RURAL GROWTH AND DEVELOPMENT REVISITED

A WORKING PAPER ON

RURAL GROWTH ANDDEVELOPMENT REVISITED

Summary Report

The World Bank Group in the Philippines

Supporting Islands of Good GovernanceEast Asia and the Pacific RegionRural Development and Natural Resources Sector Unit

THE WORLD BANK GROUP

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Disclaimer

Technical papers are published to communicate the result of The World Bank’s work to the development community with the least possible delay. The typescript manuscript of this paper therefore has not been prepared in accordance with the procedures appropri-ate to formally edited texts. Some sources cited in the paper may be informal documents that are not readily available.

This paper has not undergone the review according to official World Bank publications. The findings, interpretations, and con-clusions expressed herein are those of the author(s) and do not necessarily reflect the views of the International Bank for Recon-struction and Development/The World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the government they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

A WORKING PAPER ON

rural GroWTh and developmenT revisiTed

Summary Report

JUNE 2006

Rural Development and Natural Resources Sector Unit

East Asia and the Pacific Region

The World Bank Group

acknowledgements

i

this report is prepared under the overall supervision of ms. Idah Pswarayi-Riddihough and ms. carolinaFigueroa-geronoftheRuraldevelopmentandnaturalResourcessectorUnit.mr.ajaymarkandayprovidedsignificantinputtothesummarydocument.

contributingtothereportweremessieursandmesdames:messieursRolandody(PrivatesectorInvestments);gilberto llanto (Rural Finance — subsequently consolidated into sections of Private Investments and agriculturalPolicyworkingpapers);Joselitosupangco(RuralInfrastructure);germelinoBautista(naturalResourcemanagement);andgerryBulatao (comprehensiveagrarianReformProgram), andmesdamesdelyPascual-gapasin (agriculturalResearch,development,andextension),chingdelaPeña(agriculturalPolicy);andJosefinaesguerra(governanceIssues).copiesoftheirworkingpapersareavailablefromtheworldBankoffice,manilaandtheworldBankwebsite:www.worldbank.org.ph.

theteamofconsultantsreceivedadvicefromnedaofficialsandstaffandguidancefrommessieursJoachimvonamsberg,JoricmaglangueandJovenBalbosaoftheworldBankoffice,manila.thepapersincludeideasgeneratedduringdiscussionsandinterviewswithgovernmentofficialsandotherknowledgeableindividualsfromthedepartmentsofagriculture(da),environmentandnaturalResources(denR),andagrarianReform(daR)andotherattachedagencies.also,theycitethefindingsandconclusionscontainedinawideselectionofliterature.

thestudyteamalsoextendsitsappreciationto:ms.maryJuddwhoprovidedsupportthroughthemindanaotrustFund;mr.BenedictoRaycoforeditingthefinaldocument;andmr.andrewmendozaforcoordinatingthestudylogistics,editing,documentcoverdesign,layoutandprinting.

contents

1. EXECUTIVESUMMARY... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 1

2. THEECONOMYANDRURALGROWTH ... ... ... ... ... ... ... ... ... ... ... ... ... 3

3. DRIVERSINECONOMIC&RURALGROWTH .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . 7

aggregatecapitalInvestment. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . 7

landandassetReform. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . 9

theenvironmentandnaturalResourcemanagement ... ... ... ... ... ... ... ... ... ... ... 10

technologyandProductivitydevelopment. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 12

4. THEFACILITATORSOFGROWTH ... ... ... ... ... ... ... ... ... ... ... ... ... ... ..14

Policy,Publicsectorandexpendituremanagement .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 14

PoorallocativeefficiencyandPublicexpendituremanagement. .. . .. . .. . .. . .. . .. . .. . .. 15

Policy,PlanningandBudgeting... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 17

agriculturalFinance. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 19

5. GOVERNANCE,POLICYANDREGULATIONS .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 21

5.1.governanceandcorruption. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 21

5.2.BureaucraticandInstitutionalefficiency... ... ... ... ... ... ... ... ... ... ... ... ... ... 21

5.3.PolicyandRegulation. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 21

ii

iii

lIstoFaBBRevIatIonsAARNR agriculture,agrarianReformandnaturalResourcesACEF agriculturecompetitivenessenhancementFundAE allocativeefficiencyAFMA agriculturalandFisheriesmodernizationactAFMP agricultureandFisheriesmodernizationPlanAMCFP agriculturemodernizationcreditFinancingProgramARB agrarianReformBeneficiaryARF agrarianReformFundBSP BangkosentralngPilipinas(PhilippinecentralBank)CARP comprehensiveagrarianReformProgramCBFMA communityBasedForestmanagementagreementsCO capitaloutlayCPSD consolidatedPublicsectordeficitDA departmentofagricultureDAR departmentofagrarianReformDBCC developmentBudgetcoordinationcommitteeDBM departmentofBudgetmanagementDCP directedcreditProgramsDENR departmentofenvironmentandnaturalResourcesDOF departmentofFinanceEIU economistIntelligenceUnitENRM environmentandnaturalResourcemanagementFDI ForeigndirectInvestmentFTAA FinancialandtechnicalassistanceagreementGAA generalappropriationsactGDP grossdomesticProductGFI governmentFinancingInstitutionsGOCC government-ownedandcontrolledcorporationsGOP governmentofthePhilippinesICC InvestmentcoordinationcommitteeIPAF IntegratedProtectedareasFundIRA InternalRevenueallotmentLAD landacquisitionanddistribution(caRP)LBP landBankofthePhilippinesofthePhilippinesLGC localgovernmentcodeLGU localgovernmentUnitMFO majorFinaloutputMOOE miscellaneousoperatingandotherexpensesMPSA mineralProductionsharingagreementsMTEF medium-termexpenditureFrameworkMTPDP mediumtermPhilippinesdevelopmentPlan2004-2010MTPIP mediumtermPhilippineImplementationPlanNEDA nationaleconomicdevelopmentauthorityNFA nationalFoodadministrationNG nationalgovernmentNRM naturalResourcemanagementNSO nationalstatisticsofficeODA officialdevelopmentassistancePAMB ProtectedareasmanagementBoardPAP ProgramsactivitiesandProjectsPIP PublicInvestmentPlanPS PersonnelserviceR&D ResearchanddevelopmentSEER sectorefficiencyandeffectivenessReviewsVAT valueaddedtax

iv

lIstoFFIgURes

1. PercentageRateofgdPgrowthinasia,Philippineactual,trendandmtPdPtarget. . . . . . .3

2. gdPsector(PBnconstant1985Prices) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

3. gdPbysector(real%change)..................................................3

4. export(FoBUs$m)includingelectronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

5. export(FoBUs$m)excludingelectronicsandclothing . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

6. componentsofgdP(2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

7. structureofemployment(‘000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

8. PaddyYieldsmt/ha. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

9. cornYieldmt/ha. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

10. majorexportdestination(%)totalFoBvalue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

11. Investment-economicgrowthandmultipliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

12. ForeigndirectInvestment,2001-2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

13. domesticsavingsasPercentageofgdP(2003). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

14. totalForestexports(Us$’000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

15. cornYieldsPhilippines/asia(1961-2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

16. RicePaddyYieldsPhilippines/asia(1961-2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

17. PhilippineandworldPricesofUrea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

18. governmentRevenue,expenditureanddeficitasof%ofgdP(2001-2009). . . . . . . . . . . . . .14

