PHILIPPINES
Foreign Correspondents of the Philippines Monthly Meeting Remarks by Joachim von Amsberg
Outgoing Country Director Makati City, June 28, 2007 Good morning! Thank you so much for inviting me and for joining today. As the end of my assignment in the Philippines approaches, I want to express my most sincere appreciation and gratitude to our many partners and individuals within government and outside, with the private sector, civil society, academe, and the media, as well as our own staff. My three years assignment in the Philippines has truly been rewarding and exciting in many respects. I have been fortunate to be able to live in and accompany the developments in the Philippines during three most interesting years. I have been privileged to work closely with many partners without whom the work of the World Bank would have been meaningless. And I have been benefited tremendously from the openness, the warmth and the willingness to partner by so many Filipinos, leaders at all levels and ordinary citizens. Today, I would like to reflect on why these three years have been special in Philippine development and why the current moment could be seen as pivotal in setting the course of the nations for years to come. From the moment I came to the Philippines, I have been struck by what has been called the “Philippine Paradox.” How come a country with such incredible potential for rapid development and an outward-oriented economy located in the fastest growing region in the world could have such disappointing medium-term development outcomes? Why has this country with its rich natural resources, dynamic and talented people, and, at least at the surface, development-friendly economic policies, not achieved faster growth and more significant poverty reduction over the last, say, 30 years? The answer to the paradox that we heard from many observers was that weakness in governance and weakness of public institutions to work for the common good, rather than for special interests, was holding back more dynamic development. As this story goes, with weak governance, public decisions are distorted by special interests, thus government fails to collect taxes and fails to allocate resources equitably and efficiently, thus depriving the people public services and depriving the country of a reliable investment climate that would encourage rapid growth. Supporting Islands of Good Governance
If weak governance lies at the heart of lagging development outcomes, what is the strategy for reform? And how can an international development agency like the World Bank support such reforms, if at all? We consulted with partners and decided to look for answers and solutions inside the Philippines. We found a wealth of good experiences and initiatives to create better public institutions, to deliver services to the public, and to encourage participation of the people in public policy. We have called these success stories the “Islands of Good Governance”—experiences that illustrate that effective public institutions that provide valued public services grow stronger and strengthen the social contract between Filipinos and their governments—and we decided to focus our assistance on support for these Islands of Good Governance. We thought that if the performance of a few vital public institutions and the delivery of key public services can be tangibly improved, the public may seek similar transformation to good governance in other public institutions as well. Now, a few years later, I am amazed by the leaps towards good governance that the Philippines can achieve, when the ingenuity of Filipino people and the opportunities for development meet effective leadership. Let me mention some of these “Islands of Good Governance” most of which of course are well known to you. First, fiscal reforms. Three years ago, due to weak governance and the inability to take decisions in the public interest, public deficits were high, debt was increasing, and a fiscal crisis that would have brought poverty to millions was threatening the country. Three years on, the budget is moving toward balance, public debt has decreased, and resources that can be invested for development—education and infrastructure—have increased. The country took difficult decisions in the public interest. That is good governance. The payoff has been huge and fast, as we have seen. The credibility of the fiscal reforms has turned around market sentiments. Financial indicators have improved rapidly, bringing down interest rates and thus creating the precondition for more rapid development. I will return to this theme later. Second, private delivery of public services. The reform of water service delivery in Metro Manila has allowed millions of people to receive better water services or receive piped water and sanitation for the first time in their lives. In this example good governance means an arrangement under which the incentives for the private sector to invest correspond to the public interest in service delivery. Manila Water has already proven to be a success story. More people receive water at an affordable cost. The investor is financially successful and can thus attract additional capital to expand service coverage to the benefit of the people. The transparent rebidding of the Maynilad concession offers promise of a similar success story for the west service in the years to come. Third, the Philippine Judiciary. The Philippines is blessed with a respected and credible Supreme Court. Even at times of grave uncertainty, people ultimately trust and respect the rule of law and the decisions of the Supreme Court whether those decisions are convenient or not. That ultimate respect for the rule of law lies at the core of good governance. More specifically, I am awed by programs such as the “Justice on Wheels” program of the Supreme Court where