Chastised, toned down, hurt, and exhausted:
These are all words used to describe the mood and sentiments expressed by President Aquino (PNoy) during his fifth State of the Nation Address to Congress. Reeling from the effects of impeachment complaints filed against him on the back of the Supreme Court ruling declaring certain aspects of his controversial Disbursement Acceleration Program (DAP) as unconstitutional, the president nearly broke down as he recounted the sacrifices his parents made to restore democracy.
Suggestions that he was acting like a dictator in usurping Congress’s power over the purse and in initially defying the Supreme Court must have cut him deep. The only intention he had in pursuing the DAP was to hasten the progress of his reforms aimed at addressing the needs of the country, PNoy opined.
Despite this momentary setback, PNoy indicated his willingness to keep fighting for the nation and also suggested that even without him these reforms would continue through the people’s (whom he referred to as his boss’) initiative. This in effect was an acknowledgement that the work of repairing the nation’s institutions and implementing good governance would not be completed by the time he steps down in 2016.
He admonished the nation to look for someone who would continue the effort. He continued to affirm that the path he has chosen (Daang Matuwid) was the right path, and that despite the support of the people to move his agenda forward, there continued to be forces at work to undermine him.
At a forum hosted by the ABS-CBN News Channel (ANC) in cooperation with the National Economic Development Agency, the man at the center of the DAP controversy, Sec Butch Abad cited the glowing words issued by the World Bank president in his recent visit on the progress made by PNoy’s government in pursuing an anti-corruption and good governance agenda.
And yet, by the governments own scorecard (which by the way is based on the World Governance Indicators produced by the World Bank), the government is failing in all but one measure of good governance.
An alternative SONA
As one analyst from the IBON Foundation pointed out, four years is a sufficiently long-time to assess whether PNoy’s time in office so far has been spent well. Based on the evidence, it seems poverty continues to remain high. Despite the lowering of the poverty incidence by some percentage points, it was pointed out that the poverty line was simply based on 54 pesos a day or about US$1.25. Perhaps the more accurate thing to say about that is that the severity of poverty has been eased, but poverty overall still remains high (at about a quarter of the population of 100 million).
Another crucial statistic is that the unemployment and underemployment rates remain the highest in the region. This is what accounts for the high poverty incidence. As pointed out by Sec Almendras and NEDA Director General Balisacan at the PHDevt Forum on ANC, this is mostly due to the low productivity of the agrarian sector of the economy, which is due to poor infrastructure, and low human capital investments, which the administration has been trying fix.
Despite forging a social contract with the Filipino people at the 2010 elections, the ruling Liberal Party spent the first two years of the Aquino presidency going after its predecessor, Gloria Arroyo and her appointees in key positions of government, including Ombudsman Gutierrez and the Chief Justice Corona. Though it was successful in jailing Mrs Arroyo, getting Gutierrez to step down and removing Corona from office, this came at a cost.
The slow rate of its expenditures on infrastructure put a drag on GDP growth, and other items in the social contract were derailed by PNoy’s earlier commitment not to raise taxes and to re-examine every item in the budget to exorcise any vestige of corruption allegedly left behind by the previous administration.
When the economy slowed down the next two years were spent trying to recover through the DAP. The economy did rebound, but then the PDAF and DAP controversies blew up in their face. In its last two years, PNoy’s government will seek to pursue its social contract for accelerating inclusive development while working within the bounds set by the constitution. DAP was an aberration that could have been avoided if it had simply prioritized the social contract to begin with.
Evading the traps
The challenge of any government is always two-fold: to expand the spheres of productive activity in the economy, while increasing the social safety nets of those who slip between the cracks. What separates the “convergence club” of nations that are catching up with the rich nations with the “divergence club” that are falling behind, is the integrity and continuity of economic governance. This is “good enough” governance as opposed to good governance as espoused by the World Bank.
When using good governance as the benchmark, both converging and diverging economies fare poorly. There is no significant difference between the average governance scores of converging countries from their poorer counterparts. What is different is their ability to pursue economic reforms, which expand investments and produce jobs.
In a developing country where wealth is concentrated within a few powerful groups, this task is not easy, especially as the ability of government to generate resources to maintain its autonomy from such vested interests towards crafting independent, coherent, and strategic economic policy is very limited.
When the tax to GDP ratio of a country is 10-20% (ours is hovering between 17-19%), the revenues just aren’t sufficient to enforce contracts, property rights and maintain transparent, accountable government (i.e. good governance). An estimate of how much it costs in the West to enforce a rules based system range from 40 to 60 per cent of the economy. In a developing or even emerging country context, that simply is not feasible given the low tax to GDP ratio.