19. denRBudget,2000-2004constant2000Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

20. PercentageofnationalBudgettolgUs(1992-2001). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

21. PercentageofnationalBudgetbycategory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

22. PercentageoftotaldaBudgetbycategory,2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

23. daProjectexpenditurebycategoryandsource,2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

24. denRBudget,2000–2005,currentPrices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

25. shareoftotallendingtoagriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

lIstoFtaBles

1. majoragriculturalexports2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

2. PhilippineBusinessenvironmentRanking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Working Paper on Rural Growth and Development Revisited

1.1. this summary report integrates the findingsand recommendations outlined in the variousworkingpapersincludedintheRuralgrowthanddevelopment Revisited study1. It is structuredaround the framework of drivers and facilitatorsof, as well as policy and regulatory issues andmedium term Philippine development Plan(mtPdP)2004–2010 thrusts in rural growthinthePhilippines.Inaddition, itemphasizestherelative weight of rural sectors in the economyandtheimportanceofeffectivepublicsectorandexpendituremanagement.Ithasdonesogiventheintrinsiclinkandcommonalityandcommoralityofissuesgoverninggrowthintheeconomyasawholeandinruralareas,andthenecessityofgovernmentin setting themacro environment for improvinggovernance, rationalizing the bureaucracy, andimproving fiscal and expenditure discipline. theissuesraisedinthisreportarecentraltothedebateonsectorgrowthastheydeterminethedirectionoftheeconomy(whatappearstobeworkingandwhatnot)andtherelativesuccessofgovernmentandthepublicsectorintargetingandmanagingscarcepublicresourcesandprovidingtherightsignalsforstimulatinginvestmentandcompetitiveness,whichultimatelydeterminegrowth.

1.2. the economy and rural growth are discussed insection2,thedriversofeconomicandruralgrowthin section 3, and the facilitators of such growthinsection4. governance,policyand regulatoryissuesaretackledinsection5,whichalsooutlinesthepublicroleinmeetingtheneedsoftheprivatesectorinstimulatingagribusiness[section5.3.2].

1.3. Rural growth is intrinsically linked to overalleconomic performance and the efficiencyof government in managing it through thelegislature, policies and resources. a primarydriver in economic growth is domestic andforeigninvestments.However,relativetootherregionalandworldeconomies, the standingofthe Philippines needs to improve considerably

1. EXECUTIVE SUMMARY

inattractingforeigndirect investments(FdIs).the chief disincentives to FdIs appear to bepolitical and fiscal instability, perceived poorgovernanceandcorruptioninpublicinstitutions,and ineffective infrastructure, transport andinformationnetworks.thisdoesnotmeanthatopportunities do not exist, especially with arapidlygrowingregionaleconomy,butthatthecountryneedstoaddresstheseissuesurgentlytomakefulluseofitscomparativeandcompetitiveadvantages.

1.4. the economic, social and development costof not doing so are significant, especially as alow domestic saving rate and a potential fallin remittances, a principal driver of privateconsumptionandtheeconomy,couldhaveseriousknock-on consequences. For the same reasons,the domestic private sector remains risk averseinmaking investments.additionally there are anumber of programs, policies and legislation inagriculturethatdistortprices,resourceallocationand markets, all of which create uncertainties.For example, land distribution under thecomprehensive agrarian Reform Program(caRP),hasnotbeencompleted;landmarketsaredistortedbysignificantweaknessesinpropertyrights, title and ownership, and land cannotbe used freely as collateral for accessing credit.theseinconsistencies,therefore,underminelandinvestment,productivityandgrowth.

1.5. governmenteffortsatboostingconfidenceandinvestmentsinfactorsofproductionneedtobestrongly supportedby theway itmanages andallocates public resources. the past five yearshavewitnessedtheemergenceofsignificantfiscalimbalances, increased government borrowingandgrowingindebtedness.theriseinpublicdebtis particularlyworrying as it has reached levelsthataredeterringpublicandprivateinvestments.added to this are structural weaknesses in theway public resources and expenditures areallocatedandused.Proportionately,verylittleinpublicfinancesactuallygoestoincreasingcapitalstock, whilst the bulk is spent for keeping thebureaucracygoing.toredressthis,government

1 working papers are in the main study document. copies of the

workingpapersareavailablefromtheworldBankoffice,manilaand

theworldBankwebsite:www.worldbank.org.ph

1

rural development and natural resources sector unit (easrd)

muststeadfastlyimplementitsbureaucraticandpublicexpenditurereformprogram.

1.6. moreover,theprocessofgovernmentplanning,budgeting and monitoring is fragmented, withinadequatelinkagesbetweenprioritysettingandresourceallocation,whileasignificantportionofpublic finances (e.g. congressional allocations)are not subject to prioritization, accountabilityand transparency rigors. meanwhile, localgovernmentunits(lgUs)havenotbeenfiscallyweanedoffnationalgovernment,morethan10yearsafterthepassageofthelocalgovernmentcode (lgc) that provided for, among others,the devolution of substantial responsibilities forservice delivery to lgUs. the onus thereforeclearly lies on improving fiscal and expendituredisciplinebyadoptingaholisticapproachtopublicplanningandinvestmentwhichiscloselyalignedtobudgetrealities.Informulatingameaningfulpublic investment plan (PIP), the nationaleconomicanddevelopmentauthority(neda),departmentofFinance(doF)anddepartmentof Budget and management (dBm), workingclosely with congress, could lead the way bymakingdifficultinvestmentchoices.withoutthis,PIPsattheagencylevelhavelimitedworth.

1.7. theseimbalancesandinefficienciessignificantlyimpede agriculture and the rural economy.despite resource advantages and expandingdomesticandinternationalmarketopportunities,the sector’s importance in the economy isdecliningas it fails tomodernize,diversifyandbecomemoreproductiveandcompetitive.thislackofresponsivenessanddynamismintheruralsectors,especiallyasothersintheeconomy(liketelecommunicationsandelectronics)canandaretakingoff,isattheheartofthisstudy.

1.8. For producers and entrepreneurs to be moreresponsive, the price and market signals inagriculturehavetobeconsistent,non-distortiveandconsumer-orientated.agriculturalandfoodsecurity policies, however, have historicallyemphasized public investment in commodityand price support programmes, which haveshielded producers from being more dynamicand responsive to market needs. to this end,the current mtPdP thrusts on asset reform

(e.g. expediting completion of the caRP andthepassageoftheFarmlandcollateralBill)andfocusingpolicyandpublicinvestmentonmarketandagribusinessdevelopmentareencouraging.

1.9. In contrast to commonperceptions, theoveralleconomy is fairing reasonably well, registeringreasonablegrowthratesinthelasttwoyears.thissuggeststhatsomesectorsareexpanding,thoughnotagriculture,whereinafallinnationalincomeisevident.thisneednotbethecase.continuedgrowth in private consumption and the servicesectorswillfuelstrongdomesticdemandforfoodandagri-productsthroughcorrespondinggrowthinsectorssuchashotels,restaurantsandtourism.the challenge, however, will be how much ofthe growth in this demand domestic producerswillmeetandhowmuchwillgotooutsiders.onthebroaderfront,regionaleconomicexpansion,particularlyinchina,meanstherearesignificantopportunitiesforsuppliersofqualityproducts,aslongas theyremaincompetitive.Fromapublicexpenditure perspective, increasing resourcesto the market aspects of the agricultural andFisheries modernization act (aFma) are likelytohavehighreturns.

