and well-targeted.

Finally, NSP success requires a favourable environment for housing finance. Thus, the government must ensure the financial health of state-owned housing finance institutions, and encourage the entry of housing microfinance institutions, including foreign-based microfinance. Scale and sustainability will only come through through developed capital markets, not continuously using government funds. On the demand side, government should try to improve the bankability of the poor through community and livelihood development programs.

This article is summarised from a Phillipines Insitute for Development Studies (PIDS) Policy Note published here.

1. Social security and housing the poor in China
2. Australian housing: Baubles, bubbles and busts
3. China’s housing crisis

September 2008 might well be considered the most traumatic period in recent financial history, with shocking unfolding one after the other. The US government-sponsored enterprises, Fannie Mae and Freddie Mac, went into conservatorship. AIG appealed to the US Federal Reserve Bank for a bailout. Wall Street stock prices plummeted. Financial titans like Merrill Lynch and Bear Stearns sought cover from the white knights, Bank of America and JP Morgan Chase, to avoid bankruptcy. Lehman Brothers disappeared from the financial map. And the US government committed approximately $1.4 trillion (so far) to bail out the financial sector. Although there is a greater measure of confidence now, economic conditions remain moribund and uncertain, at least until next year.

What can the Philippines learn from the global financial crisis? How does all this affect the Philippines?

So far, the Philippines has not felt the effect of the financial mayhem in the US in any major way. The Philippine banking system has minimal exposure to structured financial products: news accounts of Philippine banks’ exposure to the Lehman Brothers’ collapse put it at approximately 0.11 percent of total banking assets, or PhP5.5 billion.Individual banks with market losses from the derivatives securities have already allocated increased loss provisions in their capital.

But the United States is a large economy with major effects on the global economy, so the Philippines will eventually also feel the pinch. There are several ways through which this is going to take place.

One is through a potential decrease in investment. The US is the major source of investments in the Philippines. In 2007, it accounted for 33 per cent of new foreign direct investment (FDI). Another channel is through a decrease in remittances. With the US recession bringing down the global economy, the jobs of overseas Filipino workers (OFWs) may also be at risk. A third channel is through a decrease in tourism receipts.Finally, the most predictable channel is a decline in exports as a result of weak demand in the US and other parts of the world.

Crises are opportunities for policy reforms that can be useful in the long term. As intellectual capacities are more and more focused on inancial maelstrom in the US, ideas for the greater stability of securities market are likey to emerge down the track.

Notwithstanding  the potential downward spiral which the US crisis is likely to cause in the Philippine economy, there are lessons to learn from the experience. weak demand in the US and other parts of the world.

For the full PIDS Policy Notes article, see here.

1. Lessons from Japan for the US financial crisis
2. Lessons for Indonesia from Thailand: Strengthen institutions before the crisis
3. The global financial crisis and short-run prospects for India

A growing number of developing countries have implemented conditional cash transfer (CCT) programs, a new intervention funded by donors that seeks to improve the health and education status of mothers and poor children, respectively, and reduce poverty in the long run. The CCT is a targeted transfer program whereby cash is directly transferred to poor household beneficiaries on condition of doing certain activities such as keeping children in school. This intervention rests on the importance given to human capital in stimulating growth and social development.

Recently, the Philippine government has designed its own version called “Pantawid Pamilyang Pilipino Program” (4Ps), allocated a budget and knocked on the doors of donors such as the World Bank for supplemental funding.

The 4Ps will provide cash to targeted poor households on condition of regular school attendance by the households’ children and visits to health centers by family members.

The 4Ps are based on the following rationale:

• Investment in human capital (e.g., basic education, health) leads to long-run poverty alleviation. Early interventions provide much higher returns over the lifecycle, and
• Cash transfers have an immediate impact on the poverty situation.

That poor households—which do not have the means to improve their education and health status—need some form of subsidies is undeniable. That cash transfers provide immediate relief, especially to poor households suffering from hunger and various deprivations, is obvious.

The policy question, however, is whether or not the 4Ps constitutes an efficient and effective instrument for providing subsidies. More importantly, will conditional cash transfers yield the expected outcomes on education, nutrition, and health? Will the expected human capital investment outcomes be realized?

