GROWTH AND POVERTY REDUCTION

Movement for Good Governance1

1. The Philippines was one of the fastest growing economies in Asia in

1960. Its per capita GDP of US$612 was twice as much as Thailand’s and
three times as much as Indonesia’s. The situation is now reversed with
Thailand’s per capita income being twice as much as that of the Philippines. 2
The growth of the Philippine economy has lagged behind the economies in
Asia. Per capita income in the Philippines grew at an average rate of 1.4
percent over 1960 to 2008 while other economies grew at annual rates
between 3.6 percent and 6.0 percent.3

2. A direct consequence of the country’s low economic growth is its

inability to reduce poverty .The poor increased from 30.0 percent of the
population in 2003 to 32.9 percent in 2006.4 The Gini coefficient, a measure
of the inequality in income distribution in the country has remained
unchanged at 44 per cent for decades, in contrast to Thailand, Vietnam and
Indonesia where reductions in income inequality have been made.5 The
richest 5.0 percent of households in the Philippines account for nearly a third
of national income, while the poorest 25 percent account for only 6 percent.6

3. Studies after studies identify binding constraints that the

Philippines have failed to address: These are: a) an unstable fiscal position;
2) inadequate infrastructure; and, 3) a weak investment climate. 7 The tax
effort has weakened from 17.0 percent in 1997 to 13.0 percent in 2008.
Government has perennially been off-track with respect to its revenue
targets and finances the budget through borrowings. Debt service takes up
more than one-fourth of the budget and the debt stock has risen to P4.2
trillion or 56.3 percent of GDP in 2008. An anemic fiscal position is a major
constraint in the provision of adequate public goods and services.

4. Insufficiencies in public investments are not compensated for by

growth in private investments. Bad governance, weak public institutions,
corruption, and peace and order problems are major barriers to investments.
The Global Competitiveness Report for 2009 ranked the Philippines 98th out
of 133 countries in terms of the quality of its overall infrastructure.8 The
Philippines ranked 141 out of 181 countries in the Ease of Doing Business
Index reflecting a cumbersome business environment.9 The Philippines was
rated poorly in terms of political stability and control of corruption. Various

1
Draft by Milwida M. Guevara with assistance from Aissa Ereneta
2
World Bank, Philippine Discussion Note no. 1 (Draft) “Restoring Faster Growth after the
Crisis”, and “Identifying Critical Constraints to Economic Growth and Economic development
in the Philippines” a paper written for the Asian Development Bank.
3
World Bank, ibid.
4
The proportion of the population with incomes below the national poverty line. Source of
data: World Bank
5
The coefficient varies from zero, which indicates perfect equality, with every household
earning exactly the same, to one, which implies absolute inequality, with a single household
earning a country's entire income.
6
World Bank, “Equity and Development” World Development Report, 2006.
7
World Bank, “Why has Poverty not been Declining”
8
World Bank, op. cit.
9
World Bank, “Restoring Growth After the Crisis”.
elements in the Philippine market legislation were observed to be extremely
rigid relative to regional and world standards.10

5. The poverty problem is fomented by: a) unequal distribution of

growth among sectors; b) unequal pattern of regional development; and
intense demographic pressure.11 Agriculture, the source of livelihood for the
poor, has the least contribution to GDP, and has been unable to provide
livelihood and income to a growing population. Two of every three poor
persons in the Philippines are in rural areas and are dependent in agriculture
for employment and income.12 Manufacturing does not generate sufficient
opportunities for employment owing to its capital intensive base.
Employment in the fastest growing sector, services, is extremely limited to
individuals with good education. These are certainly not the poor whose
access to quality education has been very limited.

6. Growth among regions is highly uneven where rich regions are

becoming richer while poor regions are becoming poorer.13 From 1988 to
2003 Metro Manila had the lowest poverty while Bicol, Western Mindanao,
and the Visayas had the highest. In 2003, poverty incidence in Bicol and
Western Mindanao was ten times higher than in Metro Manila.14

7. Population growth in the Philippines is not only the highest in the

region. The ratio of children under 15 and adults over 65 to the total
population of working age, or the dependency ratio, is highest in the
Philippines at 65 percent.15

An Agenda for Growth and Poverty Reduction

Clearly, the road towards growth and poverty reduction consists of

measures that will enable the country to hurdle its binding constraints.

