DPA 314 Special Issues in the Administration of Economic Development

Special Issues in the
Administration of Economic
Development
Prof. Josefina B. Bitonio, DPA
Institute of Graduate and Professional Studies
DPA 314
Summer 2016

The role of the government in
economic development has been a
contentious issue or considerable
controversy. It is a broad subject
with different aspects and great
diversity in their policies, actions and
outcomes.
Introduction

Functional Approach
• Examines all the functions that a
government can and should fulfill
in a developing economy
including the design and
maintenance of economic
environment.

Economic Environment
http://www.competitive.org.ph/node/413

Economic Environment
• The Philippines’ economic freedom score is
57.1, making its economy the 107th freest in
the 2012 Index. Its score is 0.9 point higher
than last year, with a significant improvement
in business freedom. The Philippines ranks
19th out of 41 countries in the Asia–Pacific
region, and its overall score is slightly below
the world and regional averages.
http://www.competitive.org.ph/node/413#sthash.MzPlz1gk.dpuf

Rule of Law
• The rule of law remains uneven, and the legal
framework is deficient in independence and
efficiency. The cumbersome court system and
loose regard for contracts continue to be
causes for concern.
• The judiciary is nominally independent but
susceptible to political interference. Despite
some progress, government anti-corruption
efforts have been too inconsistent to eradicate
bribery and graft effectively.

Limited Government
• The top income tax rate is 32 percent, and the
top corporate tax rate is 30 percent. Other
taxes include a value-added tax (VAT) and an
environmental tax, with the overall tax burden
amounting to 12.8 percent of total domestic
income. Government spending is equivalent
to 18.5 percent of GDP. The deficit has been
over 3 percent of GDP, and public debt has
hovered at around 45 percent of total
domestic output

Regulatory Efficiency
• The business regulatory environment has
improved considerably. Although launching a
business still takes more than the world averages
of seven procedures and 30 days, the overall
process has become less costly. The time and cost
involved in dealing with licensing requirements
have been notably reduced. The labor market
remains structurally rigid, but existing regulations
are not particularly burdensome. Inflation is
modest.

Open Markets
• The trade weighted average tariff rate is 4.8
percent, and layers of non-tariff barriers
further inhibit more dynamic gains in trade.
Despite a strong desire to attract longer-term
foreign investment, systemic inefficiency
exacerbated by heavy bureaucracy
discourages dynamic growth in investment.
The financial sector, which is gradually
modernizing, remains relatively stable and
sound.

Regulations of the Economy
• The enforcement of laws and contracts ,
provision of public goods such as
infrastructure and education.
Despite the challenging global economic environment, the
Philippine economy has been on a steady path of
economic expansion. The government has pursued a
series of legislative reforms to enhance the entrepreneurial
environment and develop a stronger private sector to
generate broader-based job growth. Overall progress has
been gradual, but regulatory efficiency has been notably
enhanced. The economy has expanded at an average
annual rate of close to 5 percent over the past five years.

• There are lingering institutional challenges by
the Philippine government that will require
deeper commitment to reform.
• Despite some progress, corruption continues
to undermine prospects for long-term
economic development. The inefficient
judiciary, which remains susceptible to
political interference, does not provide
effective protection for property rights or
strong and transparent enforcement of the
law.

Positive Approach
• Given the objectives of the government
to promote the development of the
economy.
• Reflection:
1) what the government done or not
done?
2) how their policies worked and under
what circumstances?

Inclusive Growth
Rapid and sustained poverty reduction requires inclusive growth
that allows people to contribute to and benefit from economic
growth.
Rapid pace of growth is unquestionably necessary for substantial
poverty reduction, but for this growth to be sustainable in the long
run, it should be broad-based across sectors, and inclusive of the
large part of the country’s labor force.
This definition of inclusive growth implies a direct link between the
macro and micro determinants of growth. The micro dimension
captures the importance of structural transformation for economic
diversification and competition, including creative destruction of
jobs and firms. (www.worldbank.org)

