Ricardo J. Romulo Lecture Series
Economic Roadmap for 2010 and Beyond

25 March 2009 - The third staging of the Ricardo J. Romulo Lecture Series on Business and Society was held at the Dusit Thani Hotel ballroom on 25 March 2009. Apart from the Makati Business Club, the American Chamber of Commerce of the Philippines, the Bankers Association of the Philippines, and the European Chamber of Commerce of the Philippines co-sponsored the event. The ballroom was packed as the members and guests of the four organizations came to hear three professors from the UP School of Economics, all former Cabinet-level economic officials, outline an “Economic Roadmap for 2010 and Beyond: A Blueprint for Philippine Development.”

Paths to Development
Former socioeconomic planning secretary Dante Canlas said the sustained growth of income and employment, a stable and predictable macroeconomic policy environment, and ensuring safeguards for economic and political freedoms are ways to achieve the medium-term economic goals of reducing poverty and enhancing living standards.

He explained that two of the effective approaches to achieving these goals involve the ability of markets, guided by a decentralized price system, to coordinate a variety of interrelated activities, and good and effective governance to complement and support private-sector initiatives.

The constraints to growth, according to Canlas, are the tight fiscal situation, poor revenue performance, inadequate infrastructure, weak investor confidence arising from concerns about governance (specifically political instability and corruption), and a narrow tax base. At the same time, hunger and poverty, as well as dismal education outcomes, are proof that the growth in recent years has left behind many families. As a result of the US financial crisis, rising unemployment must also be addressed, financial institutions must be strengthened, and recovery must be ushered.

Tax Reform
Meanwhile, former budget and management secretary Benjamin Diokno said that the next administration will have to contend with a tax-to-GDP ratio of about 14% or lower, a P4.5–4.8 trillion outstanding national government debt, and a budget deficit of about P200 billion for 2009. Weak finances will make further stimulus difficult to justify.

He stated that tax reforms are needed to broaden the tax base, starting with the rationalization of fiscal incentives, reforming the excise tax system on tobacco and cigarettes, and increasing the VAT from 12% to 15%. On the other hand, he said that a 3% tax credit should be given to fixed-income earners and that personal income tax rates should be set to 25%. Corporate income tax rates should also be cut from 30% to 25% or even lower. For the financial sector, all passive incomes should be taxed uniformly at 10%.

Professor Diokno also proposed a flexible tax on petroleum products earmarked for the development of mass transit systems. As an equity and revenue-raising measure, he also proposed a uniform presumptive tax on real property collected by local government units for education or science and technology purposes.

Priority Spending
Finally, former NEDA director-general Felipe Medalla proposed to freeze the internal revenue allotment of LGUs at current levels. To make infrastructure contribute more to economic growth and global competitiveness, Medalla said that some projects have to be financed purely through taxes, and others co-financed by LGUs, particularly those that promote tourism. Some projects will have to be subsidized, such as mass transit and toll roads (all the way to Lucena and all the way to Pangasinan, C6, and a road that connects SLEX and NLEX), as well as those involving public-private sector partnerships. For infrastructure with full cost recovery features, such as those in the utility sector, the problems are cash outflow upfront, a cash inflow for 20 years, and rules that can change in midstream. Strengthening regulatory authorities is important.

To help the poor, Medalla is for giving cash to the poor with children in school (dispensed through ATMs). He is worried about the deterioration to 83% from 90% of the number of children from ages 6 to 13 enrolled in school. “It’s a country without a future unless we address this,” he warned.
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ABOUT THE SPEAKERS

Dante B. Canlas
Professor Canlas is the current executive director of the Millennium Challenge Account Philippine Compact Program. He was the socioeconomic planning secretary and NEDA director-general from 2001 to 2002. He holds a PhD in economics from UP Diliman.

Benjamin E. Diokno
Professor Diokno was budget and management secretary from 1998 to 2001 and the president of the Philippine Economics Society in 1990. He earned his PhD in economics from Syracuse University.

Felipe M. Medalla
Professor Medalla was the socioeconomic planning secretary and NEDA director-general from 1998 to 2001. With a PhD in economics from Northwestern University, he served as dean of the UP School of Economics from 1994 to 1998.

Presentation by Dante B. Canlas (as delivered)
25 March 2009
Ballroom, Dusit Thani Hotel, Makati City

Distinguished officers and members of our sponsors—the Makati Business Club, the American Chamber of Commerce, the European Chamber of Commerce, and the Bankers Association of the Philippines—distinguished guests, ladies and gentlemen, good afternoon.

Towards a road map for Philippine development
We understand that today's forum seeks to start a dialogue on a road map to Philippine growth and development that stands a good chance of being adopted by the succeeding administration.

We, the resource persons, met and discussed how we would do this, whether to do a unified or individual presentation. We found out that we have some areas of disagreement, particularly in trying to divine how the world ought to work. But after some discussions, we realized we actually agreed on a lot of issues. Hence, this unified presentation.

