Political system still unable to deliver development

I’ve been arguing that the central characteristic of the Philippine state is its continuing weakness, which prevents our political system from delivering development to our patient people until now.

Signs of that weakness are everywhere in our public life—six decades after we as a nation have become responsible for our own fate. And they manifest themselves in problems so familiar we’ve learned to live with them. 

Take poverty. In our country, it is worse than poverty is in Malaysia, Thailand, China, Indonesia, or even Vietnam. Close to a full third of all our people still live below our own national poverty line: 13.2 percent of them subsist on the equivalent of one US dollar a day.

The last Maoists

Much of this poverty being rural, we also harbor one of the last Maoist insurgencies in the world—together with the poorest parts of rural India and of ethnic Peru. But right-wing groups and private armies, too, challenge the state’s monopoly of arms.

Unlike neighbor-economies, whose growth has been both higher and sustained for longer periods, our economy still hasn’t expanded enough to bridge the gap between the two sectors of the dual economy we’ve inherited from the colonial period.

Until now, its monopoly of political power has enabled a tiny elite to control social wealth and prevent the democratization of the political system.

A pervasive patronage system—now based more on a cash-for-votes exchange rather than on reciprocal social obligations—has demobilized everyday people and held back popular pressures for structural change.

Weakest tax effort

Among all the usual signs of state weakness, our tax effort is the most obvious. Proportionate to gross domestic product (GDP), it is the weakest (as well as among the most regressive) among all comparative economies in East Asia. GDP is the total value of goods and services produced in a country in a year.

Our own Department of Finance estimates that income tax leakage alone cost the government P107 billion in 2006. Meanwhile, even some of our “best people” apparently aren’t above tax evasion: Corporate taxpayers alone were short by nearly P82 billion. And the Bureau of Internal Revenue has just found out that 80,000 companies are registered with local governments but not with it—in effect they’re not paying national taxes due.

Even great oil tankers apparently pass our Customs barriers undetected. The smuggling of petroleum alone apparently costs the state P29 billion in lost revenues.

Yet bills to tighten up tax collection lie moldering in Congress. Prominent among them are the indexation of cigarette and liquor taxes to inflation, and the lifting of legislated tax- and duty-free exemptions enjoyed by specific industries. The exemptions have been costing the government P300 billion in revenues yearly. Revenue losses from the smuggling and under-reporting of cigarette production alone run between P23.6 billion and P29 billion.

Regulatory capture

“Regulatory capture,” or the tendency of state regulators to identify with the interest of the industry they’re supposed to regulate, is yet another sign of the state’s weakness.

Then Socioeconomic Planning Secretary Romulo Neri in January 2007 estimated that faulty regulatory policies of the agencies supervising aviation, ports, the maritime industry, telecommunications and the energy sector make the state poorer by between P100 billion and P200 billion in potential income and reduce average GDP by between one and two percentage points yearly.

The lack of competition in both aviation and shipping raises comparative transport costs and inhibits the growth of tourism. Manila’s two main harbors are both managed by monopolies whose franchises, for 25 years, will not expire until 2013. 

Squeeze on social spending

This grievous leakage of potential income from regulatory capture and from its anemic tax effort prevents the Philippine state from investing in development as much as its neighbors do. And this weakness is most critical now that the global recession compels the East Asian countries to dig deep into their pockets to pump-prime export-oriented economies shut out of receding Western markets.

Already our fiscal deficit for January to April has exceeded the original target for the whole of 2009. The Development Bank of Singapore thinks it will reach P339 billion—nearly a third higher than government’s mid-year projection of P250 billion. This means that the burden of servicing public debt will once again crowd out social spending at a time we’re facing nutritional and educational disasters.

Filipino children have higher rates of malnutrition than Vietnamese children, though Vietnam is still significantly poorer than our own country.

Thailand spends six times more and Malaysia 10 times more than we do on every primary-school child. (Singapore spends 20 times more.) And the way we neglect our out-of-school-children is morally unacceptable in the good society.

Because of the low school-participation rate (only 83 percent of children of the right age were enroled for school year 2006-2007), coupled with the high dropout rate (10.57 percent for elementary-school pupils), roughly a quarter of all Filipino children grow up functionally illiterate. Only 59 percent of all those who enter Grade 1 finish high school.

The government has been speeding up privatization—Sen. Edgardo Angara calls it “selling the Crown jewels”—but non-recurring revenues do not help a state’s credit rating. President Gloria Arroyo seems to be gearing up to ram her tax measures through a reluctant House of Representatives but her political capital is close to exhaustion, and she may yet decide to pass the buck to the next administration. –Juan T. Gatbonton, Manila Times