A New Social Contract for the Philippines

At the start of his campaign for president, Benigno Aquino stated in an advertisement that he was not a thief and that he would not steal using a play on the filipino word “magnanakaw” which means both “thief” and “to steal”. A similar statement was issued by his late mother, ex-president Corazon Aquino twenty five years earlier when she ran against Ferdinand Marcos.

So ingrained and apparent was the greed that motivated candidates to pursue public office that it had been assumed to be the case among all of them. With the installation of president-elect Aquino at 12 noon on June 30 2010, there are a few assumptions regarding the state and its role in society that also need to be challenged.

In a paternalistic society such as the Philippines, it is the role of the state to dole out benefits to the connected, by that I mean both the wealthy and the needy. The state is captured from both above by the wealthy who seek regulations that favor their commercial interests and from below by the incessant demands of constituents whose need for support drives their elected representatives to capture “rents” from government transactions to provide personal help and thus perpetuate their electability.

This it would seem is the existing social contract as it stands – it is one based on personal dealings between (1) Big Business and the power brokers of the state and (2) the disenfranchised and their political bosses. A society based on personal kinship and relations does not reward individuals who want to strike out on their own, away from the established networks. It is one where one cannot get ahead simply by working hard and relying on fair play. That is why so many have sought to pursue their fortunes outside the country.

Many commentators have seized on the potential for transformation under a new Aquino presidency based on its reputation for probity. In order for it to be transformational, it would have to restructure the “rules of the game” or negotiate a new social contract between the state and its stakeholders. The new arrangement will have to resource the state appropriately to lessen the need for its constituents to rely on personal interventions by their representatives.

It will have to ensure that the wealthy contribute a fairer share of their profits to the state. The productive sectors in turn would expect a predictable regulatory environment and a skilled laborforce enabling them to take advantage of new opportunities. For this to happen, a series of reforms are needed in areas such as social welfare, human capital, regulation and taxation which are discussed here.

  1. Social Welfare Reform. This includes the re-alignment of poorly targeted, improperly designed and ineffective programs towards those with greater impact. The rice subsidy program is one example of a program which has suffered a leakage of 71%, whose coverage of intended recipients is a mere 18%, and is costly to administer. It cost the government about Php40 billion in 2008 alone. Other similar programs that provided rebates on electricity suffered similar flaws, but were hurriedly engineered during the height of the global financial crisis and are non-recurring. The grains program on the other hand represents a recurring expense for the government. Manasan of the government think tank PIDS suggests that the same expenditure if it were spent on the more effective conditional cash transfer program or 4Ps targeting public school children would have a greater impact in terms of alleviating poverty by providing support to poorer households while improving school participation and completion rates (see her slideshow below). They are also proven to be less costly to administer and have a reduced level of leakage. At the same time preventive programs like child immunization and maternal health connected with the 4P’s program would help reduce the cost burden of treating diseases and supporting larger families.
  2. Social Welfare Programs and Social Safety Nets in the Philippines: In Times of Crisis and Beyond

