Professional Documents
Culture Documents
XIII
No. 5
September-October 1995
ISSN 0115-9097
he flow of historical events has made the question of whether the Philippines should or should not participate in the ASEAN Free Trade Area (AFTA) moot and academic. Since January 1993, the Philippines has been participating in the regions expanded trade arising from the creation of AFTA. This is as it should be. Theory is long and experience is even longer and both indicate that participating in free trade areas yields more benefits to a country than staying out. Although there is not enough empirical material yet to allow us to judge whether Philippine participation in AFTA has been beneficial or not to the economy, one can say that AFTAs impact on the country will be by Gonzalo M. Jurado decidedly favorable. It is further expected that the positive results of participation will overwhelm the negative consequences. Of course, the negative consequences themselves will not be unimportant. These should be anticipated. Programs to mitigate or reverse such negative effects must therefore be in place alongside measures that promote maximization of gains from the new arrangement. If the Asia-Pacific Economic Cooperation (APEC) forum carries on its program of trade and investment liberalization, then more benefits will be obtained due to the broadened arena. In that event, the boundaries of liberal economic interaction among ASEAN countries will extend to the Pacific rim. The limits of liberal economic interaction will be pushed even further if the General Agreement on Tariffs and Trade (GATT) as forged at the end of the Uruguay Round is ratified by all trading countries. Participants in regional arrangements, such as the Philippines in AFTA, will increase their benefits by trading and investing not just within the regional bloc but in other parts of the world economy as well. As a consequence, the pertinent issues that now require attention in the Philippines are: G What industries in the Philippine economy will be favored by AFTA?
Challenges
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Editor's Note
The ASEAN Free Trade Area (AFTA) is the first circle in the ever widening concentric circles that eventually lead to world trade liberalization. The second circle is the Asia-Pacific Economic Cooperation (APEC), a trade bloc encompassing the major economies fringing the Pacific basin. The last circle is the World Trade Organization (WTO) which seeks global trade in a spirit of free trade. Dr. Gonzalo Jurado, Senior Visiting Research Fellow at the PIDS, in his article for this DRN issue on AFTA's challenge to the Philippines, argues that the era of protectionism is gone and it is time for Filipino businessmen and entrepreneurs to stand up to the challenge of economic competition and product excellence. The globalization of trade means more foreign investments. But more investments will be made only if the available infrastructure are in place. The Local Government Code of 1991 which devolved the financing of local infrastructure projects to local governments is therefore very timely. In this regard, PIDS Research Fellow Gilberto Llanto believes that a municipal credit system should be in place to address the problem of funding. In his brief notes, he cites the current municipal credit system in the country and how it can be further improved. Finally, also in this issue, Dr. Celia Reyes, PIDS Research Fellow, provides us with a forecast of inflation rates for the coming year.
What's Inside
2 4 6 10
Some notes on a municipal credit system Living with inflation Inflation forecasts for 1996 Health care financing reforms
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1995
he Municipal Development Fund (MDF) -administered by the Bureau of Local Government Finance of the Department of Finance -- is the channeling mechanism of foreign loans and grants to local government units (LGUs). It was established in 1984 as a revolving fund, to make it self-sustaining. Loan repayments accumulate to the MDF for relending to LGUs. The MDF has been the sole source of long term finance for LGU projects and it now faces an increase in demand for capital funds following the enactment of the Local Government Code of 1991. With the devolution of expanded powers and responsibilities to the LGUs comes an increased awareness of and demand for long term financing for many local development projects. The purpose of this note is, first, to discuss the recent developments in the MDF in the context of the flexibility in credit finance sourcing that the Local Government Code has vested on LGUs and the interest among the multilateral institutions to provide long term loans to LGUs. Its second purpose is to analyze the impact of the devolution on the design, implementation and financing of projects.
and regulations of the Bangko Sentral ng Pilipinas. Before the 1991 Code, LGU credit finance was governed by the provisions of Presidential Decree 752 which, among others, enjoined them to borrow from government financial institutions subject to the approval of the Department of Finance. This restriction has been lifted by the 1991 Code. However, LGUs still cannot directly source their capital funds from foreign creditors. The 1991 Code
loans to the LGUs in the 1980s but their general experience in this respect was not encouraging. Recently, the Land Bank of the Philippines (LBP) and the Philippine National Bank (PNB) have announced new credit windows for LGUs. However, the funding available in these GFIs, together with the MDF funds (the lending capacity of the operating municipal credit system) is far below the large demand for capital funds at the local level.