The budgetary implications of this program are staggering and more so if funded by borrowing. In the next five years, the government hopes to transfer cash to 500,000 poor households. It cannot do this, though, without passing the hat to donors since it simply does not have the resources to fund the envisaged massive program of conditional cash transfer.

Conditional cash transfers have an intuitive appeal because poor households are given the choice on the composition of their consumption bundles. They can choose what they think is best, in contrast to price subsidies, and are simpler than vouchers. They are also far more transparent than subsidies, which are often hidden under earmarks or lumpsum items. There is little chance of leakage, provided there is an effective targeting mechanism.

However, even if the government wants a rapid expansion of the 4Ps, infrastructure bottlenecks may stand in the way of a successful implementation. As such, should the national government not lay down the requisite infrastructure first before it distributes cash to hundreds of thousands of poor households?

We recommend to proceed with the program but with due caution. There is no need to rapidly expand coverage when crucial program components have yet to be tested and proven, like an efficient targeting and monitoring system. While the political calculus seems to favor a rapid expansion of coverage, this Notes argues that it is paramount to first establish empirical evidence about the significant role that the 4Ps plays in producing the expected human capital outcomes crucial for growth and poverty reduction before a rapid expansion is even contemplated.

The full version of this article can be found here.

1. Evidence-based policy for basic education in the Philippines
2. A national values education agenda: The key to reform in the Philippines
3. Larry Summers on higher education and development

The Philippine economy slowed down sharply in 2008. GDP growth in the first three quarters of 2008 fell to 4.6 per cent, compared to 7.5 per cent in the same period a year ago. The jump in the inflation rate following a sharp rise in food and fuel prices was the first big setback. Inflation averaged 9.4 per cent in the first 11 months of 2008 after recording only 2.8 per cent in 2007.

Another factor was the sharp deceleration in construction activity following a surge related to the 2007 elections and the initial implementation of President Macapagal-Arroyo’s ambitious infrastructure program. The US recession, which officially began in December 2007, was alsao a likely contributor to the slowdown.

The economy seems continue to slow further following the chaos in the global financial system and the recession in major economies including Germany, Japan, Singapore and Hong Kong that has followed. Key multilateral agencies are unanimous in the view that the Philippines will see lower economic growth in 2009.  The IMF, the World Bank and the ADB all forecast growth around 3 per cent, or at most 3.5 per cent. Growth in 2008 is estimated at 4 per cent or a touch over. In 2007 it was well over 7 per cent.

The major reasons for pessimism are the likely lower growth in personal consumption expenditure largely due to a slowdown in overseas remittances; sluggish investment owing to the uncertain economic environment; and a drop in export growth rate due to a fall in global demand. The economies in East Asia are likely to continue to be affected by the aftershocks of the global financial crisis.  The virtual freeze in liquidity in US and European financial markets has stopped and, in many cases, reversed capital flows to emerging and developing countries.

The immediate impact of the liquidity squeeze in international capital markets was a rise in the price of risk—as measured by bond spreads—a sharp drop in equity prices, and exchange rate volatility. The foreign currency government bond spread for the Philippines jumped from 155 basis points in June 2007 to 549 basis points in November 2008. The main index of the Philippine stock market fell by 45 per cent between December 2007 and November 2008. The exchange rate was also volatile, with the peso depreciating by 16.6 per cent between March 1, 2008 and November 30, 2008 after appreciating by 39 per cent against the US dollar between September 20, 2005 and February 29, 2008.

These developments are unlikely to have a lasting impact on the real sector. Rather, the Philippine economy may actually be spared the brunt of the fallout from the global financial crisis. Like many economies in East Asia, the Philippine financial sector has avoided serious damage. The relative resilience of regional banking and financial systems in East Asia reflects a number of factors, including: 1) the very limited direct exposure of the region to subprime and other related securitized products; 2) relatively strong bank balance sheets with a return to profitability—as impaired loans from the 1997/98 Asian financial crisis have been worked off; 3) improvements in risk and liquidity management; 4) strengthening of supervisory and regulatory systems; and 5) moves by banks into new and profitable domestic business lines such as consumer lending. The move into consumer lending implies an absence of the strong search for yield that led many banks and other financial institutions in industrialized countries to take on too much leverage and risk.

