Course Name: Finance and Development Course Code: F- 402

Submitted To
Dr. M. Masud Rahman SubmittedChairman To, Department of Finance Faculty of Business Studies University of Dhaka

Submitted By
Farhana Rahman Farha Farzana Md. Rasel Miah Sadia Kamal 16- 004 16-006 16-068

16-070 Submitted By, Marufa Akter 16-132 Rajon Saha 16- 158

16th Batch, Section: B

Date of Submission: June O5, 2013

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LETTER OF TRANSMITTAL

June 05, 2013 Dr. M. Masud Rahman Chairman Department of Finance Faculty of Business Studies University of Dhaka

Dear Sir, It is an immense pleasure for us to submit the term report on, Development Experience of Philippine which is prepared as a partial fulfillment of the requirement of course - Finance & Development of BBA program under Department of Finance of the Faculty of Business Studies, University of Dhaka. This study has given us the opportunity to learn the development policy & its practices in the practical field, indeed. We would like to convey our special thanks and gratitude to you for patronizing our effort & giving us proper guidance. We have tried our best to cover all the relevant fields. We earnestly request you to call us if you think any further work should be done on the topic of the report. Sincerely yours,

Name FARHANA RAHMAN FARHA FARZANA MD. RASEL MIAH SADIA KAMAL SANCHITA MARUFA AKTER RAJON SAHA

ID 16-04 16-06 16-68 16-70 16-132 16-158

16th Batch, Sec: B

Department of Finance, Faculty of Business Studies, University of Dhaka

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Table of Contents
Chapter Number 1 Chapter Name Executive Summary 1.1 Highlights of the Philippines Performance 1.2 Overview of the Economy & Responsible Policies for Situation Evolution of Philippines Development Policy 2.1 Policy Before 1986 2.2 Policy After 1986 2.3 The 2008 Global Financial & Economic Crisis Economic Indicator Analysis 3.1 Growth Assessment 3.2 Poverty & Inequality 3.3 Human Development Index 3.4 Infrastructure Financial Indicator Analysis 4.1 Money and Credit 4.2 Financial Sector 4.3 Agriculture and Rural Finance 4.4 Public Finance Policy Implication Appendix A Appendix B Appendix C Page Number 4 7 8 9 9 10 11 13 13 15 19 21 23 23 28 32 34 36 30 42 47

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Executive Summary
The Philippines development performance during the past several decades has been less impressive than that of many of its East and Southeast Asian neighbors. In the 1950s and 1960s, the country had one of the highest per capita gross domestic products (GDPs) in the regionhigher than the Peoples Republic of China, Indonesia, and Thailand. However, the Philippines have now fallen behind. Its growth has not only been slow but also erraticwith frequent booms and busts. A wide spectrum of economic policies has been implemented during the past five decades. Yet the boom-bust cycle has remained a constant feature of the economy along with relatively high poverty incidence.Compared with other economies in East Asia, the Philippines economic growth record has been disappointing. On the other hand, Philippines have also been a laggard in East Asia in terms of poverty alleviation. Economic benefits have not been equitably shared in Philippines and recent studies have argued that an inequitable distribution of wealth is a constraint to economic growth and development.Mainstream economists attributed this situation largely to economic protectionism and the import-substitution policy, a policy taken after World WarII.The Philippines is therefore in a relatively unique position wherein a whole range of policies where implemented without much success. Long term structural and institutional problem can be attributed to this predicament. In 1986, the Philippine economy emerged from the martial law rule with serious imbalances. consolidated public sector deficit-6% ,external debt was close to 100% of GNP, Real GDP recorded 2 consecutive years of negative growth at 7%, unemployment was high and poverty was pervasive, The central bank was saddled with massive liabilities. Key policies of the administrations since 1986 were mostly documented In the Medium-Term Philippine Development Plans. These policies and reforms are embodied in a number of wellpublicized initiatives or programs implemented since 1986, including trade liberalization, tariff reduction and accession to the World Trade Organization (WTO); fiscal consolidation and tax reform; creation of an independent central bank with inflation targeting as a key policy tool; privatization of several government owned and -controlled corporations such as the Philippine National Bank and Petron (a petroleum refining and distribution company); power sector restructuring and reform; comprehensive agrarian reform; banking sector reform and capital market development; devolution of public services delivery to local government units; and declaration of poverty reduction as the overarching development goal and commitment to social programs for poverty alleviation and achieving MDGs. The Philippine economy slowed down considerably in 2008. GDP growth rate fell to 3.8%, compared to 7.1 % in 2007. The slowdown was a result of the surge in inflation triggered by the sharp rise in food and fuel prices and to a lesser extent the US recession. Inflation jumped to 9.3% after averaging only 2.8 percent in 2007. The global crisis left an impact over the asset prices, financial sector, real sector and various other aspects. A fiscal package known as the Economic Resiliency Plan (ERP) was taken up to respond to the global crisis. The ERP was geared towards stimulating the economy through a mix of government spending, tax cuts and public-private partnership projects. The more vulnerable sectors expected to be adversely affected by the crisis were:
OFWs vulnerable to displacement including OFWs who work in the US under temporary working visas;

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Commodity exports jobs related to i) garments ; ii) electronics ; iii)wiring and harness ; and iv) coconut oil

Infrastructure spending in the Philippines was one of the lowest amongst its neighbors, and the trend as a percentage of GDP has been declining since the 1980s. This was certainly one of the key factors why the countrys economic growth had been slow. The Philippine economy was among the slowest-growing in Asia. The slow pace of growth has been attributed to several factors, but if one indicator is to summarize all these, it would be the low level and growth of investment. The investment performance, in turn, was constrained by the low domestic savings rate the lowest in Asia and, worse, it has declined even as it rose in other countries. Rapid population growth had also been a drag on economic progress, and was partly a reason for the low domestic savings rate. Though Philippines lagged behind in terms of growth, it showed and still has been showing some remarkable improvement in terms of Human Development Index (HDI). Philippines 2012 HDI of 0.654 is above the average of 0.64 for countries in the medium human development group. But there exist a crucial problem with HDI- it masks inequality in the
distribution of human development across the population at the country level. For this, the 2010 HDR introduced the Inequality Adjusted HDI (IHDI), which takes into account inequality in all three dimensions of the HDI. In Philippine, the quality of infrastructure has been improving but is still a serious deterrent to

investment. The rating of overall infrastructure quality of Philippine is 2.7 on a scale of 1(for poor) to 7 (for excellent). The main reason is, infrastructure spending in the Philippines was one of the lowest amongst its neighbors. So it is clearly visible that the quality of infrastructure is a serious impediment to investment. Addressing the widespread poverty problem is the single most important policy challenge faced by the Philippines. Not only poverty is high in compare to other country of East Asia but also its reduction is too slow. What is causing poverty in the Philippines and why has it been persistent over the years? Answer to this question may be low to moderate economic growth for the past four decade or unemployment or failure to manage population growth or all of them. The main reason behind the slow poverty reduction is the failure of the economy to grow rapidly and generate quality employment in sectors with large numbers of poor. The Philippines has a relatively high level of inequality compared with most of its regional neighbors. Income inequality has been a long lasting development challenge for the Philippines. . It is noted that the income of the Philippines richest ten percent of the population was in fact twenty times the income of the poorest ten percent Recently government has taken some program to reduce poverty. They are known as: Pantwid Pamilyang Pilipino Programs (4Ps), Community Mortgage Program, Asset Reforms or Agrarian reform.
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We have also analyzed Philippines economic sector covering 4 variables taken from Bangladesh Bank annual report. The variables are Money and credit, Financial markets, Agricultural and rural finance and Public Finance. Through these variables we examined the contribution of Govt. , private and other overseas fund in the economic circle of Philippine and the increase or decline in the growth of various sectors.

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Chapter 1 1.1 Highlights of the Philippines Performance

Economic Growth

Poverty

Economic Structure

Fiscal and Monetary Policy

Business Environment

Financial Sector

External Sector

Economic Infrastructure Health

Education

Employment and Workforce

Real GDP has grown by 6.8 percent and have a positive rate of growth since 2000, despite a low investment rate. Investment productivity, however, has been very good. The incidence of poverty is high compared to those of other lowermiddle income countries, but the most serious problem is severe inequality. The service sector accounts for 53.7 percent of GDP, with industry and agriculture generating 32.1 percent and 14.2 percent, respectively. But more than one-third of the labor force still depends on agricultureat very low levels of productivity. The fiscal reform program shows strong signs of progress, through a combination of expenditure restraint and revenue enhancement. But the revenue yield is still low, which constrains the governments ability to deliver critical services and public investments. On most business environment indicators, the Philippines is about average compared to the benchmarks. By global standards, however, the private sector faces major impediments to doing business. The foremost problem is corruption. Financial sector indicators are mixed. There are notable weaknesses in the banking sector, including very low levels of credit to the private sector. But stock market capitalization is strong, signaling investor confidence. The economy is open; export growth is solid, if unspectacular; and remittances are high. The current account is in surplus, and there is pressure for strengthening of the peso. Infrastructure quality is generally poor, constituting a serious constraint for investors and a drag on competitiveness. Roads and ports, in particular, need attention. Although life expectancy is now more than 70 years, there are serious problems with maternal health care, child nutrition, and child inoculation. These problems reflect low public expenditure on health as well as poverty and income inequality. Enrollment rates and youth literacy are high. But indicators such as the pupilteacher ratio and expenditure per pupil suggest that the quality of education may be inadequate to meet the challenges of doing business in a competitive global economy. Unemployment is high but declining, while underemployment is high, and nearly eight million Filipinos have left the country for better job opportunities. Job creation is therefore a critical need. Yet labor market rigidities appear to hinder investment.

