The promise and the reality (Part 2)

A strong fiscal position is crucial for long-term growth. It also serves as a shield against future economic crises. Countries with robust fiscal space are able to pursue countercyclical fiscal policy when warranted, spending more when the economy is contracting, and generating large surpluses when it is booming. Sadly, Mrs. Arroyo left behind a fiscal house that is weaker, more heavily indebted, and with poorer capacity to mobilize revenues.

Arroyo turned over to Aquino III a tax system that is low-yielding and inefficient. The tax-to-GDP ratio in 2010 was lower than what it was in 2000. And because she spent beyond her means during the entire decade, with large deficits in years prior to and in 2004, the year she run for president, Arroyo ramped up public borrowings unheard of in recent Philippine history. National government debt was about P2.2 billion in 2000. It was about P4.7 billion in 2010. National government debt has more doubled in a decade!

Arroyo also left behind weakened, not stronger, political and economic institutions.The image of a strong Republic has, by the time Arroyo stepped out of Malacañang, become a caricature. The strong Republic has become a mortally wounded Republic — with weakened institutions and rock-bottom policy credibility.

But do strong institutions matter? When institutions are strong, national leaders are able to arrrive at the “right” decisions faster and with less transactions costs. When weak, decision-making is costlier, delayed, and often times compromised. When institutions are strong, hard decisions are easy to come by; when weak, hard decisions are avoided, and procrostinations rule.

The weaker institutions are most evident in Philippines percentile ratings, collected over time, in the World Bank’s Governance Index.

There are six aspects of good governance: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption.

In terms of voice and accountability, the Philippines ranked second among ASEAN-5 countries. But its percentile rank was much higher in 2000 (54.8) than in 2010 (46.9). Percentile rank of 54.8 means that the Philippines was better than 54.8 percent of the countries in the world that were included in the World Bank study.

In terms of political stability, the Philippines ranked the most politically unstable among ASEAN-5 economies. Its percentile rank was much better in 2000 (9.1) compared to 2010 (6.6). From a very low rating in political stability before Arroyo took power in 2001, the world’s perception of political instability in the Philippines continued to dip. By 2010, 93.4% of the countries in the world were deemed more political stable than the Phiippines.

In terms of government effectiveness, there was no change in the percentile rank of the Philippines. It was 51.7 in 2000 and 2010. The Philippines was the third in government effectiveness among ASEAN-5 economies.

In terms of regulatory quality, there was a deterioration in percentile rank during Arroyo’s watch. From 56.9 in 2000, the Philippines ranked even lower at 51.7 in 2010. The Philippines was the third in regulatory quality, behind Thailand and Malaysia.

In terms of rule of law, there was a slight deterioration in percentile rank during the Arroyo presidency. From 37.3 in 2000, the Philippines ranked 34.6 in 2010. The Philippines ranked fourth in the rule of law, just slightly better than Indonesia. It lagged significantly behind Malaysia, Thailand and the surging Vietnam.

In terms of control of corruption, there was a sharp fall in percentile rank during the Arroyo presidency. From 39.5 in 2000, the Philippines ranked 22.5 in 2010. Among ASEAN-5 economies the Philippines was deemed the most corrupt. In 2000 and until recently, the Philippines ranked much better than Vietnam and Indonesia in controlling corruption.

Summing up, in five of six governance indicators, the percentile rank of the Philippines has worsened during Arroyo’s watch. In one, government effectiveness, the rank was unchanged.

Arroyo served the longest among all Philippine presidents after the restoration of democracy in 1986. Much was expected of her. Regrettably, she failed to move the country forward.

Every president should strive to hand over the nation to his successor, “not only not less, but greater and more beautiful than it was transmitted” to him, in accordance with the Oath of the Athenian. Yet, Arroyo transmitted to Aquino III a people that is more impoverished, a nation that is likely to fail in meeting its Millennium Development Goals, an economy that is less competitive, a fiscal house that is weaker, more heavily indebted, and with diminished capacity to generate revenues, and, finally, economic and political institutions that are weaker, corrupt and dysfunctional.  –Benjamin E. Diokno, Businessworld