Ironically, the resilience of the Philippine economy is due to factors that limited its growth during the past 3-4 decades. The synchronized economic recession among major global economies will clearly lead to lower exports and foreign direct investment. Philippine exports, however, have relatively low value added in terms of contribution to GDP. FDI has not played the same critical role as it did in Malaysia, Thailand, Indonesia, China and Vietnam. Meanwhile, domestic private investment has been moribund during the past 10 years and there is little room for further deterioration. Remittances are still expected to grow between 6 to 10 per cent in 2009 and this remains a substantial source of growth since remittances are equivalent to 10 per cent of GDP. The improved inflationary picture should also help cushion the economic slowdown.

Another favorable development is that unemployment rate in 2008 rose only slightly to 6.8 per cent in 2008 from 6.3 per cent in 2007. This is also much lower than the unemployment rate over the past 20 years. The performance in the fourth quarter of 2008 will provide a clue as to the trajectory of the economy in 2009. A fourth quarter GDP growth above 4.5 per cent will augur well for a higher than forecast 2009 GDP growth, closer to 4 than 3 per cent. This outcome should hardly be a cause for satisfaction on the part of policymakers. The Philippines has one of the worst records in terms of poverty alleviation in East Asia, importantly it has not yet broken out of its low-equilibrium growth trap.

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Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one of the Philippine’s most prominant economists. Dr. Yap has acted as a member of the Committee on Social and Human Sciences to the UNESCO National Commission of the Philippines.

This is part of the special feature: Reflections on developments in Asia in 2008 and the year ahead

1. Lessons for the Philippines from the US financial crisis
2. Why has the Philippines lagged?
3. The Philippines: Weak institutions drag on economic performance

Regional financial cooperation in East Asia flourished in the aftermath of the 1997 crisis. Driven by common experiences, objectives, and concerns—particularly the realization that fundamental reform of the international financial architecture (IFA) was not forthcoming—the ASEAN+3 countries laid out a broad framework for financial cooperation and integration. Enthusiasm for regional financial cooperation also reflected frustration among some of the countries about the emphasis on reforms of domestic financial systems. Such emphasis carried the implicit message that the root cause of the 1997 financial crisis was the lack of transparency and poor governance in their financial sectors.

The current global financial turmoil has shifted attention back to the supply side of the problem. The crisis has revived calls for fundamental reform of the IFA, revolving around proposals for new international institutions designed to regulate and stabilize international capital flows. The proposals have ranged from the modest—collective action clauses in loan contracts and greater policy coordination among G7 countries—to the ambitious, e.g. a global currency and an international clearing system using individual country currencies.

Unfortunately, the collective response of the ASEAN+3 to the current crisis has left much to be desired. During the seventh Asia-Europe Meeting in Beijing last October 2008, the main proposal from the ASEAN+3 leaders was to continue with the process of multilateralizing the Chiang-Mai Initiative. This proposal was formalized last May 2007 and was already being discussed both at the Track 2 and Track 1 levels several years before that. Asian members of the G20 did not even attempt to consult with each other prior to the Washington meeting last November 14-15, 2008.

It is quite ironic that the current financial crisis exposed the fundamental weakness of ASEAN+3 financial cooperation: a lack of political will to overcome institutional, legal and political constraints. There is a fair chance that ASEAN+3 financial cooperation will become irrelevant and simply wither in the wake of ongoing global efforts to address the current crisis. However, this outcome must be prevented because East Asian financial cooperation remains to be useful, especially if discussions at the G20 level fall through.

In order to salvage and sustain ASEAN+3 financial cooperation, it is necessary to lower expectations and focus efforts toward reforming the IFA. These recommendations clearly go beyond short-term measures that are required to mitigate the adverse impact of the current global crisis on ASEAN+3 economies. Such measures have been discussed in other forums.

