Demystifying Duterte’s Eight Points

M. A. P. Insights
Jamil Paolo Francisco

Posted on May 31, 2016

Less than a month ago, when presumptive President Rodrigo Duterte delivered a campaign speech in front of businessmen and professionals from the Makati Business Club and the Management Association of the Philippines (MAP), not everyone was thoroughly impressed. There was “a lack of substance” according to critics, particularly about his economic platform. Opinions seemed to have changed in recent days as a number of business and policy bigwigs have expressed enthusiasm for an eight-point economic agenda revealed by Duterte’s transition team a few days after the national elections. Previously, critics pointed at the Davao Mayor’s lack of economics and business savvy, as well as his supposed socialist leanings as a threat to the continuance of the country’s economic boom.

Philippine Star_Michael Varcas
While Duterte’s broad outline seemed to have calmed, if not excited, some business leaders, those of us who insist on more concrete strategies will have to wait for a more detailed policy platform. And while each of the points raised make sound economic sense, those of us who are more keen on seeing results than counting on promises will have to assess the feasibility and potential impact of the proposed actions on the basis of recent data and their trajectories.

We attempt a speedy evaluation of where the country’s economy currently stands with respect to Duterte’s eight points, and what implementing each of these action points really entails. We organize Duterte’s eight point agenda under four main themes: (1) sound macroeconomic policy and tax reform, (2) national competitiveness, (3) capacity building, and (4) agricultural and rural development.

With Philippine GDP growth hitting 6.9% for the first quarter of 2016, the Duterte administration will be inheriting an economy that is at its best condition in decades. Unsurprisingly, they intend to “continue and maintain the current macroeconomic policies”, which have brought about, in the last six years, robust economic growth averaging 6.2%, low unemployment averaging 6.4% and reaching a historic low of 5.8% last year, and low and stable inflation averaging 3.4%. Duterte will be inheriting a booming economy with a stable fiscal position, healthy current account surpluses, and abundant international reserves. He will also be benefitting from highly improved perceptions among creditors and investors about the country’s fiscal governance, highlighted by the country’s achievement of its first investment grade rating in 2013 from Fitch.

However, one must mindfully note that the healthy fiscal position achieved during the Aquino administration has been due more to its “careful” spending rather than a substantial increase in revenue generation. Anti-corruption reforms, notable attempts at process modernization, and relentless collection efforts resulted in a rather small increase in the country’s tax take from 12.1% of GDP in 2010 to 13.6% in 2014, which falls well within the one percent to two percent fluctuation observed in the tax-to-GDP ratio during the past 15 years. The Duterte administration will have to find ways to increase the government’s revenue generating capacity if it is to afford greater spending on infrastructure and education as promised, while keeping the country’s budget healthy. There may not be enough efficiency gains from merely improving processes within the bureaus.

During his campaign, Duterte suggested the need to update income tax brackets to restore progressiveness by “accounting for inflation.” This makes sense since the current bracketing system was last updated in 1997. Since then, the cost of living has roughly doubled, rendering earners of say, P500,000 per year in 1997, significantly less well-off today. In 2014, an AIM Policy Center study found that from 2008 to 2012, over a hundred “middle-class occupations,” including engineers, art directors, and geologists, have moved into the highest income tax bracket. However, the negative short-term impact on total tax collection will have to be studied further, especially if Duterte wants to spend more and much sooner.

In 2015, the Philippines received $5.72 billion worth of foreign direct investments (FDI), almost a six-fold increase from $1.07 billion in 2010. Most of the FDI went to manufacturing, financial and insurance services, and real estate activities. Despite the remarkable increase in absolute terms, however, the share of FDI in GDP has only risen from less than one percent to slightly more than two percent. In this regard, the Philippines still lags behind the ASEAN average of over 5%. From 2009 to 2013, the Philippines received only 2.4% of FDI inflows to ASEAN, which pales in comparison to Singapore’s lion’s share of over 50%, Indonesia’s 15.6%, and even Vietnam’s 8.4%.

Recognizing the value of attracting more FDI, Duterte’s team has promised to ensure the country’s attractiveness to foreign investors, and to enhance competitiveness by making it easier to do business in the country.

