[OPINION] The bad economics of Duterte’s draft constitution

On July 9, after nearly 5 months of work, the Consultative Committee (Con-Com) headed by Reynato Puno finally submitted to President Duterte the new draft constitution which they call “Bayanihan Federalism.”

The ostensible objective of Bayanihan Federalism is to dethrone “Imperial Manila” once and for all and to give more economic power to the regions.  

Yet the draft constitution is to be criticized not just for its skewed politics and faulty economics, but also for the very opaque and exclusive process that shaped it.

Many are concerned, for example, that Bayanihan Federalism could be nothing more than a surreptitious way of consolidating political power in President Duterte who, via so-called “Transitory Provisions” (Art. XXII), could effectively become a dictator just like Ferdinand Marcos. 

In this article, however, I want to focus on the economic aspects of Bayanihan Federalism, and show that, even here, there’s much reason for concern. 

In particular, it appears that not much thought was given to the provinces’ readiness for federalism, nor to federalism’s ultimate impact on regional growth and development.

RISE-UP 

One of the Con-Com’s earliest concerns was to assess the provinces’ readiness for federalism and to determine the optimal number of federated regions. 

To do this, the Con-Com concocted “RISE-UP,” or “Readiness Index for Sustained Economies Under PHederalism.” (Should it be RISE-UF instead?) 

RISE-UP originally comprised 68 indicators ranging from economic dynamism, infrastructure, human development, poverty, labor, governance, and local government finance.

But there’s a fundamental problem in RISE-UP, or at least its earliest version: it crammed too many indicators and used too complex a formula that rendered it, in the end, useless.

Figure 1, for example, shows the formula used for RISE-UP in each province.  

To be sure, the use of so-called geometric means (indicated by the cube roots) is standard in the computation of the UN’s Human Development Index or HDI. But nesting geometric means within a geometric mean is practically unheard of in the development literature, and frankly makes little sense.

Notice that some indicators were also used more than once (like the land index or LI), resulting in double counting. RISE-UP also assumed equal weights throughout, whereas unequal weights might at times be more appropriate. 

Figure 1. Sample formula in RISE-UP. Source: Consultative Committee.

Figure 1. Sample formula in RISE-UP. Source: Consultative Committee.

Even with this abomination of an index, the initial computations showed that only a minority of regions were ready for federalism – whatever “ready” means (see Figure 2). 

For all its complexity, RISE-UP turned out to be empty and meaningless. One can’t help but feel then that the whole numerical exercise was done only to provide a semblance of legitimacy or a veneer of scientific credibility to the Con-Com’s proceedings.

Figure 2. Initial results of RISE-UP across proposed 16 federated regions. Source: Consultative Committee.

Figure 2. Initial results of RISE-UP across proposed 16 federated regions. Source: Consultative Committee.

As I understand it, the Con-Com has since consulted with legitimate economists and even contracted researchers who applied more sophisticated and meaningful techniques to RISE-UP. But till now the results of that analysis have not been made public. 

It’s also not clear how exactly version 2 of RISE-UP ultimately figured in the final draft of Bayanihan Federalism.  

Section 1 of Article XI, for example, laid down the division of the Federal Republic into 16 Federated Regions, apart from the Bangsamoro and the Federated Region of the Cordilleras. But how exactly the regions are cut up is yet to be revealed.

Financing federalism 

Another important yet understudied aspect of Bayanihan Federalism is the all-important “Equalization Fund” it establishes. 

In essence, it’s a pot of money – no less than 3% of the national budget – from which subsidies for poor federated regions will come to help them cope with their finances.

Indeed, some regions are not at all financially ready for federalism. 

Figure 3 shows that richer regions tend to be more self-reliant, as measured by the share of their revenues coming from, say, real property and local business taxes. Some regions with small economies – including ARMM – will inevitably need financial help once federalism is in full swing.

Figure 3.

Figure 3.

Even if equalization funds can also be found in other countries, applying them to the Philippine case is more complicated than it seems.

First, we can implement such "intergovernmental transfers" even without charter change. 

Last July 4, the Supreme Court held that local government units or LGUs are entitled to a “just share” in all state revenues, not just those collected by the BIR.

Economists are worried that this landmark decision could imperil the government’s coffers. Budget Secretary Ben Diokno warned that this could easily double the government’s budget deficit from around 3% to 6%, undermine big-ticket projects like President Duterte’s flagship “Build, Build, Build,” and downgrade our international credit ratings.

Yet, at the same time, this perfectly illustrates why Duterte’s federalism is totally needless: even a single Supreme Court decision can instantly bump up the share of LGUs in the national coffers, thus obviating the need for charter change. 

Second, public financing under the new federal setup could prove to be a “nightmare.” 

Finance Secretary Sonny Dominguez, for example, is worried not just about the way taxes will be administered across the federated regions, but also about the management of the Equalization Fund.

Dr Chat Manasan of PIDS earlier found that provincial and regional tax administrators today lack adequate staff and equipment to efficiently collect taxes. Many local chief executives also avoid taxing their constituents aggressively for fear of losing votes. 

It’s not clear how Bayanihan Federalism aims to address these fundamental local government issues.

Third, the Equalization Fund might make some federated regions less (rather than more) financially independent.

As things stand, LGUs already enjoy a sizable share of national tax revenues through the Internal Revenue Allotment (IRA) provided under the Local Government Code of 1991.  

But Dr Manasan also found that, even with greater tax powers, the share of revenues collected by LGUs has stagnated over time (see Figure 4). This suggests that many LGUs have learned to depend on IRA funding instead of boosting their own collections.

Figure 4. LGU own-source revenues (green) and local taxes (red) as a share of GDP, 1991-2016. Source: Manasan [2017].

Figure 4. LGU own-source revenues (green) and local taxes (red) as a share of GDP, 1991-2016. Source: Manasan [2017].

Unless we figure out how to strengthen local government financing first, Duterte’s Bayanihan Federalism – and the Equalization Fund it entails – might only incentivize LGUs to be less (rather than more) self-reliant.

We need more transparency

One last lamentable aspect of Bayanihan Federalism is how opaque and exclusive the discussions have been.  

For example, very few people today know about the horrendous and cringeworthy economic analysis that went into RISE-UP early on – if it can even be called “economic analysis.” 

The improved version of RISE-UP also remains secret even now that the draft constitution has already been submitted to the President. 

It also would have been better if the Con-Com included expert economists right at the get-go. A number of economists specialize in local government issues and decentralization, and their inclusion in the proceedings would have improved the quality of the discussions.

In sum, for something that could fundamentally change the country’s politics, economics, and overall way of life, the process that spawned Bayanihan Federalism was far from transparent or participatory. Recently, a number of professors and scholars have decried this state of affairs and petitioned for more inclusivity in the talks.

At this point, we don’t even know if Congress will adopt Bayanihan Federalism in whole or in part. 

But because every Filipino will be affected in the end, we must debate all aspects of Bayanihan Federalism as openly and thoroughly as possible. We owe that to ourselves. – Rappler.com 

The author is a PhD candidate at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter: @jcpunongbayan

JC Punongbayan

JC Punongbayan is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations.

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