The following are this writer’s proposals:

1. The ASEAN+3 must pay greater attention to a neglected aspect of regional financial cooperation, i.e. the ability to project their common interests more effectively in a global setting. What should be highlighted by ASEAN+3 leaders are concrete and practical measures to reform the IFA. A study team can be formed to determine which of the proposals are more useful for the economies of East Asia.

This recommendation has the advantage of keeping ASEAN+3 financial cooperation moving without expending a great deal of political capital. It also addresses the deeper causes of the current financial crisis by relating it to the 1997 and other previous crises. Following this recommendation also makes it easier for ASEAN+3 financial cooperation to dovetail with the G20 effort.

2. Events over the past decade showed that a more flexible exchange rate did not generate the benefits predicted by economic theory. Many East Asian economies had to resort to accumulating reserves in response to the weakening of the US dollar and a surge in capital inflows. Inadequate policy coordination among the G7 countries has led to frequent gyrations and misalignments of major reserve currencies. The latter has combined with large swings in capital flows to make it difficult for emerging markets to manage their exchange rates.

One area of ASEAN+3 financial cooperation that received a great deal of interest was exchange rate coordination with a single Asian currency as a long-term goal. This was intended to reduce the adverse impact of volatile exchange rates among the major currencies. However, progress has stalled largely due to institutional and political constraints. A less ambitious alternative would be for ASEAN+3 countries to discuss “measures to discourage short-term capital inflows, particularly when markets have become euphoric and inflows are excessive” (see S. Grenville (2007): Globalization and Capital Flows: Unfinished Business in the International Financial Architecture). These types of measures will be more effective if coordinated at the regional level.

3. The multilateralization of the Chiang-Mai Initiative can be put on hold until the prospects of reform of the IFA under the G20 are ascertained. Continuing negotiations will likely magnify political differences among the ASEAN+3 and derail financial cooperation permanently. ASEAN+3 financial cooperation can instead promote further the development of domestic financial markets and regional financial integration in order to facilitate the intermediation of Asian savings within the region, as well as attract foreign investment in instruments denominated in the domestic currency. Such alternative sources of funding would reduce Asia’s reliance on foreign currency borrowing and concomitantly, the risk exposure of the region to maturity and currency mismatches.

This type of regional financial cooperation has already been initiated in the form of the Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund (ABF). However, the ABMI and ABF consider only the financial side of the issue. Regional cooperation can also be useful in identifying infrastructure projects to be funded. Recently, the Network of East Asian Think Tanks proposed the establishment of the Asia Investment Infrastructure Fund (AIIF) which is a mechanism by which infrastructure projects in the region can be prioritized and funded. By considering the “real” side of the issue, more substance and relevance will be given to regional financial cooperation. The AIIF will lead to greater domestic demand and intra-regional trade to offset the decline in exports to industrialized countries. The AIIF will likewise contribute to narrowing the development gap in the region.

President, Philippine Institute for Development Studies (PIDS). Policy brief submitted to the Asian Development Bank Institute (ADBI) as an input to the paper “Asia’s Contributions to Global Financial Stability and Economic Growth: Policy Recommendations to the ASEAN, ASEAN+3, and ASEAN+6”.The usual disclaimer applies.

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Josef Yap is President of the Philippine Institute for Development Studies (PIDS) and is one of the Philippine’s most prominant economists. Dr. Yap has acted as a member of the Committee on Social and Human Sciences to the UNESCO National Commission of the Philippines.

1. The sub-prime crisis and East Asian financial cooperation
2. The East Asia Summit and regional financial cooperation
3. China-Japan-Korea trilateral cooperation and the East Asian Community

Compared with other economies in East Asia, economic growth in the Philippines has been disappointing. The Philippines was, notably, not described as a ‘high-performing economy’ by the World Bank in its 1993 study of the East Asian Miracle, while Thailand, Malaysia and Indonesia were included in this group.

The per capita GDP of the Philippines was almost twice as large as that of Thailand and three times that of Indonesia in 1960. Yet by 2006, Thailand’s per capita GDP was more than double that of the Philippines while Indonesia — which has a population more than twice that of the islands — has nearly caught up.

