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Notes on Regional Decentralization
NOTES ON THE FEDERAL STRUCTURE FOR THE PHILIPPINES*
By Gonzalo M. Jurado, PhD
Vice-President for Finance and Development and Professor of Economics
Kalayaan College
We’ve heard of the pros and cons of a federal structure of government for our country from various authorities in the last several years**, perhaps even taking sides in the debate. My own thoughts on the matter have been formed from my long association with Dr. Abueva who as a scholar has long advocated the federal structure of government for our country. Though I am apprehensive that a federal structure of government might unleash latent forces of separatism in our country, I am persuaded that it might just be the structure that will ensure that decisions and actions taken at higher levels of political authority, which in our current unitary structure seldom affect people on the ground, impact positively on the lives of our countrymen. This should accelerate the development of our economy and speed up the enhancement of the welfare of the Filipino people.
I am in general agreement with Dr. Abueva on the points he has raised in his paper for which reason I shall not anymore comment on them. What I shall do is to cite three propositions in economics suggesting that a federal structure of government compared to a unitary one will be better for our country, more responsive to our individual and common aspirations.
One. The federal structure of government will reduce the negative and increase the positive impact of location on our political subdivisions. Location theory says that the nearer you are to the center the more likely you are to benefit from the advantages of the center; the opposite is also true, the farther you are from the center the more likely you are to suffer from the disadvantages of distance.
No matter what we do, we can never obliterate the consequences of distance. Everything else being equal, it will always take longer to travel over a longer distance than over a shorter distance. It will always take longer to come to Manila from Batanes than from Bulacan. It will always be more costly to deliver a product to distant South Cotabato than to nearby Cavite. Those closer to the kitchen will receive more culinary attention and service than those farther from it.
This explains why Mindanao and the Visayas, both physically distant from Manila, the center of our current unitary structure of government, suffer from inadequate infrastructure and poor political, social and economic services, while provinces neighboring Manila, including Manila itself, suffer from a surfeit of these facilities and services -- notwithstanding commitments regularly made by Luzon political leaders to direct more attention and more resources to Mindanao and the Visayas or lessen the concentration of resources in Luzon or Manila.
A federal structure of government will enable our provinces to maximize their benefits (or minimize their costs, which is the same thing) from distance. That is because each federal unit will have its own capital which, naturally, will be located somewhere in the federal state. With its own center, the federal unit will have no compelling reason to defer to the unitary center. Provinces, towns and communities within the federal unit will now be referring to a center nearby rather than to any capital situated hundreds of kilometers away. People from Batanes will not have to come to Manila when they can settle their problem in Basco. The high transport cost of a product coming from Luzon to South Cotabato can be avoided if the product can be sourced from Koronadal. Why bother about distance to the kitchen when the kitchen has relocated to your immediate neighborhood?
Two. The federal structure of government will attract the forces of agglomeration to the federal units and thus accelerate the federal units’ development. From agglomeration theory we know that people and resources tend to concentrate in places where there are already large concentrations of people and investments. People are attracted to people; investments attract further investments. The opposite is also true: people and resources tend to be “repelled” by empty space.
As matters currently stand people and investments tend to agglomerate in Manila, the center of our unitary structure of government. Despite strenuous demands for decongestion and dispersion frequently voiced by city officials and urban planners, people from the provinces gravitate to Manila; businesses large and small come to settle in Manila. The reason is simple, here is where jobs are located, here is where incomes and profits are earned.
As the various federal units work for their development, they will attract agglomeration forces to themselves. New or refurbished federal capitals will function as magnets to people and resources in the federal state. Responding to perceived needs of civil servants in the various departments of the new federal state and the relocated departments of the unitary government, businessmen can be expected to make investments in housing, restaurants, and personal services. In due time, these investments will draw further investments in hotels, education and medical facilities. Before long industrial, commercial, and cultural agglomerations will have risen in the federal capital and its environs, dynamizing the whole federal state.
And three. The federal structure will promote friendly competition among the federal units, accelerating their growth and development. Economics abhors monopolies for the simple reason that monopolies are inefficient, selling poor quality products at prohibitive prices, to the detriment of the interest of the communities they serve. In contrast, entities operating in competitive markets are constrained to deliver the “best” products at the most reasonable price to customers in order to keep their share of the market. The government in a unitary system is the most glaring example of a monopoly, unchallenged in its collection of exceedingly high taxes from the citizens and delivery of unspeakably poor services to them.
The federal structure of government will give vastly expanded autonomy to federal units. In the exercise of this autonomy federal units will be obliged to rely upon themselves. They will have to plan out and implement the development of their areas of responsibility on the basis of their own vision and resources.
One virtue of the federal structure is that it will enable the federal units to benefit not just from their own genius and resources but also from developmental stimuli coming from outside. That is because sooner than later they will find themselves in friendly competition with their neighbors. Competition will enable them to replicate the successes and avoid the failures of their neighbors, even as their neighbors will also benefit from their successes and failures.
This friendly competition will be a most welcome development. For, operationally, it can only result in the improvement and expansion of the economic, social, political, cultural, educational, and other social overhead, not just of one federal unit but of all of them, to the benefit of the country as a whole.
These are economic reasons supportive of the political arguments put forward by Dr. Abueva, suggesting that the federal structure of government is superior to the unitary structure in the acceleration of the development of our economy and the more speedy enhancement of the welfare of the Filipino people.
*Delivered at 4th Round Table Discussion on Structural Reform: Forms of Regional Decentralization, sponsored by the University of Asia and the Pacific, Ortigas Center, Pasig City, on September 10, 2012, in reaction to “Federal Form of Decentralization” by Jose V. Abueva.
**For a comprehensive discussion of federalism, see, among other sources, the Stanford Encyclopedia of Philosophy, with Internet Link: plato.stanford.edu/entries/federalism/.