Policy Pillars of Inclusive Growth

http://www.unescap.org/sites/default/files/3.Framework%20of%20Inclusive%20
Growth%20Indicators%20(FIGI)_ADB.pdf

http://www.unescap.org; www.adb.org;

http://www.unescap.org; www.adb.org

Framework of Inclusive Growth
Indicators (FIGI)
(i) success in achieving growth, employment generation, and
access to economic infrastructure—50% weight;
(ii) success in reducing extreme poverty, moderate poverty, and
inequality (including vertical, horizontal, and gender
inequality)—25% weight;
(iii) success in enhancing human capabilities (e.g., health,
education, water, and sanitation)—15% weight; and
(iv) success in providing basic social protection (especially for
eliminating extreme poverty)—10% weight
The ADB’s broad recommendations for the four-
component, country-level Inclusive Growth Composite Index
are as follows:

(i) growth, productive
employment, and economic
infrastructure;
(ii) income poverty and equity
(including gender); (iii) human
capability dimensions of
inclusiveness; and (iv) social
protection dimensions of
inclusiveness.
http://www.adb.org/sites/default/files/publication/28493/adb-wp14-
inclusive-growth-criteria.pdf
The methodology is then being applied in case study
analysis for Bangladesh (4.55), Cambodia (5.05), India
(5.70), Indonesia (4.40) , the Philippines (3.8), and
Uzbekistan (6.8)

A Review of the Philippines’
Development Context: The
Philippine Development Plan (PDP)
2011-2016

Inclusive Growth
The Philippines envisions inclusive growth
through sustained economic development,
improved lives of Filipinos, and empowered
poor and marginalized sectors. This has been
the core agenda of the Philippine
Development Plan (PDP) 2011-2016 that
serves as the country’s guide in formulating
policies and implementing development
programs.
http://unesdoc.unesco.org/images/0023/002303/230331e.pdf

Secretary Arsenio M. Balisacan (2014)

METRO MANILA, PHILIPPINES - Aug 20, 2015: Philippines in recent years,
unemployment remains a persistent problem for the sprawling Southeast
Asian nation of more than 100 million people.
Under President Benigno Aquino, in office since 2010, unemployment has
fallen. But progress has been uneven and the Philippines still has one of
the highest rates of unemployment in the Asean region.
Felipe Salvosa. Tuesday, 1 Sep 2015 | 9:46 PM ET. CNBC

An enormous challenge to
inclusive growth is poverty
reduction. Poverty, under the
updated PDP 2011-2016, is
being dealt with as a state of
deprivation in multiple
dimensions—health and
nutrition, education, and
living standards (water and
sanitation facilities, electricity,
and quality of housing, among
others).

To Improve Human Capabilities
In pursuit of inclusive growth and poverty reduction, the
country aspires to improve human capabilities through better
health and nutrition and through enhancement of knowledge
and skills. The country also aims to reduce people’s
vulnerability by expanding social protection services and
providing more secure shelter

Human Capital Development was also
considered an important pillar in the
government road map. The government
initially targeted public school children in the
basic primary and secondary education levels.
The roadmap also outlined initiatives to
promote cooperation with other government
agencies especially the Dept of Education
(DepEd) and the technical Education and Skill
|Development Authority (TESDA) for
vocational training.
Hanna and Knight (2011)

The updated Social Development priority
strategies include:
1) providing health care to all;
2) providing complete and quality basic education;
3) developing workforce competence and life skills
through TVET;
4)making higher education competitive and
responsive to national development goals;
5) enhancing the targeting system by identifying the
“near poor”/ vulnerable and knowing their needs;

Social Development
6) enhancing social protection and insurance for
vulnerable groups;
7) setting up a convergence mechanism at all
levels;
8) providing a menu of housing
options/assistance;
9) building strong partnerships with
stakeholders; and
10) pursuing a policy agenda for socialized
housing.

Broadly speaking, three sources of growth
of an economy can not be identified.
• Increases in tangible inputs such as
capital, labor and human capital
• Increases in efficiency both technical and
• Allocative Increases in R & D capital and
adoption of new managerial methods or
organizational form for production

Efficiency
• Allocation and utilization of available
resources and movement of the
production possibility frontier which
is presumably due to intangible input
(luck).

Policy Review
• Was the given policy has done some good?
It is better in comparison with alternative?
• Whether it is optimal? Recognizing that in
the real world there are so many
constraints in dealing with the best policy.
• How the government augment their input
of production, capital, labor and human
capital?