At present, the Philippines ranks 103rd globally in terms of ease of doing business as measured by the World Bank (WB). Businessmen have to go through 16 procedures to merely register a new business in the Philippines, which takes roughly 29 days to complete. As for taxes, there are 36 payments to be settled, which takes roughly 8 days. For comparison, it takes only ten procedures and 20 days to register a business in Vietnam, while in Singapore it takes 3 procedures and two and a half days. Duterte said he plans to simplify and expedite the business registration process, citing a 72-hour rule for the release of documents in Davao City. The WB reports that it does take only 17 days to register a business in Davao City, despite the same number of procedures required.

Other concerns that foreign investors and local businessmen have are transportation restrictions, costly permits, and capital requirements. Having said that, the 2015 World Competitiveness Yearbook, has seen an increase in business efficiency, which has contributed to an improvement in the country’s ranking by one notch from 42 to 41 out of 61 economies studied. The same report saw declines, however, in terms of bureaucracy, business legislation, basic infrastructure, health, and environment, and education. A more often cited annual competitiveness survey from the World Economic Forum (WEF) had reported large improvements in the country’s competitiveness ranking across more than 140 countries year after year since 2010. The Philippines jumped from rank #85 in 2010 to rank #65 in 2012, rank #52 in 2014, and rank #47 last year, mostly on the grounds of an increasingly favorable macroeconomic environment.

The country’s “sound fundamentals” have put rose-colored lenses over the eyes of most businessmen. However, many are now beginning to feel the growing pains of an economy that is not yet fully conditioned to run full steam ahead. Survey respondents cite corruption, poor infrastructure, inefficient bureaucracy, and tax issues as their biggest concerns. Interestingly, crime was not among their greatest worries. The easier part of improving national competitiveness, i.e. building sound macroeconomic fundamentals, had fueled the country’s recent competitiveness gains, but its physical, social, and institutional infrastructure would have to be built up if its competitiveness boom is to be sustained.

Aside from mere bureaucratic inefficiencies, low productive capacity in terms of infrastructure and specialized human resources continue to limit the Philippines’ ability attract a higher volume of FDI, particularly in high-value added industries. Beyond attracting foreign investments, better infrastructure and better education are essential to securing higher standards of living for Filipinos. It is expected that Duterte plans to provide more of both.

According to his team, basic education would be strengthened by putting greater emphasis on communication, mathematics, and logical thinking. The quality of basic education in the country has long been a growing concern, which the Aquino administration had sought to partly address by implementing the new K to 12 program. Still, there is plenty of room for improvement. The overall achievement rate of Grade 6 pupils on the latest National Achievement Test was just 68.88%. Pupils scored the highest in Filipino at 69.2% and lowest in Hekasi (geography, history, and civics) at 65.97%. High school pupils recorded an overall achievement rate of 51.41%, scoring highest in Araling Panlipunan (social sciences including history, sociology, and economics) at 54.22%, and lowest in Science, at just 40.53%.

Also according to Duterte’s team, new scholarships for tertiary education would be targeted in order to align the work force’s skill set with the current needs of the private sector. This, too, is important since at present, there are mismatches between popular discipline groups with the most number of graduates and the number of professional vacancies.

For example, 27% of graduates from 2009 to 2014 specialized in Business Administration and Related fields (BAR), but only two BAR professions, accountancy and human resource development, were among the disciplines with the most number of vacancies from January 2013 to June 2014, which together accounted for 12% of vacancies. The top three most cited reasons for the existence of vacancies were lack of skills among applicants (29.90%), lack of applications (26.03%), and lack of experience among applicants (16.79%). Given the boom in the country’s IT-BPM sector, the next administration must realize that public investment in information technology education may yield higher returns than in the disciplines currently popular among incoming students. There are opportunities in higher value-added services, specifically in the fields of transcription, animation, and software development.

Duterte’s economic agenda also included the improvement and expansion of the government’s generally successful conditional cash transfer program (CCT), currently known as the Pantawid Pamilyang Pilipino Program (4Ps).

The 2016 budget appropriates P62.7 billion for around 4.6 million household-beneficiaries. The current program aims to improve the well-being of one million families from survival to subsistence and of 150,000 families from subsistence to self-sufficiency in 2016.