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1995
therefore constrains MDFs capacity to lend to LGUs. Besides, the level loan proceeds generated from foreign sources under the MDF are scrutinized and ultimately decided upon by the House of Representatives and the Senate. Because of the limitation imposed by the budgetary ceiling, the national government created a new account (outside the account of any department) called the Allocation for Local Government Units (ALGU) which absorbs the capital outlay component of MDF. The personnel component remains with MDF. This approach is a convenient way to get around the budgetary ceiling on the MDF. However, it still faces the probable budget cuts wielded by Congress. Because of this, the constraint to the MDFs lending capacity remains. In fact, for 1994, the national government submitted a budget of almost a billion pesos for ALGU but Congress appropriated only P400 million. Multilateral institutions have worked with the MDF and considered it as a viable relending facility for LGUs. The MDF, through its policy governing board, has in fact taken steps to institute market-oriented loan terms and conditions. For instance, the MDF lending rate is set at 2 percent above the weighted average interest rate on 61-90 day time deposit rate. However, there is an increasing recognition that the aforementioned budgetary constraints, including the provision in the 1991 Local Government Code on relending of foreign loans, limit the access of LGUs to long term financing and the capacity of foreign creditors to grant LGU loans. The raging question now among the multilateral institutions is the conduit arrangement for foreign loans. The challenge at the moment is how to bridge the gap between the huge demand for capital funds and the willingness of multilateral institutions to make loans to LGUs within the limitations imposed by the 1991 Code and the influence of the budgetary process on the amounts that could be appropriated for MDF.
funded from the proceeds of foreign loans and grants, operate with concessional or, in some instances, near-market terms and conditions, side by side with private financial institutions which are nevertheless encouraged to lend to those target groups. In many instances, governments mandate loan quotas for banks to fulfill in an attempt to make them lend directly to the target groups.
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he first s e v e n months of 1995 saw manageable inflation rates hovering between 5 and 6 percent. In August, however, inflation rose to 8.1 percent. In September, it soared to 11.3 percent. These rates are evidently higher than governments inflation target of 6.5 percent for the year. What happened?
Living with
Inflation
ments crisis of political leadership. Those years saw public clamor for political change whose culmination was the 1986 people power movement. Not surprisingly, political shocks affected the economy, driving prices up as a result of the abnormal situation. In a sense, the Philippine economy was at the brink of joining the ranks of the banana republics in 1984 and 1985. Inflation in Latin America hovered between 25 and 30 percent in this same period. In 1986, however, something unusual happened. There was a deflation, which means that the purchasing power of the peso increased (at a minimal 0.4 percent). Perhaps one should be very thankful for not experiencing the crisis that gripped Mexico when its peso collapsed in 1994. The liquidity crisis sent stocks skidding in Latin American countries and dominoed on emerging markets worldwide. Chile meanwhile experienced inflation rates of 1,000 percent immediately after the Allende government was toppled by a military coup in 1973. Nearer at home, permanently stable prices of goods are hallmarks of the consumer markets in Singapore, Taiwan and Malaysia. Inflation rate in Singapore was an average 4.2 percent between 1973 and 1990. In Taiwan, it was 4.3 percent in 1980-1990. In Malaysia, it was 5.1 percent from 19731990. From 1973 to 1990, the Philippines saw an average 14.3 inflation rate. The figure was slightly nudged by Indonesia's 15.8 percent inflation rate average for the same period.
Surveys conducted by the Social Weather Stations reveal that Filipinos consider high prices of commodities as the countrys gravest problem. This should not come as a surprise since similar opinion polls in other countries, particularly in the US, also show that people react very sharply to inflation, ranking it as a graver problem than unemployment.
Inflation trends
From a historical perspective, inflation was highest in the country in 1984 (47.1 percent), 1985 (23.4 percent), 1991 (18.7 percent), and 1981 (17.8 percent). The years 1984 and 1985 are associated with the Marcos govern-
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where the economy overheats leading to inflation. To cure inflation, government can tighten its fiscal and monetary policy. But tightening it too much can lead to a recession, which leads to unemployment. Simply put, policies aimed at reducing inflation inadvertently lead to higher unemployment and policies which seek to contain unemployment ultimately leads to higher inflation rates. Hence, government must do a balancing act. Inflation targets at zero rate may not be socially desirable because of the tradeoff in terms of increased unemployment and vice versa.
high and inflation was low, there was an improvement in income distribution and a substantial reduction in poverty incidence. Thereafter until 1991 when growth was low coupled with a rising inflation rate, there was a sharp deterioration in income distribution and a sharp increase in the Gini ratio. This suggests that low growth and high inflation really tend to hurt the poor the most. Inflation affects both rich and poor but mostly the poor. This has led economists to suggest that government should measure the effect of inflation on various income classes. It would not be surprising to find out that the upper classes are only marginally affected by inflation. It is the bottom 30 to 50 percent of the population which surely have to bear the brunt of inflation. The 1991 Family Income and Expenditures Survey of the National Statistics Office showed that, on the average, more than half of all incomes are spent on food items. Common people are therefore more prone to price shocks in basic commodities.
management and labor. This group convenes and presents the pros and cons of a wage increase after which it either votes for or turns down a wage increase and by how much if it opts for the first. In the absence of wage adjustments or in the face of inadequate wage increases, ordinary workers can simply tighten their belts and make do without -- a very hard option considering that Filipinos have a time preference for present consumption. Others can moonlight (which can affect productivity in their fulltime job). Still, others can depend on that allencompassing Filipino institution: the extended family.
