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May 17, 2016

Duterte’s Economic Agenda: Doable and Comprehensive

President-elect Duterte was swept into the presidency not on the strength of his economic agenda but on the promise of law and order and the wiping out the drug menace everywhere, in urban centers and rural communities.

One can argue that Duterte won the presidency largely due to his reputation as a punisher and, at the same time, as a compassionate Mayor–an indirect repudiation of the slow-moving, inept, and uncaring Aquino administration.

Overall, his economic roadmap is doable and comprehensive.

Below are my random notes on Duterte’s 8-point agenda.

1. Continue and maintain the current macroeconomic policies. However, reforms in tax revenue collection [within the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC)] efforts will be complemented by the reforms within the bureaucracy of these tax- collecting agencies.

Uncertain. I don’t know what macroeconomic policies will be continued and maintained. If it refers to the low interest rates and low inflation rates, then the low interest rates are more the achievement of the independent Central Bank, not the Aquino administration. The low inflation rates are more due to the low cost of borrowing money (thanks to the 2008/09 Global recession) and the sharp fall in oil prices (of which the Aquino administration deserve no credit).

I disagree with Mr. Aquino’s contractionary fiscal (expenditure-tax) policy. It should be reversed. Past and future growth could have been faster had the Aquino administration allocated and spent more money for public infrastructure. For the last 6 six years, the outgoing administration has underspent close to a trillion pesos.

I agree that the efforts of the Bureau of Customs have to be stepped up.

Smuggling is at its historic heights.

2. Accelerate infrastructure spending by addressing, among others, major bottlenecks in the Private-Public partnership (PPP) program. Maintain the target of setting aside five percent of the country’s gross domestic products (GDP) to infrastructure spending.

Agree. But public infrastructure spending should not be limited to PPP programs. There are many capital projects, especially in the countryside, which are not susceptible to capital-intensive PPP arrangements. For a labor-surplus economy like the Philippines, the government should put equal emphasis on many small- and medium-sized projects. They create a lot of jobs and they are faster to implement.

The public infrastructure target of five percent of GDP should just be the beginning. It should be as high as seven percent by the end of 2022.

3. Ensure attractiveness of the Philippines to foreign direct investments by addressing restrictive economic provisions in the Constitution and our laws, and enhancing competitiveness (i.e., “ease of doing”) the economy.

Agree. FDIs, unlike footloose capital or ‘hot’ money, create jobs — in agriculture, manufacturing and services. They also bring with them new technology which, in turn, would improve the competitiveness of the economy.

4. Pursue a genuine agricultural development strategy by providing support services to small farmers to increase their productivity, improve their market access, and develop the agricultural value chain by forging partnership with agribusiness firms.

Agree. Under the Aquino administration, agriculture grew by a measly average of 1.6 percent and was practically flat (0.2 percent) last year. The sector is expected to contract by single digit level this year.

Given an annual population growth of about 2 percent, agriculture should grow by at least 3 percent every year. But for this to happen, it requires massive infusion of productivity-enhancing public infrastructure (farm-to-market roads, irrigation facilities including small water impounding projects), fertilizer, high-yielding seeds, and investment in research and development.

5. Address the bottlenecks in our land administration and management system.

Agree. The World Bank notes that a big chunk of land in the Philippines is untitled. A majority of land owned by agrarian reform beneficiaries is in the nature of collective, not individual, titles. Titling of untitled land should be the focus of the next administration. If done, it would bring about much capital and credit in rural areas.

6. Strengthen our basic education system and provide scholarship for tertiary education which are relevant to the needs of private sector employees.

Agree. The cold reality is that unemployment is highest among college-trained and college graduates. This implies a mismatch between what the education system produces and what the economy needs. Strengthening the basic education system is also a way of providing better foundation for technical-vocational and college work. Scholarship should be provided on the basis of academic performance and needs, not on political connection.

7.  Improve the income tax system to enable those who earn little to have more money in their pockets.

Conditionally agree. The existing tax structure is close to two decades old. Through inflation, it is taking more money from individuals and firms now than before. The existing income tax system is uncompetitive compared to our ASEAN-5 neighbors. Tax breaks for big firms continue to proliferate.

The Philippine tax system requires a comprehensive overhaul, not minor tinkering.

8. Expand and improve implementation of the Conditional Cash Transfer (CCT) program.

Agree. There are many ways to improve the CCT program. First, the program’s  leakage has to be plugged. There are many deserving beneficiaries who are outside the program while, at the same time, there are many undeserving participants who are in the program.

Second, by creating a parallel organization to administer the program, its overhead cost is much too high.

Third, local government units (LGUs), to which social welfare programs have been devolved, were totally shut out of the CCT program. The unelected DSWD officials are lording it over the elected local authorities.

Here’s an alternative arrangement: DSWD may continue to identify the recipients through scientific survey methods, but the administration of the program would be shared with local authorities. This new set-up will enhance fiscal responsibility of both national and local officials, and will give the latter partial ownership of the program.

The 8-point economic agenda is an excellent start. But the devil is in the details. In the next few weeks, Mr. Duterte and his team should put flesh and blood to the skeletal framework. He should identify the men and women who will carry out the program. Finally, he should reveal the strategy for managing the reform process, the timing, and sequencing of reforms.


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