How the Philippines has failed its rural poor (a book review)

I’ve just finished reading a really nice book and writing a review of it for an academic journal.  I doubt that anyone much will read the review once it’s published (no disrespect to the journal; it’s just that there’s so much to read, so little time… ).  But I liked the book, and I enjoyed the train of thought it set me on, so I’ll post a version of it here.  Not that I expect it to attract many more readers this way!

The book is edited by Arsi Balisacan and Hal Hill and is called The Dynamics of Regional Development: The Philippines in East Asia.  It’s a joint publication (2007) of the Asian Development Bank Institute and Edward Elgar Publishing.  Besides the editors themselves, there are chapters contributed by many of the Philippines’ leading economists.  What can we learn from this book?

The Philippines is a nation made up of thousands of islands; its peoples come from a variety of ethnic and cultural origins and speak hundreds of distinct languages.  For most of its history this was a collection of small (even tiny) clan-based fiefdoms; Spanish colonialism imposed superficial uniformity but was in practice highly decentralized.  Only under the US colonial administration (1901-1946) did the central government in Manila gain absolute ascendancy, and only under the Americans was predominantly Muslim southern Mindanao incorporated into the state in more than a merely cartographic sense.  Accordingly, when in 1991 the Philippine legislature enacted one of the developing world’s earliest comprehensive decentralization laws, it was, in part, simply acknowledging the impracticality of imposing ‘one size fits all’ laws and administrative practices on such a heterogeneous state, and taking a few small steps back toward to a more natural prior order.

There was, however, much more to decentralization than merely making room for cultural and linguistic differences.  Since independence, political power and administrative authority had been vested exclusively in Manila– a system that was practically unsuitable given the costs and practical difficulties of communicating with remote provinces.  The expense of centralized rule, and the opportunities for corruption, inefficiency and informal local practices that it created all argued for a devolved system of governance, one that moves authority and responsibility closer to its constituent populations and allows it (to some extent at least) to adapt to local conditions and preferences.  That was the claim made for the Philippine decentralization. This book helps us to assess the extent to which it has proved true.

The task is complicated, as the editors note, by the fact that simultaneous with decentralization, the Philippines in the 1990s was also adopting a broad program of deregulation and economic policy reforms that promoted domestic economic and political integration, and at the same time opened the economy to the rapidly growing and highly volatile world trading system.  The book addresses this with a set of essays comparing the Philippine experience with those of Indonesia and China.  These are interesting, but it’s the second part where the real meat is found, in a set of essays that deal in detail with aspects of Philippine decentralization.

The overarching context of Philippine regional development is provided by that country’s sorry record of post-colonial growth; in this respect the country has lagged far behind its SE Asian neighbors.  It has maintained highly distortionary policies on trade, industrial development and factor markets and has been highly susceptible to macroeconomic and policy instability.  All this has discouraged private investment in fixed assets; the Philippines has the lowest domestic savings and investment rates in SE Asia and, by contrast with most of the region, foreign direct investment also plays a very small role.  Public investment in infrastructure, energy, education and other growth-related areas has also been woeful by regional standards—about 2-3% of GDP as opposed to 5-6% in adjacent countries.  Transport infrastructure in particular has remained grossly inadequate, and given the country’s geography, this has had a direct impact on the growth of subnational economies by placing strict limits on the spatial spread of tradable industries other than agriculture.  An excellent chapter on this subject by Gilbert Llanto informs us that in 1988-2003, 76% of fixed capital investment took place in the National Capital Region (where the Port of Manila is located) or in Southern Tagalog, the immediately adjacent region.  Little wonder, then, that the brightest and most entrepreneurial Filipinos from the provinces migrate, either to Manila or overseas, to raise their own productivity and thus their earnings (as documented in a chapter by Esguerra and Manning on labor).  That their departure has a brain-drain impact on productivity is clear; it is unlikely that the remittances they send back come close to compensating for this, particularly in the prevailing climate of macroeconomic instability, which discourages private investment and thus encourages the use of remittances in consumption and education, the key to positively selected migration.