In addition, since the final outcome document that we are targeting after a series of dialogues with various stakeholders is supposed to be a consensus document, we think it best to use as point of departure the areas that we agree on and then build from there. So we don’t think this will be the first and the last meeting. We think that there will be a series of dialogues, all designed to forge a consensus document on a Philippine road map to economic development.

Outline of the presentation
We agreed on a division of labor. I'll be giving an overview based on previous road maps and see whether there are some elements there that remain relevant today and in the future. We view the set of important themes and issues extracted from previous plans as very helpful in forming our organizing framework.

My two colleagues will then present some details. (And after that, I will sit back and relax, and I’ll let them do all the heavy lifting.) Specifically, Ben will discuss fiscal issues and tax policy choices. Philip will be our closer; he will talk about public spending, particularly on infrastructure, and getting value from citizens’ money.

A word of caution is in order: our discussion is not meant to be exhaustive but illustrative. We are reckless enough, however, to hope that the ideas we will talk about today are going to trigger serious thinking and help build consensus about the next road map to development.

Basic development goals
Let me start with, as I said, some important themes that we’ve extracted from previous plans dating back to 1986.

All societies recognize the importance of reaching the highest possible level of human welfare. To get in this regard the best results from any level of effort, two goals or tasks are crucial:

One, eliminate poverty and end its transmission from one generation to another. All modern societies have one prominent feature: mass consumption, not mass mendicancy.

Two, ensure continuous improvements in living standards. People value quality of life. In doing so, they are motivated to increase not only the quantity but also the quality of their allocations of goods and services. The appetite for new commodities is enhanced. Growth is thus induced not from making more of the same goods, but from the production of new products and services.

Achieving these goals
There are ways of achieving these goals. The two that I mentioned, poverty reduction and living-standards enhancement, have several dimensions. Addressing them calls for meeting head-on some immediate and long-term challenges.

We partition the twin development goals into some finer components that can be measured and monitored periodically.

One, sustained growth of income and employment is vital. It’s jobs that yield money income, that then puts food on the table, pays for tuition and other school fees, and pays the doctor when a family member gets sick.

Two, macroeconomic policy, whether monetary or fiscal, must have one important objective and that is to provide a stable and predictable environment for the private sector. We all know the trials and tribulations of making decisions under risk and uncertainty. Stable prices or a low inflation rate is essential. Price signals direct resources to their most valued uses. These signals are deadened by a high inflation rate, throwing out of whack the most preferred consumption and production plans of people.

Three, let’s make sure that we safeguard political and economic freedom. The policy choices we make based on sustained growth and a stable environment are bound to increase the economic opportunities people face. Making people free to choose within a system of evolved rules and norms raises their individual and collective welfare. Down the road, opportunities far more plentiful than what their initial endowments allowed emerge.

Basic principles and approaches
I believe that everybody in this hall wants to heighten the likelihood of achieving the finer development goals that I've just mentioned. There are at least two effective and time-tested approaches.

One is the reliance on the ability of markets, consisting of numerous buyers and sellers, guided by a decentralized price system to coordinate a variety of interrelated activities. Such a situation is based on competition, which promotes innovation, invention, and technological progress, all sources of long-run economic growth.

Two, good and effective governance complements and supports private-sector initiatives. There are instances where markets fail or yield limited outcomes. (And my colleagues will be talking about this later on.) Government then steps in to provide such commodities through a tax-and-spending scheme. Good governance is thus considered, and rightly so, a precondition for growth. It has many aspects, including peace and order, political stability, and, very importantly, a credible legal and judicial system conducive to contractual performance and timely adjudication of any contractual dispute that may arise.

Critical constraints to growth
Since 1986, much progress has been made in transforming the Philippine economy. The process, however, is by no means complete at this point. Several constraints to growth, for instance, still exist and the most critical are: the tight fiscal situation and poor revenue performance; inadequate infrastructure; the poor investor climate or the weak investor confidence arising from concerns about governance; and we still have a small, narrow [inaudible] to really enable the country to take off on the path of long-run growth.

We know that many individuals and families continue to lag behind, untouched by any of the growth we have seen in recent years. This is evident from the observed high incidence of hunger and poverty, and dismal education outcomes. And on spotty governance, I think we’ve all heard it, two of the very prominent pathologies included there are political instability and corruption.

Enter the financial turmoil on a global scale
The financial turmoil that originated in massive loan defaults in the housing loan market of the US has now spread to the real sector and spilt over to the rest of the world.

In the Philippines, we know it has caused a sharp decline in merchandise exports like semiconductors. In consequence, several thousands of workers have been laid off, jacking up the unemployment rate by nearly one percentage point early this year compared to last.

Segue
What's the next president to do? It is clear that before work on his or her own road map can begin, the challenges posed by the financial turmoil must be actively confronted. The rise in unemployment must be stemmed. Financial institutions must be strengthened. In other words, usher in a recovery as soon as possible and don't look back. Make sure any recovery gathers strength through time.

At this juncture, let me turn to my colleagues to supply some details on how we may do this, starting with Ben who will address what is regarded by many as the most important constraint to growth at this point.