The national economy is growing, but at such a slow rate that the Philippines continues to be considered the “sick” man of South Asia. Even late blooming Vietnam has outpaced the country’s economic performance.

This, according to Danny Leipziger, head of the World Bank’s Poverty Reduction and Economic Management (PREM) Network. He said that the Philippines today is reputed to be characterized by a good economy and bad governance. Curbing corruption, reducing politically tainted public spending and overcoming “regulatory capture” are key factors that can potentially translate recent economic gains into sustained high growth. Leipziger was the keynote speaker at the Lecture Forum on Growth, Poverty and Governance held at the UP School of Economics on February 8, 2007.

He stressed, “There is a huge leakage in the public sector due to bad governance. The more leakages, the lower the economic returns.”

Comparing experiences in other developing countries, the visiting World Bank official noted that the quality of institutions has a strong impact on investment flows and growth trends. While the short-term correlation between corruption and growth is weak, World Bank studies show that over the long term, there is a strong relationship between control of corruption and economic growth.

Politically motivated theft

Leipziger argued then that economies that effectively control corruption tend to develop faster. High quality public institutions promote good policies that spur growth. On the international front, the quality of governance impacts on a country’s global competitiveness.

He said good governance delivers better results. Enabling policies lead to a more effective use of foreign investments. In contrast, bad governance turns away even foreign aid that can help stimulate growth.

The incalculable costs of corruption to society undermine the capacity of an economy for sustained development. In the Philippines (and Nigeria in Africa), politically-motivated theft of resources has been a major source of corruption. Wasteful use of public funds and misallocation of national resources due to under-regulation have also contributed to slow development.

Leipziger spoke at length on “regulatory capture”. This refers to a situation in which the people in power dominate the regulatory agencies they are supposed to manage. Their domination adversely affects the level of competition even in vital industries. Foreign investors look at the quality of the playing field in the application of just and predictable rules, respect for property rights and scale of corruption. Where competition is reasonably honest and just, investors come in not only expanding job opportunities but also helping lower prices by creating more products in the marketplace.

Guide to spotting leakages

Another World Bank report shows that low productivity and high cargo handling charges in Philippine ports have contributed to high transport prices and overall inefficiency in the delivery of services. Allowing greater competition in the ports sector is expected to give a strong boost to tourism and agriculture. With eco-tourism attractions and food production largely based in rural areas, encouraging effective competition will benefit the country.

Leipziger also stressed that it is not the quantity but the quality of public expenditures that spells a big difference. Countries that spend the same amount could have vastly different outcomes. As an example, he showed that while Malawi and Ethiopia spent the same amount of money on primary education from the 1980s to the 1990s, there was significant increase in school completion rates in Malawi and not much change in Ethiopia.

In the Philippines, there has been a deplorable decrease in learning skills of elementary school pupils as reflected in annual competency tests in basic and so-called survival subjects. This is compounded by rising drop-out rates at the early education stage and rapid brain drain among college graduates and skilled labor. Part of the problem has been leveled at low budget allocation to improve school facilities as well as leakages in the procurement process and widespread poverty particularly in the rural areas. Children are compelled to work rather than remain in school. The toll of an under-educated generation will be felt in the years ahead.

Leipziger acknowledged that there is no single response to corruption. Still, there are international efforts by various development partners to initiate policy interventions, share experiences, and address transnational issues. The World Bank has developed a guide on identifying vulnerabilities to corruption at the industry level, citing vulnerable points in the pharmaceutical industry, for instance, from manufacturing to product distribution. It could be a reference material in combating corruption on specific public and private sectors.

He also noted that the Philippines has a very active civil society which can be tapped to assist in improving governance and fight corruption especially in the public sector. In different parts of the developing world, low-budget NGOs have been monitoring government services and their initiatives against corrupt practices have resulted in significant improvement in the quality and speed of delivery of public services. Philippine civil society may actively adopt such good practices to create a major impact on governance and public spending.

Reactions

The reactions of two resource persons to the Lecture Forum generally validated the need for sweeping economic and social reforms. Prof. Michael Alba of the College of Business and Economics of the De La Salle University said the country continues to make minor progress in the face of high performing neighboring economies. In fact, the Philippines has not fully recovered from a major decline during the 80’s.

Prof. Alba added that the bad economics has contributed a lot to brain drain, low quality of education and uncompetitiveness of local produce in the international market. Poor sense of leadership and the erosion of family values simply worsen the situation for every Filipino.

Economist Romeo Villegas, consultant to the Ayala Group of Companies, thinks there is so much potential for growth in the country. It’s just that the present capacity for survival hinges on OFW remittances, which may or may not be sustainable over the long term. As for corruption, he suggests that the World Bank and its development partners conduct more lecture fora to make the people sensitive to the interrelated issues in poverty, inequality, growth and governance.