Press Release
October 6, 2012

(Keynote speech, Part 2, at the inter-university conference on business economics
at Adamson University Theatre on 6 October 2012.)

Compared to our ASEAN-5 neighboring countries - Indonesia, Malaysia, the Philippines, Thailand and Vietnam - the Philippines is one of the poorest performing country in terms of governance. It is the most politically unstable and second worst in terms of control of corruption, among ASEAN-5 countries.

In terms of changes in perceptions over the past decade regarding corruption, Hong Kong based PERC rated the Philippines the worst in the Asia Pacific region in 2012 - 9.35 (grade range from zero to 10, with zero being the best grade possible and 10 the worst (Source: "The Web of Corruption in Asia," Asian Intelligence, 21 March 2012, page 4).

In brief, the Philippines has a credibility problem. As a result, it received and continues to receive the lowest foreign direct investments (FDIs) into the country. Yet the country needs a lot of foreign direct investment in order to sustain strong, inclusive growth that we can only dream about at the moment. Despite the hype, foreign investors are not coming. They are going elsewhere - to Vietnam, Indonesia, Thailand and other places.

According to some economists, the country can sustain a growth of around 4.5 percent. But that's not good enough. The economy needs to grow on a sustained basis at about 7 percent for a decade to make a difference in the lives of ordinary Filipinos. Why? Because there are simply too many of us. Some two million Filipinos are born every year, a great majority in abject poverty.

Where Do We Go From Here?

First, the government has to invest more in education, health, and social welfare in order to build a more productive and intelligent work force.

It has to invest heavily in public infrastructure. During the last 12 years, the government has invested very little in public infrastructure. Here I mean hard infrastructure such as roads, bridges, airports, seaports, urban transit systems, irrigation systems, power plants, and so forth and so on.

Hard infrastructure will help expand the capacity of the economy to produce. Historically, we have only spent less than two percent of Gross Domestic Product (GDP), the size of the economy. Other countries in dynamic Asia have spent the equivalent of five percent or higher for public infrastructure. If we want to be like our more fast-growing Asian neighbors, we should be spending about P500 billion annually, not P500 billion for the next five years, but P500 billion annually for public infrastructure.

That is why the first major challenge for the government is where to get the money to finance social services and public infrastructure. A recent World Bank Public Expenditure Review recommends increasing public expenditures in priority sectors - meaning education, health, social welfare and public infrastructure - by around five to seven percent of GDP. That is roughly P500 billion to P700 billion annually.

But where are we going to get the money?

Second, the government should adopt measures that would fix and strengthen its shaky fiscal house. The government has to reform the tax system.

Tax effort (defined as taxes as percent of GDP) is around 12.5% to 13.0%. It peaked in 1997 before the Asian financial crisis. Mr. Ramos and Speaker de Venecia messed up our tax system on their way out. As a result, tax effort went into a free fall. The tax-to-GDP ratio was a disappointingly low 12.0% in 2010 and 12.2% in 2011. It should be increased by 5% to bring it back to around 17%.

Third, the government should adopt a multi-year budget. Most of the problems in government - poverty, poor literacy, inadequate health care, crumbling infrastructure, peace and order, unfair justice system and so on - cannot be solved in a year or two.

The government should be looking at a multi-year budget system rather than annual budget process. The Executive and Congress should agree on a common agenda for addressing past neglect in infrastructure, education and health. The Executive should submit a medium term expenditure framework, and Congress should approve it through a joint resolution.

The multi-year budget will force the Executive to reveal what it intends to do during any administration's incumbency.

Fourth, the Philippines should invest heavily in public infrastructure to make up for past neglect and to put the country on a higher growth path. Sadly, the Philippines has not invested enough for long-term growth.

Capital formation has been neglected in the past, averaging around one-fifth of gross national income from 1986 to 1998. This is low by Asian standards. Worse, capital formation has dropped sharply in the last six years.