1.10. the competitive base of the Philippine ruraleconomyremainshamperedbycontinuedlackofinvestmentingood,reliableandreasonablypriced transport infrastructure. the roads arenot there or are poorly maintained, whilstshippingremainsuncompetitiveandoverpricedduetomonopolisticpractices.apart fromthedirectbenefitoflinkingproducerstomarkets,reliable infrastructure is a criticalprecursor toinvestmentasconfidencegrows.

1.11. while economic growth is essential todevelopment, it is not without environmentand natural resource repercussions and costs.Recent experience in managing these in thePhilippines has been inadequate and if currenttrends continue there will be few resources toexploitbeforelongandthecostofcleaningupthe environment will outweigh the short termbenefits.viewedbythiscost/benefitperspective,thepropermanagementoftheenvironmentandnaturalresourceisarguablyasmuchalongtermdriverofeconomicgrowthasinvestment.

2


2.1. theeconomygrewatover6percent in2004,thefastestin15years.thiswasencouragingandispartlyattributedtopositiveexternalfactorsintheworldeconomyandtopaststructuralreforms,whichhavebegunintegratingsignificantsectorsoftheeconomytoglobaltradeandinvestmentflows,enhancedcompetitionintheprivatesector,and began transforming the export base fromrelianceoncommodities tovalueaddedgoodssuch as electronics. moreover, entrepreneurialtalent and proficiency in english are stronglyenhancing competitiveness in sectors such asbusiness outsourcing and telecommunicationswhichfurthersupportgrowth.

2.2. In terms of gross domestic Product (gdP)growth, the country has fared reasonably wellcompared with other regional economies,although the mtPdP growth targets seemsomewhat optimistic compared to trend anda (comparative) forecast by the economistIntelligenceUnit(eIU)[Figure1].

rateofoutputgrowth[section3.5].Incontrast,therelativeshareofindustryandservices,whichemployfarlesspeoplethanagriculture,willlikelyincrease from the present 33 percent and 48percentrespectively,astheycontinueregisteringstrongerproductivityandgrowthrates[Figures2&3],inresponsetodemand.

2.tHeeconomYandRURalgRowtH

3

Fig. 1: % rate of Gdp Growth in asiaphilippine actual, Trend and mTpdp Target*

*targetismedianofrangesource:eIU/mtPdP

2.3. although the agricultural sector, includingforestry and fisheries, will continue playing astrategicroleintheeconomyandruralgrowth,its relative share of gdP (around 20 percent)hasbeendecliningforyearsbecauseoftheslow

Fig. 2: Gdp by sector (p Bn constant 1985 prices)

source:eIU/BsP

Fig. 3: Gdp by sector (real % change)

source:BsP/eIU

2.4. agricultural exportshavebeendeclining andnowaccountforlessthan5percentofforeignearnings. [Figures 4 & 5, table 1]. thishas been the result of slow agriculture andproductivity growth, subsidies, and limiteddiversification away from staple crops, whichare raised almost entirely for the domestic


2.5. Privateconsumption,fuelledbylargeexpatriateremittances, [Figure6]will remainaprincipaldriver in economic growth in the mediumterm.

market. subsidies and limited diversificationhavemeantthattherehasbeenlittlepressureforproducerstoinnovateorresponsetopriceandothersignals.

Fig. 4: export (FoB us$ m) including electronics

Table 1. major agricultural exports 2003

Total Export US $ m % earnings

Coconut oil 5051.4Desiccated coconut 96 0.2Copra 36 0.1Bananas 333 0.9Pineapple products 131 0.4Mangoes 31 0.1Total inc others 1458 4.1

source:BsP

Fig. 7: structure of employment (‘000)

4

Fig. 5: export (FoB us$ m) excluding electronics and Clothing

source:eIU/BsP

Fig. 6: Components of Gdp (2004)

source:eIU/BsP

2.6. a relatedgrowthdriver inboth the rural andnational economy will be the high level ofemployment (and hence household income)agricultureprovidesandtheconsequentdemandthis generates for services and consumption[Figure7].

2.7. totakeadvantageof the fooddemandfroma rapidly growing population, which morethandoubledfrom36millionin1970to76millionin2000,andincreasedconsumption,the sector will have to increase productivityandgrowth.achievingthisposesconsiderablechallenges as overall crop and factorproductivity in the sector is low comparedtothoseofothercountriesintheregionand


2.8. the Philippines will also need to look atneighbouring economies as sources of furthergrowth.Forthecountry,beinghometoalargeethnic-chinese business community has meantthat trade relations with china will becomeincreasinglymorecentraltotheeconomy.chinaandHongkongtogetheraccountedforalmost15%ofPhilippineexports in2004upfrom7%threeyearsago[Figure10].

2.9. Rapid gdP and income growth in china andits projected demand for diversified, qualityagricultural and fisheries products also meanthatitsmarketswillbeofconsiderablestrategic(andgrowth)importancetothePhilippineruraleconomy–providingthelatterissuitablygeared

to the world average [Figure 8 & 9]. lowproductivity, moreover, compounds seriousunderlying problems of a stagnant sectorwhichrequiresurgentimpetusforinnovationanddiversification.

upandflexible.thegovernmentisalsotargetingchinaasacriticalsourceof investmentcapital.this is foundedonchina’s strongdemandforraw materials in the medium term and by therecentopeningupoftheminingsectortoforeigninvestment2. In april 2005, agreements worthUs$1.5bn3 covering loans and investmentsin railway and mining projects were signedbetween the two countries. this representsa significant increase in volume of potentialinvestmentgivenrecenttrends,whichhavebeenquitevolatileduetouncertaintyandchangesinthepoliticallandscapeofthePhilippines[Figure3&section3.1].clearly,exploitingthesetypesof comparative advantages and historic andindigenous trade linkages in the domestic andregional economy will be important to futuregrowthinthewholeeconomyandkeyinsectorsinruralareas.

2.10. the sectors that are projected to benefit mostfromthisgrowtharetelecoms,health,restaurants,hotels,tourism,leisureandeducation.theshareofthesegrowthmarketsthatdomesticproducersareabletocapturefromagricultureandrelatedsectors(i.e.food,beveragesandagro-processing)

5

Fig. 8: paddy Yields mt/ha

Fig. 9: Corn Yield mT/ha

source:Fao

Fig. 10: major exports destination (%) Total FoB value

source:eIU/BsP

2 this ruling will open the way for significant outside investment(interest)inthesector,whichwouldbeimportantforgrowth,itwillbeequally important that such investmentsaremanaged responsiblyfrom an environment and natural Resource management (nRm)perspective to ensure that long term costs do not outweigh theshorttermbenefits.[Refsection3.3].australiaisalsolikelytobeanimportantinvestmentsourceinmining.3economistIntelligenceUnitcountryForecastReportmay2005.


will be highly relevant in determining thedirectionandextentofruralgrowth.