Indexing
Indexing is a mechanism for periodic adjustments in the nominal value of contracts in line with movements in a specified price index. The escalator clause in wage contracts is one example. Care should be exercised in implementing this social mechanism. In the case of Latin America, the
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Table 1. Consumer Price Index and Inflation Rate in the Philippines (1988 = 100) CPI
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 January February March April May June July August September October 43.1 46.8 49.3 72.5 89.5 89.1 91.8 100.0 112.2 128.1 152.0 165.6 178.2 194.3 199.6 200.4 201.2 202.8 205.2 207.7 209.8 213.8 220.4 219.7
Inflation Rate
17.8 8.6 5.3 47.1 23.4 -0.4 3.0 8.9 12.2 14.2 18.7 8.9 7.6 9.0 6.2 4.9 5.6 6.2 6.8 7.2 7.4 8.1 11.3 11.0
Forecasting inflation
A short-term forecasting model for inflation is estimated by incorporating cost-push and demandpull factors. Some of the cost-push factors include wages as proxied by legislated minimum wage, interest rates as proxied by the 91-day treasury bill rate, prices of petroleum products and prices of nonfuel imports as proxied by the implicit price deflator for nonfuel imports. The ratio of total liquidity to GNP is included to capture the effects of excess liquidity. Monthly data from January 1981 to March 1995 are used in the estimation. The equation is shown in Table 2. All the variables have the expected positive signs. Except for interest rates, all the variables significantly affect the movements in the consumer price index.
Possible scenarios
Should the government decide to postpone price adjustments until January 1996, given the problems brought about by the current rice shortage, several scenarios may be considered. Under Scenario 1 where prices of petroleum products are adjusted by P0.27 per liter and minimum wages are increased by P20 per day, the inflation rate is expected to jump to 9.24 percent for 1996.
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Table 2 GNP January February March April May June July August September October November December
GNP TL TBILL IPINF WAGE WPP
TL 605,154 626,577 638,382 656,761 635,023 645,882 657,702 674,145 699,897 705,776 739,794 798,978
TBILL 10.18 11.11 13.80 14.86 14.24 13.61 11.40 9.28 9.50 10.00 10.50 11.00
IPINF 177.550 177.550 177.550 194.218 194.218 194.218 204.099 204.099 204.099 214.304 214.304 214.304
WAGE 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00
WPP 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344 5.5344
196,558 196,558 196,558 199,645 199,645 199,645 200,948 200,948 200,948 235,895 235,895 235,895
= = = = = =
Gross National Product Total Liquidity (in billion pesos) 91-day Treasury Bill Rate Implicit Price Index for Imports of Nonfuels (1988 = 100) Legislated Daily Minimum Wage Rate for the National Capital Region Wholesale Posted Price
In Scenario 2, oil prices are increased by P0.50 per liter and minimum wages by P20. Inflation then goes up to 9.52 percent in 1996. The last scenario considers the case of a P0.60 per liter increase in petroleum prices and a wage hike of P20 per day. As expected, this causes the biggest increase in consumer prices among the three scenarios, with an inflation rate of 9.64 percent.
prices but the downward rigidity of prices of most commodities may prevent the attainment of the targetted inflation rate. Likewise, deferment of price adjustments may defer the inflationary impact. This is true only if the inflationary expectations are not significant. Thus, if there is no plan to
implement oil price adjustments within the next months, the government should make an announcement. This will serve to dampen inflationary expectations. However, once the government makes an announcement that there will be no price increase, it should not backtrack or it will serve to fuel inflationary expectations. DRN
Still high
The simulations indicate that in order to minimize the inflationary impact, the increase in petroleum product prices should be kept to a minimum. It is assumed that the method chosen for financing the Oil Price Stabilization Fund (OPSF) deficit to afford the lower oil price adjustment will not lead to higher inflation. What will bring down inflation rate? GNP growth higher than 6 percent, lower interest rates and lower import prices may curtail the increase in prices and may even bring down
Table 3. Impact of Oil Price and Wage Increases Scenario Inflation Rate 1995 1996
8.68 8.67 7.37 9.24
Baseline: No oil price and wage increase Scenario 1: Price adjustments in January 1996 P0.27/liter increase in petroleum product prices P20 increase in minimum wage Price adjustments in January 1996 P0.50/liter increase in petroleum product prices P20 increase in minimum wage Price adjustments in January 1996 P0.60/liter increase in petroleum product prices P20 increase in minimum wage
Scenario 2:
8.68
9.52
211.16
231.27
Scenario 3:
8.68
9.64
211.16
231.52
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1995
impact but limited (three years) time dimension. This particular stance would distort preferences in the LGU, producing projects of limited duration but with high visibility and impact, at the expense of long-gestating but more useful projects. For these reasons, it is necessary to work for the development and availability of a professional cadre of local bureaucrats who would sustain and maintain local projects far beyond their immediate project life. The natural check to the short time horizon of elected officials -- both the executive and the local councils ( sanggunians ) -would be the nongovernment organizations (NGOs) and people's organizations (POs) which have been mandated by the 1991 Code to be members of the local councils (according to the Code, at least 25 percent of the local councils must be NGOs or POs). Of course, the reality is that everyone is a self-interested agent. The NGOs and POs are also driven by both self-interest and community interest. However, there is a certain degree of transparency and a set of self-checking mechanisms among NGOs and POs which would tend to minimize selfinterest action. It would be crucial for these NGO s and POs to instill a certain level of awareness in the local communities where the LGU is allocating resources for a particular project. A community watch spearheaded by genuine NGOs could offset the negative impact of local politics. It is important to make the distinction between genuine and not-so-genuine NGOs and POs. A discussion of the parameters to distinguish one from the other is beyond the scope of this note but certainly, it is an interesting topic.