justices and courts travel to poor and far-flung areas that have otherwise no access to judicial services as well as by the commitment of the Court to resolve backlogs and delays. Fourth, procurement reforms. Good governance means that public contracts must be awarded to the lowest bidder rather than to the closest friend. Reforms to Philippines public procurement have already resulted in huge savings for government. At the Department of Education, increased competition and transparency in the public procurement of textbooks have lowered the risk of corruption and lowered the price of textbooks from an average of 100 Pesos to 40 Pesos, while also improving the durability and quality of books. The recent decision to separate the bidding for the manuscript from the bidding for printing has further increased transparency and competition. This, plus the earlier procurement reforms, has translated into cumulative savings of three billion pesos for the government, or in other terms more textbooks for children in the classroom. Likewise, the Department of Health saw significant reductions in the price of procured drugs as a result of competitive and transparent bidding process. Civil society's role in overseeing transparent procurement and implementation of public expenditure programs is a unique and fascinating experience in the Philippines, which shows great promise for increased social accountability and is already a model for other countries in the world. Fifth, local governments. There are numerous islands of good governance at the local level—the local government executives and their staff, communities and NGOs who chose to make a difference in their towns, despite the odds; those who chose to innovate and take risks to upgrade slum areas, to provide water and sanitation, to manage solid waste, to connect to other cities, to prevent and manage disasters, to make local bureaucracies more responsive to people’s needs, and to encourage and empower their constituents. The success stories of Marikina City and Naga City are well known, but there are many other large and small Islands of Good Governance among the Philippines LGUs. There are also islands of good governance at the community level. The KALAHI-CIDDS program of DSWD supports communities who develop their own investment priorities and then are able to undertake projects at a cost often much lower than when services are provided centrally. As Filipinos experience good governance in some local governments, they will expect no less from all governments at all levels. Sixth, new modern services industry. Effective deregulation of telecommunications in the previous decade has led to the dynamic development of the modern tradables services sector. The emergence of this sector, of which call-centers are just a small part, has already generated a large number of jobs. Significantly, the country now has a modern services industry that keeps innovating towards greater accessibility, more value added services, at highly competitive prices. It has the potential to generate even more jobs and generate a pull to increase education levels as growth shifts to higher value added tradable services. This dynamic development has been the result of good governance—regulatory reforms in telecoms that pursued the public interest over special interests. These “Islands of Good Governance” are stories not of potential but of actual results. They show that Philippines public institutions can work for the common good and that the Philippines can achieve results. International partners like us can sometimes help to some limited extent, but these are genuine and truly Filipino success stories. Three transitions toward modern governance in the Philippines—joining the East Asian Renaissance
These success stories and islands of good governance are significant. They have contributed to a far more positive outlook for the country today compared to just a few years ago. But the successes have yet to reach a scale sufficient to lift the Philippines up the ladder of sustained progress that its neighbors in East Asia have been climbing for years now. What would it take for the Philippines to join the East Asian Renaissance, the unprecedented growth in East Asia that has literally lifted hundreds of millions of people out of poverty in just a decade or two? I suggest that the development challenge of the Philippines can be expressed in three transitions toward modern governance, each representing a potential virtuous circle of better public institutions and policies, on the one hand, and better development outcomes—higher growth, jobs, incomes and poverty reduction, on the other hand. The first transition is towards economic stability. This is a short-term challenge, and most significant progress has been achieved in the last three years. The second transition is towards an attractive investment climate based on effective competition. This is a medium term challenge, and progress over the next three years is very much achievable. The third transition is towards social inclusion. This one is a long-term challenge. But progress could and should start soon. Let me discuss these three transitions in turn. Economic stability
