Economic issues for next president

Business World
Introspective

The author moderated the discussion by a panel of economists in the 9th Ayala Corporation-UP School of Economics Lecture Series last April 14. The panel was composed of former Economic Planning Secretary Philip Medalla, former Budget Secretary Benjamin Diokno, former Agriculture Undersecretary Arsi Balisacan, and Raul Fabella, former dean of the UP School of Economics. Below is the continuation of the author's introductory remarks intended to frame the discussion:

B. Fiscal: How to generate resources needed for infra and social spending and to enhance private investment climate through sound macro.

1. Introduction: The new government will be coming in with debt to GDP levels quite high (57% vs. 35 to 45% for our neighbors), tax-to-GDP ratio close to historic lows (at 12. 7% vs. 15 to 16% for the region), erosion in revenues due to new measures passed over the last couple of years and for specific taxes, from inflation. At the same time it needs resources to address the large infrastructure and social spending deficit/backlog that is creating a drag on the country's future growth which can only get worse with time. Our infra spending is only about half the average for the region of 5% of GDP, and our education quality has slipped dismally over the years, and from being one of the highest among our peers, is now down the cellar.

2. Questions:
a. How much can the next administration depend on improving tax administration/plugging leakages to generating fiscal resources? How can this new administration generate sizeable increases in collection via improved administration considering poor track record of past administrations (and modest successes in other countries that yielded no more than 1% of GDP)?
b. Should the new administration look to new/additional taxes? VAT, excise taxes, especially on oil, text tax? How to generate public support for new taxes?
c. What reforms are needed in spending priorities to get more bang for the taxpayer buck? In budget and procurement processes?
C. Government Interventions in Imperfect and/or Important Markets. How should government intervene better in key sectors to generate inclusive sustainable growth?
1. Introduction: There are a number of key areas where there is serious lack of supply, despite clear demand, perhaps bordering on crisis proportions if unattended. Examples are in important infrastructure like power, water, and mass transport. Just to illustrate how market or government failure can lead to serious losses - consider the power crisis of 1991/92, resulting from failure to anticipate and build power plants and losses in growth and investment. Growths during those years were negative and only marginally positive, respectively, instead of what could have been at least the historic level of 4%. Even if we assume that the losses were confined only to those two years, putting aside losses from the fruits of lost investment and reputation damage, every 1% of growth forgone each year translates to P70 billion, $1.5 billion, the same price of as two Bataan Nuclear Power plants. Multiply this by 8 for the two years- that's what it cost the economy- that's P560 billion down a dark pit, lost forever. Presented this way, the losses of inaction for under provision of other important infrastructure - water, roads, mass transport, though perhaps not as staggering can be quite compelling.

2. Questions:
a. We are already seeing an increase in frequency and duration of power outages, perhaps driven by combination of factors - weather, inadequate reserves, breakdowns - what can the next administration do to prevent power crisis of the magnitude of the early '90s which is consistent with the EPIRA architecture and law? Or does the EPIRA need change?
b. In the other areas of water, mass transport, roads, how can government improve the investment climate for more public-private partnerships to augment its constrained budget for public works? Does the Philippines also need broader competition policy so that infra services become cheaper, for example in transport or power?
c. Is there a role for government providing fiscal incentives or production subsidies for particular industries or activities (say, SME financing, R and D, training) on a temporary basis until they can be competitive? What are the pitfalls to this strategy advocated by some?

D. Poverty Reduction: How can government make growth more inclusive?
1. Introduction: The Philippines now has one of the highest incidences of poverty counting over 20% of its population as having incomes below one dollar per day, higher than Vietnam, Indonesia, China. This is explained by limited dynamism of economic growth, which moreover has not translated to poverty reduction. There is likewise evidence of deterioration in the distribution of income. Factors identified by the World Bank as contributing to this deterioration include unequal, inadequate access to social services and social protection, leading to unequal sectoral and regional distribution of growth and barriers to factor mobility.

2. Questions:
a. What are the roots of poverty in the Philippines?
b. How might some of the barriers in factor mobility help reduce poverty, i.e., policy bias like legislated wages against low-skill employment, or biases vs. more efficient use of land due to agrarian reform? Too sensitive to embark on? Are there political feasible actions possible in these areas?
c. What improvements in social services and social protection are feasible, e.g., redeployment of NFA subsidies toward conditional cash transfers? What could be the possible political road map for doing this without raising obstacles on ground of food security, etc?
d. What are the other kinds of interventions should government embark in the areas of education and health, including reproductive health, that addresses the requirements of the poor that are politically feasible early on?

Mr. Romeo Bernardo is board member of The Institute for Development and Econometric Analysis, Inc. and managing director of Lazaro Bernardo Tiu & Associates, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.