Powering the Philippine recovery: The Duterte Administration’s COVID-19 Recovery Plan

On May 14, the National Economic and Development Authority (NEDA) unveiled PH-Progreso or the proposed economic recovery program of the Rodrigo Duterte administration. Building on earlier stages of the government’s four-pillar socioeconomic strategy against COVID-19, PH-Progreso entails a mix of supply-side, demand-side, and tax reform measures that are aimed at supporting a rapid or “V-shaped” recovery for the Philippine economy following the widespread disruption posed by the pandemic in the country.

While the PH-Progreso plan remains a work-in-progress, we are encouraged by several of its features, such as the priorities of its proposed Bayanihan II expenditure program. The spending program will direct public investment towards the health and the food value-chain (including agricultural) sectors, and will recommence Build, Build, Build projects, subject to health standards, with the most promising job-creation impact. We also support the passage of a revised Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, even as we propose critical adjustments to the said bill.

Moving forward, we urge our policymakers to also incorporate the following considerations in the government’s recovery plan:

NEDA should publicly share or develop contingency plans for different recovery scenarios.

In presentations of PH-Progreso and other facets of the recovery plan, the economic managers have spoken about proactively determining a “V-shaped” recovery in the forthcoming months. Yet this remains the best-case scenario among a variety of trajectories, and “radical uncertainties” remain as to how the COVID-19 mutates in the following months, and when or whether a vaccine against it will be developed. Indeed, on May 13, the head of the World Health Organization’s health emergencies program cautioned that COVID-19 could become a permanent “endemic virus” and that the development of an effective vaccine against the disease remains “a moon shot” rather than a certainty.

Given the various pathways in which the pandemic and responses to it can unfold, it is only prudent for the government to develop plans for scenarios that are other than the best case. Among others, these contingency plans can identify how the Build, Build, Build program and other public investment programs can be calibrated, as well as which sectors will be “rescued” and supported by supply-side measures, depending on how long the COVID-19 pandemic lasts. Especially in a situation that the pandemic persists, large-scale infrastructure projects whose viability may be severely affected by physical distancing and travel restriction measures (e.g. airports, tourism infrastructure, commuter railways, mega-bridge projects) may have to be put on hold for a longer period, while sectors that are capable of producing medical supplies (e.g. Protective Physical Equipment, N95 masks, testing kits) may need additional support to streamline their supply chains and expand their operations.

Fiscal stimulus is necessary to boost the economy in this crisis, but fiscal discipline should be maintained.

Because of the “radical uncertainties” surrounding the pandemic, we really cannot be definite about a particular development track and predict specific expenditures in the fiscal stimulus package being currently deliberated in Congress. It is wasteful and inefficient to allocate tens or hundreds of billions of pesos for specific projects that Congress dictates, some of which are redundant, some of which are questionable, and some of which are driven by commercial interests.

We recognize the imperative of adequate financing for health, social protection, and recovery. We recognize that the country must undertake bold deficit spending in a time of crisis, especially given our country’s “financial strength.” Spend if we must. But this cannot be a license for unbounded, undisciplined spending.

The CREATE bill can be fine-tuned to enhance its impact on employment.

Though a full CREATE bill has yet to be submitted to Congress, what has been disclosed thus far by the Duterte administration’s economic managers indicates that among the measures that will be included in the said reform will be an immediate reduction in corporate income tax rates (CIT) from 30% to 25% starting July this year. This will be coupled by an extension of Net Operating Loss Carry-Over (NOLCO) deductions to five years for non-large firms, as well as rationalization of fiscal incentives with a longer transition period for existing investors and greater capacity of the Fiscal Incentives Review Board to tailor-fit incentives to different types of investors.

While we see the proposed CIT reduction as an immediate fiscal stimulus to firms during the COVID-19 pandemic, we also take note that the literature on corporate income tax cuts is ambivalent on their effect on business investment and employment. This is ultimately because firms can choose to spend the windfall from tax reduction in a variety of ways, including those that do not trickle down to the rest of society (e.g. distributing dividends, replacing workers with automated technologies). Similarly, we emphasize that much of the anticipated stimulus effect of CREATE will be highly sensitive to changes in the expected trajectory of the COVID-19. That is, should recovery in businesses’ sales and income take longer, then the stimulus effect of CREATE would likewise be dampened. This underscores the importance of retaining substantial demand-side measures through government investment and spending.