Heterogeneity of LGUs
Second , the LGUs have varying degrees of executive, managerial and technical expertise and financial capabilities to implement projects. The LGUs can be broadly classified into three groups:
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beneficiaries of a given project must figure prominently in the design, implementation and maintenance of projects. A commitment to improve revenue mobilization will be necessary in order to assure creditors that the LGU would be able to service the debt and maintain the project for which funding is being asked. The 1991 Code provides an expanded set of taxing powers and responsibilities, but the reluctance to use the taxation power more vigorously will constrain the capacity to provide public goods and services, service the debt, maintain projects, and discharge a host of other LGU responsibilities. More importantly, a reluctance to raise more local revenues will adversely affect the viability of nonrevenue generating projects. The LGUs have much to gain from the imposition of user charges. Cost recovery techniques will have to be increasingly used in many LGUs which seek to provide adequate public goods and services. This gives creditors the assurance that the LGUs would have the means to service the debt. The LGUs have to educate their constituency on the advantages created by user fees and to show more resolve in imposing them given the tendency among users of public goods and services to shirk from the obligation to pay for the cost of those goods and services. Adequate revenue mobilization and the adoption of cost recovery techniques would enhance the creditworthiness of LGUs and minimize LGU credit risks. This would help clear the way for private sector financing of LGU projects.
and it happens that expensive capital projects deteriorate for lack of proper maintenance. It would be a total loss of borrowed resources to neglect maintenance. To assure proper maintenance, the project should require a commitment by the LGU to devote resources for appropriate project maintenance.
granted Cebu City a loan of P50 million for a seven year term at 16 percent interest with a city-owned real property as collateral. Another instrument is the use of LGU deposits as loan collateral to reduce credit risks. At present, PNB is using this to reach LGUs. However, there is a need to liberalize the policy on LGU deposits. For instance, the Commission on Audit (COA) has issued Circular 92-382 which favors the use of GFIs as depository institutions and limits the LGUs use of
Local government units will be able to access both domestic private sectors and foreign sources to address their demand for capital depending on their expertise and financial capabilities to implement and maintain projects.
interest rate risks in LGU lending. One way to reduce the credit risk is to withhold at the Department of Budget and Management (DBM) the internal revenue allotments (IRAs) for LGUs which are delinquent in loan repayments. The MDF experience with this approach shows that it is an effective device to ensure loan repayment. Under present rules, the IRAs could not be intercepted at source without the consent of the LGUs but certainly, an arrangement for an IRA intercept could be worked out with the LGUs concerned. The downside of this approach is the possibility that lenders will be less careful in screening loan applications from LGUs because of the security provided by the IRA intercept. A functioning municipal credit system would have to identify other creative means to reduce credit risks. One approach is to secure loans with real property collateral. The PNB
the deposit facilities of private banks. This policy should be reviewed. The volatility of domestic interest rates is the source of interest rate risk and has constrained the development of a long-term credit market. Variable interest rates have therefore been used by lenders to compensate for the interest rate risk. On the other hand, given the longgestating and lumpy nature of public investments, the LGUs are wary about the implications of the interest rate risk on their capacity to repay a long-term loan. Both borrowers and lenders are affected by the interest rate risk and it is hard to see how they can efficiently transact unless this is adequately addressed. Some view the creation of an interest rate stabilization fund in the MDF as a necessary transitional mechanism to shield LGU borrowers from the volatility of interest rates.
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1995
e, at the NEDA, have often been accused by our detractors that while we have projected a healthy picture of the countrys economy for the last few years with gross national product (GNP) up and inflation at manageable levels, we have failed to address the basic question of how this translates to a better quality of life for the common man on the street. Today, we shall try to provide the answer to that question, with particular reference to the issue of health care needs.
proper investment in human development that political and economic development could be guaranteed and sustained.
Health Care
by Cielito F. Habito**
You are no doubt aware of the two key principles of the MTPDP: people empowerment and global competitiveness. By people empowerment, we envision a people who enjoy the same benefits and opportunities, regardless of social status, that enable them to take direction of their own lives. While this is our goal, the idea of an empowered citizenry shall remain untenable for as long as basic health care services remain outside the reach of the majority. It is therefore our responsibility to come up with an adequate health care program and ensure that this program is within reach of the lowest income brackets.
"We are not investing enough in our health care needs," stated Secretary Cielito Habito.
*Excerpted from the keynote address delivered during the PIDS-DOH policy workshop on "Baseline Research for Health Care Financing Reforms," September 28, 1995, The Manila Hotel. **Secretary of Socioeconomic Planning and Director-General, National Economic and Development Authority.