2.11. Insummary,theoveralleconomyappearstobefaringwellincertainquartersbutnotsowellin others. In the rural/agricultural economythere will be a number of factors that willinfluencefuturegrowth.First, therearecleardomesticgrowthtriggers,suchasanincreasingpopulationandanexpandingnonagriculturaleconomy, with growing aggregate income,which will need to be supplied with foodand food products. second, with increasingincomes, the domestic market is becomingincreasinglysophisticatedandpriceandqualityconscious.Howmuchofthisdemandcanbesuccessfully captured by domestic suppliersis a key challenge. third, as other powerfulregional economies grow, and trade barriers

relax, the export market for agricultureproduce will grow rapidly. the Philippines,however,hasonlybeenabletocaptureasmall,anddecliningshareofthismarket.Fourth,thenaturalcomparativeadvantagesthePhilippineshas,togetherwithitsliteracyandtechnicalandentrepreneurialskills,haveonlybeenpartiallyharnessedinpushingeconomicgrowth–andlittle in agriculture. growth in rural areas,therefore, would benefit enormously if thesignals (policy and price) are less distortiveand can capture the competitiveness anddynamismwhicharebeingenjoyedbyother,emerging sectors in the broader economy.last, theoverallpeaceandsecurity situation,particularly in mindanao greatly hindersinvestmentandoutput.longtermpeaceandsecurity in mindanao would greatly improvetheoveralleconomicenvironment.

6


3.dRIveRsIneconomIc&RURalgRowtH

3.1 AggregateCapitalInvestment3.1.1 economic growth is highly contingent on

investment,which is critical todeveloping andmaintaining the country’s vital capital stock.capital stock, in turn, stimulates employment,incomes, demand for improved productivityenhancingtechnologies,anddemandforhigherhuman skills capacity while facilitating betterintegration between producers and consumersin existing and emerging markets. this vitalsynergy underpins a number of essentialeconomic linkages andmultipliers,which interalia,stimulate(Figure11).

domestic investment to maintain sustainablegrowth. In an analysis conducted by theeconomist Intelligence Unit (eIU), thePhilippinesisranked36thamong60countriesworldwide and 10th among 16 countries inasiaintermsofprojectedinvestmentflowsfortheperiod2000-2004(table2), although itsscoreisprojectedtoimproveoverthenextfiveyears(2005-2009),itsregionalrankingislikelyto remain unchanged, suggesting that effortsinothercountries tocourt investmentwillbeequallystrongorstronger.

3.1.4. globally however, thePhilippines’ ranking isprojectedtodecreaseto40th,againsuggestingstrongerglobalcompetitionforinvestmentandasluggishmomentuminthecountry’sreformagenda.thecountry’sscoreforpoliticalstabilityandeffectivenesswillremainmiddlingtopoor,as uncertainties persist and progress remainsveryslowonpolicylegislation.Howevermoreencouragingimprovementsareforecastinthemacroeconomic environment and in policiestoward foreign investment, trade, andexchange controls. the macroeconomicenvironment will improve as tighter fiscalmeasuresarebroughtintoreducethebudgetdeficit.thesemeasures,however,willmostlybeontherevenueside(taxes)asthescopeforlowering expenditures is limited given highinterest payments and public service costs.the largest single factor that compromisesinvestmentinthecountryispoorinfrastructure,therankingforwhichisalmostatthebottomof the world and regional scores. Higherpublic/private investment in infrastructurewouldthereforehaveconsiderablebenefitsinimproving not only investor confidence butdirectlyinopeningupmarketsandeconomiclinkages through multipliers. the issues thatthegovernmentoughttoaddressare:(i)howtogeneratesuchinvestmentinthefirstplace,given the budget situation; and (ii) how toprioritize infrastructure investment given alimited public purse and conflicting publicexpendituredemands[table2].

3.1.2. ForeignDirectInvestment.asthePhilippineshas one of the lowest domestic savings ratesin asia, foreign direct investment (FdI) willremain an extremely important engine ofgrowth[Figure12].

7

Fig. 12: Foreign direct investment, 2001-2004

Fig. 11: investment-economic Growth and multipliers

3.1.3. clearly, in the medium term, the businessenvironment has to remain competitive toensure higher volumes of both FdI and


3.1.5. Domestic Investments. In addition to FdIs,domesticprivateinvestmentswillplayaninvaluablerole in stimulating growth and increasing thecountry’scompetitiveedge.thetrendshavenotbeenencouraging,however.comparedtocloseregional players, the Philippines generally faresunfavourablywith its lowdomestic investment-to-gdP ratio, although the gap appears lesssignificant after the asian financial crisis in thelate1990s[Figure13].

8

lag in productivity has resulted from failuresineducationandhumancapital,whichindeedare relatively high in the Philippines, but tomuch lower physical capital accumulationand sustenance in productivity growth.consequently,intheperiod1960to2003,theoutput per worker in the Philippines rose byaround50%,comparedto450%inothereastasianeconomies.thisgap,needlesstosayisamajorhurdlewhichwillneedtoberedressed.

3.1.7. Investments in Rural Infrastructure. Inrelation to most countries, the Philippineshas comparatively more complex and costlytransport system, given its island-basedeconomy. additionally, its overall state ofinfrastructure is poor due to significant longterm underinvestment. In roads, less than 50percentareallweatherandmanyofthefeederroadsareinpoorconditionduetosubstandardconstruction,inadequatemaintenance,andusebyoverloadedvehicles.Bridgesareoftenweakorabsent,andsomeremoteareashaveverylittleinaccessroads.Inruralareas,primaryeconomicgrowthwillbehighlydependentonareliableroadandwatertransportnetwork,whichlinksproducerswithconsumers, and,on irrigation,whichreducesrisksandraisesproductivity.themajorcostoftheseinfrastructureswillliewithnationalandlocalgovernmentastheyareclearly

3.1.6. amajorknock-oneffectofthislowinvestmenthas been the slow emergence and integrationinto the economy of improved, productivityenhancing technologies [section 3.5]. this

Table 2. philippine Business environment ranking

value of indexa Global rankb regional ranka

2000-04 2005-09 2000-04 2005-09 2000-04 2005-09

Overall 5.78 6.45 36 40 10 10Political Env 4.9 4.9 41 43 11 12Political Stability 6 6 38 39 10 10Political effectiveness 4 4 44 46 12 12Marco-economic Env 6.8 8.5 45 34 15 10Market Opportunities 5.5 5.9 39 39 11 12Policy toward private enterprise & competition 5.2 5.8 39 40 9 11Policy toward foreign investment 6.1 7.2 41 34 9 8Foreign trade & exchange controls 7.2 8.9 31 9 8 4Taxes 6.9 6.9 16 22 7 7Financing 5.5 5.9 37 42 9 11Labour market 6.9 6.7 18 29 5 9Infrastructure 2.8 3.9 56 52 13 12

source:eIU;a.outof10;b.outof60countries

Fig. 13: domestic savings as % of Gdp (2003)

source:adB


perceivedaspublicgoods.Forthenationalandlocalgovernments, the issuesare: (i)howcannational government can mobilize resourcesfor infrastructure investment in the currentfiscal climate, without substantial cost cuttingacrossothersectorsandexpenditurecategories;and(ii)whatcapitalandrecurrent investmentcanbeexpectedfromlocalgovernmentUnits(lgUs).thefirstwillrequiregovernmenttodevelopandadoptaholisticpublicinvestmentplan, covering national priorities and fundingstrategies across all sectors. the second willrequire a clear understanding of fund flowand cost share modalities between nationalgovernment (ng) and lgUs together witha substantial strengthening of their financialmanagement and technical capacity [see alsosection5].