1. A Robust, Equitable, and an Efficient Fiscal System. It is an

oversimplification to say that good administration is the only thing that the
fiscal system needs. Many of the provisions of the Tax Code of the country
resulted from intense lobbying by vested interest groups, including those
from government, and horse trading among members of Congress. The
country has moved away from a simple tax system through the introduction
of several tax incentives and multiple tax rates. The refusal of Congress to
lift the Bank Secrecy law has tied government’s hands in prosecuting tax
evaders.

1.1. The first order of the day is lifting the provisions that have made
the tax system a slave to vested interest. These are the grant of exemption
and lower income tax rates on certain forms of income such as interest,
capital gains, royalties, winnings, GOCCs, and certain forms of corporations.
The provisions on excise taxes, e.g. use of 1996 prices in classification of
cigarettes, and alcohol products, have to be amended.

10
World Bank, ibid.
11
World Bank, ibid.
12
Arsenio M. Balisacan, “Growth and Poverty Reduction” Trends, Determinants and Policies”
a Study conducted for the Asian Development Bank.
13
World Bank, ibid.
14
Balisacan, op. cit.
15
World Bank figures. The dependency ration in Indonesia is 27 percent, Malaysia, 16
percent, and Thailand, 50 percent.
 1.2. The second priority is to lift the structural infirmities of the law
that have resulted to an incoherent incentive system. There is a whole slew
of economic zones, and activities that enjoy packages of tax exemption and
incentives that differ by location and by activity. One does not need to go
outside the Philippines for tax havens that provide opportunities for tax
arbitrage through transfer pricing schemes. The unabated grant of tax
incentives has eroded the tax base through the years. More importantly¸ tax
incentives introduce inequity, inefficiencies, and complications in the tax
system. It is timely to revisit the recommendation of the Department of
Finance in 1995 to remove the incentives for non-exporters.16 More recently,
Medalla17 reiterated that the P42.7 billion incentives given to non-exporters
“are likely to be redundant or inconsistent with economic efficiency.”
However, Medalla recommended that the duty and tax exemption of raw
materials used by exporters be retained. “They are not really incentives but
partial removal of penalties from the country’s protectionist trade policies.”18

1.3. Equal priority should be given in ensuring that governance is the

rule in tax administration and compliance.

Accountability by ensuring that targets and standards for

performance of revenue officials and personnel are defined, monitored, and
evaluated. Good performance is rewarded, and under-performance and
misdemeanor are sanctioned. At the very least, the worst offenders are
criminally prosecuted.

Transparency through the formulation and enforcement of rules,

standards, and codes of conduct for tax officials which are broadly
publicized. Rules and procedures for tax audits should be clearly provided, a
clear paper trail for tax assessments should be established, and information
on how to seek redress on unfair assessments is publicly made available.
Clear limitations on the exercise of the compromise power by the BIR and
Customs Commissioner should be provided for by law.

Participation through broad-participation of diverse sectors in

formulation of rules and standards, strengthening capability of CSO in
providing oversight over enforcement of codes of conduct, and, in
conducting information campaigns.

1.4. The rules of good governance should be observed in budget

formulation and management. Instead of being an instrument for efficient
management and accountability, the budget has become an instrument for
partisan politics. These are due to the opportunities that are open to the
executive branch to reallocate budgetary resources, failure of Congress to
perform its oversight functions, and the lack of opportunities for civil society
to monitor and evaluate how public funds are spent. Reform measures to
institute governance in expenditure management include major
amendments to the budget law to limit executive discretion over the budget,
restore constitutional checks on government spending and increase
transparency in budget implementation.19 Greater oversight of civil society
in budget planning, legislation, and execution will be facilitated by the
legislation of the freedom for information, dissemination of information

16
Presidential Tax Force on Tax Reforms, “Studies on the Tax Incentive System”.
17
Felipe Medalla, “On the Rationalization of Fiscal Incentives”, a study conducted for the
USAID under the EPRA program
18
Medalla, ibid.
19
Human Development Network, Philippine Development Report, 2008/2009
through the web, and building their capability in analyzing budgets and
measuring performance of public agencies and officials.