The Philippines also lags in terms of poverty alleviation. The incidence of absolute poverty — based on the one dollar a day threshold applied to recent data — is 13.2 per cent in the Philippines, higher than Indonesia (7.7 percent) and Vietnam (8.40 percent). In stark contrast, Malaysia and Thailand have virtually eliminated absolute poverty. Inequality, based on the spread of household expenditures, is amongst the highest in developing Asia. This is a serious problem for growth as well as social welfare, as recent studies have argued that an inequitable distribution of wealth constrains economic growth and development.

Among the factors that explain weak Philippine economic performance and the persistence of poverty and inequality in the country are:

1) The low priority of basic social services. Effective delivery of basic social services remains the most cost-effective way of combating poverty and inequity. The ideal way to achieve this is to channel 20 per cent of budgetary expenditure and 20 per cent of aid into social services. However, only 8.6 per cent of the Philippine national budget goes to basic social services, whereas a combined 40.6 per cent goes to debt service and defence expenditure.

2) Low investment in infrastructure. Upgrading the Phillipines’ infrastructure is necessary to improve economic performance of the country, as it would help attract more foreign investment and reduce production costs. The Philippine budgetary allocation of infrastructure at 2.8 percent of GDP (between 2000 and 2006) is far below the 5 per cent of GDP benchmark set by other Asian countries. Moreover, some resources allotted for infrastructure have become vulnerable to corruption and thus have been inefficiently utilised.

3) Lack of political will to implement a sustained and credible fiscal reform programme. Weak fiscal institutions have led to the creation of policies that increase the national debt burden and create a bias towards deficit spending. Fiscal programs have been marred by politicised spending and corruption. (This has also led to low spending on basic social services and physical infrastructure.) There is a need to establish stronger fiscal institutions that adhere to rules and that do not easily give in to populist demands. The fiscal reforms implemented in 2005 and 2006 have alleviated the situation somewhat, though there is still definite room for improvement.

4) High transaction costs on market-related infrastructure, facilities and services needed to conduct business, in acquiring and exchanging information, and in the enforcement of contracts. This has severely affected the manufacturing sector and prevented domestic industries from fully benefiting from trade liberalisation. It’s also affected decisions by foreign investors to consider the Philippines in their production and logistical networks.

5) Lack of a coherent industrial policy. Some analysts argue that the Philippine government has not played an effective strategic role in providing the necessary physical, institutional and social infrastructure for industrialisation. Instead, it has allowed economic managers to follow a program that largely mimicked the Washington consensus. The first attempts to implement a strong and effective industrial policy failed because they did not target high value added exports, instead favouring sectors owned by close political allies of the administration. More recent programs for attracting FDI and setting up industrial and export processing zones achieved some employment generation, but they had weak or absent links to local firms, failing to create technological spillovers to domestic industry. There is a need for the government to reassess industrial policy and create an environment that facilitates a more dynamic interaction between foreign and local firms, and between large and small and medium enterprises.

The government needs to develop a long term strategy to increase productivity by increasing investments in infrastructure, and boosting human and technological capital.

Commitment to regional economic integration might give the impetus for these investments. It might provide the necessary leverage for policymakers to advocate for the reforms that are necessary. Trade agreements—whether sub-regional, regional, or multilateral in scope—can be the rationale for opening up sectors, for example, air transportation, that would lead to greater efficiency and more widespread benefits through activities like tourism and overseas workers.

Regional cooperation, particularly through new age agreements, like the Japan-Philippine Economic Partnership Agreement, will provide opportunities for upgrading the capability of domestic economic agents and enable them to latch on to global and regional production networks.

The constraints on economic development are not purely economic. There are other ‘deep parameters’ that affect economic performance. Lack of social cohesion, spotty entrepreneurship, and the inability to establish a credible and selfless political leadership are among the challenges that the Philippines faces today. There is a degree of inconsistency between how religion affects society and capitalist development in the Philippines. Meanwhile, long-held social values, such as ningas cogon (an old Filipino expression, which literally means ‘grass flash-fire’, referring to cogon dry grass which blazes furiously when set alight, but only for a few minutes before turning to cold ashes), have adversely affected economic growth in less tangible ways.