Notable policies and mechanisms already have been put in place by Aquino’s DSWD to protect the 4Ps program from political patronage and inclusion or exclusion errors.

For example, a nationwide database of poor households had been successfully developed by the Department to help direct public funding to those that needed it most. At this stage of the national CCT program’s implementation, thorough targeting assessment and impact evaluation must inform expansion initiatives to ensure adequate economic and social returns.

But expansion is indeed needed.

According to Reyes and Tabuga (2012), families must receive P5,000 per person per year to get out of poverty. The current allocation is P3,000 per person per year. This limits upward mobility enabled by the program to only 26% of the chronic poor. When rightly done, the CCT program can help the poorest families make ends meet in the short run, while enabling them to build their own capacities through investments in human capital, ensuring more sustainable and inclusive growth in the long run.

While the CCT program in its current form unarguably is a praiseworthy legacy of the Aquino administration, the current government’s legacy in terms of physical infrastructure is rather dim.

Although Government Final Consumption Expenditure had been growing constantly in the past several years, accounting for about 10% of GDP on average, the country continues to lag behind its dynamic ASEAN neighbors in term of infrastructure spending. In the last decade, the Philippines spent only two percent of GDP on infrastructure, which is less than half of what the WB recommends. In the last few years of Aquino’s presidency, greater infrastructure spending was put into the national budget, but implementation delays had resulted in weak actual infrastructure development.

Duterte’s promise to follow through on Aquino’s five percent target for infrastructure spending is forthcoming. It will be interesting to see how he deals with the hurdles faced by the current administration, which includes having to deal with the challenges of public-private partnerships (PPP). Although fiscal figures show enough room for spending, much of the fiscal space had been due to spending too little rather than to collecting more taxes. While the next administration figures out a way to increase revenue generation, it will have to resort to PPP as an alternative means of infrastructure development, which means having to find better ways to deal with the problems that beset the current administration -- issues in the bidding process, delays in tariff adjustments, conflicts on right of way, and adverse rulings regarding the awarding process and operations.

Perhaps what is most exciting for those who want to see big changes in the country is Duterte’s plans to pursue a “genuine agricultural development strategy” based on helping small farmers increase productivity, improve market access, and develop the agricultural value chain. This action point involves the provision of better irrigation, support services, and links to agribusiness firms. Duterte also aims to better coordinate the government agencies in charge of land administration and management.

Recent news articles about how VIPs have been flying into Davao from Manila to show support to the presumptive President have excited many about the prospects of more inclusive economic development that goes well beyond Metropolitan Manila.

However, at face value, Duterte’s ideas on agricultural development is not very different from what the current administration had already been allocating resources for.

In 2016, the National Budget for agriculture, agrarian reform, and the development of natural resources amounted to P91.5 billion, almost six percent higher than the allocated budget in 2011. In addition, P52 billion in 2016 had been set aside for water resources development and flood control. Taken together, these figures account for 17.8% of this year’s total budget for Economic Services.

The Department of Agriculture already currently emphasizes improving rural infrastructure and facilities, as well as promoting higher value-added for local products. What is more interesting to see is how Duterte’s administration will enable the rural and agricultural sectors to hinge on the national economic boom sweeping the country’s urban, service and industrial sectors. Here, linkages through micro-, small, and medium enterprises would be key. It will also be interesting to see how he would approach agricultural and rural development in the light of ASEAN economic integration.

The eight-point economic agenda recently released has sparked interest among hopeful business leaders. No doubt, some see willful change coming. Many others may simply be happy to see that it doesn’t seem to go too far from business as usual.

(The article reflects the personal opinion of the authors and does not reflect the official stand of the Management Association of the Philippines, the M.A.P., or the Asian Institute of Management, the AIM)

Jamil Paolo Francisco is Associate Professor of Economics at the Asian Institute of Management and Executive Director of the AIM RSN Policy Center for Competitiveness (formerly AIM Policy Center). His co-author is Emmanuel Garcia, an Economist of the AIM RSN Policy Center for Competitiveness. The authors would like to thank Christopher Ed Caboverde and Ria Ysabelle Flora for their research assistance.