1.4. With a broad tax base and better governance in expenditure

management, substantial tax relief to fixed-income earners can be granted
through the reduction of income and or VAT rates. Earmarking more than
one-third of one’s income to tax payments is at the very least, truly
dissatisfying for middle-income taxpayers. A 25 percent income tax rate
can be imposed if more taxpayers are brought into the net.

2. Good Governance Nurtures Investments. The operations and

performance of all government agencies should be guided by good
governance. Complicated rules should be simplified and translated into
simple steps that are translated into work flows and procedures. The
successful experiences of many local governments in organizing transactions
with clients through a “one-stop-shop’ are good benchmarks. The “Citizens’
Charter of Naga City is a model on informing citizens on where and how
public services can be obtained, as well as timelines for their delivery. The
monopolistic behavior of government agencies can be discouraged through
the institution of systems for generating feedback from the public, and a
report card system that measures performance of government agencies in
terms of outcome and impact.

3. Growth that Includes the Poor. Studies establish a strong

connection between poverty reduction and agricultural development, and
investments on social services such as health and education.20 However,
raising investments is not enough; investments have to reach the poor. Poor
targeting and badly designed programs, result to high leakages,
administrative inefficiencies, and rent-seeking processes.21

3.1. In reviewing the poverty-reduction programs of government,

Balisacan22 notes success stories particularly those that came with the
empowerment of local communities in identifying needs of the poor through
the use of simple surveys such as the “Minimum Basic Needs”. In
partnership with local governments, communities held workshops and
assemblies to plan and implement poverty-reduction programs and generate
resources, as their counterpart. Although evidences between community
empowerment and increase in economic gains of the poor were weak,
Balisacan acknowledges the limitation imposed by time. Results from
community empowerment can be long-term in nature.23 But the KALAHI-
CIDDS experience demonstrates how community ownership and participation
can result to community empowerment. Of the 2,770 projects that cost
US$67 million in 2007, 34 percent was shouldered by local communities.
The projects were cost-effective with unit costs that were lower when
compared to similar projects undertaken by government agencies.

3.2. The first priority is to raise level of public investment in social

services particularly basic health and basic education. The level of public
spending for social services decreased from 31 percent in 2000 to 27
percent in 2005. It is important however that increased spending should be
20
Balisacan, op. cit.
21
The health insurance card and the rice program of NFA easily come into mind.
22
Balisacan, op. cit.
23
Synergeia’s experiences show that empowerment of communities in providing quality
basic education to children takes time and continued handholding. Extraneous factors such
as peace and order problems, inadequate school infrastructure, low quality of school
instruction, are beyond the control of communities.
accompanied by narrow targeting, i.e. stipulation of inclusion and exclusion
criteria to identify the beneficiaries from the non-beneficiaries of the
program.24

3.3. The design and implementation of poverty reduction programs

should be undertaken in close partnership with local governments and NGOs
that have proved successful in implementing community-based programs.25
The wheel does not need to be reinvented in adopting strategies for
targeting, community-based planning, and resource mobilization. There are
enough success stories in the field. The next step is to enable these islands
to converge, and foster unity by capitalizing on a shared vision. The
Regional Development Council has become too politicized to be able to
effect convergence. The more effective mechanisms are peer-led alliances
of municipalities such as the NIACDEV in Iloilo, and the Synergeia Regional
Councils in Mindanao, Iloilo and Northern Luzon.

3.4. The population issue has to be addressed. In the absence of

strong and definite policies of the central government in the past, some local
governments have stepped up and implemented pro-active programs.26 Best
practices can be the basis of flagship programs of the central government in
enabling the country to address the population challenge.

24
Balisacan, op.cit.
25
Habitat, Gawad Kalinga, are good examples.
26
Some of these are Quezon City, Marikina and Saranggani province.