  3. Education and Skills Reform. The next step would be to undertake reforms that would improve the stock of human capital through educational and health reform. As school children improve their participation and completion rates, it becomes necessary to strengthen the content of their education to ensure they are equipped with necessary skills and knowledge needed in the workplace both here and abroad.  Part of the solution lies in extending the years of schooling from 10 to 12 years with the option of leaving school after year 10. The senior years of high school should offer students the option of either college preparation or vocational education and training (VET). There is a need to address the imbalance between college and VET that is leading to the strange anomaly of skills shortages alongside high unemployment. Work-based apprenticeships and traineeships in partnership with industry can also be introduced. The “adopt a school” program can be leveraged in order to provide such a partnership. Metropolitan and provincial polytechnics could also be tapped to provide instructors and facilities for such training. A voucher or entitlement system that would allow public school students to take up a place in a technical college can be designed to allow the funding to move with the student to any local technical college or institution to complete the equivalent of years 11 and 12. It is also important for such VET courses to feed into the higher education system in a seamless manner. The lack of vertical integration currently is a disincentive to pursue technical training.
  4. Health and social insurance reform. The Philippines has a health system akin to the US, where a mixture of public and private hospitals abound and the state funds them through what amounts to a health insurance program called PhilHealth, the key challenge here as it is in the US would be to increase the coverage of the program. This cannot be done without mandates and concurrent subsidies to firms that employ people to increase contributions. Part of the reform process also involves looking at the funding rate of various treatments. Chronic diseases are on the rise in developing countries. While the Philippines does not have an ageing population, there is a high dependency ratio. This means the problem confronted by households at-risk of slipping into poverty due to lost income of primary breadwinners has to be addressed through a combination of social and health insurance improvements.
  5. Regulatory Reform. The cost of doing business in the country has to be lowered through regulatory reform. This entails opening up many sectors including aviation, ports, power and transportation to greater competition. It also involves red-tape reduction and strengthening the property rights of investors. A comprehensive review and consultation process needs to take place to give direction to many of the reforms in these areas. A mix of policy tools could potentially solve many of the bottlenecks in the process of business registration and licensing. Stakeholder consultation would shed light on which tools to use.
  6. Tax Reform. From the mid-90s to the mid-noughties the tax collection effort measured in terms of collection to GDP ratio deteriorated from 17 percent to 12 percent. It recovered slightly with the hike of the VAT rate from 10-12%, but leakages such as the granting of fiscal incentives for the country’s freeports and special economic zones and the non-indexation of sin taxes have offset much of the improvements in tax collection. The redundancy and inefficacy of many fiscal incentives have been extensively documented (see for instance the article by Dr Reside below). Meanwhile corporate and personal income taxes in the country remain higher than elsewhere in the region. The current deficit amounting to 4% of GDP or roughly Php300B has to be brought down to a sustainable level, say 1-2%. A mixture of improved collection efficiency, fiscal rationalization, indexation of sin taxes along with budget neutral adjustments to the tax system to lessen distortions and improve the country’s competitiveness are all justifiable and in keeping with the spirit of Mr Aquino’s campaign pledge of no immediate new taxes.

Fiscal Incentives and Investment in the Philippines

The first step of any reform process is for the leader to be honest and committed to it. Mr Aquino satisfies this  condition with his probity and policy seriousness. During this period of transition, his first task involves assembling a competent team to help him in this effort. They should focus on assembling a coherent package of reforms with the help of partners and stakeholders in the community aimed at restructuring incentives in the Philippines that would transform the current set of assumptions about the state and its role in it.

Moving from a padrino society that depends on personal transactions based on kinship and wardship to one where citizens are empowered with greater access to improved services requires a new social contract between the state, market and society. It will be necessary to move towards the new mold in the next six years.

The state needs to be equipped with the resources necessary to improve the incentives towards human capital acquisition and productive activities. It requires reforms in social welfare, education, health as well as regulation and taxation. At the end of his six year term, if Mr Aquino is able to say that he brought the country forward in these areas, he would have done it a great service worthy of the term transformational.

(This article was originally posted on the author’s website, The Cusp)

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • ATTENTION MANILA MAYOR ALFREDO LIM

    One of your Manila Board of Regents, Mr. Jesus B. Trinos Jr., was alleged involved in a Fraud Complaint in a multibillion peso anomalous deals, the Capability Upgrade Program (CUP), AFP Modernization Program Fixed Communications System Projects SCAM as supplier/agent for Datatrail Corp., Ceragon Networks Israel and Alcatel.

    We need your help in the speedy investigation the one-million-peso-company Datatrail Corp. grossly defrauded the Philippine government, illegally bagging the Contracts in AFP DID NOT PASS the 1ST STAGE BIDDING THE ELIGIBILITY STAGE Datatrail Corporation DID N0T submit their Eligibility documents thereby grossly violating the RA9184 and IRR, this PhP 55,000 taxpaying company getting the multi-billion projects in AFP by fraud and influence peddling.

    We know you as Mr. Clean honest disciplinarian and well known as criminal fraud buster, you hate Cheaters (ayaw po ninyo sa mga sinungaling, mapaglinlang, manlalamang, magnanakaw at mandaraya) especially when they are taking advantage of your good image; even using you and your good name by photo ops. We just saw you recently with Mr. Trinos and Ms. Gemma Cruz-Araneta at PLM during the ceremony welcoming the two new Regents. This is quite disturbing knowing that your good reputation will be at stake here gladly endorsing Mr. Trinos as Manila Regent. Mr. Jesus Trinos is currently involved in various fraudulent illegal activities highly anomalous deals controversial biddings and kickback schemes seen to be raking millions of dollars in government deals that are tainted with graft and corruption issues, influence peddling, grave collusion, daylight robbery and treacherous conspiracy among suppliers and the AFP DND BAC.