Hence, we urge making CREATE’s CIT cut conditional on job preservation or job creation by individual firms. By integrating such conditions, we can be better assured that businesses will use the additional income afforded by the reform in ways consonant with an inclusive economic recovery. In line with our past positions on CITIRA, we likewise emphasize the importance of integrating direct employment considerations into the criteria by which fiscal incentives will be awarded and monitored by the Fiscal Incentives Review Board.

CREATE should not be considered in a vacuum but as part of a broader package. In conjunction with job preservation and creation, we emphasize propping up MSMEs (micro, small and medium enterprises) to ensure that not only formally registered corporations but also those in the informal economy benefit from the fiscal stimulus.

PH-Progreso must be made more responsive to region-by-region differences.

The administration’s recovery plan has been formulated on a nationwide basis. While this is understandable given the early stages of the plan’s development, the pandemic has had vastly different impacts across regions and provinces. Indeed, recent papers by the University of the Philippines’ School of Economics have underscored the varying infection risk levels faced by different economic sectors, while statements of Ateneo de Manila University economists have emphasized the need for a spatial restructuring of the Philippine economy to overcome the country’s economic dependence on infection-prone Metro Manila, Metro Cebu, and Metro Davao.

These spatial and sectoral differences on the impact of COVID-19, coupled with a need for a more even spread of economic activity and opportunities, make the planning of region-specific, if not province- and locality-specific recovery efforts, even more imperative. Just as academic institutions, businesses, and civil society organizations have been critical players in developing the national COVID-19 response, so too should such players be instrumental in designing regional efforts, whether with regional inter-agency task forces and regional development councils. To this end, region-level analysis of the impact of investments proposed in PH-Progreso must be undertaken to support the development of regional recovery plans that are sensitized to their existing endowments.

At present, the Balik Probinsya, Bagong Pag-Asa (BP) program, as established by Executive Order 114 on May 6, falls short of the localization needed for the government’s recovery program. The BP program prescribes a uniform approach towards regional development that, after the immediate relocation of beneficiaries to provinces and the extension of various types of social assistance, leans heavily on the proposed use of special economic zones (SEZ), infrastructure provision, fiscal incentives, and microenterprise promotion programs to generate local employment and livelihood opportunities. Thus far, there is little indication that this approach will leverage the local endowments of returnee destinations and will decisively address typical impediments to local business expansion and investment in more rural areas (e.g. governance issues, supply chain gaps, access to markets).

Quite indicative of the top-down nature of the program is the fact that no representatives among local government units or local government leagues are included in the Balik Probinsya Bagong Pag-asa Council, which is dominated by national agencies. If past experiences with such initiatives in the Philippines (e.g. SEZ development drives) are any indication, the BP program would likely not deliver upon its intended outcomes. Indeed, Rosario Manasan (2013) and the Philippine Human Development Network (2013) have emphasized that SEZs outside of Metro Manila, Central Luzon, and Calabarzon have typically underperformed for the reasons mentioned above.

Beyond recovery, we must build a more resilient, sustainable, and pandemic-proof agro-industry.

Government should beef up its support for sustainable investments in agriculture and agro-industry, particularly for R&D towards stronger agro-industry linkages in the rural areas. These will be investments in agro-industries and resource-based industries with potential for producing and health/medical supplies and for sustainable construction materials (e.g. abaca masks, and coconets for infrastructure projects). The agro-industry investments will promote domestic food supply, absorb displaced workers, and provide raw materials for key industry sectors.

Involved in the drafting of this paper are the following members of Action for Economic Reforms: Jerik Cruz, Victoria Viterbo Quimbo, Jenina Joy Chavez, Buenaventura Dargantes, Menandro Berana, Manuel Montes, Jessica Reyes-Cantos, Filomeno Sta. Ana III, Laurence Go, Nadine Agustin, and Arjay Mercado.