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1.2 Overview of Economy and Responsible Polices for Situation

Sustainable economic development continues to be elusive for the Philippines. A wide spectrum of economic policies has been implemented during the past five decades. Yet the boom-bust cycle has remained a constant feature of the economy along with relatively high poverty incidence. Compared with other economies in East Asia, the Philippines economic growth record has been disappointing. While the regions middle and high income economies experienced at least two per cent average growth of real per capital Gross Domestic Product (GDP) during the past 50 years, the Philippines recorded only a 1.9 per cent average (Table 1). As a result, the Philippines was not even 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 select group. Meanwhile, the Philippines is also a laggard in East Asia in terms of poverty alleviation. Absolute poverty incidencebased 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 Viet Nam (8.40 percent). In stark contrast, Malaysia and Thailand have virtually eliminated absolute poverty (Table 2). At 0.44, the Philippines Gini coefficient per capita income is highest among all middle income countries in Southeast Asia (Table 2). This is evidence that economic benefits have not been equitably shared and recent studies have argued that an inequitable distribution of wealth is a constraint to economic growth and development. Mainstream economists attribute this situation largely to economic protectionism and the import-substitution policy that were followed after World War II up to the 1970s. Protection of selected sectors led to the misallocation of the countrys resources, i.e. sectors in which the Philippines did not have a comparative advantage benefited from this policy stance. Moreover, the lack of competition removed the incentive of protected firms to become innovative and adopt modern technology. This resulted in monopolistic firms producing poor quality goods and services at relatively high cost, the burden of which was passed on to the Filipino consumer. In response to this analysis, the Philippineslike many other developing countries adopted the openness model. This reform package began modestly in the early 1970s and was interrupted by the debt crisis in 1983-85. The reform program, however, was accelerated in the late 1980s and has been the government mantra since. The general thrust of the reforms was closer global economic integration underpinned by liberalization, deregulation and privatization. At the same timesimilar again to other developing countriesthe Philippines adopted measures to strengthen the supply capacity of its economy with a view to building competitive industries which would be the main beneficiaries of increased access to world markets. More attention was given to macroeconomic stability and exchange rate movements; appropriate sequencing of liberalization of the trade, financial and capital account regimes, supported by prudential regulation and financial sector reform; strengthening domestic institutional capacity; and attracting foreign direct investment (UNCTAD, 2004). Unfortunately, these policies did not generate the desired results and the Philippines continued to lag behind its neighbors. As seen from Table 1, per capita GDP growth in
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2001- 06 were still below the peak reached in 1951-60 and were also lower than that of other East-Asian economies. Moreover, the openness model did not generate the structural transformation that it was supposed to. The Philippines is therefore in a relatively unique position wherein a whole range of policies where implemented without much success. Long term structural and institutional problem can be attributed to this predicament.

Chapter 2
Evolution of the Philippines Development Policy
In the last 5.5 decades the Philippines experienced not only dramatic economic ups and downs, but also political upheavals. The country was under martial law rule for 13 years starting in1972. In 1986, a people power revolution restored democracy. Since then, successive democratically elected administrations have initiated various policy and structural reforms aimed at accelerating the pace of economic growth and poverty reduction 2.1 Development Policy before 1986: In the 1950s, the countrys development policy was centered around an industrialization strategy based on import substitution. The strategy allowed GDP to grow by about 6.4% annually during the decade. Import substitution, however, soon lost steam and, during 1960 1970, GDP growth slowed to an annual average of 4.9%. The Philippines adhered to import substitution well into the 1970s and the first half of the 1980s, long after the four Asian NIEs had shifted to export-led industrialization Import substitution rested on protectionist trade barriers, including high tariffs and quantitative restrictions against imports, and on foreign exchange controls. From the elaborate system of trade protection and foreign exchange controls emerged favored domestic industries, mostly heavy and upstream, that absorbed a good deal of official foreign reserves and contributed to persistent balance-of-payments difficulties. In addition, smuggling of imported goods, abetted by corrupt officials, became pervasive. The restrictive foreign trade regime benefited mostly the owners and employees of industries the Government chose to promote based on policies that were later consolidated under the Investment Incentives Act of 1967. The investment and industrial promotion policies, consisting mainly of tax and customs duties exemptions, did little to bring sustainable growth and poverty reduction.

Associated with the import substitution strategy was a fixed or managed exchange rate regime, which periodically collapsed from the weight of countercyclical fiscal and monetary policies. Each of the peso collapses was generally accompanied by a balance-of-payments crisis, forcing the Government to seek liquidity support from the International Monetary Fund (IMF). The countercyclical policies had resulted in large and persistent deficits in the
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current account and in the national Government budget. To finance the twin deficits, the Government borrowed abroad, thereby enlarging its foreign debt. The fiscal deficits were automatically accommodated by the central bank. Because the central bank was not independent from the Government, its monetary management was inconsistent, inflation increased, and official foreign reserves were eroded. In the early 1980s, the Philippines was forced to declare a moratorium on foreign debt servicing, after the oil price shocks brought in high interest rates worldwide. The dismal economic performance could also be traced to poor governance during the 1970s. A good deal of the foreign debt, it turned out later, consisted of loans that financed projects of political cronies of the then president. Most of the projects failed, and because the loans were coursed through Government financial institutions, they were eventually assumed by the Government. 2.2 Development Policy after 1986 In 1986, the Philippine economy emerged from the martial law rule with serious imbalances. The consolidated public sector deficit reached about 6% and external debt was close to 100% of gross national product. Foreign reserves fell to a level equivalent to less than 1 month of imports. Inflation hit 50% in 1984 before falling to 23% in 1985. Real GDP recorded 2 consecutive years of negative growth, at 7% (in 1984 and 1985). The central bank was saddled with massive liabilities, and the finance sector was plagued by huge nonperforming loans of the two Government financial institutionsthe Development Bank of the Philippines and the Philippine National Bank. Social indicators were just as disappointing: unemployment was high and poverty was pervasive. Key policies and reform agendas of the administrations since 1986 were mostly documented in the Medium-Term Philippine Development Plans (MTPDPs)1. A review of the MTPDPs reveals that policies and reforms pursued since the restoration of democracy broadly fall into the following areas: monetary and fiscal reforms for restoring and maintaining macroeconomic stability; trade, industrial, and financial reforms for improving economic efficiency and competitiveness; governance reform and decentralization for improving the effectiveness of the national and local governments; and social policies and programs for fighting poverty, improving income distribution, and achieving the Millennium Development Goals (MDGs). These policies and reforms are embodied in a number of well-publicized initiatives or programs implemented since 1986, including trade liberalization, tariff reduction and accession to the World Trade Organization (WTO); fiscal consolidation and tax reform; creation of an independent central bank with inflation targeting as a key policy tool; privatization of several government owned and -controlled corporations such as the Philippine National Bank and Petron (a petroleum refining and distribution company); power sector restructuring and reform; comprehensive agrarian reform; banking sector reform and capital market development; devolution of public services delivery to local government units; and declaration of poverty reduction as the overarching development goal and commitment to social programs for poverty alleviation and achieving MDGs. Policies and reforms initiated and implemented so far have had some visible impact on the Philippine economy. However, the Philippines policy and structural reform is by no means
1

The Medium-Term Philippine Development Plan (MTPDP) is the most important planning document of the Government of the Philippines. It spells out the strategic framework to guide the Governments policies, normally for the coming 6 years.

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complete. The list of unfinished reform programs remains long and, arguably, more difficult reforms are yet to be implemented. The strongest evidence is the fact that the countrys domestic investment remains sluggish and its share in GDP has continued to decline. Moreover, the reduction in poverty incidence has been slow and the Ginicoefficient of per capita income remains very high, suggesting that the fruits of economic growth have not been widely shared among Filipinos.

2.3 The 2008 Global Financial and Economic Crisis

On September 15, 2008 the global investment bank Lehman Brothers filed for bankruptcy protection, sending shock waves across the international financial system. This was soon followed by other bankruptcies, bailouts and takeovers of financial institutions in the US and Europe. Subsequently many economiesGermany, Japan, Singapore and Hong Kong among otherswere declared to be in recession. The high point came when the National Bureau of Economic Research announced on December 1, 2008 that the US economy was in recession since December 2007. Like many other emerging markets, the Philippine economy slowed down considerably in 2008.Latest data show that GDP growth rate in 2008 fell to 3.8 percent, compared to 7.1 percent in 2007 (Table 3). However, also like many other emerging markets, the slowdown was not primarily a result of the global financial crisis. Rather, the deceleration in the Philippine economy was largely brought about by a surge in inflation triggered by the sharp rise in food and fuel prices and to a lesser extent the US recession 2. Inflation jumped to 9.3 percent in 2008 after averaging only 2.8 percent in 2007. The negative effect of high inflation came through various channels: households postponed consumption expenditures, particularly durable goods; the high cost of fuel scaled back services in the transportation sector; and higher prices caused an increase in the cost of production. The global crisis left an impact over the asset prices, financial sector, real sector and various other aspects. Policy responses: The Philippine Government, through the Department of Finance and National Economic and Development Authority (NEDA), crafted a PhP330-billion fiscal package, formally known as the Economic Resiliency Plan (ERP) to respond to the global crisis. The ERP was geared towards stimulating the economy through a mix of government spending, tax cuts, and public-private partnership projects. The more vulnerable sectors expected to be adversely affected by the crisis were: OFWs vulnerable to displacement including OFWs who work in the US undertemporary working visas;

The subprime mortgage crisis, surge in fuel and food prices, and even the current global financialcrisis have a common root cause: global excess liquidity caused by the unipolar financial system. Meanwhile, primarily because of historical low correlations between US and Philippine GDP growth rates, it has been argued that the US recession will have minimal impact on the Philippine economy

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Commodity exports jobs related to i) garments ; ii) electronics ; iii)wiring and harness ; and iv) coconut oil

The ERP initially involved an increase in the capital outlay in 2009 amounting to PhP275 billion or 3.3 percent of GDP. This is higher than the amount in 2008 which was PhP225 billion. Subsequently, the ERP was announced as a P330 billion package that would prioritize "easy to implement projects" like repair and rehabilitation of roads, hospitals, bridges and irrigation facilities, school and government buildings.The breakdown of funding has been
identified as follows:3

PhP160 billion is the increase in the 2009 budget compared to the 2008 budget. This funds small, community-level infrastructure projects and social protection measures. PhP40 billion is the combined tax cuts for low and middle income earners and the scheduled cut in corporate income taxes as provided in the Revised Value Added Tax Law. PhP100 billion is outside the budget. Part of the fund will be provided by government financial institutions and social security institutions to finance large infrastructure projects. PhP30 billion is the additional benefits to members by social security institutions. This will be taken from the gap between contributions and claims/benefits.

Economic Resiliency Plan Frequently Asked Questions in http://www.neda.gov.ph/erp/downloads_/Q&A%20on%20ERP.pdf

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Chapter 3 Economic Indicator Analysis

3.1 Growth Assessment

Following the Philippines political independence in 1946, in the 1950s the country embarked on an industrialization drive. Between 1950 and 2010, the Philippine gross domestic product (GDP), expressed in 1985 prices, expanded 11.2 timesan average growth of 4.4% each year. But the growth rate was never smooth. The economy, for instance, contracted in 19841985, 1990, and 1998. It is

important to point out that these serious stagflationary periods 1984-5, 1991 and 1998 were all periods when the Philippines was employing monetary targeting.

Why Philippines economy collapsed in 1984-85? In 1983, five commercial banks failed, followed by the closure of the then largest thrift bank in 1984. Those commercial banks failed on account of their fast and loose assessments of the default risks of borrowers. One reason was the projects were associated with the directors, officials and related interests of the failed banks, in violation of existing DOSRI rules. The average share of the non-performing loans of these banks reached more than 20%. The collapse of these banks was hastened by a balance-of-payment crisis in 1983, the year the government declared a moratorium on repayment of its foreign debts. The government had engaged in counter-cyclical fiscal and monetary policies following the oil-price shocks in the 1970s. These moves led to large and persistent deficits in the national government budget, the financing of which led to excess liquidity. At that time, the exchange-rate system in place was to a great extent fixed. The central bank ran out of official foreign reserve assets and had to turn to the International Monetary Fund for standby drawing rights (SDR). To get the needed liquidity, the government submitted to the policy conditionalities imposed by the IMF on client countries with serious balance-of-payments problems. These included a sharp devaluation of the peso against the US dollar. The devaluation made it more difficult for the banks to service their foreign loans. Loaned up to domestic projects that were also bankrupt, the banks became insolvent and had to be taken over by the central bank. Prior to central bank takeover, the deposit bases of these banks had been impaired from massive withdrawals. The 1983 financial crisis was largely the offshoot of inconsistent fiscal, monetary and exchange-rate policies. Inflationary fiscal and monetary policies under a fixed exchange-rate regime created incentives for excessive risk taking. Viewed against a setting where banks were undercapitalized and loans were in nature of request (behest) loans to bank owners and managers, the bank failures and the financial crisis that was generated seemed inevitable.

