Assessing Duterte’s economic reforms

A Pulse Asia survey conducted in June 2021 showed that the top issues Filipinos wanted President Rodrigo Duterte to discuss during his State of the Nation Address (SONA) were creating jobs (38%), improving the economy (35%), controlling inflation (33%), and expediting COVID-19 vaccination (31%).

The President’s speech on July 26 covered many topics. Getting first mention were not the issues heaviest on Filipinos’ minds but the President’s biases like the support for the police and the military, the armed conflict and shooting communists dead, and the war on drugs. He enumerated the accomplishments, but he could have been even-handed by acknowledging failures.

To be sure, he did talk about the economy and the pandemic response. In particular, he underscored the threat of the Delta variant, and he made an assurance that he “will exert every effort to restore the lost livelihood of our countrymen.”

But he did not lay out a concrete strategy on how the administration plans to recover from this dual economic and health crisis, President Duterte’s remarks on the virus included: “Maybe we will just have to pray for salvation.”

One thing the President praised during the SONA was our robust economic standing before the pandemic hit. Before the pandemic broke out, the economy experienced high growth. Between 2016 and 2019, our average growth rate was 6.615%.

Bearing in mind that President Duterte inherited an extremely healthy fiscal environment from the Aquino administration, one may argue that the growth performance could have been better, if not affected by the political polarization and radical violence and impunity brought about by the war on drugs. Political disturbance and violence can spook a segment of the investor community, including investors who value human rights.

Despite the high growth average, this was likewise below what the administration itself targeted. Furthermore, the pre-pandemic growth rates went down on a year-on-year basis.

Beyond the GDP figures, there was a sharp reduction of poverty incidence between 2015 and 2018. Poverty incidence among the population dramatically dropped to 16.7% in 2018 from 23.3% in 2015.

The drop in poverty reduction could be explained by the cumulative impact of structural reforms that transformed the economy (which began before Duterte’s term), the sustained high annual growth rates, and the techno-populism of the Duterte administration. We define techno-populism as populism (exemplified by bigger transfers or subsidies and provision of public goods) but disciplined by technocracy and hard reforms.

Another key development was the enactment of disruptive and transformative reforms, especially the comprehensive tax reforms, which significantly widened fiscal space and boosted revenues to an all-time high (measured by tax effort), resulting in a credit upgrade. For the first time, the country achieved a rating above investment grade, which provides investors easier access to credit and lower interest rates.

Other reforms of critical importance include the removal of the quantitative restrictions on rice importation, which had the immediate effect of lowering food inflation. Removing these restrictions is a necessary condition for modernizing agriculture. Other reforms like the Universal Health Care Law and the establishment of the Bangsamoro Autonomous Region have long-term social and economic dividends.

If these reforms were steps forward, our economic situation after the outbreak of the COVID-19 pandemic took us many steps back.

In 2020, our GDP shrank by 9.6%, and negative growth extended to the first quarter of 2021. Consequently, poverty has shot up. We have one of the worst economic performances in Asia and are in our deepest recession since World War II. On July 12, 2021, Fitch Ratings revised our credit rating outlook from stable to negative.

The deep economic recession was indeed an outcome of the pandemic, and policy-makers had no choice but freeze the economy to contain the virus. However, the deeper and prolonged recession could also be attributed to leadership failure.

The failure in leadership is manifested in two main ways. First, the clashes within the IATF (Inter-Agency Task Force for the Management of Emerging Infectious Diseases) and between government agencies led to policy incoherence, inconsistency, and confusion in implementing policies to fight the pandemic. This of course weakened collective action.

Lockdowns were not fully effective because their implementation was botched. The implementers themselves violated the quarantine rules. The lobby of commercial interests led to porous lockdowns. The obsession with re-opening the economy at a premature time contributed to the virus’s exponential growth.