Added to that are the costs associated with patronage to “payoff” vested interests to give way to reforms or to maintain political stability and security (think of business groups, rebels and the military), and you have a situation where the government’s ability to maneuver is significantly diminished.
When the whole purpose of running for political office is to capture the “off-budget” items such as franchises, licenses and monopolies the congress issues or creates, or to protect business interests by controlling appointments into regulatory agencies or by influencing key policies through legislation crafted in congress, it is hard for a government to pursue reform without sufficient “sweeteners”.
In an emerging country like the Philippines where the productive sectors of the economy are expanding and governments are able to raise more money for social safety nets, the challenge is in maintaining the momentum, while seeking a sustainable path to development (given the environmental and social costs associated with development).
More importantly, escaping the “poverty trap” of low or underemployment, intergenerational poverty in an atmosphere of expanding opportunity for some may lead to a “middle income” trap where development takes place within a narrow segment of the economy and fails to “trickle down” to the base of the social pyramid. It is within this context that PNoy finds himself with severely diminished political capital, in the last two years of his presidency.
Foreign chambers will challenge him to lift restrictions to expand investment opportunities in the economy, encourage greater competition and improve infrastructure. The marginalized sectors of society will press him to complete social reforms and expand the system of safety nets.
PNoy will have to pick his battles from now on. Will he continue to pursue his ambitious good governance agenda, or will he be content with achieving “good enough” governance, the definition of which is to eliminate the worst forms of corruption (i.e. the most extractive) that do not facilitate the expansion of productive sectors and lock people into a path of dependency while maintaining the integrity of economic policy making and governance?
Coherent economic policy does not necessarily equate to liberalization. The power sector is a good example. For a long time we were told that the key to lower energy bills was to “leave it to the market”. This was accomplished through the EPIRA. Now we are seeing that this regulatory framework will not prevent a power shortage and higher energy bills. Calls for emergency powers to allow government intervention to correct a ‘market failure’ are getting louder.
This problem is not just confined to the power sector. In transportation, education, telecommunications, and internet policy, the independence of regulatory bodies and their capacity in formulating policy is hampered either by an incestuous relationship with the very industries they are meant to regulate or corruption.
Deregulation may simply lead to a glut of operators (as in the case with buses in the metro) or having global monopolistic capital capturing regulation as opposed to local monopolists, leading to the same market failures. What is required is a significant improvement in the integrity and capacity of regulatory bodies overseeing strategic sectors of the economy to help expand economic activity.
Success won’t be measured by how liberalized the sectors are but by how efficiently they operate, how low the prices they charge, how available and reliable are the services they offer. To monitor and track all that and wield the carrot and stick effectively to produce desired outcomes requires strong, well-resourced government agencies.
You might have guessed by now that the priorities of a “good enough” governance agenda are very different and more direct to the point than the good governance agenda, per se.
The next item in the agenda would have to be increasing the tax collection effort. Despite his claims that the sin tax indexation reforms did not constitute a new tax, the net effect is that it imposed a higher tax on tobacco and alcohol producers. The template for achieving this reform is just as we outlined above. Affected farmers were compensated with the revenues generated by the tax. The improvements in tax collection were earmarked to improve social safety nets through health expenditure.
This is a template the administration can use to expand the tax base. Forming a social contract requires sacrifice from some taxpayers, in exchange for greater investments in social and human capital. That lies at the core. One proposal would be to have a one percent property tax that would be invested in public and social housing to eliminate the problem of informal settlers.
A minerals and resource rent tax imposed in exchange for liberalizing the mining sector, with proceeds invested in a future fund to provide loans and scholarships to tertiary students would be another example. Whether this administration likes it or not, tax policy is an important lever for achieving its social contract. But to legislate and enforce a minerals and resource rent tax requires a beefing up of the economic bureaucracy. Again, “good enough” governance will get you there.
As the PNoy administration tries to beat the clock in the remaining year and ten months that it has in office, priorities matter. Will it continue to pursue its good governance agenda, or will it focus on “good enough” governance? As shown here, the priorities are very different based on which agenda he uses. If he wants to pursue inclusive growth and development and fulfill his social contract with the Filipino people, he needs to follow “good enough” governance by improving the capacity of economic agencies within the bureaucracy.
This will make the strategic sectors of our economy perform more effectively and efficiently. It will allow him to generate additional resources, beyond just what the present tax code affords him, even with an intensive collection drive. He will need to look at generating additional sources of revenue by following the sin tax indexation template his government has developed.
Two years may not be enough to complete the good governance agenda, but it is sufficient to achieve “good enough” governance, which is more achievable and will be more direct in following the elusive quest for inclusive development. If he chooses the latter, he will be able to step down in 2016 having a more lasting legacy.