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What was the reason for 90s recession? The development of Philippines hindered again as the economy entered the 1990s. In 1990 91 the islands suffered the triple blow of earthquake, super-typhoon, and volcanic eruption. The destruction caused by the natural disasters was severe enough to cause a contraction in 90s.

The Asian crisis period 1998 In 1998, Joseph Estrada was elected president. Even with its strong economic team, the Estrada administration failed to capitalize on the gains of the previous administration. His administration was severely criticized for cronyism, incompetence, and corruption, causing it to lose the confidence of foreign investors. Foreign investors' confidence was further damaged when, in his second year, Estrada was accused of exerting influence in an investigation of a friend's involvement in stock market manipulation. Social unrest brought about by numerous bombing threats, actual bombings, kidnappings, and other criminal activities contributed to the economy's troubles. Economic performance was also hurt by climatic disturbance that caused extremes of dry and wet weather. Toward the end of Estrada's administration, the fiscal deficit had doubled to more than P100 billion from a low of P49 billion in 1998. Despite such setbacks, the rate of GNP in 1999 increased to 3.6 percent from 0.1 percent in 1998, and the GDP posted a 3.2 percent growth rate, up from a low of-0.5 percent in 1998. Debt reached P2.1 trillion in 1999. Domestic debt amounted to P986.7 billion while foreign debt stood at US$52.2 billion. In January 2001 Estrada was removed from office by a second peaceful "People Power" revolution engineered primarily by youth, non-governmental organizations, and the business sector. President Estrada was the first Philippine president to be impeached by Congress, and his vice-president, Gloria Macapagal-Arroyo, became the fourteenth President of the Republic.

Accounting for Sources of Growth

The key drivers of and reasons behind the slow and erratic growth of Philippines is highlighted in this segment. On the supply side, the three major sectors (agriculture, industry, and services) grew steadily during the 1950s, 1960s, and 1970s (Table 4). But the economic crises in the mid-1980s, early 1990s, and late 1990s slowed growth considerably. During the recession in the early 1980s, industry was the hardest hit as the growth rate for the period slipped to 0.6% from a high 7.9% in the previous decade. Industry recovered in the 1990s and stabilized in the 2000s, but services proved to be the main contributor to growth starting in the 1980s. In the 1990s, agriculture contributed 12.9% to GDP growth; industry, 35.3%; and services, 51.9%. During 20012010, agricultures average contribution to GDP growth increased to 15.9%; that of industry decreased to about 22.6%, while that of services increased to almost 61.5%.

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Graph 2 depicts the output share of the major sectors. Agriculture, including fishery and forestry, was a major source of income and employment from the 1950s to 1980s. In 1986, agricultures share of real GDP was about 25%. In 2006, this had declined to about 19%. The biggest subsector in agriculture is crops and, during 19862006, its share of real GDP fell from 23.0% to 18.6%. Forestrys share declined from 1.7% in 1986 to 0.1% in 2006, reflecting the rapid rate of deforestation that had taken place. In the course of economic development, the share of agriculture to real GDP is expected to decline. Industry is normally expected to pick up the slack. This did not happen in the Philippines. The share of industry was highest in the 1960s and 1970s as import substitution policies, which were oriented mainly toward the domestic market, extended high rates of effective protection to local industries against imports. In the 1980s, industrys share began to decline. In 1986, industrys share to real GDP was 35%; in 2006, the share had dropped to 32.5%. The biggest subsector in industry is manufacturing. In 1986, manufacturings share of real GDP was 24.7%; this fell to 24% in 2006. Food processing is the most important manufacturing subsector. On the demand side, the share of private consumption in GDP in the Philippines averaged around 75% during the 1950s and 1960s, and declined to just below 70% in 1970s. Since then it has been on a rising trend, and reached 78% during 20012010 (Table 5). Consequently, private consumption has been the most important driver of GDP growth, averaging at 89.0% of GDP growth in the 1990s and slightly declining to 81.9% afterward (Table 6). Meanwhile, the contributions of investment to GDP growth have stayed below one third that of private consumption in most periods, and average contribution has fallen to 7.2% during 2001 2006. As for government spending, its share in GDP has continued to be below that of comparator countriesand has consistently been less than 10% of GDP. The dominant role of private consumption in driving GDP growth in the Philippines is also in sharp contrast with many of its ASEAN neighbors, where the role of private consumption is much less significant and the contributions of investment and net exports are more important.

3.2 Poverty & Inequality

Addressing the widespread poverty problem is the single most important policy challenge faced by the Philippines. Not only poverty is high in compare to other country of East Asia but also its reduction is too slow. Philippines poverty line marks a per capita of 16,841 peso per year. According to the data from the national Statistical Co-ordination Board 27.9% of the population fell below the poverty line in the first semester of 2012. What is causing poverty in the Philippines and why has it been persistent over the years? Poverty in the Philippines has persisted for almost three decades even as Malaysia & Thailand, which had similar economies in the 1960s, have almost eradicated it. There are some well known reasons behind this. Reasons are as follows:
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Low to moderate economic growth for the past four decades The main reason behind the slow poverty reduction is the failure of the economy to grow rapidly and generate quality employment in sectors with large numbers of poor. While the Philippines was on the upturn during 1960s and 1970s with a 5%-6% growth rate, in the 1980s and mid 1990s the average real GDP growth was around 2%. Only recently the Philippines have returned to its moderate expansion trend of around 5%. Which is still lower than other comparable countries. Unemployment: The failure to sustain a high level of economic growth also explains the unavailability of the jobs in Philippines. Without job opportunities people will not be able to earn income and are exposed to poverty. Since last few years, on an average 1 million new people entrants into the labor force. This is not only due to high population growth but also to the steady increase in the participation of women in the workforce. Since access to quality employment is one of the most sustainable paths out of poverty, it is important to point out that quality jobs generally come from the manufacturing sector. In the case of the nearby countries such as Vietnam and India, structural changes saw movement from the agriculture sector to manufacturing and other sectors. Indeed, the labor-intensive nature of the manufacturing sector has high employment potential, including for the lessskilled workers. Yet, a look at the structure of the Philippine economy point to a shrinking agriculture sector (from 25.1% of GDP in 1980, to 13.1% in 2009 to 12.8% in 2011), a declining manufacturing sector (from 25.7% of GDP in 1980, to 21.3% in 2009, and 19.4% in 2011) and a burgeoning services sector (from 36.1% of GDP in 1980 to 55.2% in 2009, and 55.7% in 2011) (See Table 7, Graph 3). This shows that there has been a lack of sustainable income opportunities, especially in the rural areas where most of the poor are found. Service sector is absorbing more and more employee in the last few decades.

Failure to Manage Population Growth Population growth remains rapid by Asian standards and has decreased slowly compared to other countries over the last three decades. Various studies have shown that larger family size is associated with higher poverty incidence, gap, and severity. Larger family size has also been associated with higher vulnerability to poverty. Moreover, the high population growth rates exacerbated the poor performance of the economy because of the rapid expansion of the labor force, which increased more than 2.0% annually in the past 10 years. This resulted in double-digit unemployment and underemployment rates during that period resulting in more poverty.

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Income Inequality The Philippines has a relatively high level of inequality compared with most of its regional neighbors. Income inequality has been a long lasting development challenge for the Philippines. Data spanning across 1980-2010 in the Philippines have shown that income inequality has been prevalent throughout her history, despite signs of economic growth. In a statement released by the National Statistical Coordination Board in 2005, it was recognized that the income gap between the rich and the poor was wider in the Philippines than in Indonesia and Thailand, indicating serious inequality in the distribution of the countrys economic gains. It is noted that the income of the Philippines richest ten percent of the population was in fact twenty times the income of the poorest ten percent (See Table 8, Graph 4).

Recent government taken poverty related program: Pantwid Pamilyang Pilipino Programs (4Ps) The 4ps is a conditional Cash Transfer Program (CCT) aimed at addressing poverty and supporting improved health and education outcomes of poor children and pregnant women. The 4Ps provides cash grant to poor households subject to their meeting certain conditions in health and education. These include parents ensuring that their children attend school at least 85% of the time and receive vaccinations and health care.CCT programs implemented in some Latin American countries have been touted as relatively successful (e.g., in Brazil and in Mexico). The lions share of social protection spending in the national budget is devoted to Pantawid Pamilya, whose allocation has been dramatically increasing every year since the program started in 2007, while the budget for other pro-poor programs has suffered by comparison. Since the implementation of CCT in the Philippines, self-rated poverty and hunger incidence has decreased as recorded by the Social Weather Stations in areas where it was implemented. But a small study conducted among Pantawid Pamilya beneficiaries reveal that while the latter are grateful for the conditional cash grants, they believe that what will generally get them out of poverty is access to jobs. Thats why though Pantawid Pamilya is de-linked from job provision, program planners are currently linking it up with livelihood programs. Program planners of the Pantawid Pamilya admit that they have yet to finalize a clear exit strategy to this five year program. But for as long as access to sustained employment in general is not part of the equation of Pantawid Pamilya, public uncertainty abounds about its effectiveness as a pro-poor program. Community Mortgage Program The Community Mortgage Program (CMP) is a highly innovative program for the urban poor. From 1989 to 2003, the CMP has financed 1,109 projects nationwide, benefiting 138,871 households. The total loan released in mortgage take-out amounted to P4.3 billion and the average loan size per household is about P30,000. The overall collection efficiency
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ratio of the CMP was 80.2% at the end 2002. In 2004, the government created the Social Housing Finance Corporation to be the agency mandated to implement the community mortgage program. CMP marked its 20th year of operation in 2008. With around P7.4 billion worth of loans made available to organized urban poor communities. However, the key issues that continually harass the program are insufficient funding requirements, delays in the processing of CMP projects, the need to establish and strengthen collective action and joint liability in CMP community organizations, and the need to resolve land issues in group lending for housing. Asset Reforms Agrarian reform has proven to be an effective tool for poverty reduction as confirmed by several evaluation studies. These studies found that agrarian reform has some important impacts including significant increase in the number of owner cultivator, agrarian reform beneficiaries (ARBs) invest more in on-farm assets compared with non- ARBs; ARBs have better perceptions Of their economic and social conditionsand are more optimistic about their future. Between 1990 and 2000, poverty incidence among ARBs declined from 47.6% to 45.2%, while it increased among non-ARBs from 55.1% to 56.4%. While the intention was that inequitable land distribution would be corrected through the full implementation of the Comprehensive Agrarian Reform Program (CARP), delays overwhelmed its implementation. In Phase I of land redistribution, about 1 million hectares including rice and corn lands, idle lands, and certain agricultural lands held by the government were transferred to private owners. Phase II implemented only 23% of the targeted 7.66 million hectares including other public agricultural lands and all private agricultural holdings in excess of 50 hectares. The third and final phase of the program (5 to 50 hectares of private lands) is yet to be fully implemented. Governance weaknesses, including weak coordination, overlapping mandates, conflicting laws, lack of clear accountability, and poor interagency communication have been the typical hurdles to implementing the program effectively. Besides, to ensure long term sustainability of poverty reduction government should take necessary steps. At the core of people's participation is building their potentials and capacities whether they are children, youth or adults. Therefore, ensuring the right to education and health are keys in empowering people with knowledge, skills, critical thinking, participation abilities and well-being to enable them in their productive and political life. To address long-standing inequalities in the country, redistribution and affirmation action must take center stage. This includes the long-standing quest for social justice by completing the agrarian reform program. Unfortunately, this quest is beyond reach more than ever as the newly created Save Agrarian Reform Alliance (SARA), charging that it has the worst implementation rate and which is accompanied by uncontrolled land conversion from agricultural to commercial lands. Asset reform, including the need to reform the tax system to make it more progressive, are urgently needed. Financing these reforms must come from revenues generated from more progressive taxation systemmeaning prioritizing direct over indirect taxation.
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Consistent with the demand of poor women and men for sustained access to civilized jobs, there is an urgent need to make job creation central in the development agenda and to regenerate the manufacturing sector. This underscores the need for structural change in favor of the more dynamic sectors and that will help ensure the creation of quality jobs. Furthermore, the majority of poor women and men are in the agricultural sector. As such, considerable investments must be made to increase the incomes and productivity of small producers in this sector through credit facilities, irrigation, farm to market roads.