3.2 LandandAssetReform

3.2.1. In addition to capital and labour, the thirdcrucialfactoringrowthinthePhilippineswillbeland,whichistheprincipalassetinruralareas.Heretheregulations,principlesandsignalsthatgovernhowtheassetis,orallowedtobe,usedwill ultimately determine investor confidence,the assets contribution to agriculturalproductivity and overall contribution togrowth. the longer, for example, distortionsand uncertainties in these signals and in assetvaluation,propertyrightsandlandmarketsareallowed to persist, the less their contributionand the higher their cost to the economy intermsofcompetitivenessandgrowth.Indeed,akeyreasonputforwardforthefailureofthePhilippine economy to take off (compared toothersintheregion)isthe‘treatmentofland’---itshistoricandskeweddistribution(formerly)and the long delays in completing land andagrarianreform.thecomprehensiveagrarianReformProgram(caRP)isfarbehindscheduleandwillnotbecompletedby2008,thecurrentcompletiontarget.toremoveuncertaintiesandimproveinvestmentandproductivityinland,itisimportantthattheagrarianreformprocessbecompletedexpediently.

3.2.2. to achieve this,however, thegovernmenthas

difficultchoicestomakeandchallengestoface,including:

• substantiallackoffundingforcompletingandconsolidatinglandreformunderthecaRP;4

• Political and social resistance to furtherdistributionoftheremaininglands;5

• slow resolution of existing land disputes andlackofpropertyrights,whicharesubstantially

MTPDP Thrust - Investment: In relation to investment in growth, the Medium Term Philippine Development Plan (MTPDP 2004-2010), rightly signals key trusts that will contribute positively to overall investor confidence and growth. These include: (i) fiscal strength; (ii) power, water and infrastructure; (iii) decentralized economic activity; (iv) more transparent political processes; and (v) peace. The relevant targets to meet these trusts are: (i) fiscal balance and reduction in public sector debt to 1% of GDP by 2010; (ii) more streamlined public expenditure programs, together with increases in revenues to support greater public investments in infrastructure from 2.6% of GDP in 2003 to 4.2% of GDP by 2010; (iii) lower inflation to 3 to 4 % by 2007; (iv) the maintenance of a stable peso exchange balance; (v) policy reforms particularly to support enterprise development and agri-business; and (vi) the boosting of revenues from mining. Aside for the macro thrusts, specifically from a rural economy perspective, the core areas would be agriculture and agri-business, rural infrastructure and mining. In rural infrastructure the thrusts are: (i) greater investment in linking production areas to major markets through the construction of farm-to-market roads, expansion of shipping services and use of roll-on roll–off facilities; (ii) construction and repair of post harvest facilities by the private sector; and (iii) construction of regional and municipal fish port complexes.

4 latest estimates indicate that some 100 billion pesos (Us$ 1.85billion) would be required to complete the land acquisition anddistribution (lad) componentof thecaRP.of this, a partof the38billionpesos (Us$556million) fromexmarcos assets couldbeused, thougha substantialgap still remains.appropriations throughthegaaforthisleveloffunding,especiallyintheremainingperiodofthecaRP,arealsounlikelygiventhepresentfiscalclimateandothergovernmentpriorities.Italsounlikelythatsubstantialrecoverieswillbegeneratedthroughcollectionofamortization.5therearesome1.78millionhectaresofcaRPablelandremaining.much of this is private coconut land where current owners are notinvestinginproduction.

9


deterringinvestment;• legislativeobstaclesthatdetertheuseofdistributed

landascollateralinaccessingcredit;and• Poordeliveryofsupportservicestocomplement

landdistribution.

3.2.3. In addition, there are a number of distortionsand uncertainties in the reform process whichaffect landbeingusedproductivelyasanasset.theseinclude:

•Poor recovery of amortization funds fromagrarianReformBeneficiaries(aRBs);

•Poor recovery in private transactions as this isreliantonthebuyer’scapacitytopay;

•the decline in government land availablefor future redistribution, thus leaving theredistribution of private lands, which aremostlyplantationswhoseconversiontoviableagriculturallandswillrequireinvestmentfundsinaccessible to agrarian reform beneficiaries(aRBs), as the main vehicle for agrarianreform;

•thelegalprohibitionthatcurrentlymortgagedland under the caRP cannot be sold on theopenmarketwithinaperiodof10yearsafterpurchase,andthen,onlytootheraRBs,whichdeters banks from lending against such landdue touncertain value and futureownership,thusseverelylimitingproduceraccesstocreditanddistortingthelandmarket;

•the hampered access to land through rentaland sales markets caused by compulsoryland acquisition and collateral-based lendingunder which collateral in land cannot beforeclosed, which, together with uncertaintiesinlandownership,hasdepressedinvestmentandproductivityinagriculture;

•the highly inefficient land transaction systemexacerbatedbymultiplefakeandbadlandtitles;

•thehighly inefficient land registration system:under which only 45 percent of parcels havedeeds; while the total number of land parcelsis unknown, and the titling of land and theregistrationoflandtransactionsarelongdelayed;and

•the high land transaction costs due to tax,corruption and informal payments resulting intheemergenceofaparallel,informallandmarket,whichdoesnotcontributetotaxrevenues.

3.3 TheEnvironmentandNaturalResource Management

3.3.1. to complement measures for a sound andopen investment base in the economy, thereistheneedforpropermanagementofnaturalresources (agriculture, marine, forests andminerals) and the environment. Inadequateregard for implementing sound naturalresource management (nRm) measures andsafeguarding the economy from excessiveenvironmentalcostsisrapidlyerodingresourceinventoriesandwillseriouslycompromiseshortterm economic gains by larger, longer termcosts. Inaddition todirect resourcecosts, intheformofadepletedresourcebase,thatlackofconcernforthenaturalresourcedbaseandtheenvironmentwillcauseinvestorconfidenceto lag as pollution, health and congestioncosts increase, tourismrevenuestodeclineasthe earlier comparative advantages (wild lifeand natural beauty) disappear, and the costofcleaningupafterirresponsibleindustriestofallongovernment.consequently,continuedenvironment and natural Resourcesmanagement (enRm) mismanagementconstitutesamajor impedimentto long-termgrowth.