Friday, November 2, 2012
Tuesday, October 30, 2012
Domestic industry: Philippine-owned industries follow a 'narrow' nationalist path
CROSSROADS (Toward Philippine Economic and Social Progress)
By Gerardo P. Sicat
(The Philippine Star) Updated October 31, 2012 12:00 AM
(Last week’s column dealt with the failure to exploit unique opportunities for industrialization during early independence. Today, I touch on some points affecting the Philippine experience during this period of industrialization.)
The early outcome of the nationalistic program of industrialization appeared triumphant. It could not otherwise be, coming as the country was from the destruction of the war. It was brought on by a wide range of displacements of imported consumer goods by new domestic industries.
“Industrial protection, government paternalism and limited domestic market growth.” The installation of import and exchange controls made possible the stoppage of competing imports and the dominance of the newly created domestic goods assembled locally. Further rise in tariffs assured that the import supplies would become high priced but detrimental to the low income pockets of Filipino consumers at home, thereby assuring good returns for the new local industrialists.
The heavy presence of government discretion in these policies created a political framework of dependence between the businesses seeking protection, support and financing, on government decision-makers and those in charge of the political process.
The system was faulty.
(1) Instead of creating competitive pressures for the new industrialists, they became the main suppliers for the local market, essentially making them monopolies, promoted by paternalistic support of the government.
(2) These new industries did not earn any foreign exchange but they continually ate up the dollar earnings of export industries in order to continue producing.
(3) Many business proponents had inadequate capital and depended highly on government loans.
(4) Because of domestic market limitations, the new industries benefited only those laborers that they could employ. Thus unemployment of the growing labor force in the formal sector continued to enlarge in absolute terms.
“The Board of Investment and the nationalist agenda.” As the era of exchange and import controls essentially ended with their dismantling, the nationalist agenda for industrialization continued. By this time, the industrial interests were already well in place in the country’s growing industrial sector.
On the eve of the expiring investment promotion laws on industrialization and the near expiration of the Laurel-Langley Agreement (the end of parity for American investors), a new investment law had to be written to pave the way for the continued growth of industry. The new law was steered in Congress by Senator Jose Diokno, the inheritor of Claro Recto’s brand of economic nationalism, who headed the Economic Affairs Committee of the Upper Chamber.
The concepts, the incentives and the main thrusts of this law encouraged Filipino capital to invest in industry. This would have been perfect if it also included the same provisions to allow foreign investments in industrial ventures.
But as regards FDIs, the provisions were full of stops and regulations that limited their role in the economy. It promoted joint ventures only with Filipino control following the 60-40 equity restrictions. Figuratively, the BOI investment incentives represented the canonization of the restrictive economic provisions in terms of promoting Filipino industrialization.
Thus, the BOI investment promotions tended to be exclusive to Filipino enterprise and less inclusive to participation of FDI which was allowed mainly in a minority position. The industrial priorities plans were geared for Filipino-owned enterprises or as defined, joint ventures controlled by them.
There was provision for the possibility of fully owned FDI in industry. These were confined to “pioneer” industries which were intended to attract foreign capital in new technological and capital intensive ventures. But the law provided that in due time these FDI would be required to divest part of their ownership.
Efforts were undertaken by the government during the Marcos years to improve on the BOI law. But in general, the tight restrictions and confinement of major provisions for domestic Filipino owned enterprises under the joint venture arrangements continued to be the heart of the law. Despite the fact that the specific constitutional provisions on foreign investments limited the 60-40 Filipino-foreign equity rule only to public utilities and corporations dealing with land and natural resources, in the various applications of the incentives, the same policy was promoted as a desirable objective.
Until the government was able to direct its attention to inviting fully owned FDI to engage in export processing within the export processing zones, the country could not attract FDI except those that were mainly serving the domestic market and no more (as described in last week’s essay). In the meantime, most of the Filipino-owned industries were relatively small and medium scale enterprises, designed as they were to meet a small market. Thus, domestic industries tended to be limited in size and grew only from that start.
Most of the BOI-registered enterprises were Filipino- majority-owned enterprises and had little foreign equity contributions in them. The earlier provisions on pioneer industries that allowed for FDI to divest in due time contained much regulatory restrictions on what they could do that the provisions became barriers toward attraction.
Although the government was able to attract wholly owned foreign direct investments to engage in export processing for manufacturing under the export processing laws, it had limitations. Some access to the domestic market was critical for some types of industries in order for them to raise their stakes in the economy. The restrictions in the BOI law prevented this.
This explains why the performance of the BOI as an investment attraction agency has fallen badly behind the accomplishments of the PEZA. It has also fallen far behind similar agencies in other ASEAN countries, for instance those in Thailand and Malaysia. To use a term now well used in development economics, BOI policies were exclusive in favor of Filipino enterprises. The PEZA policies had an inclusive posture in inviting foreign enterprises that contribute to the country’s economic development.
Thus, most of the successes in manufacturing exports in the country have come from enterprises registered under the PEZA law and the earlier laws governing export processing zones that it succeeded.
In fact, the BOI law has been the principal stumbling block in creating a larger internal integration of the export manufacturing sector based in the PEZA, with domestic industries. The PEZA encourages the imports of raw materials of all the locators because their sources of supplies come from enterprises outside the country. The BOI promotion of industry was supposed to enlarge the domestic industrial sector.
On the other hand, few FDI and local Filipino-owned enterprises have the facilities to manufacture the raw material needs of the PEZA locators. There are too many rules and restrictions that prevent the setting up of compatible industries because of, again, the inability of BOI to invite sufficiently wide-ranged foreign direct investors under the investment incentives laws except under the “pioneer” registration setup.
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