3.3 Human Development Index (HDI)

The Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used to rank countries into four tiers of human development. It was created by the Pakistani economist Mahbub ul Haq and the Indian economist Amartya Sen in 1990. HDI is a tool to measure and rank countries' levels of social and economic development based on four criteria: I. II. III. IV. Life expectancy at birth, Mean years of schooling, Expected years of schooling and Gross national income per capita.

The HDI makes it possible to track changes in development levels over time and to compare development levels in different countries. Philippines HDI value for 2012 is 0.654in the medium human development category positioning the country at 114 out of 187 countries and territories. The rank is shared with Uzbekistan. Between 1980 and 2012, Philippines HDI value increased from 0. 561 to 0.654, an increase of 17 percent or average annual increase of about 0.5 percent. The rank of Philippines HDI for 2011 based on data available in 2012 and methods used in 2012 was 114 out of 187 countries. In the 2011 HDR, Philippines was ranked 112 out of 187 countries. However, it is misleading to compare values and rankings with those of previously published reports, because the underlying data and methods have changed.

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Assessing progress relative to other countries Long-term progress can be usefully assessed relative to other countriesboth in terms of geographical location and HDI value. For instance, during the period between 1980 and 2012 Philippines, Malaysia and Fiji experienced different degrees of progress toward increasing their HDIs. Assessing progress relative to other countries Long-term progress can be usefully assessed relative to other countries both in terms of geographical location and HDI value. For instance, during the period between 1980 and 2012 Philippines, Malaysia and Fiji experienced different degrees of progress toward increasing their HDIs. 1980-2012 Philippines 2012 HDI of 0.654 is above the average of 0.64 for countries in the medium human development group and below the average of 0.683 for countries in East Asia and the Pacific. From East Asia Figure : Trends in Philippines HDI component indices 1980-2012 and the Pacific,countries which are close to Philippinesin 2012 HDI rank and population size are Thailand and Indonesia, which have HDIs ranked 103 and 121 respectively.

Inequality-adjusted HDI (IHDI)

The HDI is an average measure of basic human development achievements in a country. Like all averages, the HDI masks inequality in the distribution of human development across the population at the country level. The 2010 HDR introduced the Inequality Adjusted HDI (IHDI), which takes into account inequality in all three dimensions of the HDI by discounting each dimensions average value according to its level of inequality. The HDI can be viewed as an index of 'potential' human development and the IHDI as an index of actual human development. The loss in potential human development due to inequality is given by the difference between the HDI and the IHDI, and can be used as a percentage. Philippines HDI for 2012 is 0.654. However, when the value is discounted for inequality, the HDI falls to 0.524, a loss of 19.9 percent due to inequality in the distribution of the dimension indices. Thailand and Indonesia, show losses due to inequality of 21.3 percent and 18.3 percent respectively. The average loss due to inequality for medium HDI countries is 24.2 percent and for East Asia and the Pacific it is 21.3 percent.

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3.4 Economic Infrastructure

Reliable physical infrastructurefor transportation, communications, power, and information technologyis the backbone for improving competitiveness and expanding productive capacity. For the Philippines, the quality of infrastructure has been improving but is still a serious deterrent to investment. The World Economic Forum (WEF) compiles an annual index of overall infrastructure quality based on a survey of executive opinion in each country. In the last two WEF Global CompetitivenessReports, among the ASEAN-6 economies, the
countrys overall infrastructure quality ranked below Singapore, Malaysia, and Thailand and about the same as Indonesia and Vietnam (See figure 2)For 2006, the Philippines received a

rating of 2.7 on a scale of 1(for poor) to 7 (for excellent). This is a low score in absolute terms. The low levels of investment and poor conditions of infrastructure in the Philippines have increased the cost of doing business in the country and had significant adverse impact on the perceived competitiveness and attractiveness of the Philippines as an investment destination. Increased cost of doing business and the inability to attract more foreign investment has constrained growth at both national and sub-national levels. Because of the rapid growth of the mobile phone industry, the Philippines is performing very well in telecommunications infrastructure. Table 10 shows a similar pattern of the Philippines in comparison to the ASEAN-6 countries for measures of power quality, telecommunications, access to water and sanitation, and roads. The Philippines is ranked the lowest for fixed telephone lines per 100 inhabitants and percentage of total road network paved. Infrastructure spending in the Philippines was one of the lowest amongst its neighbors, and the trend as a percentage of GDP has been declining since the 1980s. This was certainly one of the key factors why the countrys economic growth had been slow, as World Bank studies have established a direct correlation between public investment and economic growth each 1%-point share of infrastructure spending to GDP more or less generates a 1%-point growth in real per capita GDP. Recent studies by the Asian Development Bank, the World Bank, and other agencies indicate that expensive and unreliable electricity supply and inefficient transport network are the two most critical constraints in the infrastructure sector to growth in the Philippines. The administration of former President Macapagal-Arroyo in 2003 began a policy initiative to improve inter-island connectivity through the RORO Road Terminal System (RRTS). In her 2006 SONA former President Macapagal-Arroyo highlighted more than 400 projects (mostly related to air, ground, and marine transport) targeted for completion before the end of her term in 2010. Some of the projects were criticized as politically motivated to dissuade congressmen from supporting an impeachment motion against the president. The overall infrastructure record of the outgoing administration is weak, considering it had almost ten years to complete projects. It neglected to start many major projects and to utilize several which were completed. The administration expropriated the privately-owned international passenger terminal at the national gateway airport in December 2004. The PhilippineGerman joint venture that built the terminal has not been compensated after more than five years, despite the assurances of the Philippine government that all issues would be settled expeditiously. There are new ports in Batangas and Subic which are hardly used. The Department of Transportation took seven years to approve a US$1 billion light rail project in Metro Manila. For ten years it was unable to decide how to bid and award another large light rail project. Manila residents paid a terrible price in lives and property when one
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typhoons torrential rains proved the high risk of neglecting flood control infrastructure and unregulated urban sprawl. Maritime safety remains a major issue, highlighted by many small and several large disasters. Power blackouts became frequent in the Visayas and Mindanao in 2010. The Philippines faces urgent infrastructure challenges. The most urgent is assuring an adequate supply of power, eventually reducing its cost through increased competition among generators. The second is improving the efficiency of transportation, by air, land, and sea, which is too crowded for a population growing in size and spending power. A third is the water supply, which is not enough for drinking and farming and too much during typhoon season, as well as poor sanitation and solid waste disposal systems. By contrast, telecommunications services, in the hands of competing private sector providers, are much improved following reforms initiated by President Ramos in the 1990s. The quality of infrastructure in the Philippines is therefore a serious impediment to investment and a drag on competitiveness. The government of the Philippines has rightly identified infrastructure development as a priority in the 20042010 Medium-Term Development Program. There is no doubt that donors should strongly support the government in this endeavor, particularly in roads, ports, and ICT development.

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Chapter 4 Financial Indicators Analysis

4.1 Money and credit

From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25 percent of GNP, about 5 percentage points less than annual gross domestic capital formation. This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving as a proportion of GNP declined on the average by a third, initially because of the impact of the economic crisis on personal savings and later more because of negative government saving. Investment also declined, so that for three of these years, domestic savings actually exceeded gross investment. From the time it began operations until the early 1980s, the Central Bank intervened extensively in the country's financial life. It set interest rates on both bank deposits and loans, often at rates that were, when adjusted for inflation, negative. Central Bank credit was extended to commercial banks through an extensive system of rediscounting. In the 1970s, the banking system resorted, with the Central Bank's assistance, to foreign credit on terms that generally ignored foreign-exchange risk. The combination of these factors mitigated against the development of financial intermediation in the economy, particularly the growth of long-term saving. The dependence of the banking system on funds from the Central Bank at low interest rates, in conjunction with the discretionary authority of the bank, has been cited as a contributing factor to the financial chaos that occurred in the 1980s. For example, the proportion of Central Bank loans and advances to government-owned financial institutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82. Borrowings of the government-owned Development Bank of the Philippines from the Central Bank increased almost 100-fold during this period. Access to resources of this sort, in conjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and the later bailouts that contributed to the financial chaos. .