3.3.2. the cost of past failures has already been high.Forestry is now a marginal sector, as a result ofresourcedepletionandunsustainablemanagementoveralongperiod,whichtookthecountryfrombeing the world’s biggest exporter of tropicalhardwoodsinthe1970stobeinganetimporterofforestproductsbythe1990s.Intheearly1960s,thetimberindustrywasthelargestsourceofforeignexchange earnings, which declined rapidly and

10

MTPDP Thrust - Land and Asset Reform: In view of the issues above, related plan thrusts under Agrarian Reform include: (i) the use of the Agrarian Reform Fund (ARF), including the Marcos assets, to complete land distribution and fast track suport services; (ii) expedite the passage of the Farmland as Collateral Bill to improve credit access; (iii) fast track mediation and resolution of land disputes to improve tenure; and (iv) accelerate the provision of support services.


best.thisisattributedtoavarietyofreasons,including:

•anopenaccesspolicy,andweakpropertyrights

and management authority, the open accesspolicy being brought about by the limitedsuccess of various tenurial instruments toconferpropertyrightsandtheirfailuretocloseaccess,thusencouragingover-exploitation;

•the department of environment and naturalResource’s [denR] falling budget and itsstructurewhichallocatesahighproportiononpersonnel servicesand little foroperationsandinvestmentinenRm;

• the fragmentation of the denR’s budget overdiverseandundercoordinatedfunctions(bureaus)anditshighdependenceonofficialdevelopmentassistance(oda);

•theslowdevolutiontowardmorecommunityandlocalresponsibilityforenRm,compoundedby complex and cumbersome processes ofsecuring tenure and property rights, andrecently, the blanket cover annulment ofall community Based Forest managementagreements (cBFmas) to the benefit of theprivatesector;

•the goals of more local transparency andaccountability in enRm not being met asthe Integrated Protected areas Fund (IPaF)mechanism remains ineffective and there issignificant lack of assured funding for localinstitutional bodies - provincial environmentcouncils and Protected areas managementBoards(PamBs);and

•the lackof serviceandperformance standardsinenRm,e.g.veryslowproceduresinsecuringtenureinstrumentsandissuanceofresourceusepermits.

Whatisneeded?

•a sound and efficient institutional basis forenRm based on a watershed and ecosystemapproach - only after which other purposefulpolicy and regulatory actions become morefeasible;

•a substantial management and institutionaloverhaultoimproveservicedelivery,including(a) the rationalization of expenditures (e.g.

bythe1990sthesector’scontributiontoexportearningswaslessthan0.5percent.Inadditiontoexportproducts,therewasalsosignificantlossofnaturalbio-diversitywiththelossofawidevarietyoftropicalrainforest,floralspecies,adiverserangeof endemic faunal species and several importantmarineandcoastalecotypes.[Figure14].

11

Fig. 14: Total Forest exports (us$ 000)

source:Fao

3.3.3. Unregulated illegal logging, moreover, has alsoincreased human and economic cost, as landslideandflooddisastersincentralluzondemonstratedin2004.

3.3.4. Infisheries,theproblemsofover-fishingandfisherystockdepletionareattributedtotheprevalenceofanopen-accesssystem,theuseof destructive techniques, and the inabilityof government enforcement agenciesto regulate entry to fishing waters andpenalizedestructiveanddepletiveactivities.the decline in fishery stock is also relatedto upstream externalities, i.e. pollution,siltation, sedimentation, and mine tailings,and the loss or damage of coral reefs,mangroves,andotherfishhabitats.

3.3.5. longterm,sustainableeconomicgrowthandpovertyreductioninthePhilippineswilldependcritically on how successful government willbe in providing an effective framework forenRm.However,despitesomeimprovementin policy and other instruments to instituteresponsibleenRm,resultshavebeenmixedat


Personnel services (Ps vis non Ps); (b) asignificant improvement in prioritization offunctions–linkingmajorfinaloutputs(mFos)with budget; (c) more effective partnershipwithlineagenciestoimprovedelivery;(d)moreeffectivedevolutionandlocalresponsibilityforenRm;and(e)therationalization/streamliningofthepolicyandlegalframeworkforenRmtoimproveefficiency;

•the structuring of enRm on the integratedmanagement of: (a) watersheds, (b) coastalresourceand(c)protectedareas,whichrequiresthedenRtodevelopeffectivelanduseandrealtimedatabasesystemstoupdateinventoriesandmonitorthecountry’sresources,thusprovidingsound basis for environment and naturalResources(enR)planningandmanagement;

•closingopenaccessforestry,marinefisheryandwater resource areas and establishing securetenuresystems;and

•concertedeffortstoimprovemineralresourceshare agreements6, to solicit approval andparticipation, particularly in protected areas,areaswithancestraldomainclaimsandareasofhighseismicandnaturalhazardrisks.

productivity enhancing technologies and theirefficient dissemination. Past efforts in researchhavebeenundeniably successful,withyieldsofstaplesincreasingsignificantlyinthe1960s,whenfoodshortageswererampantandtheworldfoodoutlookwasbleak.duringthisperiod,althoughitalsoprogressed,thePhilippineslaggedbehindothercountriesinasia.thisaccruedparticularlyin corn, where the projected productivity gap(over the plan period) is likely to increase7leadingtofurtherrisesinimports[Figures15&16].

12

MTPDP Thrust - ENRM: The thrusts in the MTPDP can only be realized if the financial and institutional basis for ENR management (primarily through DENR, LGUs and communities) is made much stronger, allowing them to direct more efficiently operational resources in aggressively pursuing the policy, legislative, regulatory and governance changes required. [Section 4]. The key thrusts in ENRM are: (i) sustainable and productive utilization and investment in natural resource; (ii) promotion of responsible mining; (iii) protection of vulnerable and ecologically fragile areas; (iv) a healthier environment; and (v) disaster mitigation.

6themineralProductionsharingagreements(mPsa)andFinancialandtechnicalassistanceagreement(Ftaa).7Basedontrend,Philippinecornyieldsarelikelytobesome58%lowerthanotherasiancountriescomparedto52%lowerin2004.thegapinpaddyproductivityislikelytoremainunchanged,whichalsosuggeststhatimportdemandwillincreasewithpopulation.

3.4 TechnologyandProductivityDevelopment

3.4.1. enhancing the contribution of factors ofproduction(land,labourandcapital)ineconomicgrowth requires complementary investment in

Fig. 15: Corn Yields philippines (1961-2004)

source:Fao

Fig. 16: rice paddy Yields philippines/asia (1961-2004)

3.4.2 themainreasonsputforwardforthecountry’slow productivity are: (i) declining and poorstructureofresearchexpenditure;(ii)institutionweaknesses;(iii)thenatureofresearch;and(iv)availability and price of inputs. taking these inturn:

• Research Expenditure. International fundingforresearchhasbeendeclining.Forexample,the


potential. likewise, funding for training islargelyonsupply-drivenissues.correctingthisimbalance between supply- (production) anddemand-(market)ledresearchwillbeimportantinmodifyingandstrengtheningthesystem.

• High Input Prices. low productivity is alsoattributedtothepoorinputdistributionnetworkandcost.Irrespectiveofproductivityenhancingresearchrecommendationsandpackages,manyfarmers will not apply recommended dosesnor use high yielding seed varieties due tothe potential risk involved in failure and cost.althoughthisiscommontomostpoorfarmersin developing economies, in the Philippinesthe problems are exacerbated by inordinatelyinflatedcosts.Forexample,pricespaidforureain someyearshavebeenmarkedlyhigher thanworld market price8 [Figure 17]. the mostlikelyreasonsattributedforinflatedcostarethemonopoly in fertilizer supply, and inefficientregulations governing distribution and supply.thesamesituationprobablyexistsforpesticidesandotheragrochemicals.therearealsosupplyconstraintsinhighyieldingseedvarieties.

worldBank’slendingtoresearchhasdecreasedtoaroundUs$30millionin2002,fromapeakofalmostUs$400millionin1998.Inpart,thedeclineisattributedtothefailureofborrowingcountriestocommittoprogramsofinstitutionalreforms. In the Philippines, research is mostlypubliclyfunded,withprivateresearchaccountingforaround20%.Inpublicexpenditure,Researchanddevelopment(R&d)hastoclamourforscarceresourceswithothergovernmentdepartmentsand agencies and rates fairly low in terms ofnational expenditure priority in comparison,forexample, to infrastructure.Problemsof thedeclineinaggregateresearchfunding,arefurtherexacerbated by expenditures disbursed overmultipleinstitutionsandexpenditurestructure,which, in common with other departments, isheavilyweightedtowardpersonnel(wage)costs.without being able to invest more in actualresearch and to operationalize it much moreeffectively, research is becoming almost anendinitsself,demoralized,non-responsivetochangingdemands,andpoorlydisseminated.