In the Philippines, as in other countries, policymakers have to be aware of the limitations of economic reforms and contextualise reforms in local society.

1. The Philippines: resilience from a low base
2. The Philippines: signs of economic improvement
3. Evidence-based policy for basic education in the Philippines

The destabilising effect of the US subprime mortgage crisis and global economic turmoil has affected East Asia, with mounting inflation and escalating food and fuel prices around the region. There is serious imbalance in the world economy. This is in part due to worldwide overreliance on the US dollar – a currency that is weakening, and one in which confidence has been eroded by persistent US current account deficits – and a lack of any sort of reform in the international monetary system. In the latest PIDS Policy Note I ask: what might East Asia do?

Stronger regional cooperation would be an excellent start, starting with the closer integration of the Pan Beibu Gulf Economic Cooperation and ASEAN + 3, with a focus on developing infrastructure.

The region needs to shift focus from financial initiatives like the Asian Bond Markets Initiative and the Asian Bond Fund towards investment in regional capital for sustained and integrated development. This would encourage Asian investors, presently intermediating their savings outside the region, to invest them within the region. Integration based on investment in regional infrastructure will also lead outside investors moving into instruments denominated in regional currencies and decreased reliance on foreign currency borrowing.

East Asian think tanks have called for an Asian Investment Infrastructure Fund. The details have to be worked out but this is worth exploring in detail.

This is a practical step towards a Comprehensive Economic Partnership for East Asia.

1. W(h)ither East Asian financial cooperation?
2. China as a ‘Great Power’ and East Asian integration
3. A regional solution to global imbalances: We need a Beijing Accord

Can the Philippines achieve its goal on two key international commitments–the Millennium Development Goals (MDGs) on Education and the Education for All (EFA) Initiative–for the achievement of education for everyone? A close look at the figures shows that the country may be at risk of not achieving its goal of attaining universal primary education by 2015. Given this scenario, the government should intensify its efforts in improving basic education by developing evidence-based policies and actions. In particular, the Department of Education (DepEd) should be required to have a sound monitoring and evaluation system to assess the conditions of basic education regularly.

For more, see the full Policy Note [pdf].

1. Universal access to primary education and basic healthcare in the Pacific
2. Philippines rolls out cash in return for health and education
3. A national values education agenda: The key to reform in the Philippines

Overseas Filipino worker (OFW) remittances are huge. The economy has relied on the them as they accounted for around 11 percent of GDP in 2006 . Fourth in the world in fact, behind India, Mexico and China.

But how is the money spent by households? Do they invest it? Apparently it has mainly gone into consumer spending fuelling years of consumption-led growth. This article by Philip Bowring points to the dangers as remittances are cyclical and as the global economy slows, the remittances fall. Sure, there are a lot of Filipino workers in all over East Asia and the demand for Filipino labour remains high, but the largest source of OFW remittances is from the US and the stronger Peso (vis a vis the US dollar) means trouble.

The stronger Peso and expected falling remittances this year could spell trouble on many fronts, including politically as Bowring notes:

Most of the success as the Arroyo government has achieved in terms of economic growth can be attributed to the remarkable rise in overseas remittances over the past five years.

In the not so obvious department, it seems entrepreneurial activity in the Philippines is linked to remittances, as families that receive remittances from relatives working overseas start more of their own businesses, on average. That finding and further analysis was found in a recent study by Aubrey D. Tabuga at the Philippine Institute for Development Studies (PIDS). PIDS produces short, crisp and to-the-point Policy Notes regularly and Tabuga’s is called How do Filipino families use the OFW remittances? The Tabuga piece concludes:

Remittance income, temporary as it is, is not the solution to the chronic problems of the society but is a potential tool. If the country grabs the opportunities presented by the large inflow of remittances and if more attention is focused on pursuing effective reforms to improve the country’s economic condition, then the Filipino labor force will not have to seek greener pastures abroad.

Perhaps external factors this year which could cause the remittances (income from external sources themselves) to decrease, could spur some much needed domestic reforms. Let’s hope the adjustment costs won’t be high.

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