Money supply
Money supply growth has been highly variable, expanding during economic and political turmoil and then contracting when the Philippines tried to meet IMF requirements .Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economy with money prior to the 1986 elections was one reason why the newly installed Aquino administration chose to scrap the existing standby arrangement with the IMF in early 1986 and negotiate a new agreement. The Central Bank released funds to stabilize the financial situation following a financial scandal in early 1981, after the onset of an economic crisis in late 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and the Central Bank--the so-called Jobo bills, named after then Central Bank Governor Jose Fernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater borrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, the
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growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, and the current account (see Glossary) was in surplus. Success, however, was obtained at the expense of a steep fall in output and high unemployment. Fiscal Policy Historically, the government has taken a rather conservative stance on fiscal activities. Until the 1970s, national government expenditures and taxation generally were each less than 10 percent of GNP. (Total expenditures of provincial, city, and municipal governments were small, between 5 and 10 percent of national government expenditures in the 1980s.) Under the Marcos regime, national government activity increased to between 15 and 17 percent of GNP, largely because of increased capital expenditures and, later, growing debt-service payments. In 1987 and 1988, the ratio of government expenditure to GNP rose above 20 percent. Tax revenue, however, remained relatively stable, seldom rising above 12 percent of GNP. Chronic government budget deficits were covered by international borrowing during the Marcos era and mainly by domestic borrowing during the Aquino administration. Both approaches contributed to the vicious circle of deficits generating the need for borrowing, and the debt service on those loans creating greater deficits and the need to borrow even more. At 5.2 percent of GNP, the 1990 government deficit was a major consideration in the 1991 standby agreement between Manila and the IMF. Over time, the apportionment of government spending has changed considerably. In 1989 the largest portion of the national government budget (43.9 percent) went for debt servicing. Most of the rest covered economic services and social services, including education. Only 9.1 percent of the budget was allocated for defense. The Philippines devoted a smaller proportion of GNP to defense than did any other country in Southeast Asia. The Aquino government formulated a tax reform program in 1986 that contained some thirty new measures. Most export taxes were eliminated; income taxes were simplified and made more progressive; the investment incentives system was revised; luxury taxes were imposed; and, beginning in 1988, a variety of sales taxes were replaced by a 10 percent value-added tax--the central feature of the administration's tax reform effort. Some administrative improvements also were made. The changes, however, did not effect an appreciable rise in the tax revenue as a proportion of GNP. Problems with the Philippine tax system appear to have more to do with collections than with the rates. Estimates of individual income tax compliance in the late 1980s ranged between 13 and 27 percent. Assessments of the magnitude of tax evasion by corporate income tax payers in 1984 and 1985 varied from as low as P1.7 billion to as high as P13 billion. The latter figure was based on the fact that only 38 percent of registered firms in the country actually filed a tax return in 1985. Although collections in 1989 were P10.1 billion, a 70 percent increase over 1988, they remained P1.4 billion below expectations. Tax evasion was compounded by mismanagement and corruption. A 1987 government study determined that 25 percent of the national budget was lost to graft and corruption. Low collection rates also reinforced the regressive structure of the tax system. The World Bank calculated that effective tax rates (taxes paid as a proportion of income) of low-income families were about 50 percent greater than those of high-income families in the mid-1980s. Middle-income families paid the largest percentage. This situation was caused in part by the government's heavy reliance on indirect taxes. Individual income taxes accounted for only 8.9
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percent of tax collections in 1989, and corporate income taxes were only 18.5 percent. Taxes on goods and services and duties on international transactions made up 70 percent of tax revenue in 1989, about the same as in 1960. The consolidated public sector deficit--the combined deficit of national government, local government, and public-sector enterprise budgets--which had been greatly reduced in the first two years of the Aquino administration, rose to 5.2 of GNP by the end of 1990. In June 1990, the government proposed a comprehensive new tax reform package in an attempt to control the public sector deficit. About that time, the IMF, World Bank, and Japanese government froze loan disbursements because the Philippines was not complying with targets in the standby agreement with the IMF. As a result of the 1990-91 Persian Gulf crisis, petroleum prices increased and the Oil Price Stabilization Fund put an additional strain on the budget. The sudden cessation of dollar remittances from contract workers in Kuwait and Iraq and increased interest rates on domestic debt of the government also contributed to the deficit. Negotiations between the Aquino administration and Congress on the administration's tax proposals fell through in October 1990, with the two sides agreeing to focus on improved tax collections, faster privatization of government-owned and government-controlled corporations, and the imposition of a temporary import levy. A new standby agreement between the government and the IMF in early 1991 committed the government to raise taxes and energy prices. Although the provisions of the agreement were necessary in order to secure fresh loans, the action increased the administration's already fractious relations with Congress.

Monetary Policy The Central Bank of the Philippines was established in June 1948 and began operation the following January. It was charged with maintaining monetary stability; preserving the value and covertibility of the peso; and fostering monetary, credit, and exchange conditions conducive to the economic growth of the country. In 1991 the policy-making body of the Central Bank was the Monetary Board, composed of the governor of the Central Bank as chairman, the secretary of finance, the director general of the National Economic and Development Authority, the chairman of the Board of Investment, and three members from the private sector. In carrying out its functions, the Central Bank supervised the commercial banking system and managed the country's foreign currency system. From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25 percent of GNP, about 5 percentage points less than annual gross domestic capital formation. This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving as a proportion of GNP declined on the average by a third, initially because of the impact of the economic crisis on personal savings and later more because of negative government saving. Investment also declined, so that for three of these years, domestic savings actually exceeded gross investment. From the time it began operations until the early 1980s, the Central Bank intervened extensively in the country's financial life. It set interest rates on both bank deposits and loans, often at rates that were, when adjusted for inflation, negative. Central Bank credit was extended to commercial banks through an extensive system of rediscounting. In the 1970s,
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the banking system resorted, with the Central Bank's assistance, to foreign credit on terms that generally ignored foreign-exchange risk. The combination of these factors mitigated against the development of financial intermediation in the economy, particularly the growth of long-term saving. The dependence of the banking system on funds from the Central Bank at low interest rates, in conjunction with the discretionary authority of the bank, has been cited as a contributing factor to the financial chaos that occurred in the 1980s. For example, the proportion of Central Bank loans and advances to government-owned financial institutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82. Borrowings of the government-owned Development Bank of the Philippines from the Central Bank increased almost 100-fold during this period. Access to resources of this sort, in conjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and the later bailouts that contributed to the financial chaos. At the start of the 1980s, the government introduced a number of monetary measures built on 1972 reforms to enhance the banking industry's ability to provide adequate amounts of longterm finance. Efforts were made to broaden the capital base of banks through encouraging mergers and consolidations. A new class of banks, referred to as "expanded commercial banks" or "unibanks," was created to enhance competition and the efficiency of the banking industry and to increase the flow of long-term saving. Qualifying banks--those with a capital base in excess of P500 million--were allowed to expand their operations into a range of new activities, combining commercial banking with activities of investment houses. The functional division among other categories of banks was reduced, and that between rural banks and thrift banks eliminated. Interest rates were deregulated during the same period, so that by January 1983 all interest rate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rates were set in relation to the cost of competing funds. Although the short-term response seemed favorable, there was little long-term change. The ratio of the country's money supply, broadly defined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in 1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowest in Southeast Asia. Monetary and fiscal policies that were set by the government in the early 1980s, contributed to large intermediation margins, the difference between lending and borrowing rates. In 1988, for example, loan rates averaged 16.8 percent, whereas rates on savings deposits were only slightly more than 4 percent. The Central Bank traditionally maintained relatively high reserve requirements (the proportion of deposits that must remain in reserve), in excess of 20 percent. In 1990 the reserve requirement was revised upward twice, going from 21 percent to 25 percent. In addition, the government levied both a 5 percent gross tax on bank receipts and a 20 percent tax on deposit earnings, and borrowed extensively to cover budget deficits and to absorb excess growth in the money supply. In addition to large intermediation margins, Philippine banks offered significantly different rates for deposits of different amounts. For instance, in 1988 interest rates on six-month time deposits of large depositors averaged almost 13 percent, whereas small savers earned only 4 percent on their savings. Rates offered on six-month and twelve-month time deposits differed by only 1 percentage point, and the rate differential for foreign currency deposits of all available maturities was within a single percentage point range. Because savings deposits accounted for approximately 60 percent of total bank deposits and alternatives for small savers were few, the probability of interest rate discrimination by the commercial banking
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industry between small, less-informed depositors and more affluent savers, was quite high. Interest rates of time deposits also were bid up to reduce capital flight. This discrimination coupled with the large intermediation margins, gave rise to charges by Philippine economists and the World Bank that the Philippine commercial banking industry was highly oligopolistic. Money supply growth has been highly variable, expanding during economic and political turmoil and then contracting when the Philippines tried to meet IMF requirements .Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economy with money prior to the 1986 elections was one reason why the newly installed Aquino administration chose to scrap the existing standby arrangement with the IMF in early 1986 and negotiate a new agreement. The Central Bank released funds to stabilize the financial situation following a financial scandal in early 1981, after the onset of an economic crisis in late 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and the Central Bank--the so-called Jobo bills, named after then Central Bank Governor Jose Fernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater borrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, the growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, and the current account (see Glossary) was in surplus. Success, however, was obtained at the expense of a steep fall in output and high unemployment. Bank deposit Growth rate :At the start of the 1980s, the government introduced a number of monetary measures built on 1972 reforms to enhance the banking industry's ability to provide adequate amounts of longterm finance. Efforts were made to broaden the capital base of banks through encouraging mergers and consolidations. A new class of banks, referred to as "expanded commercial banks" or "unibanks," was created to enhance competition and the efficiency of the banking industry and to increase the flow of long-term saving. Qualifying banks--those with a capital base in excess of P500 million--were allowed to expand their operations into a range of new activities, combining commercial banking with activities of investment houses. The functional division among other categories of banks was reduced, and that between rural banks and thrift banks eliminated TOTAL DEPOSITS* Deposits grew 8.9 percent to P5.0 trillion for the period March 2010 to March 2011 slower than the 9.0 percent deposit growth for March 2009 to March 2010.

PROFILE OF DEPOSITS:By Bank Type Deposit growth for KBs was lower at 8.9 percent from the 9.2 percent growth in the previous period. TBs experienced accelerated growth at 10.0 percent from 6.77 percent. Deposits in RBs grew slower at 6.2 percent from 12.2 percent in the previous period. Commercial banks (KBs) continue to hold the largest share of deposit liabilities of the Philippine Banking System (PBS) as of quarter-end. KBs share of deposits held at 88.21 percent of total deposits
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slightly lower from the 88.24 percent share last year. The share of Thrift banks (TBs) marginally increased to 9.30 percent from 9.22 percent while Rural banks (RBs) share to total deposits was a hairline lower at 2.48 percent from 2.55 percent.

By Deposit Type Savings deposits still account for the biggest share of deposits at 47.2 percent. Followed by Time and LTNCD deposits at 33.7 percent and Demand & NOW deposits at 19.1 percent of total. Savings deposits grew most at 12.6 percent followed by Demand & NOW deposits at 10.7 percent, and by Time deposits growing by 3.4 percent after contracting by 1.0 percent last year.

Interest rates:Interest rates were deregulated during the same period, so that by January 1983 all interest rate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rates were set in relation to the cost of competing funds. Although the short-term response seemed favorable, there was little long-term change. The ratio of the country's money supply, broadly defined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in 1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowest in Southeast Asia. The benchmark interest rate in Philippines was last recorded at 3.50 percent. Interest Rate in Philippines is reported by the The Bangko Sentral ng Pilipinas (BSP). Historically, from 1985 until 2013, Philippines Interest Rate averaged 10 Percent reaching an all time high of 56.60 Percent in December of 1990 and a record low of 3.50 Percent in September of 2012. In Philippines, interest rate decisions are taken by The Monetary Board of The Bangko Sentral ng Pilipinas (BSP). The official interest rate is the reverse repo rate (RR/P) which is the overnight borrowing rate. The central bank of the Republic of the Philippines is committed to promote and maintain price stability and provide proactive leadership in bringing about a strong financial system conducive to a balanced and sustainable growth of the economy.