Contentious Issue
• Market friendly view in which there
is little government intervention?
• Development state view which is to
govern the market

Imperfect Market
• We can illustrate imperfect competition by an
example in the energy sector. If there is only one gas
station in your geographical area and you cannot
afford to go and buy fuel from the neighboring gas
station because of its distance and costs. Then your
local gas station will price its commodity above the
prevailing market prices because there is no
competition from other firm. The CONSUMERS do
not have any choice but to purchase from this station
at the inflated prices. The gas station has therefore
created an imperfect market.

• The capacity of the government policy to
facilitate or complement private sector
coordination
• Capabilities of the private sectors. The
government policy as improving the
ability of the PS to solve coordination
problems and overcome market
imperfection

• Size of domestic market. Did it benefit
from any government intervention and
coordination?
• The larger and effective size of economy
the less market coordination will be
required.
• Consider controllability

• Problem of this type are likely to be
much more acute in the beginning phase
of economic development when capital
markets are small or underdeveloped.
However, overtime, there is a
technological progress to allow minimum
efficient scale plants to grow.

The judgment of the extent to
which market failures have been
brought to be should be
remedied by direct government
interventions

Analyzing and Evaluating Government
Intervention in Markets
What is laissez faire economics?
• In a free market system, governments take the view that
markets are best suited to allocating scarce resources and
allow the market forces of supply and demand to set prices.
• The role of the government is to protect property rights,
uphold the rule of law and maintain the value of the currency.
• Competitive markets often deliver improvements in allocative,
productive and dynamic efficiency
• But there are occasions when they fail – providing a case for
intervention.
http://www.tutor2u.net/economics/reference/government-intervention-in-markets

What are the main reasons for
government intervention in markets?
The main reasons for policy intervention by the
government are:
• To correct for market failures
• To achieve a more equitable distribution of
income and wealth
• To improve the performance of the economy

• Government will have to make
choices, whether consciously or by
default some choices that will have
serious long term consequences for
the economy.

• No policy or sets of policies no matter
how brilliant can work for all countries at
all times. Initial conditions as well as
external circumstances influence the
suitability and effectiveness of
government policies and hence,affect
their choices.

For example
• Low savings and investment – Government
should make a policy that promotes savings
and investments
• If capital is high – policy that promotes R & D
activities
• The quantity and quality of HR is the economy
are also relevant in the determining the
appropriate rule of the government

• Flow of information and authority within the
economy. The functions of the technology
becomes critical
• Degree of decentralization and devolution
corresponding to the degree of structure of
information flows.

Distribution of Enterprises
• Large number of small of large well
capitalized enterprises – government
more active rule in the promotion of R &
D like tax credit is very effectual
• None of the small has the capital and is
able to accept the long gestation period
and risk inherent has very little effect.

Other Conditions
• Surplus labor
• Level of per capita income
• Savings ratio
• Agriculture share to GDP
• Government budget. Is it surplus with deficit?
• The private share of GDP and capital structure
• Extent of marketization
• Public tolerance for inflation
• Degree of tax compliance

“Labor Surplus”
http://www.econ.upd.edu.ph/perse/?p=2957
The Philippine story of growth
can also be approached using
the “labor surplus” model. Official
statistics report that around
seven to eight percent of the
labor force is unemployed. There
is however a high degree of
underemployment. Around 25
percent of the total labor force
suffers from unemployment and
underemployment.
What is worse is that
unemployment and
under -employment
affect the younger
members of the labor
force by a bigger
margin. The “informal
sector” of the economy
has enlarged to absorb
all forms of
underemployment.

“Labor Surplus.”
• Unlike the typical East Asian narrative, the
Philippine experience is unique: the labor
surplus has remained a permanent feature of
the economic landscape since independence.
• Yet, the Philippine growth story is not one of
failure. It is not a success like that of our
neighbors either. It is a long-standing story of
sustained labor surplus.

Level of Per Capita Income
It shows that even though GDP per capita rates across the region are
expected to grow over the course of the present decade, the wide
discrepancies in living standards between ASEAN nations will likely increase
with the difference in annual GDP per capita between a Singaporean and an
average ASEAN citizen growing from almost US$42,000 to nearly US$54,000.
High population growth in countries such as the Philippines and Malaysia is
likely to hinder higher per capita income growth rates, though there could still
be an increase of over one third. Lower income economies, such as Laos,
Cambodia and Vietnam, are expected to attain two thirds growth in GDP per
capita by the end of the decade, with Vietnam achieving a similar per capita
income level in 2020 as the Philippines has now.