A country that does not invest enough cannot be expected to grow rapidly in the future. And there are some unmistakable signs of economic decay - the crumbling infrastructure and the thinning and unreliable power supply.

Fifth, the country's political leaders have to fix the dysfunctional political system. What's happening in the economy goes beyond economics. The sad state of the economy now, and what appears to be its future trajectory, is the result of a flawed political system, rampant rent-seeking, and a political and economic elite that has the propensity to resist change.

In short, bad politics and the avaricious political and economic elite have triumphed over good economics.

Much has been written about constraints to growth. But no one is bold enough to write about the elephant in the house - bad politics and the avaricious elite. When bad politicians and their counterpart in the private sector remain satisfied with the status quo, it would be difficult to expect real reform.

This cozy relationship between bad politicians and business interests are reflected in many tax incentives laws, old and new economic zones, awards of government contracts, large and small, and appointments in key public positions.

Some Real Reforms

First, reform the tax system. Introduce fundamental changes in the tax system to include Reform the tax system: introduce fundamental changes in the tax system to increase its efficiency and revenue yield. The reforms should include the following: higher consumption tax accompanied by lower personal income tax; rationalization of fiscal incentives to broaden the tax base and make taxation neutral accompanied by reducing the corporate income tax; higher tax on commodities which impose negative externalities (cigarettes, liquor, petroleum products, soft drinks, and bottled water); higher tax on real property, especially on the second, third and succeeding homes.

Second, invest for the future. There should be higher and sustained government spending for education, health and productivity-enhancing public infrastructure.

Third, embrace meritocracy in government. The government should recruit and keep the best and the brightest in government. Hiring political lackeys rather than experts lead to mediocre performance.

Fourth, transform the political system so that competence, public accountability and good performance are rewarded. Enact reforms to strengthen the party system and to give teeth to the constitutional provisions on political dynasty. As a start, party switching should be seriously discouraged. The "pork barrel" system has to be seriously curtailed. Legislators are expected to pass laws, not build roads, bridges, or school buildings, nor award scholarships and so on.

Fifth, open up the Philippine economy. Allow foreign ownership of land, and foreign ownership of all forms of businesses including the media. But this requires amending the 1987 Cory Constitution. After 25 years, some changes may be justified.

Sixth, the government should stop borrowing from abroad until further notice. As a way of making a positive contribution in efforts to stem the sharp appreciation of the peso, the national government should declare a moratorium on foreign loans. In order to service its foreign debt obligations, the national government should borrow in pesos and then use the pesos to buy foreign currencies from BSP. The BSP has gross international reserves equivalent to one year's imports.

Seventh, manage population growth. Address the rising population problem by giving couples the freedom of choice to manage the size of their family, and for the poor access to modern methods of population control. Pass the RH bill now.

Eight, honor government contracts. The sanctity of contracts entered into by the previous administration based on existing procurement rules and regulations should be respected. This is to ensure policy continuity, consistency and credibility. There is hope but only if our leaders act boldly and decisively now.

I do not want to end this talk on a negative note. There is hope for the Philippines, but only if its leaders do the right things. Economic collapse is not inevitable but possible. But by failing to act boldly and purposively for the general good, the Philippines could fall further behind its fast growing Asian neighbors. Many experts forecast that the world economy might continue to go through a period of high volatility and slow growth in the years ahead. During the long recovery period, we should focus on rebuilding the country's crumbling infrastructure and on strengthening its weak public institutions so that the Philippines will be stronger, nimbler and more competitive when world growth is restored. The present and future Filipino leaders should design and implement a bold economic program, with the clear understanding that such program requires strong leadership, a clear road map, an effective and competent government, leaders who will work for the welfare of the majority of the people rather than their own, and a credible and well-performing legal system and regulatory framework.

The present and future Filipino leaders should design and implement a bold economic program, with the clear understanding that such program requires strong leadership, a clear road map, an effective and competent government, leaders who will work for the welfare of the majority of the people rather than their own, and a credible and well-performing legal system and regulatory framework.

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