Against this backdrop, how much influence has decentralization had on the course of Philippine development?  The answer, it seems, is not much.  Relatively little real power, a small percentage of public sector jobs, and almost no revenue-raising capacity, has moved out of Manila.  Since devolution, local government expenditures have doubled as a share of GDP, but only from 1.6% to 3.3%; revenues raised by local governments have risen from 0.8% of GDP only to 1.2%; nearly all local government expenditure is funded by central government transfers.  The rates of most taxes devolved to provinces and local governments remain tightly controlled by Manila, which also limits the frequency and the magnitude of revisions—even of taxes denominated in nominal pesos (Chat Manasan’s chapter records all this in detail).  That the World Bank should describe the Philippines as having “the strongest history of democratic decentralization” in Southeast Asia says more about the state of government and governance in neighboring countries than it does about the scope of this devolution.

Despite devolution and a much longer history of regional development policies (summarized in a contribution by Gwendolyn Tecson), the Philippines continues to exhibit glaring spatial distinctions.  Infrastructural deficiencies and disparities in educational attainment play a large role in explaining persistent differences in subnational growth rates, and these in turn are the dominant sources of variation in poverty alleviation.  Arsi Balisacan’s outstanding chapter on growth and poverty captures this in a quantitative analysis.

Ultimately, Philippine development policies, by fostering a pattern of economic growth based on the primate city Manila, have discouraged investment in the provinces, encouraged outmigration, and stymied growth both in remoter regions and in the economy as a whole.  As Balisacan points out, the elasticity of poverty alleviation with respect to aggregate growth in the Philippines is only about half that estimated in other developing countries.  Without dynamic local economies, devolved administrations in the poorer provinces are trapped between the basic needs of poor constituents and the lack of a buoyant or independent tax base.  Worse, they remain dependent on transfers from a national government whose own permanent fiscal crisis makes both the value and the timing of transfers highly unpredictable.  The provinces furthest from Manila are caught in a trap of persistent poverty, political and policy instability, low investment and low growth.

The contributors to this book document the story of Philippine regional development (or the lack thereof) in great detail, for the most part with analytical clarity and a pleasing uniformity of style, and this makes for a readable and very coherent volume overall.  However, the book leaves two important subject areas underserved: agriculture, and natural resources and the environment.

The book assigns no special place to discussion of agricultural development and its links to regional growth.  A chapter on rural non-farm development takes just three paragraphs to document what its authors call “the declining importance of agriculture in providing labor employment opportunities for rural households”, but this statement about a trend (with data, moreover, from atypically fast-growing areas adjacent to Manila) overlooks the importance of the underlying levels: agriculture still employs over 37% of the labor force; farming and associated industries remain the dominant sources of income outside the Manila-centered industrial zone, and poverty is very strongly correlated with rural and agricultural households.  Another chapter, on regional responses to trade liberalization, mentions agricultural trade policy only once before dwelling for an entire chapter on industrial policies.  This neglects (among other things) the general equilibrium penalties imposed on the farm sector by decades of import-substituting industrialization tariffs—a subject that has been the focus of intense analytical attention since the mid-1960s—and their inevitable effects on regional growth rate disparities.  Even though the pace of agricultural trade liberalization has lagged that for manufacturing, many of the indirect penalties imposed on the sector by pre-WTO trade regimes have been relaxed, with the result that some agricultural industries—livestock, for example, and bananas and other export-oriented tropical fruit crops—have flourished in recent years.

The book also neglects attention to natural resource sectors.  From the production side, the biggest contrast between greater Manila and the rest of the Philippines is the dependence of the latter on soils, water and other depletable natural resource wealth.  While Manileños justly complain about air and water quality, the real environmental disaster in the Philippines has been the pillaging and destruction of its natural resource wealth, both by corporations acting above the law and by poverty-stricken farmers and fisherfolk lacking viable alternative livelihoods.  In many areas, their actions have sent rural (and especially upland) communities into a spiral of environmental decay, productivity decline, and income stagnation.  Environmental damage increases economic vulnerability (as evidenced by periodic tragedies due to mudslides and flooding) and reduces incentives for fixed capital investment.  The result is higher rural poverty, exacerbated regional disparities and lower aggregate growth.

These omissions aside, this is a volume that defines the state of the art in economic analysis of Philippine development.  It’s a must-read for all students of that country’s economy, and for all who seek to understand better the regional implications of growth, policy and devolution in low-income economies.

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