4. 2 Financial Market The Philippine banking system continued to gain ground during the quarter, marked by sustained loan growth, improving asset quality, and increasing capital adequacy ratios. The systems CAR of over 16 percent remained comfortably above the BSPs and the BISs minimum requirements. The total resources of the banking system rose by 4.8 percent y-o-y to P7.5 trillion as of end-March 2012. The increase could be traced to the growth in currency and deposits, indicative of the publics continued trust in the banking system. U/KBs accounted for nearly 90 percent of the total resources of the banking system.

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Performance of the Banking System Market Size The number of banking institutions (head offices) fell further to 723 as of end-March 2012 from the quarter- and year-ago levels of 726 and 746 respectively, denoting the continued consolidation of banks as well as the exit of weaker players in the banking system. The banking system continues to gain ground. Number of banks declines but operating network continues to expand. By banking classification, banks (head offices) consisted of 38 U/KBs, 71 TBs, and 614 RBs. Meanwhile, the operating network (including branches) of the banking system increased to 9,186 in Q1 2012 from 9,050 in Q4 2011 and 8,870 during the same period last year, due mainly to the increase in the branches/agencies of TBs. Savings Mobilization Savings and time deposits remained the primary sources of funds for banks. Banks total deposits as of end-March 2012 amounted to P4.0 trillion, 5.3 percent higher than the year-ago level of P3.8 trillion. The continued growth in depositsreflected depositors sustained confidence in the banking system. Savings deposits grew by9.4 percent growth and continued to account for nearly half of the funding base. Meanwhile, demand deposits expanded by 12.1 percent y-o-y, while time deposits declined by 6.9 percent from the level posted a year ago. Bank Lending Operations Outstanding loans of commercial banks, net of banks' RRP placements with the BSP as of end- March 2012, grew by 18.7 percent y-o-y and by 0.9 percent compared to the level as of end- December 2011. Likewise, outstanding loans of commercial banks, inclusive of RRPs, expanded by 17.7 percent y-o-y and 0.7 percent q-o-q. Commercial banks' loans have been growing steadily at double-digit growth rates since January 2011, providing support to the domestic economy amid subdued global growth prospects. Loans for production activities, which comprised more than four-fifths of commercial banks total loan portfolio, grew by 19.3 percent as of end- March 2012, higher than the 15.6 percent growth registered in March 2011. The growth of production loans was driven mainly by increased lending to wholesale and retail trade (58.0 percent); public administration and defense (41.2 percent); construction (38.4 percent); manufacturing (35.0 percent); financial intermediation (32.1 percent); real estate, renting, and business services (25.1 percent); electricity, gas, and water (21.6 percent); and transportation, storage, and communication (16.9 percent).Similarly, the growth in consumer loans also increased to 18.5 percent from 12.3 percent, reflecting the rise in lending across all types of consumer loans. Loans Outstanding of Universal/

Auto Loans The combined auto loans (ALs) of U/KBs and TBs, inclusive of non-bank subsidiaries, increased by 4.8 percent to P139.2 billion as of end-December 2011 from the previous quarters P132.7 billion and by 18.3 percent from P117.6 billion a year ago. Consumers continued confidence in the economy, as well as the aggressive marketing strategies of Credit card receivables increase. Consumers continued confidence in the economy helps sustain demand for auto mobiles, banks and other car financing firms, underpinned the rise in
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automobile purchases. The proportion of total ALs to TLP, exclusive of interbank loans (IBL), was slightly lower at 4.0 percent as of December 2011 than the previous quarters ratio of 4.1 percent. The ratio of non-performing ALs to total ALs also improved to 4.3 percent from 4.4 percent, while the ratio of non-performing ALs to TLP was stable at 0.2 percent. Residential Real Estate Loans As of end-December 2011, the combined residential real estate loans (RRELs) of U/KBs and TBs rose by 6.5 percent to P220.8 billion from P207.4 billion in the previous quarter and by 17.3 percent from P188.3 billion in the previous year. The sustained favorable outlook for the real estate market, as indicated by the increase in the number of projects unveiled by real estate developers as well as banks intensified promotional campaigns in terms of offering lower interest rates, supported increased real estate purchases during the period. The ratio of RRELs to TLP was generally unchanged at 6.4 percent as total loans grew at a faster pace than RRELs. By industry, U/KBs held a bigger slice of the total residential real-estate exposure at 56.1 percent (P123.9 billion), while TBs accounted for the remaining 43.9 percent (P97.0 billion). In terms of loan quality, the ratio of Sustained favorable outlook for the property sector supports real estate purchases. non-performing RRELs to total RRELs of U/KBs and TBs eased to 4.3 percent in December 2011 from 4.7 percent in the previous quarter and 6.9 percent a year ago.

Banking Policies Banking policies implemented during the quarter were aimed at strengthening regulations on the: 1) capital adequacy framework; 2) risk weighting of guaranteed bank loans; 3) strengthening corporate governance in BSP supervised financial institutions; 4) provision of micro-agri loans

Capital Market Reforms Capital market policy reforms continued to gain ground during the period as the BSP maintained an active collaboration with other government agencies and the private sector for the development of the Philippine capital market. The reforms focused on the following: enhancing transparency and corporate governance, and using the latest technology to enhance market infrastructure BSP maintains active collaboration with government agencies and the private sector in developing the capital market. Banking policies implemented aim to strengthen and enhance existing regulations.

Stock Market In Q1 2012, the Philippine Stock Exchange index (PSEi) trended upwards to average 4,820.7 index points, higher by 13.7 percent than the 4,239.2- index point average posted in Q4 2011. The stock market index rose as steady improvements in the US economy, combined with favorable manufacturing data from Germany and China, raised investors risk appetite during the period. The upbeat local response was reinforced by the two policy rate cuts of the BSP due to favorable inflation environment, the NGs plans to increase its spending to spur growth, easing domestic unemployment, and an optimistic outlook on local corporate earnings. However, equity gains were tempered by worries about the global economy after the World Bank and the International Monetary Fund cut their global growth forecasts in
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early 2012. Lingering concerns about the euro area sovereign debt crisis amid the increased risk of a Greek default and the successive credit rating downgrades on several euro area economies also dampened trading sentiment. The composite index closed at 5,107.7 index points on 30 March 2012, higher by 17.7 percent year-to-date (ytd). A new historic high was also set in Q1 2012 when the index closed at 5,145.9 index points on 16 March 2012. Local stocks trend upwards on optimismabout the recovery of the US economy .All six sub-indices of the PSEi advanced during the quarter. Driven by optimism over the performance of the banking system, the financial sector led all sectors and rose by 21.7 percent q-o-q to average 1,165.3 index points. The property sector and holding firms sector also posted gains, rising by 20.8 percent and 16.6 percent, respectively. The services, mining and oil, and industrial sectors likewise increased by 11.9 percent, 10.5 percent, and 6.5 percent, respectively

Bond Market Size and Composition Local currency (LCY) bonds issued by both public and private sectors amounted to P350.3 billion int he first three months of 2012, up by 30 percent from the P269.5 billion registered in the same period in 2011 and by 57.2 percent from the P222.8 billion posted in the previous quarter. Public sector issuances aggregated P322.8 billion, rising by 31.2 percent y-o-y. The increase can be traced to higher public sector issuances of benchmark and retail treasury bonds. The private sector also continued to tap the local funding markets, issuing P27.5 billion worth of LCY bonds, 16.6 percent higher relative to year-ago level. Both sectors took advantage of the very liquid domestic financial markets in sourcing funds for fresh capital and refinancing needs. In terms of market share, the public sector continued to dominate the domestic bond market, accounting for 92 percent of total bond issuances. The private sector comprised the remaining 8 percent. #) Bonds issued by the Bureau of the Treasury (BTr) accounted for the bulk of total public issuances, which were mostly in the form of Fixed-Rate Treasury bonds (T-bonds) and Treasury bills (T-bills). #) Private sector bond issuances consisted largely of bonds and notes, with issuances made mostly by real estate and financial firms. Local Currency Bond Market Issuances By Issuer (January - March 2012) Primary Market In Q1 2012, demand for Philippine T-bills and T-bonds in primary auctions conducted during the review period remained robust. Investors tendered more than twice the NGs programmed borrowings for both short- and long-dated securities. The amount of tenders reached P249.7 billion against the NGs total offerings of P108.0 billion. The NG accepted P82.0 billion worth of T-bills and T-bonds but rejected bids amounting to P167.7 billion. Apart from the regular T-bill and T-bond issuances, the NG also issued 15- and 20-year fixed rate RTBs in February 2012, raising an aggregate amount of P179.8 billion RTBs (P44.1 billion 15-yr and P135.7 billion 20-year tenured RTBs). Of the said amount, P49.6 billion were sold to government securities eligible dealers (GSEDs) through Dutch auction. Secondary Market At the secondary market, liquidity for both government and corporate bonds increased as the volume of trade at the fixed income exchange (FIE) climbed to P1,199.5 billion in the first
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three months of 2012, up by 84 percent y-o-y and by 13.9 percent q-o-q. Following the relatively quiet activity in the previous quarter, trading at the FIE picked up in January and February as improvements in global growth prospects lifted market sentiment. Trading was also buoyed by investors search for higher yields given the US Feds announcement to keep interest rates low through 2014, increasing the demand for higher-yielding Philippine debt papers. However, trading slowed down in March on persistent concerns over the sovereign debt problems in the euro area.

International Bond Market In January, the NG raised US$1.5 billion from the sale of 25-year US dollar-denominated benchmark bonds in an offering that was about eight times oversubscribed. Tenders reached US$12.5 billion compared to the programmed amount of US$ 1.5 billion. The bond sale enabled the government to raise two-thirds of its total 2012 foreign borrowing requirement of US$2.12 billion. The proceeds of the global bond issuance were expected to fund the country's stimulus projects. Private corporations likewise tapped the international bond market in 2012, taking advantage of the high liquidity and low interest rate in the global market. In the first three months of the year, a total of US$1.05 billion worth of bonds were raised, led by the US$300 million worth of global bonds issued by both BDO Unibank Incorporated and Carmen Copper Corporation (CCC), the first Philippine mining firm to successfully issue bonds offshore. 4.3 : Agriculture and rural Finance Rural development as a social goal has long been given major attention by politicians and policymakers in the Philippines. This is reflected in the concern frequently expressed about rural problems and the plethora of laws and institutions that have been created to deal with them. Agricultural Income Growth An important consideration in the assessment of the contribution of rapid agricultural growth during 1965-80 to rural development and overall economic performance is that the income gains from that growth were not broadly based. First of all, the dramatic productivity improvement associated with the green revolution in rice bypassed a large segment of the farming population that did not have access to irrigation water. Although there was widespread adoption of modem seed varieties (Herdt 1987), the new technology was notably much less effective in raising yields where water levels could not be strictly regulated. Irrigation investment expanded tenfold between 1966-70 and 1973-77 (Barker 1985: 124); even so, the proportion of irrigated area to total rice area in the late 1970s was only 25.4 percent in the wet season and 17.7 percent in the dry season--much lower than the corresponding percentages for Indonesia (39.9 and 23.4 percent) and Malaysia (36.2 and 29.9 percent). 2 The greater access of large producers to effective subsidies on credit and fertilizer and to infrastructure investments (electricity and roads) also contributed to the bias in the structure of income growth against small farmers (Bautista 1992). Landless rural families that depend on wage labor as their main source of income (about 20 percent of all rural households in 1965) also did not benefit much from the accelerated agricultural growth. Agricultural wage rates in real terms fell significantly from the mid- 1960s to 1974, after which there might have been a slight improvement (Bautista 1992).

