In Focus Archived (February 2014)

IN FOCUS: Infrastructure and Development

One of the key factors for the economic success of East Asian countries is infrastructure quality. Research suggests that when infrastructure is inadequate or infrastructure services are unreliable, investments and growth are constrained. East Asian countries that have invested on infrastructure have a competitive edge over others. The Philippines, unfortunately, has underinvested in infrastructure over the years, and is only now beginning to scale up investments via public-private partnerships or PPP. The countrys infrastructure investments have averaged at just two percent of gross domestic product in recent years, way below the five-percent level in neighboring countries in the Association of Southeast Asian Nations (ASEAN). In the Global Competitiveness Report 2012-2013 of the World Economic Forum, the Philippines ranked 98th among 144 countries in terms of quality of overall infrastructure. It got the lowest rank in terms of quality of port infrastructure (120th) and air transport infrastructure (112th).

Key reforms have expanded the fiscal space, allowing the government to increase spending on social services and making its annual budget outlay more inclusive. The passage of Republic Act 10351 or the sin tax law, which raised the excise taxes on tobacco products and alcohol, has yielded billions for the universal health care program, the improvement of health facilities, and the attainment of the Millennium Development Goals. Analysis made by PIDS Senior Research Fellow Rosario Manasan on the various versions of the sin tax bill provided valuable inputs to legislators during deliberations on the tax measure. Manasan notes that the bicameral version of the bill has greatly simplified the excise tax structure, easing tax administration by minimizing opportunities for mis-classification or mis-declaration of goods and transactions. PIDS has also provided research support for a signature budget reform of the Aquino II Administration: zero-based budgeting (ZBB), which aims to do away with wasteful incremental budgeting and ensure fiscal discipline. Among the ZBB studies conducted by PIDS researchers pertain to the cost-efficiency and effectiveness of sitio and household electrification, reforestation, housing resettlement, and agricultural support programs.

Still, the latest Analysis of the Presidents Budget by Dr. Manasan shows that the countrys fiscal space remains limited. Although the government has arrived at a more balanced budget distribution between social and economic services in the 2013 national budget, it continues to underinvest in certain basic services. For instance, our 2013 education budget still pales in comparison with those of our Southeast Asian neighbors. Low priority was also given to national defense, a critical area given current geopolitical issues.

Research by PIDS has identified opportunities for the country and factors inhibiting investments in infrastructure projects. A study by Gilberto Llanto, PIDS president, found a significant link between rural infrastructure and agricultural productivity, and that electricity and roads are significant determinants of agricultural productivity. Moreover, access to electricity creates various income-earning opportunities for rural households. A separate paper by Llanto on Mindanaos high-value crops sector points out that better and more reliable road and transport infrastructure will help to expand production, increase value-added of those commodities, generate employment, and contribute to poverty reduction. To do this, the Philippines needs to widen its fiscal space such as using more cost-efficient approaches like PPP.