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Financing Reforms*
Based on the literature on health care financing, an effective health policy program should cover the following areas: G coverage of beneficiaries of health care financing schemes G type of benefits conferred to the beneficiaries G level of contribution required by beneficiaries, government and other sectors G payment schemes and disbursement procedures to be applied to the providers G management, administration and information systems to be adopted by health care financing institutions involved G measures to enhance and improve the performance of the health care providers G roles of public and private sectors in the delivery and financing of the health care services and G the implementation strategy, including legislative initiatives required for effective implementation. These are the areas that we need to address today. comprehensive social insurance package with appropriate recovery schemes. We also hope to create a better regulatory environment to monitor and ensure that the additional resources generated by these reforms do not go to waste. In providing us with a framework to deal with this problem, we can already assess the strengths and weaknesses of the current health financing program in the Philippines. Later on, the recommendations based on this baseline study can help us decide on the best options in formulating a health care financial program beneficial to all sectors.
mechanisms available to fund the health sector. These include taxation, compulsory health insurance through salary deduction schemes, private health insurance, and paying on a perservice basis. This makes the Philippine health sector one of the most diversely financed among developing countries. However, despite the variety in the availability of health care financial programs, most of these schemes are still heavily underutilized and out of reach of the greater majority. For one thing, public provision of health services financed by taxes tend to be highly inequitable because the effective tax rates are regressive. Statistics show that in 1990, the Medicare I program -- a compulsory insurance scheme for all public and private sector wage earners, non-owner employees and their dependents -covered a mere 38 percent of the population, or some 20 percent of the labor force. This small segment of the population presently covered by Medicare represents those who are more likely to be economically better off vis-a-vis the rest of the population. Employed persons who are not members of the Medicare program are likely to be concentrated in the agriculture and service sectors (which account for the bulk of the countrys labor force) .
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Whatever might be their positive effects on the individual member countries, regional groupings are not the most efficient mechanism for achieving production and consumption optimum as far as the world as a whole is concerned. This is because regional groupings can still coexist with trade and investment restrictions in the rest of the global economy. Only a steady and ever widening removal of these restrictions throughout the world economy will lead toward that optimum. The first-best solution, from the viewpoint of both the world as a whole and individual countries, is the globalization and acceleration of the trade and investment liberalization envisioned under GATT. A trading arrangement in which all participating countries reduce trade Table 1. ASEAN, Basic Indicators barriers is superior to one in which a number of GNP per Capita regional free trade areas Country Population Area Dollar Average Annual aim separately for an (million (000 (1990) Growth Rate optimum within their own mid-1991) sq.km.) (1965-90) boundaries. In the first instance, both individual countries and the world Brunei 0.3 6 * as a whole attain their Indonesia 178.2 1,905 570 4.5 production and conMalaysia 17.9 300 2,320 4.0 sumption optimum; in the Singapore 3.0 1 11,160 6.5 latter case, it is only Thailand 55.8 513 1,120 1.1 individual countries Philippines 61.5 300 730 1.3 which attain their optimum and not the Total ASEAN 316.7 3,049 16,200 20.7 global economy as a whole. The likelihood of Source: Asian Development Bank, Key Indicators, 1992. * Estimated by the World Bank to be in the high income range. trade diversion in the
world economy is greater in the framework of regional free trade areas than in the context of worldwide tariff liberalization. Under GATT, trading countries bind themselves not to exceed ceiling rates for tariffs over a wide range of industrial products. They also agree to tariffy all nontariff barriers and bind all resulting tariffs at lower levels for agricultural products. Along with these bindings, all country groups and regions offer to reduce tariff rates on a large portion of industrial and agricultural product tariff lines. With respect to services, these will also be covered by the most favored nation clause. AFTA is less comprehensive in coverage but is much more specific on the goods covered and the time frame involved. Under a recent decision of the regions economic ministers, the reduction of tariffs on goods originating from ASEAN countries shall be accomplished within ten years instead of the original 15. As envisioned by the economic ministers, there will be two schemes under AFTA -- the normal track and the fast track. Under AFTAs normal track, tariff rates above 20 percent shall go down to 20 percent by January 1, 1998 and subsequently to 0-5 percent by January 1, 2003, while tariff rates of 20 percent
and below shall go down to 0-5 percent by January 1, 2000. On the other hand, under the fast track scheme, tariff rates above 20 percent shall go down to 0-5 percent by January 1, 2000 while rates at 20 percent and below shall go down to 0-5 percent by January 1, 1998. In addition, products currently excluded from the Common Effective Preferential Tariff (CEPT) shall be transferred to the included list over a period of five years at 20 percent annually starting January 1, 1995. By January 1, 2000, all products shall have been under CEPT coverage. The tariff reduction for certain groups of products will also be accelerated. Quantitative restrictions affecting these products will be removed. All nontariff barriers will also be dismantled within a period of five years. As a moderately small player in the world economy, the Philippines cannot take up the burden of global production and consumption optimization. It must concern itself with the more modest problem of optimizing its own production and consumption in the AFTA context. All the same, it is clear that for the prospective gains from AFTA to become even more substantial than they may be at this time, the lowering of tariffs and the abolition of nontariff
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barriers among AFTA member countries should be made faster than is currently scheduled. Moreover, the coverage of this tariff and nontariff reduction and elimination should be made more comprehensive than that defined under GATT.