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. The distribution on income gains from agricultural growth has also been shaped by the distribution of landholdings. With an unequal distribution of land and agricultural capital, technological change that increases land rent (and the return to capital) but not the real wage can be expected to worsen the distribution of rural income. As late as 1980, only 3 percent of al farms in the Philippines were larger than 10 hectares, but they accounted for about onequarter of the total agricultural land area. In the early 1960s, about half of Philippine farms were fully or partly owned by the operator, over a third were share-tenanted and the rest were under other forms of tenancy. Reflecting the substantial inequity in share-cropping practices, the net income of owner-operators in the major rice growing region of Central Luzon during 1963-70 averaged about 2.3 times that of share tenants (ILO1974: 475). The government implemented a redistributive agrarian reform program called Operation Land Transfer, beginning in October 1972. It was limited to tenanted land, however, so that the landless continued to have no access to land. Moreover, the coverage was limited to rice and corn; the exclusion of farms growing other crops, constituting about half of the total crop land area, further restricted the program's effectiveness in redistributing land ownership and in alleviating rural poverty. Based on census data, the proportion of total farm area that was owner-operated decreased only slightly from 73.9 percent in 1971 to 72.4 percent in 1980 Apart from inducing inefficient production shifts toward crops other than rice and corn, the agrarian reform law also had the un salutary effects of encouraging tenant eviction by landlords and reducing the labor input per unit of land. The concentration of agricultural income growth was further accentuated by the major presence in the export crop sector of foreign firms engaged in plantation farming and large-scale, capital-intensive processing. Rural Income Growth and Distribution The acceleration in agricultural growth during 1965-80 did not seem to be accompanied by commensurate income growth among rural households. Based on FIES (Family Income and Expenditure Survey) data, the average rural household income in real terms increased by 11.2 percent between 1957 and 1961, and by 17.8 percent between 1961 and 196. After 1965, however, income growth was only 4.5 percent through to 197I, even negative between 1971 and 1975, and insignificant from 1975 to 1985. Using a different price deflator, Balisacan's (1991) finding is that the average real income of rural households (in 1978 pesos) grew by 19 percent from 1961 to 1965 and by another 19 percent from 1965 to 1971, Not only was the growth of rural income unimpressive, income distribution among rural households appeared to have become more unequal. From 1965 to 1971, the index of quantile inequality rose from 0.38 to 0.41 while the Gini coefficient increased from 0.42 to 0.46, based on FIES data. Balisacan (1991) also found increasing income inequality among rural households from 1965 to 1971 based on the coefficient of variation (from 0.797 to 0.920) and on the standard deviation of logarithm (from 0.366 to0.396). These results are consistent, at least in qualitative terms, with the stagnation of wage earnings in agriculture as observed above at the same time that the agricultural terms of trade was improving, with the index (1971-- 100) rising from 77.9 in 1965 to 108.6 in 1975. It is important to point out that there are potentially serious measurement problems in making intertemporal comparisons of both the average income level and degree of income inequality of rural households based on FIES data. This is in view of the changes over time in the
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composition of households in the "rural" category. Thus, a particular community might be initially classified as rural, but if it became very progressive, the same group of households after a few years could graduate into the "urban" category based on FIES definitions. There is a systematic bias, therefore, toward underestimation of the average income of the original group of rural households in later years; however , the direction' of bias in the estimate of income inequality is ambiguous.

4. 4- Public Finance Philippine Tax Revenues, 1957-1978 Total tax collections grew at an average annual rate of 16.9 per cent during the period 19571978. Over the years, the proportional increments in aggregate tax revenues had been fairly stable except for the sharp increases in 1964, 1971, 1973, 1974 and 1975. The growth rates of the different tax categories were very close to that of total tax collections except for the other taxes category which grew at 26.8 per cent per year on the average and excise taxes which exhibited the slowest upward movement at 12 per cent yearly growth rate on the average. In terms of their contribution to total tax collections, there had been some shift in the relative importance of the different tax categories except for license and business taxes whose share remained at roughly 21 per cent over the years. The contribution of excise taxes and import duties declined from 24 per cent and 29 per cent in the earlier years to 12 per cent and 25 per cent, respectively, in the later years. On the other hand, the proportion of revenues attributable to other taxes and income taxes increased from 4.6 per cent to 17 per cent and 25 per cent, respectively. Within the income tax category, the individual income tax is gaining in importance over the years.

GOVERNMENT EXPENDITURES Total government expenditures increased at an average annual rate of 16.6per cent from P1.116 billion in 1951 to p32.66 billion in 1979. Total government spending grew at an average of 10.4 per cent per annum between 1957 to 1979. During the first half of the seventies, government expenditure expanded at an accelerated pace (36.3 per cent annual rate of increase on the average) with the rate of increment reaching a peak of 57.6 per cent in 1975. From 1976 to the end of the seventies, this growth trend exhibited a tapering off with an average of14 per cent per year for this period. In real terms, total government expenditures grew at 7.8 per cent per year on the average from 1957 to 1978.4 Prior to 1967 the growth of aggregate government spending was sluggish as reflected in an average 1.5 per cent rate of annual increase for the period as compared with the 29.2 per cent average yearly growth rate for 1967-1979. The maximum rate of increase posted for any given year was 44 per cent (in 1973). From 1972-1979, government expenditures as a proportion of GNP averaged 14 per cent reflecting increased government spending during the Martial Law regime. Distribution-wise, the patterns of government expenditures has remained stable over the years. The bulk of government spending is channeled to economic development and social
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services. Taken together these two expenditure groupings account for approximately twothirds of total government outlays. Until 1971, however, a slightly larger piece of the government expenditure pie went to the social development sector. From 1972 onwards, there was a shift in the expenditure thrust of the government as economic development is given more emphasis. National defense consisted roughly 15 per cent of total government spending during the period 1957-1979. On the other hand, the share of general administrative operations in total government expenditure was at the 10 per cent level all throughout the period except in the years 1976, 1977 and 1978 when itsshare rose to 17 per cent. Debt service rate up 6 per cent of total government outlay up to 1977 when this proportion grew to 9 per cent. Among the subcategories, education maintained its number one position in terms of budgetary allocation with over 25 per cent of total government expenditure on the average while transportation and communications playing second lead till 1972. After1974, however, utilities and infrastructure moved up in terms of it share in government spending accounting for one quarter of the total figure.

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Chapter 5

Policy Implication
Our policy recommendation for coming years assumes that things dont change, current regulations and policies are still enforced; political systems and institutions remain unchanged; government spending behavior on basic social services is still the same; and household consumption patterns are unaltered. Before presenting our projections, we state up front that recommending detailed and specific reforms is not a subject of this paper as this is more appropriate for short- and medium-term development planning studies.
The Philippine economy was among the slowest-growing in Asia, with GDP growing by only 3.6% annually during the past 33 years, 1970-2003. Combined with the fastest-growing population in the region at 2.4% p.a., wealth creation and poverty reduction had been weak, with real GDP per capita rising by only 1.2% yearly during the 33-year period and the poverty incidence of 30.4% of the population in 2003 still among the highest in East Asia. The slow pace of growth has been attributed to several factors, but if one indicator is to summarize all these, it would be the low level and growth of investment. The investment performance, in turn, was constrained by the low domestic savings rate again the lowest in Asia and, worse, it has declined even as it rose in other countries. Rapid population growth had also been a drag on economic progress, and was partly a reason for the low domestic savings rate. There had been a lack of decisive actions to manage population growth, with the policy largely influenced by the belief that population growth will fall in the natural course of development. As the data on fertility showed, this was a mistaken belief. Other countries in Asia that pursued a deliberate policy to reduce population growth rate had faster economic growth. The faster economic growth then reinforced the lowering of the population growth rate which, in turn, led to lower poverty incidence and better social outcomes. Notably, a significant number of these countries did not attain a low population growth regime by allowing the natural course of demographics to work its way through, or when economic growth dramatically accelerated. Rather, these countries put in place aggressive birth control policies to create the necessary condition for rapid economic increase. Politics and corruption have exacerbated matters. Due to politicians and public officials abuse of institutions, slow action on policy reforms and disregard of the laws, people has lost faith in the electoral system, the legislature, etc. The following factors should be considered with due care to enhance the base of Philippines development

Expanding the Fiscal Space Despite significant Government efforts in fiscal consolidation and tax reform since 1986 the fiscal situation remains very tight. Expanding the fiscal space requires further action on at least two frontstaxation and government spending. Many measures could be taken on both fronts, but the following are the top priorities. 1. Making the tax collection machinery efficient should be the top priority for improving revenue generation. While the Government has devoted significant efforts to this in recent years, more needs to be done. Equally important is regular monitoring of the status and outcomes of programs for improving tax collection that have been started, such as the RATES or Run after Tax Evaders effort.