1,203.8
2,052.3
5,977.4
2,872.51,094.6
40,979.611,307.1
56,284.3
3,491.9
1,793.5
http://data.worldbank.org/indicator/NY.GDP.PCAP.CD (2014)
Level of per Capital Income
6th out
of 10

Savings Ratio
17.6
Gross Domestic Savings (% of GDP)
2011-2015
17.2
34.3
52.1
33.9
62.6
30.7
30.1
20.9
No Data 9th out of 9
countries

Agriculture Share to GDP
Agriculture, value added (% of GDP)
30.4
27.7
11.3
18.1
10.5
8.9
13.4
No Data
No Data
No Data
5th out of 7
countries

Government Budget: Surplus or Deficit?
- 0.90 (2015)
-4.31 (2014)
-4.20 (2014)
-6.01 (2015)
-2.50 (2014)
9.30 (2015)
-4.10 (2014)
-3.50 (2014)
-1.20 (2015)
-2.53 (2015)
Percent of the country's Gross Domestic
Product in 2014/2015
Lowest
deficit out of
9 countries

President Aquino sets P2.606T 2015
National Budget in motion

The Private Share of GDP
and Capital Structure
Private capital flows total of RI
(% OF GDP) in Philippines was last
measured in 2011 at 3.02 %

• Foreign direct investments (FDI) grew by 54%
from USD1.8 billion in 2011 to USD2.8 billion
in 2012, outpacing Malaysia, Indonesia,
Thailand, and Singapore.
2011 2012 2013 2014
2,007,150,725 3,215,415,155 3,737,371,740 6,202,380,556
Source: http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

Extent of Marketization
Marketization: A Development Concept
Marketization, as a management / organizational concept is the adoption of
market principles to public management. In the context of service delivery,
Marketization means letting the service be delivered by competing market players
for profit / incentive providing consumers a range of choices on the service they
need. This will require the government to let private providers to compete with the
traditional government providers or even better, let the private providers compete
while the governments take on the role of facilitators enabling the market to
function properly.
A major focus of marketization is the concept of competition which is necessary
for the market to function well. Moreover, competitive environments provide
innovation and continuous improvement, maximizing benefits while preventing
price-gouging. With this, many consider marketization of public services as a
potential solution for some of the weaknesses and problems in the traditional
bureaucracy. access to skills, and innovation.

Extent of Marketization
One of the ways of marketizing public services is
contracting or more popularly known today as outsourcing. It
can be observed that today’s governments are increasingly
interested to outsource their services to non-governmental
entities. This is not so surprising because outsourcing has
had significant positive results to some of the public services.
The benefits from such schemes include cost reduction,
greater flexibility, access to skills, and innovation.
Ex. Fare increases regulated not full marketization;
compliance to safety standard. There is a need to introduce
a commercial management culture (C. Y. Ng, Norbert
Wagner (1991)

Public Tolerance for Inflation
Philippines Core Inflation Rate
2001-2016
Core Inflation Rate in Philippines
increased 1.50 percent in April of
2016 over the same month in the
previous year. Core Inflation Rate in
Philippines averaged 3.95 percent
from 2001 until 2016, reaching an all
time high of 7.25 percent in October
of 2008 and a record low of 1.40
percent in September of 2015. Core
Inflation Rate in Philippines is
reported by the National Statistics
Office of Philippines.
http://www.tradingeconomics.com/philippines/
core-inflation-rate

The full-year average inflation rate for 2012 was
at 3.2%—the lowest recorded inflation rate in
five years and lower than the average inflation
rates in Indonesia, Singapore, India, and
Vietnam.
http://www.tradingeconomics.com/philippines/inflation-cpi

Degree of Tax Compliance
– Income taxes will account for the bulk of the more than P2 trillion the
Bureau of Internal Revenue (BIR) targets to collect this year.
Under Revenue Memorandum Order, up 21 percent from last year’s
goal of P1.674 trillion The Philippine Star January 17, 2016)
http://www.bir.gov.ph/images/bir_files/annu
al_reports/annual_report_2014/ocp.html

Reference
Lau, Lawrence J. (1997) The Role of
Government in East Asian Economic
Development: Comparative Institutional
Analysis. Clarenta Press Oxford. (Accessed
May 2016).

DPA 314 Special Issues in the Administration of Economic Development

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