1982
1985
1987
1990
1991
Imports
Total ASEAN Brunei Indonesia Malaysia Singapore Thailand Other Countries Total World Total ASEAN as % of Total World
Sources:
For 1981-91 Import and Export data -- the National Statistics Office; for 1981 Import and Export data and 1980-89 Total World Data -- UN-ESCAP Statistical Yearbook for Asia and the Pacific, 1991; and for 1990-91 Total World Data -- Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries, 1992.
from ASEAN are paying higher tariffs than what ASEAN importers are paying in the Philippines. That these Philippine industries have nevertheless remained viable is a testimony to their basic competitiveness. Data on effective protection rates (EPRs) of Philippine industries, however, show another dimension of the situation. EPRs are generally lower for export-oriented industries than for domestically-oriented industries, implying that in addition to the handicap they endure in foreign markets, Philippine exports are penalized in their own home market. That EPRs in general are now much lower than they were a decade ago as a result of the series of tariff reductions carried out by the government in the last ten years does not mean that export disincentives have altogether disappeared. It simply means that the need to equalize EPRs among
industries has been recognized. The EPRs are supposed to be progressively lowered to improve the chances of Philippine exports in foreign market. The fear of some Philippine industries of losing out in the economic competition with their ASEAN neighbors has little basis in fact. Even the nervousness exhibited by domestically-focused industries seems to be more intense than can be justified by the reality. Still, it is correct to say that some Philippine industries are competitive and some are not. Those that have been exporting to ASEAN countries will become even more competitive now that tariffs are beginning to be lowered. With AFTA, these industries will be confronted with a vastly expanded market. On the other hand, those which are domestically focused will be confronted with the
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The foregoing elasticity estimate is of course based on tariff-ridden foreign prices for Philippine exports. Once tariffs in these countries are dismantled, markets in these countries are expected to widen for the same level of real output, enhancing opportunities for growth of Philippine exports. Apart from the matter of elasticity, the annual growth rate of Philippine exports to the ASEAN-4 in the 1981-91 period ranged from a negative 34 percent to a positive 46 percent. The figures indicate that the fluctuation over the years has been wide; they also signify that the upper bound of the possible growth rate of Philippine exports to the ASEAN-4 can be very high.
Repeating past or improving present performance. Growth rate Growth rate Elasticity Another way to of Philippine exports of GDP of Philippine exports size up the to ASEAN-4* of ASEAN-4* with respect market potential (percent) (percent) to GDP of ASEAN-4 of Philippine exports to its 1981 9.0 16.0 0.56 ASEAN neigh1982 -12.0 5.0 -2.40 bors is to classify 1983 -2.0 -2.0 1.00 these exports into 1984 46.0 4.0 11.00 three groups: 1985 3.0 1.0 3.00 Group A which 1986 -34.0 -6.0 5.67 1987 44.0 4.0 10.00 c o n s t i t u t e s 1988 -3.0 8.0 -0.17 exports that have 1989 8.0 15.0 0.53 grown steadily in 1990 10.0 15.0 0.67 the last ten years; 1991 5.0 12.0 0.42 Group B which refers to exports Average 6.7 6.5 1.03 that have de* Counting only Indonesia, Malaysia, Singapore and Thailand. No data available clined after for Brunei. reaching a peak; and Group C GDP gives rise to a one percent increase which includes exports that have in Philippine exports to the ASEAN-4. remained unchanged or have declined A low figure indeed. However, if the over time. expected increase of ASEAN-4s GDP Table 4 shows the classification of an average annual rate of 6-8 percent of Philippine exports vis-a-vis the in the next several years is taken into ASEAN-4. account, then Philippine exports to With respect to Indonesia, all these countries can be expected to rise Philippine exports (with the exception by more or less the same percentage. of food and food preparations) have
either increased steadily or decreased after reaching a peak (Table 4a). With respect to Malaysia, the story is the same. All Philippine exports except food and food preparations have either grown steadily or decreased after reaching a peak (Table 4b). With respect to Singapore, the exceptions to the expansion are inedible crude materials and animal and vegetable oils and fats. The rest of Philippine exports have either increased steadily or decreased after reaching a peak (Table 4c). With regard to Thailand, all Philippine exports have either increased steadily or declined after reaching a peak. The only exception are exports of animal and vegetable oils and fats (Table 4d). Finally, with respect to Brunei, all Philippine exports have either increased steadily or declined after reaching a peak. There are two exceptions to this: exports of inedible crude materials and miscellaneous commodities which have tended toward zero (Table 4e). If Group A exports can only maintain the average growth rate of 10 percent which has characterized their performance in the last few years and if Group B exports can only return to their previous peak or grow by the same rate as those in Group A, total Philippine exports to ASEAN neighbors will expand by an average annual rate of between 60 and 80 percent.
