Phase I 2008-2011

The peso appreciation is ravaging the prospects of our dollar-earning sectors. Jobs are being lost and investment and expansion plans are being shelved. Some firms are considering relocating to other countries. Our OFW heroes are being treated as doormats.

Historically, rapid appreciations have also seeded economic bubbles that eventually morphed into banking and financial crises: the Mexican tequila in 1994, the Asian Crisis in 1997-8, the Argentine Crisis in 2002 and the Japanese Bubble in the late 80’s and eventual banking crisis in the 90’s. It is more ominous if it flows from the Latin American Syndrome which is anchored on a romance with the strong peso. We look at what may be doable to stem future appreciation and its offspring of sustainable penury in a remittance driven economy.

The Philippine national government experienced large and unsustainable budget deficits in the 1980s. After a brief period of near balanced budget in the mid-1990s, large budget deficits have reemerged in recent years. But unlike the heavy fiscal imbalances in the early 1980s which were caused by large investment in public infrastructure and low tax effort, the return of large fiscal deficits in recent years was accompanied by falling tax effort and underspending for education, health and public infrastructure. With deficits rising and investment in human capital and public infrastructure deteriorating, an appropriate question is: what has caused the poor fiscal performance of the Philippines in recent years? Is it the result of unfortunate events, macroeconomic shocks or misdirected fiscal policy?

Labor migration began to be promoted in the late 60s or early 70s by a number of Asian countries burdened by problems of unemployment, poverty, and scant foreign exchange. However, labor export was generally intended to be a stop-gap measure while governments were trying to implement policy reform to whip their economies into shape. Indeed, labor migration as policy has largely faded in many of our Asian neighbors but remains a major development policy plank in our country. What has made the Philippines specially cut out to be a labor exporter? What are the benefits and costs of migration? Is the export of labor sustainable? Are we content with being a labor exporter?

The purpose of giving this lecture is to start a paper on how on how taxation and government expenditures in the Philippines could be reformed. This short paper is the bare bones of a longer paper that would hopefully be finished in a month or two. With regard to sustainability of the national debt, our view is that a 150 billion peso deficit (or even 200 billion) would not be a threat to the sustainability of the public debt if:
(a) Macroeconomic stability and fiscal credibility can be maintained.
(b) Government expenditures and programs give taxpayers good value for money.
1. Off‐budget deficits (e.g., arising from contingent liabilities) can be eliminated or significantly
reduced, and
(c) The tax system is buoyant (i.e., tax‐GNP ratio is not falling).

By almost all accounts this is the worst financial crisis since the Great Depression and it may end up being the worst economic crisis since that time as well. As of March 2009, the United Kingdom, Japan, and the United States have suffered absolute declines of -1.9%, -4.3%, and -6.2%, respectively, in their gross domestic product. Other countries, such as Iceland and Spain have suffered similar if not worse fortunes. There are indications that things will get worse before they get better.
How did it all start? How seriously is the Philippines affected? How will we get out of it? The center of the battle for recovery is the United States. Only time will tell how long it will take for the recovery to finally take root. But it is useful to explore the conditions—international and national— required for this to happen.

Agrarian reform programs, particularly land redistribution, land tenure, and restrictions on land transactions, have been a popular response to persistent poverty in rural areas. This response draws in part from a flawed understanding of income dynamics and poverty reduction in rural areas. CARP has blunted incentives, stifling productivity and rural income growth. Getting the extended CARP to help pave pathways out of rural poverty poses a key implementation challenge.

The global economy goes through systemic crises. Problems of insufficient global aggregate demand arising from the asymmetric adjustment of deficit and surplus countries and constraints on the policy space for such adjustment, as well as inadequate provision of global liquidity, are recurring themes in these crises. The resolution of these problems necessitates reform of the international monetary system. An alternative to the US dollar as the main global reserve currency and a system that is reflective of the distribution of economic power in the world needs to be found.

The record of growth will show that the quality of institutions represents a significant hindrance to growth and development. In particular, political uncertainty and the failure to control corruption can be empirically shown to discourage investment in the recent period. The deeper issue, however, is why Philippine institutions are what they are, and by what means they can be reformed. Theory, history, and comparisons with other countries of the region may provide some answers to these questions.

With the world economy still in the doldrums, where will the impetus for economic recovery and job generation come from? Is there room for growth beyond what OFW remittances can deliver in the foreseeable future? How can investor confidence be restored? Given its poor performance on the revenue front, what can the government realistically do to jumpstart the economy?

In principle, only public expenditures that contribute to economic growth and poverty reduction ought to be chosen. What reforms in which institutions are necessary for achieving such an outcome? How can growth be made inclusive? What are the prospects for reversing the decline in basic education enrollment rates? Is there scope for further expanding public spending for health and other social services without having to reform tax rates?

These are just some of the issues to be discussed by a panel of economists, most of whom have grappled with questions such as these not only as academics, but as senior economic managers in four administrations, dealing in real time with difficult policy trade-offs, often against strong vested interests and working through weak, sometimes even compromised institutions.

Unemployment in the Philippines remains high by Southeast Asian standards notwithstanding the change in definition of unemployment in 2005. Firm level data also support the survey finding of a heightened sense of employment insecurity among workers in recent years. The sluggish growth of employment is often cited as an argument for reducing labor regulations which, it is claimed, increase the cost of doing business and thereby only exacerbate unemployment. However, the empirical evidence to support this policy prescription is scanty for the Philippines and at best mixed for other countries. The key to stable and productive employment is rapid and sustained economic growth supported by investments in physical and human capital.

Informal housing arrangements, substandard structures, congestion, and land use conflicts characterize the housing problem in the Philippines. Evidence suggests that rather than help, however, the response of the State, especially its reliance on below-market priced mortgage loans, has aggravated the situation. If the housing problem is to be solved, government needs to rethink its role in housing finance, delink housing social assistance from financial markets, and turn its attention to fundamental supply side and urban governance issues. The recent Ondoy, North Triangle, and Xevera debacles illustrate why.

The lecture suggests policy reforms designed to raise the quality of instruction, encourage and strengthen academic institutions that undertake research and provide advanced instruction in the sciences, engineering and mathematics, as well as to broaden the access to tertiary education in the Philippines. Only a handful of its 1,741 colleges and universities are of high quality and provide advanced instruction in science and technology. The dismal state of its tertiary education has helped hamper economic growth of the Philippines and explains its poor stranding in global competitiveness. The lecturer recommends drastic changes of the subsidy program to higher education. She proposes to replace the current system that is politically driven and not linked to quality, program offering and student ability with one directed at promoting innovation through research and advanced instruction, and offering scholarship to all bright and deserving students, with living allowance for the relatively poor among them.  She recommends the replacement of the nominal fee system in state universities and colleges with socialized tuition at full cost in the intermediate run, and with full-cost tuition in the long run.