The Philippines has succeeded in making a fiscal turnaround through a series of credible tax reform measures. The consolidated public sector deficit declined from 4.9% of GDP in 2004 to 1.9% in 2005 and shifted to a surplus of 0.1% in 2006, implying a primary surplus of about 6% in 2006. Market sentiment has since improved, and financing costs declined, thus reinforcing a virtuous circle of fiscal consolidation. The Philippine stock market was among the top East Asian performers in 2006 and continues to rise. The peso appreciated by about 7.5% in 2006 and strengthened further in 2007. The benefit of fiscal reform has thus been immediate and huge: reform has translated into interest savings for both the public sector and the private sector. The progress has been most significant. But gains are still vulnerable and government needs to be steadfast. We are encouraged that government has recognized the recent slippage in revenue collection and is committed to addressing them. Decisive tax administration reform is key and we are supporting the Bureau of Internal Revenue in this effort. The BIR has clear plans in place. It now needs the full support to implement these plans and full protection from the various unhealthy pressures that are naturally exerted on a revenue collecting agency. I am sure that the payoffs from recent fiscal reforms will serve as an inspiration for perseverance on this critical agenda. Dynamic investment climate
The second transition is one toward an attractive investment climate. The fiscal turnaround has now created the precondition and the space for focusing on increased real investments. Investment in the country, at 15% of GDP, is lagging behind other neighboring countries where investment rates are typically 20-30% of GDP. The move to create a positive environment for dynamic investments is now ongoing. Good governance and effective control of corruption are key for a predictable policy environment and thus to encouraging investment by the private sector. Policy reforms that would increase competition in key sectors such as power, ports and shipping as well as aviation can spur investment and job growth. Those reforms for more competition would greatly enhance the country competitiveness vis-à-vis neighboring countries. Those policy reforms could set off a second virtuous circle whereby good governance encourages investment, which will create jobs, raise incomes and reduce poverty, which will reinforce support for sound policy reforms.
Effective investments in infrastructure and education will help provide the necessary public goods that are key ingredients to private investment. The voices of many stakeholders are now converging, which can help address entrenched interests. The moment is ripe for progress. The benefits and payback to reforms are huge because of the unprecedented international liquidity. Policy reforms and strong signals of commitment to good governance will very quickly lead to large investment flows. This is the time to move quickly and decisively. Social inclusion
The third transition for good governance is toward more social inclusion. This may be the hardest challenge and is long-term in nature. But it is no less important than the other two. In international comparison, the Philippines has very high inequality of incomes, assets and opportunities, more similar to indicators in Latin American countries rather than in East Asian peers. This means growth benefits relatively few, and relatively few contribute to economic development. When the benefits of growth are concentrated, it is naturally more difficult to form political consensus for growth-promoting policies. High inequality interacts with traditional governance structures that contribute to social exclusion by holding back policies that would equalize opportunities. The challenge is how to escape from this inequality trap, so that social and economic policies that give better economic and social opportunities for the poor and less privileged lead to greater equality and social inclusion, which in turn reinforce better governance. Economic policies that promote equitable distribution of wealth, such as efficient and progressive taxation, as well as competition policies that result in better services and facilities at lower costs, are one element. Likewise, social policies such as those that would provide quality education for all and those that shield the poor and vulnerable against risks that they cannot manage would lead to greater social inclusion, reinforcing a virtuous circle of social inclusion and better governance. The policy agenda is clear. The benefits from policy reforms are clear. There are two possible scenarios for the next years. In the first scenario, the forces of Philippine society come together to implement reforms for sustained fiscal stability, higher investments and social inclusion. In that positive scenario, the current years will be seen as the pivotal turning point when the Philippines joined the East Asian Renaissance and entered a period of sustained growth and poverty reduction. The alternative scenario is one where the current improved economic situation leads to complacency, and weak policy implementation. In that bad scenario, the current time will be seen as the time when the Philippines failed to grasp its opportunity to rise from the image of a laggard in East Asia. It is difficult to predict short-term events, but in the medium term, I am optimistic for the future of the country. The benefits of reform for economic stability, investment climate, social inclusion and overall better governance are compelling and will not go unnoticed. The “Islands of Good Governance” demonstrate amply that the Philippines is fully capable of moving forward rapidly on this agenda and achieving its potential and its aspirations. I was privileged to have accompanied the Philippines for three years during which the country has made significant progress. I thank the leaders of the country and our many partners who have allowed us to work with them and support them. Personally, I am moving on to a new assignment, but I shall remain a friend of the Philippines who cares about the future of this country and its people, who wishes you well, and who is confident that you will achieve the rapid social and economic progress that Filipinos deserve and can achieve if they grasp the current window of opportunity. Maraming salamat at mabuhay kayo! |
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