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broader competition in the domestic market as an aftermath of AFTA. Domestically-oriented industries consist of two types: those which do not need domestic tariff protection to survive, and those whose survival depends on the continuation of domestic tariff protection. With respect to the first type, AFTA will merely mean the loss of the redistributive effect of protection but not the impairment of their economic viability. It is with respect to the second type of industries that the consequences of AFTA can be unsettling. The second type of industries can of course acknowledge their fate passively and allow imports to take up their share of the domestic market, in which case the economy would have lost that much domestic output and domestic factors (capital and labor) would have lost their employment and incomes. This is, of course, precisely the kind of response that neither the industries themselves nor the national community may be willing to accept. Accepting the challenge. The more socially preferable course of action for noncompetitive domestically-oriented industries will be to take on the challenge of AFTA. This can be done by uncovering the causes of lack of international competitiveness and implementing measures to overcome them. One major cause of this lack of international competitiveness is low productivity which is in turn the result of technological backwardness. Another cause is the attitude of dependence of leaders in these industries on government protection. Needless to say, these industry heads have reached their present position of leadership under the mantle of a protected environment in the last three decades. With regard to the first source of lack of global competitiveness, a number of factors underpin this technological backwardness. For one, the private sector has never had any significant participation in the nations
Source: National Statistics Office. Note: A - Commodities that increased steadily. B - Commodities that increased to a peak then decreased. C - Commodities that decreased or did not change.
756 13,613
225 28,925 82,500 137,125 B 266 323 313 381 A 131 52 161 248 A 2,700 66 44 115 400 101 109 122 373 B 149 A 92 B 118
Source: National Statistics Office. Note: A - Commodities that increased steadily. B - Commodities that increased to a peak then decreased. C - Commodities that decreased or did not change.
R&D program. Of total R&D expenditures in 1979, only 16 percent came from the private sector. In 1984, it spent only 19 percent. The number of R&D people in the private sector was similarly small, representing 16 percent of the total in 1982 and 10 percent in 1987. For another, the sector has been slow in appreciating the inventions and discoveries of the Department of
Science and Technology (DOST). Many of these new technologies remain unutilized to this date. Finally, it is clear that the capital goods imports availed of in the past years by the private sector under various investment schemes have not given the industries access to any technology resembling cutting edge. Notwithstanding the billions of
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equipment, the industries remain in technological limbo today. The managerial leadership of the domestically-oriented private sector is also partly responsible for the sectors lack of daring and innovativeness. Many of these leaders cut their managerial teeth in the sheltered
environment of the 1960s and 1970s. In those decades, they had to develop political abilities as well as business acumen in order to ensure the growth and viability of their business enterprise. That home-focused entities are now "terrorized" by the prospect of coming into contact with foreign enterprises in a liberalized market is an indication of how debilitating the psychological impact of this orientation can be. These problems cry for attention as the country enters into the more intensely competitive environment of a free trade area.
Source: National Statistics Office. Note: A - Commodities that increased steadily. B - Commodities that increased to a peak then decreased. C - Commodities that decreased or did not change.
Source: National Statistics Office. Note: A - Commodities that increased steadily. B - Commodities that increased to a peak then decreased. C - Commodities that decreased or did not change.
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expanded value added tax law becomes a necessity. On the expenditure side of the budget, there is need to increase the allocations for infrastructural and social overhead capital. The supply of energy, electricity and telecommunication services are indispensable to public and private investment. Well- educated and trained human resources are sine qua non to the competitiveness of industry and to a high quality of life in the community. In the monetary field, there is need to pay close attention to the money supply for purposes of price stabilization. While it is true that some degree of inflation is inevitable in the course of growth, or that indeed, it is necessary in order to spur growth, it is nevertheless even more correct to say that inflation can become a brake to growth when the rise in the cost of inputs squeeze out margins of profits. Inflation can also be destabilizing as the consuming public may carry out mass actions to express their resistance. These two policy areas -- fiscal and monetary -- are of course related. So long as a budget deficit exists, the government will find it irresistible to borrow from the public or from the Central Bank. In the first instance, it will have to raise the interest rate which will lead to a dampening of investment while the second instance will mean printing more money which will then generate inflation. Both courses of action must be resisted so as not to upset the investment and production calculations of industries. The rate of savings must also be raised. The stabilization of prices and the improvement of taxation measures will help achieve this aim but the contribution of foreign investments will be critical. Foreign investment augments both domestic savings and domestic investment at the same time thereby broadening the extent of development and speeding up its pace. Attracting foreign investment, there-fore, must be made an integral part of macro policy.
2,114 571 85 7
Source: National Statistics Office. Note: A - Commodities that increased steadily. B - Commodities that increased to a peak then decreased. C - Commodities that decreased or did not change.