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2. The countrys corporate income tax rate is one of the highest in the region. This should be reviewed because the rate is seen as disadvantageous by potential investors. There may be scope for enhancing excise taxes. For instance, the questionable excise tax law on cigarettes enacted in 2005 could be reassessed and amended so that it can deliver the expected increase in tax revenues. 3. On the expenditure side, there is still significant room for cutting Government spending on net lending or subsidies to some large and loss-making Government corporations. The Government may also look into some aspects of their operating activities to find out which of them could be privatized. Savings derived from reducing or removing subsidies to loss-making Government corporations could be reallocated to finance infrastructure and social safety nets that are working effectively. Accelerating Infrastructure Development Our previous discussion has highlighted the high cost of electricity and inadequacy of the road and transport system as critical constraints to growth. The Government recognizes this, as evidenced by the priorities every MTPDP since 1986 has given to infrastructure development and, more recently, the introduction of the Comprehensive Integrated Infrastructure Program (CIIP) 20062010, under which the Government has committed to increasing infrastructure spending to 5% of GDP (ADB2007a).To accelerate infrastructure development and successful implementation of the program, four problem areas urgently need the Governments attentionregulation, competition and incentives, capacity development for the lead agencies, and finance. Instituting Good Governance Governance concerns not only weaken investor confidence, but also underlie many other critical constraints identified in this report. Instituting good governance should therefore be made a top development priority in the Philippines. Two issues stand outfighting corruption and addressing political instability. Supporting Expansion and Diversification of the Industrial Base The Philippine Government has long held industrialization to be a major development goal. As agricultural productivity increases and many of the sectors workers are rendered redundant, industry and services must grow fast enough to reach full employment and raise living standards. The economy must learn to walk on two legs: industry and services (ADB 2007b). The Philippines needs more efforts to diversify its product range and enhance the value addition of its industry, whether designed for the export or domestic markets. Growth comes from the emergence of new goods, not only from the increased production of the same ones. In addition, process innovations are important to raise the technological contents of products and achieve sufficient economies of scale. While industrial restructuring, diversification, innovations, and technological upgrades are essentially activities of the private sector and should be driven by market forces, the Government has the responsibility to provide an enabling environment and has a strategic and coordinating role to play. The responsibility involves not only institutional and social infrastructure conducive to business and private investment, but also addressing distortions arising from market failures such as
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information and learning externalities and coordination failures. These failures could lead to underinvestment in knowledge and innovations, discourage entrepreneurship, and constrain diversification. Thus, some alternative thinking about industrial policies, departing from the traditional approach can be useful. Making Access to Opportunities More Equitable For reducing poverty by ensuring growth, the Government must ensure not only that the growth process generates sufficient productive employment opportunities, but also that they are within reach of every segment of society, including low income bracket people. The list of things the Government has to accomplish before this challenging goal could be achieved is long, and attention to the following three policy priorities will help advance the development agenda in the Philippines in a visible way: (i) Increasing investment in expanding human capacities. (ii) Improving the effectiveness and funding of development programs at local levels and (iii) Improving the effectiveness and targeting of social safety nets and disaster relief.

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Bibliography

Reference 1) Dr. M Masud Rahman Chairman Department of Finance University of Dhaka

2) Shakila Halim Lecturer Department of Finance Faculty of Business Studies University of Dhaka

Book
Economic development Michael p. Todaro Stephen c. Smith

Websites:
1) Indexmundi 2) Wikipedia 3) https://mobiledevelopmentintelligence.com/statistics/47-human-developmentindex-value 4) http://www.indexmundi.com/facts/philippines/gni-per-capita 5) http://egateg.usaid.gov/sites/default/files/Philippines_Economic_Performance_As sessment.pdf

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Appendix A
Related Data Tables
Table 1: Annual Average Growth Rate of Real Per Capita GDP, 1950-2006 (in %)
Period 1951-1960 4.0 1961-1970 2.0 1971-1980 5.3 1981-1990 4.3 1991-2000 2.9 2001-2006 3.3 Average growth rate 5.9 3.6 for 56 years Source: Asian Development Bank (2007) Hongkong, China 9.2 7.1 6.8 5.4 3.0 4.o Indonesia Korea 5.1 5.8 5.4 7.7 5.2 4.2 5.6 Malaysia 3.6 3.4 5.3 3.2 4.6 4.7 3.8
Philippines

Singapore 5.4 7.4 7.1 5 4.7 3.2 5.5

3.3 1.8 3.1 -0.6 .9 2.7 1.9

Taipei, China 7.6 9.6 9.3 8.2 5.5 3.4 7.3

Thailand 5.7 4.8 4.3 6.3 2.4 4.0 4.6

Table 2: Poverty and Inequality in East Asia

Population in Poverty Proportion of Population (in percent) Below $1 (PPP) a Day (%) PRC 2.50 10.80 Indonesia 16.70 7.70 Malaysia 5.10 0.00 Philippines 30.00 13.20 Thailand 9.80 0.00 Viet Nam 19.50 8.40 Source: Asian Development Bank Key Indicators, 2007 Gini Coefficient 0.47 .34 .40 .44 .42 .37

Table:3Key Indicators of the Philippines (in percent)

GDP Agriculture Industry Manufacturing construction Personal consumption Export import inflation 2007 7.1 4.8 6.8 3.3 21.1 5.8 6.4 7.2 2.8 2008 3.8 3.2 5 4.3 7.8 4.7 -2.8 2.2 9.3

Notes: 1/ All figures are growth rates in percent unless otherwise indicated; variables are based on constant prices except for remittances, exports and imports 2/ 2Q2009 inflation data refers to April-August period average Sources: BSP, NSO and NSCB, Philippines

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Table 4: Sector wise contribution to GDP

Agriculture GDP Growt h Rate 1951-60 6.4 1961-70 4.9 1971-80 5.9 1981-90 1.8 1991-2000 3.1 2001-2010 4.6 Source: World Bank Period Growth Rate 5.0 4.3 4.1 1.2 3.1 4.6 Contribution to GDP Growth 25.5 26.0 17.6 16.3 12.9 15.9 Growth Rate 7.5 5.7 7.9 0.6 3.1 3.2 Industry Contribution to GDP Growth 34.1 37.0 49.6 8.5 35.3 22.6 Growth Rate 7.0 4.8 5.3 3.4 3.7 6.1 Services Contribution to GDP Growth 40.4 37.0 32.8 75.3 51.9 61.9

Table 5: Share of expenditure components in GDP

Period 1951-60 1961-70 1971-80 1981-90 1991-2000 2001-2010 Source:ADB Consumption Growth Share in GDP Rate 6.5 74.9 4.7 74.2 4.7 67.7 3.0 70.1 3.5 77.8 4.9 78.4 Government Growth Share in GDP Rate 4.5 7.3 5.5 7.1 7.0 8.7 1.5 7.6 3.5 8.0 0.4 6.8 Investment Growth Share in Rate GDP 5.8 18.4 6.3 20.7 9.5 25.2 3.0 21.3 4.0 23.0 -1.3 19.7 Net Exports Share in GDP -5 -3 -4 -2 -9 -7

Table 6: Contribution to GDP Growth by Expenditure Components (%)

Consumption Period Growth Rate 6.5 4.7 4.7 3.0 3.5 4.9 Contribution to GDP growth 75.4 71.3 54.1 118.0 89.0 81.9 Government Growth Rate 4.5 5.5 7.0 1.5 3.5 0.4 Contribution to GDP growth 5.2 7.9 9.9 6.1 9.0 0.2 Investment Growth Rate 5.8 6.3 9.5 3.0 4.0 -1.3 Contributio n to GDP growth 15.5 24.7 36.7 11.9 26.0 -7.2 Net Exports Contributi on to GDP growth -2.2 -4.6 -1.7 -23.7 -1.3 -1.9

1951-60 1961-70 1971-80 1981-90 1991-2000 2001-2010

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Table 7: Sector Employment Share (%)

Sector Agriculture Industry Service 1960 61.2 12.6 26.2 1965 56.7 11.3 31.5 1970 53.7 12.6 32.1 1975 53.5 12.1 34.1 1980 51.4 11.6 36.5 1985 49 10.7 40.2 1990 45.2 10.8 44 1995 43.4 5.9 40.5 2000 37.1 6.2 46.7 2005 35.9 10 53.9 2010 33 9.2 57.7

Source: World Bank

Table 8: Income share held by top and lowest 20%

Indicator Income share held by highest 20% Income share held by lowest 20% GINI index Source: World Bank 1985 48.08 1988 47.77 1991 50.46 1994 49.54 1997 52.33 2000 52.3 2003 50.68 2006 50.41 2009 49.69

6.43 41.04

6.51 40.63

5.88 43.82

5.95 42.89

5.36 46.16

5.37 46.09

5.44 44.48

5.6 44.04

5.98 42.98

Table 9: Philippines HDI trends based on consistent time series data, new component indicators and new methodology
Life expectancy at birth 1980 1985 1990 1995 2000 2005 2010 2011 2012 Source: ADB 63.2 64.2 65.2 66 66.8 67.4 68.5 68.7 69.0 Expected years of schooling 10.4 10.5 10.7 10.8 11.4 11.6 11.7 11.7 11.7 Mean years of schooling 6.1 6.7 7.1 7.5 8 8.6 8.9 8.9 8.9 GNI per capita (2005 PPP$) 2,786 2,208 2,506 2,606 2,694 3,040 3,568 3,649 3,752 HDI value

0.561 0.563 0.581 0.594 0.610 0.630 0.649 0.651 0.654

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Table 10: Key Infrastructure Indicators, ASEAN-6

Appendix B
Graphical Expressions Graph 1:
60

GDP growth and Inflation Rate

50

40

30 Inflation 20 GDP Growth Rate

10

1976

1994

1970

1972

1974

1978

1980

1982

1984

1986

1988

1990

1992

1996

1998

2000

2002

2004

2006

2008

-10

2010

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Graph 2:

Sectorwise Contribution To GDP

80 70 60 Percentage 50 40 30 20 10 0 1951-60 1961-70 Agriculture 1971-80 1981-90 1991-2000 Services 2001-2010 Industry

Graph 3:

Sector Employment Share (%)

70 60 50 40 30 20 10 0 1960 1965 1970 1975 1980 1985 Industry 1990 1995 2000 2005 2010 Agriculture Service

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Graph 4:

Income share held by top and lowest 20%

60 50 Percentage 40 30 20 10 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 Income share held by highest 20% Income share held by lowest 20% GINI index

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Figure 1:

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Figure 2: Quality of overall Infrastructural Ranking, ASEAN -6, 2008-2010

Figure : 3

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Appendix C
Glossary of the terms used in the Report

4P: Pantwid Pamilyang Pilipino Programs. A human development program of the national government that invests in the health and education of poor households, particularly of children aged 0-14 years old. ARB: Agrarian Reform Beneficiaries CARP : Comprehensive Agrarian Reform Program CCT: Conditional Cash Transfer CMP: Community Mortgage Program CIIP: Comprehensive Integrated Infrastructure Program DOSRI rules: Guidelines followed by the central bank of Philippines for lending to their Directors, Officers, Stockholders and Related Interests. Gini Coefficient: The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has an exactly equal income). ICT: Information and Communication Technology LMI: Lower Mekong Initiative. The LMI was created in response to the July 23, 2009 meeting between Secretary of State Hillary Clinton and the Foreign Ministers of the Lower Mekong Countries -- Cambodia, Laos, Thailand and Vietnam -- in Phuket, Thailand. At this first ever U.S.-Lower Mekong Ministerial Meeting, the Ministers agreed to enhance cooperation in the areas of environment, health, education, and infrastructure development. Martial law: It is the imposition of military rule by military authorities over designated regions on an emergency basis. Martial law is usually imposed on a temporary basis when the civilian government or civilian authorities fail to function effectively. People power revolution: The People Power Revolution was a series of popular demonstrations in the Philippines that began in 1983 and culminated in 1986. The methods used amounted to a sustained campaign of civil resistance against regime violence and electoral fraud. RATES: Run after Tax Evaders SARA: Save Agrarian Reform Alliance WEF: World Economic Forum

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