    Jesus Trinos Jr. PLMAAI President (representative/agent for Ceragon Networks Israel, Datatrail Corp. and Alcatel) and Hermie Orbe PLM Foundation President (representative/agent for Alcatel) are both MAJOR PLAYERS here as telecommunications suppliers actively participating in the highly anomalous controversial AFP deals and they are on the way to transfer the AFP Modernization Program Funds thru PLM Foundations in which they elected themselves as officers to control the PLM Scholarship bank accounts they opened these bank accounts in Makati City (not in Manila) !?? These suppliers bagged Contracts the AFP Modernization Program Funds illegally, by massive fraud, collusion and these conspiring vendors have entered into JVA (c/o Ceragon Networks Israel and Datatrail Corp.) without Income Tax Return Stamped Receipt from BIR (EFS), etc., grossly violated the latest Government Procurement Act RA 9184 and IRR on JVA published early 2005. Like the Film Scam in 1994 (where the late Ms. Viveka Babajee the Miss Mauritius 1994, she announced the Winners by Fraud; likewise here, the suppliers in conspiracy with the AFP DND BAC 2005-2006 they announced the Winner thru a mere JVA declaration they exacted ‘switching of ballots/Winners’ i.e., thru a JVA, AN INSTANT Winner was declared by DND BAC, Winner without eligibility documents and BYPASSED THE 1ST STAGE BIDDING THE ELIGIBILITY STAGE ! )

    Government fraud is A VERY SERIOUS CRIME !

    This is a national interest and your local government interest as well especially that one of your Regents was deeply involved in these illegal acts that are tainted with GRAFT AND CORRUPTION and fraudulent transactions, the AFP DND BAC highly controversial anomalous deals.

    Sadya po nilang iniligaw yung mga Signatories na binabanggit nila. They DID NOT follow the rule of law the latest RA 9184 and IRR on JVA published early 2005. Datatrail Corporation DID NOT participate the 1ST STAGE BIDDING which is the MOST IMPORTANT STAGE BECAUSE IT IS THERE WHERE WE CAN SEE IF THIS COMPANY, DATATRAIL CORPORATION IS PAYING THE RIGHT TAXES and TO SEE THE QUALIFICATION HISTORY OF DATATRAIL CORPORATION, wala po silang pinakitang kahit anong ELIGIBILITY Documents. Again, Datatrail Corporation DID NOT participate the 1ST STAGE Bidding. This is highly illegal and criminal offense as a Contractor, obviously THIS BIDDING AND AWARDING OF CONTRACT WAS TAINTED WITH GRAFT AND CORRUPTION.

    And So, the public may know !

    SOLID EVIDENCE (THIS IS WELL DOCUMENTED)

    TO SHOW PROOF OF EVIDENCE THAT We have NOT seen Datatrail Corp. during the 1ST STAGE THE ELIGIBILITY STAGE Bidding, here’s an AFP document from their online archive:

    AFP Modernization Program Fixed Communications System Bid Bulletin (notice ONLY four bidders’ ELIGIBILITY DOCUMENTS WERE SCRUTINIZED, namely: Alcatel Phils., Inc., Lucent Technologies, Nera Phils., and Ceragon Networks)

    X X X X X X
    Fixed Communication System (stage/status: 1st stage of the 2-stage procurement mode was held last September 8, 2005; new invitation to apply for eligibility and to bid (ITAEB) will be issued on October 20, 2005)
    Procurement Stage: 1st Stage – Opening and Submission of Bids
    ABC: P447,360,000.00
    Length of Delivery: 240 calendar days upon issuance of Notice to Proceed
    Highlights : Through a Supplemental Bulletin, the deadline for submission and opening of bids for the 1st stage bidding for this project was changed from 25 August 2005 to 8 September 2005, 9:00 a.m. On the day of submission and opening of bids, 4 companies complied, namely Alcatel Phils., Inc., Lucent Technologies, Nera Phils., and Ceragon Networks. None of them failed when their eligibility envelopes were opened. During the initial evaluation of the technical proposals of the 4 bidders, the BAC declared that they all passed, yet subject to post qualification/evaluation. BAC shall formally announce in writing, through the Secretariat, the results of the evaluation. Schedule of the opening of the revised technical proposal and their financial proposals (i.e. 2nd phase of a two-stage bidding process) is scheduled on October 20, 2005 due to request of bidders for longer time to prepare revised technical proposals.

    http://www.hueybravo.net/Modernization%20Projects.htm

    X X X X X

    Based on the AFP BAC’s Bid Bulletin, it showed beyond doubt that there were ONLY 4 Bidders, not 5; the private Filipino company Datatrail Corp. was not in the list !