The foreign exchange rate will also be a relevant policy concern. The rate should be determined by the foreign exchange market but monetary and foreign exchange policy must be brought in to prevent sharp fluctuations. Devaluation as a means of encouraging exports and compressing imports must not be ruled out either. Policy reforms at the enterprise l e v e l . Reform at the enterprise level must address two concerns: the technological deficiencies of many industries and the attitudinal limitations of some sectors in the industrys leadership. Domestic industries can upgrade their technology either through indigenous efforts or through transfers from foreign sources. To pursue the first alternative, they will have to put in more resources into R&D as well as make more active use of the many (as of yet) untested techniques developed by national engineers and sci-entists, including those from DOST. On the other hand, they can source modern technologies by importing new or best-practice
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Solutions to inflation
Although the National Economic and Development Authority (NEDA) claims that inflation has been on the decline in the past 25 years, what consumers would really like to see are stable prices especially of basic goods - rice, sugar, meat, fish, transportation fare, to name the most basic. Nobody wants to live under the shadow of uncertainty. Is the creeping inflation that Filipinos are experiencing permanent or temporary? NEDA believes it to be temporary. The culprits: intimation of oil price increases and the artificial shortages of rice causing abnormal shocks in the price system. Persistent talks of a rice cartel have led people to ask whether government has appropriate policies to deal with this market structure. Governments policy in case of distortions in the market has never been through price control as in the centrally-planned economies. Price control is a very short term solution that is resorted to in preventing major disasters into festering. It leads to disappearance in supplies and proliferation of the black market. Government's more positive response is to assure that supply lines are kept open. In the face of disasters, however, government must be prepared to provide relief goods and make sure the market functions. From a macro perspective, inflation can be reined if government narrows down the consolidated public sector deficit (CPSD), with a view of eventually balancing it. The CPSD
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The government, clearly, has a critical role to play in this technological modernization of the private sector and the changing of the guards. The government should continue to provide the lead in R&D in fundamental research. It should also disseminate the efforts of the private sector in applied research or experimental development and should devote more resources to modernize institutions of higher learning, particularly laboratory facilities. Specifically, the government should accelerate the installation of cutting edge machinery and equipment in the electronic, electrical, mechanical, civil, chemical and other physical laboratories of the universities and the computerization of these institutions facilities. To achieve this, the government must extend to the universities all necessary assistance and incentives. Financial support should be made available to educate and train high level scientific and managerial manpower as called for in the programs of DOST. Government should also broaden and intensify its educational program at the lower levels as mandated in the Constitution. The determined implementation of these reforms will enable the Philippine economy to exploit the
opportunities for growth and development in AFTA and will permit the economy to maximize its gains and minimize its losses from the new trading framework. DRN
References
Asian Development Bank. Key Indicators of Developing Member Asia and Pacific Countries, various years. Azarcon, Chulia. "Tariff Liberalization Update: Issues and Concerns." Typescript. Quezon City: Philippine Tariff Commission, 1991. David, Cristina, Eliseo Ponce and Ponciano Intal, Jr. Organizing for Results: The Philippine Agricultural Sector. In Emmanuel de Dios and Associates Poverty, Growth and the Fiscal Crisis. Makati: Philippine Institute for Development Studies, 1993. de Dios, Emmanuel. "Technology Transfer by Transnational Corporations with Special Reference to Export Processing Zones and Science Parks (the Philippines)." Draft Copy. Quezon City: University of the Philippines, 1992. Jurado, Gonzalo. Industrial and Trade Policy for Poverty Eradication in de Dios and Associates, op cit. Medalla, Erlinda. "An Assessment of Trade and Industrial and Trade Policy, 1986-1988." PIDS Working Paper Series No. 90-07. Makati: Philippine Institute for Development Studies, 1990. National Statistical Coordination Board. Philippine Statistical Yearbook. Makati, 1993. National Statistics Office. Statistical series, various years. Computer printouts. Tariff Commission. Tariff Profiles of ASEAN, 1985. United Nations Economic and Social Commission for Asia and the Pacific. Statistical Indicators of Asia-Pacific Countries. Bangkok, 1992. World Bank. World Development Report. Washington, D.C., 1992.
order to help them meet their basic health care needs. There is still a need to assess and finetune the following areas in community financing: utilization patterns of health services, the ability and willingness of community members to voluntarily contribute finances for health activities, and the role and involvement of nongovernment organizations (NGOs) in setting up such a system. The second option, soliciting and maximizing the involvement of the private sector, is vital in view of the following gains. By substituting private resources for currently used public resources, government can reallocate its public resources to areas of greater
priority (rural areas). The added resources that will be provided by the private sector will likewise expand the total amount of resources devoted to health care services. Lastly, the private sector may be counted on to exert some influence in securing the necessary reforms to improve the efficiency of public services.
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Philippine Institute for Development Studies NEDA sa Makati Building 106 Amorsolo Street, Legaspi Village 1229 Makati City, Philippines
STAMP
process but this time focusing on the health sector. I certainly hope the degree of success we achieved in setting the country on the road to economic recovery will be your experience as w e l l . DRN
September-October
1995
Editorial Board
Dr. Ponciano S. Intal, Jr. President Dr. Mario B. Lamberte Vice-President
DEVELOPMENT RESEARCH NEWS is a bi-monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars.
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