• Institutional Weaknesses. there are alarge number of public R&d institutionswith overlapping functions and roles, manyduplicating R&d networks; and with weaklinkages to producers, lgU extension unitsandtheprivatesector.thereis,therefore,clearneedtoconvergeandstreamlinefunctionsandresponsibilities. Recommendations towardthis end include developing unified systemsfor planning, and research and extensionprogrammingamongstthevariousagencies.

• Nature of Research. Research expendituresare almost entirely on expanding production,mostly food crops, with little provided formarket-drivenandpost-harvestresearchinhighvalue commodities with recognized market

13

Fig. 17: philippine and World prices of urea

source:workingPapers

8BorderpricescIF.


In most agencies, this deterioration in publicfinanceshasledtosignificantdeclineinrealbudgetsforexample,thatofthedenR[Figure19].

4.1Policy,PublicSector&ExpenditureManagement.Public resource availability to finance expenditures inthe medium term is saddled with critical constraintsthat will have to be addressed if the volume, allocativeefficiency(ae)andmanagementofpublicfinancing is tobe improvedmeaningfully.these includepoor:(i)overallfiscalsustainability,budgetsizeandinvestmentcapital;(ii)allocative efficiency, public expenditure management andbudget structure; and (iii) linkage between public sectorpolicy,planningandbudgeting.takingtheseinturn:

4.1.1. Poor Fiscal Sustainability: the Philippinepublicdebthasgrowntoalevelthatsignificantlyconstrains public and private investments, andthis is significantly undermines the quality andsustainability of economic growth. large publicsector financing requirements mean that thecountryisparticularlyvulnerabletoshiftsininvestorsentiment [section3.1], and is at increasing riskof financial market volatility and crisis. overall,fiscalflexibilityisbeingsteadilyerodedasrevenuesdeclineandmandatedexpenditures remainhigh.discretionary expenditures, growing transfers tosub-nationalgovernments,lowrevenuecollections,rising debt service, and high expenditures onpersonnel servicesprovidevery littleflexibility toevolving needs, to trigger growth. since 1997,therehasbeenacontinueddeteriorationinpublicfinances, which has seen a slight budget surplustranslate into a significant deficit. there have,however, been some upward trends since 2003and slight improvements which are projectedtocontinueas recent tax revenuemeasures (e.g.vat)filterintotheeconomyandthegapbetweenrevenuesandexpenditurenarrows[Figure18].

14

4.tHeFacIlItatoRsoFgRowtH

source:doF

Fig. 18: Government revenue, expenditure and deficitas % of Gdp (2001-2009)

source:dBm

Fig. 19: denr Budget, 2000-2004Constant 2000 prices

4.1.2. tosustainfiscalflexibility,9theclearoptionsareto:(i)reduceexpenditures;(ii)raiserevenues(reversethedeclineintaxrevenuessince1997);and(iii)improveallocativeefficienciesandstreamlinethebureaucracy.Unlesstheseareaddressedtherewouldbecontinuedadverse impacts on growth, through: (i) reducedresourcesforhumandevelopmentandinfrastructure;and(ii)decliningpubliccapitalinvestmentandlowerforeignandprivateinvestorconfidence.

4.1.3. a key area on the revenue side would be toenhancethecapacityoflgUstogeneratemorelocalrevenues,therelativelevelsofwhichhavenotincreasedsignificantlyoverthelast10years.ontheotherhand,theproportionofnationalbudgetgoing through Internal Revenue allotments(IRas)hascontinuedtoincrease[Figure20].

9RefertoPhilippinesImprovinggovernmentPerformance;discipline,efficiency and equity in managing Public Resources a Publicmanagement,ProcurementandFinancialmanagementReviewworldBank/adBapril2003.

source:dBm

Fig. 20: percentage of national Budget to lGu’s (1992-2001)


4.1.1. moreover, although revenue mobilization andadministration at the local level appear to havegreatpotential,theimpassevis-à-visIRasandcostshare arrangements betweenngandlgUshasintroducedconsiderableuncertaintyininvestmentplanning and expenditure. this needs to beaddressedquickly.

15

4.2.1. maintenance, operating and other expenses(mooe)andcapitaloutlay(co)areessentialfor making and maintaining past and currentinvestments. that these cost items have haddeclining allocations is unfavourable in termsof increasing and sustaining the productive,capital stock of the country. these will requiregovernmenttofocusonprovidingstrategicpublicgoodsinlinewithrecognizedpriorities,reducingthepublicsectorwagebillthroughrationalizingthebureaucracytoincreasetheshareofnon-wageexpenditure.

4.2.2. allocativeefficiencyisalsodiminishedbyvariousdistortions.amajorconcernistheallocationofscarce resources to specialbudget/developmentfunds that are not necessarily aligned withnationalprioritiesandarenottransparentinuse.theprevalenceofspecialcongressionalfundsinthe national budget raises the issue of budgetcomprehensiveness, as expenditures from thesefundsarefrequently“off-budget”astheyarenotaccountedforeitherduringbudgetformulationorexecution. Individual senators andcongressmenarealsoentitledtoavarietyofadditionalfundsfordevelopment purposes, and other congressionalinitiatives,andtocompensatoryallowances.thesecongressionalfundsineffectrepresentasignificantamountofoff-budgetresourceallocationthatisnot open to prioritization, accountability, andtransparencyrequirementsasotherexpendituresare.thisinevitablyunderminestheefficienciesofproperpublicinvestmentplanning[section4.3].

4.2.3. an additional issue is the myriad of specialauthorities,corporations,funds,andadministrationsaffiliatedwithsectoraldepartments.Forexample,the da and daR have 11 governmentcorporations and numerous special-purposefunds, the total allocation of which representsmorethantwothirdsofthetotalsectoralbudget.Inagriculture,publicgoodsandservicesaccountforonly40percent,whilstricepricestabilizationreceives20percentofallocation.

4.2.4. theslowdevolutionoffunctionsandresourceshas added to the problem and costs, asinstitutional arrangements for service deliveryremain incomplete and national agenciescontinueplayingaroleinfunctionsthatshould

MTPDP Thrusts - Fiscal Strength: The Plan clearly recognizes that the government can not continue sustaining national growth through foreign and domestic borrowing as growing interest payments will fast erode the budget share of non debt servicing expeditures. This will have clear repercussions on public service delivery and invesment. The government is, therefore, committed to strengthening fiscal and expenditure discipline and by doing so provide positive signals to investors to increase the inflow of foreign and domestic capital, new technologies and jobs. In the medium term the priorities, therefore, are: (i) generate higher tax revenues through VAT (the bill for which has been passed); (ii) balance the Government Budget by 2010; (iii) reduce the consolidated public sector deficit (CPSD) from 6.7% in 2004 o 1% of GDP by 2010 and; (iv) reduce the ration of public sector debt to GDP from 136% in 2004 to 90% by 2010.