Second, the test of fighting COVID-19 would show in the government budget. In Duterte’s SONA, he said: “Naturally, we prioritized saving lives. Buhay muna bago ang lahat. Ibig sabihin, inuna natin ‘yung gastos — ‘yung pera natin sa pandemic (Life before anything else. What that means, is we prioritized the expenses, our money, on the pandemic).” While the government indeed incurred higher deficit spending, the 2021 budget, for all intents and purposes, is not a budget to contain COVID-19.

The response to the pandemic has been greatly hampered by inadequate testing, insufficient number of contact tracers, lack of quarantine and critical care facilities, delayed purchase of vaccines, and deficient social amelioration or ayuda.

Further, the budget contains an insertion of close to P240 billion  of pork barrel funds for favored legislators. It allocates abnormal spending for counter-insurgency and unaccountable intelligence funds. All this constitutes huge opportunity costs.

Not only is the budget misaligned with health priorities, but the government has also been reluctant to commit to higher deficit spending to fund the essential programs in Bayanihan III, our third COVID-19 relief package. The bill has yet to move forward in the Senate and is missing a certificate of availability of funds from the National Treasurer.

Over the past year the Duterte administration has advocated prudent management of our debt levels, to be ready for action in the future and to preserve our investment grade credit rating. However, such fiscal prudence leading to a lack of relief and stimulus has hampered our pandemic response and plunged us into a deeper recession.

The country’s good credit rating and fiscal space from previous tax reforms should have been used to fight COVID-19 and quicken recovery. We should not be afraid of higher deficit spending in this situation, as long as it is used efficiently and wisely. A welcome development is the recent statement from the Finance Secretary about readiness to spend for health and relief in the face of the Delta variant.

Moving forward, we view that the biggest challenge is containing COVID-19 through a decisive vaccination strategy and other health and social-economic interventions. The June 2021 survey of the Social Weather Stations discloses what respondents identified as “the primary deficiency or weakness of the government.” The top factors are the lack of ayuda for those affected by the pandemic (19.4%) and vaccination issues, namely the slow process of vaccination, the lack of vaccines, and the inequitable distribution of vaccines (18.7%).

The highly transmissible Delta variant, which is causing surges in countries that previously contained COVID-19, has made its way to our local communities. Our vaccination rate remains low; as of July 27, only 6.1% of the population has been fully vaccinated. We are very vulnerable to infection spikes, which will impede our economic recovery.

Government must learn from its mistakes of institutional gridlock, policy incoherence, and inadequate budgetary support. Bigger, bolder, well-targeted public expenditures for health and relief are necessary to prevent deeper economic scars and facilitate recovery. But the spending also has to be disciplined to check inefficiency, abuse, and politicization during an election year.

For the longer term, the tax reforms enacted by the Duterte administration will serve the next administration well. It can provide the foundation for the fiscal program to unwind the deficit spending while sustaining the essential financing to build a better new normal.

Meanwhile, several critical reform proposals have reached the advanced stage in the legislation process. The remaining packages of the comprehensive tax reforms — specifically property valuation and rules governing passive income and financial intermediary services — must be passed immediately.

Senator Frank Drilon recently expressed his support for the Public Service Act, Retail Trade Liberalization Act, and the Foreign Investment Act, which he said would address foreign investment roadblocks and speed up economic recovery. This suggests that the bills have bipartisan support, which should accelerate their passage.

The Duterte administration only has less than a year left to cement its economic legacy. The biggest obstacle is still COVID-19. The administration should mobilize enough resources to beat COVID-19 and provide the relief and stimulus. Fulfilling health objectives will lead to economic recovery.

The economic repercussions of the pandemic are already deep and long lasting. But containing the pandemic through the appropriate health interventions and fiscal policies and legislating structural reforms cited above lead to optimism that predicts economic recovery.

 

Pia Rodrigo And Filomeno S. Sta. Ana III are the strategic communications officer and coordinator of Action for Economic Reforms, respectively.