    WHERE’s DATATRAIL CORPORATION during the 1st STAGE Bidding ?? No docs ? Missing in action ? Datatrail Corporation totally ignored the 1ST STAGE ELIGIBILITY STAGE. THEY HAVEN’T EVEN SUBMITTED THEIR EFS BIR Certifications PAID Stamped Receipt equivalent to 50% of the ABC and Qualifications History, etc ? So now here’s the question, IS THIS the “level playing field” that AFP DND BAC were talking about ? Bakit napakalakas naman po yata ng Datatrail Corporation sa DND BAC. Kung kelan halos patapos na ang bidding, dun lang ididikit yung name nila sa Project na naka- “JVA” kuno ! Dahil po ba kasi masyadong malaki ang Kickbacks or “TONG-PATS” !??

  • Superb article.

    Re: regulatory reform. How to get the regulators out of bed with the regulatees I wonder.

    I would offer up two additional reforms.

    Judicial reform, so the courts become a resource for the people, not just the wealthy, and to somehow encourage advocate attorneys to work for public needs. That is one way to split regulators from those regulated. For example, litigate to stop the abusive advertising techniques of packing a Paquaio fight with 30 minutes of commercials per hour, and cranking the volume up. Not to mention graft, spousal abuse, and other harms that would be addressed. Get rid of the 300,000 backlogged cases so justice becomes tangible and immediate, so that it is a lesson for all. Now it is all a mushy mystery of going nowhere.

    Employment reform, so regular people have the opportunity to apply ambition and capability to a career. Not have careers blocked by the “trade of favors” that employs mediocre cousins and classmates instead of talent. It is the competitive drive for individual success – a career – that empowers the US economy. That competitive fire needs to be lit in the Philippines so that “aspiration” is not seen to be a sari-sari store.

    • To my knowledge, judicial reform will be underway shortly with the enactment of the law that raises salaries, which will be used to attract better personnel in the DOJ. This also coincides with the bureaucratic reforms that raise the salaries of the president on down the line. These were enacted during the previous dispensation.

      We will see if these reforms pay off. The alternative would have been more targeted reforms at agencies critical to economic development. The core question here is whether we need a widespread enforcement of rules (which is what these policies represent) which is very costly to implement or a more targeted set of capacities.

      The risk is that the governance push could collapse under the weight of the cost. As the US growth stalls with Europe already under a cloud of forced austerity, 2011 and 2012 look to be very difficult years to be introducing such massive upward cost pressures in the budget. Stay tuned!

  • Mike H

    Isn’t the Noynoy Aquino administration considering RESTRICTING the curriculum —- in essence, matching the education curriculum to the needs of Pilipinas. The focus on vocational training seems to be part of this thinking (a thinking that seems to originate in Kerala district, India). The thinking is that Pilipinas taxpayers should fund the education of more mechanics or more carpenters and farmers or the basic skills of merchandising — skills needed by the local industry — instead of spending for brain-drain skills like computer-engineers or physicists or radiologists.

    But Pilipinas has a more basic need — strengthening the elementary-school and high-school system. It was very disheartening — Noynoy did not mention any programs to build more elementary school classrooms in Mindanao and the Visayas.

    • I don’t know whether it is restricting. It certainly opens up choice to the student. The whole point is that if you require them to do two extra years of study at least give them skills that they can use in the workforce as not everyone will go on to college.

      The jobs of the future will require a higher skills grade, so the approach of offering them such courses should be linked to some sort of workforce or manpower planning process.

      The most important thing is to keep them engaged in either further study for longer since full time students don’t add to unemployment, particularly chronic unemployment due to low skills.

  • Mike H

    Many of the tax-loopholes are already encoded in Pilipinas tax laws. The lower-middle class and the very poor carry the tax burden much more than the rich. Case in point — The tax-rate on wages is much much higher than the tax rate on dividends and bank-interest earnings. The tax on P100,000 salary is much higher than the tax on P100,000 dividends.