4.2PoorAllocativeEfficiency&PublicExpenditureManagement. to compound the problems of fallingbudgets is thedeterioration in spendingonoperationsandespeciallycapital investment(mooeandco).Incontrast, the cost and shareof personnel services haveincreasedsharply[Figure21].

source:dBm

Fig. 21: percentage of national Budget by Category


havebeenfullydevolved.Inagriculture,researchand extension, for example, remain de-linkedand key infrastructure such as farm-to-marketroadsandcommunalirrigationaredeterioratingduetothisconfusionofresponsibilityandfundflow.tomakedevolution anddecentralizationmoreeffectiveandlesscostly,lgUcapacity infinancial management and procurement willbe essential to improve service delivery andaccountability.

4.2.5. ImprovingAllocativeEfficiencyinAgricultureandAgrarianReform.InlinewiththethrustsinthemtPdP,theallocativeefficiencyofpublicresourcestoagricultureandagribusinesssectorshastobeimprovedsubstantially.Inagriculture,given resource constraints, public expenditurewill need to be more narrowly focused on“growth-enhancingpublicgoodsand services”and less on personnel. Figure 22, illustratesthe distribution of da’s regular (non-aFma)budgetbycategory.

4.2.7. themajorsourcesofgrowthincropproductionwill also need sustained public expenditureinvestments in improved and strategicallylocated irrigation and farm-to-market roads,market related developments and increasedfarmer access to these facilities, adoptionof improved seed varieties, and limited areaexpansion.

4.2.8. In agrarian reform, key recommendationswould be to complete land distribution andagrarianreformasquicklyaspossibletoreducedistortions and uncertainties as the economiccost of delaying the process are extremelyhigh. the suggestions10 toward this endinclude: (i) exploring ways to finance landacquisitionthroughalternativesources,inviewofthemagnitudeoftheresourcesrequired;(ii)greateruseofmarket-orientedandcommunity-driven modalities of land transfer; and (iii)pursuit of a “parallel approach” that balancespublic expenditure on land acquisition anddistributionwithprovisionofsupportservicesto previously redistributed landholdings.the provision of support service throughconvergence in rural development involvingagenciesandstakeholders,undersomeformofareabasedapproach, for example agribusiness[section 5.3.2], would also have additionalbenefitsthroughcomparativeadvantages,valueadditionandmultipliers.

4.2.9. the composition of expenditures can alsobe improved by goP: (i) phasing out ofprivate and non-growth-enhancing goodsand services - including price stabilization,whichbenefitsonly3percentofricefarmers,and production inputs (e.g., seeds); and (ii)movinglgUstowardfinancingmajorgapsindevolvedresponsibilities,especiallycommunalirrigation, research and extension andstrengthening farmers’ institutions.directingmore resources for agriculture developmentin mindanao would also have large benefits,inviewof the island’sconsiderableuntappedpotential.

16

source:da

Fig. 22: percentage of Total da Budgetby Category, 2005

4.2.6. conversely, non-growth enhancing ex-penditures such as those for rice pricestabilization, which account for 20 percentof the agriculture sector’s allocations, needto be phased out. the government has alsoexpressed determination to resolve issuesrelated to the removal of the national Foodauthority’s monopoly to import rice and toallow farmers’ organizations to undertakedirectimportation.

10 Improving government Performance: discipline, efficiency andequity in managing Public Resources goP, world Bank asiandevelopmentBank(2003).


4.3.2. In addition, line agencies tend to budgetand spend on an ad hoc basis as even smalldiscretionary allocations are rarely predictable.Indeed,unpredictabilityoffunding,fromoneyeartothenextandwithinthebudgetyear,isoneofmany factors thatcontribute topooroperationalperformance in the public sector. others arerelatedtothefailuretodirectresourcestopolicypriorities–insignificantpartbecausebudgetingistreatedasanannualfundingexercise,notapolicy-basedexercise-andtothe lackofauthorityandresponsibility given to line managers to manageresourcesattheirdisposal.

4.3.3. Budgetinginthelineagenciesismostly“planorneedsdriven”ratherthanbasedonaperceptionofavailability,despitethedepartmentofBudgetmanagement’s (dBm) prior warning on theavailable funding in an annual cycle. theseconflicting positions have become par of thecourse.thedepartmentofFinance(doF)anddBmareobliged tokeep tightbudget ceilingsinlinewiththepresentfiscalclimateandforecastavailability, whilst line agencies routinely inflateneeds toprotectagainstperceivedcutsand fearthat if lower better prioritized budgets weresubmittedtheirceilingswouldbecut.thisleadstosignificantdiscrepanciesbetweenproposedandappropriatedbudgets [Figure24].the result isaninefficientbudgetprocess,whichundermineseffectiveness.

4.3. Policy,PlanningandBudgeting

4.3.1. governmenteffortsatimprovingfiscalhealthanddisciplinecouldbeconsiderablycompromisedbythecontinuedpoorlinkageamongdevelopmentpolicy (targets), planning and budgeting. thiscontributestopoorbudgetingoutcomesatthemacro, strategic and operational levels as theprocess is highly fragmented and independent.Planning,moreover,ismostlyfocusedondonorfundedinvestmentactivities,whichsupplementcapitaloutlayandmooe.consequently,annualbudgeting is reduced to allocating resourcesthinly across donor and domestically fundedcapitalprojectsandtooperations[Figure23].

17

MTPDP Thrusts for Allocative Efficiency: The MTPDP recognizes that revenue reforms and fiscal strengthening have to be complemented strongly by expenditure restructuring and discipline at agency level. The following are advocated: (a) rationalizing the scope and function of government agencies through voluntary separation and reengineering; (b) improving budget allocation to focus expenditures towards those areas with the greatest number; (c) reversing the decline in public investments to strengthen the economic capital and strictly prioritize capital expenditures for infrastructure to those with the greatest economic returns for the country, as a whole, in terms on ensuring transport and communication linkages, providing base power and water supply, and promoting agribusiness; (d) rationalizing NG spending for devolved services; (e) reducing debt service through debt management; and (f) reducing Government Owned and Controlled Corporation (GOCC) deficits. The specific expenditure rationalization measures include both administrative and legislative measures.

Fig. 23: da projected expenditure by Category and source, 2005

Fig. 24: denr Budget, 2000-2005, Current prices

4.3.4. moreover,betterreconciliationbetweenproposedandappropriatedbudgetswillneedtimeandmorefundamental restructuring of public expenditureengaging dBm, neda, line departments andthe cabinet (as inter-sectoral trade-offs have to


be faced) in a process that has a medium-termperspective.donorsalsoneedtobeinvolvedgiventheirsignificantcontributiontobudgetfinancing.“availability,”bothdomesticfundsandaid,mustbeprojectedbeyondasingleyear,andindicativeshares communicated to departments. “needs”must be prioritized and made consistent withthe resource framework. all these must happenin amanner that encourages departments to re-examine commitments, together with oversightagencies, under a workable and holistic PublicInvestmentProgramframework.

4.3.5. Improving Planning and Budgeting inAgriculture. to continue the process ofimprovingbudgetingandresourceutilizationintheagriculturesector,thereisaneedtocontinuemoving towards functional budgets and awayfrom the commodity-based structure while alsoenhancing convergence of resources. there isalso a need to eliminate costly duplication offunctions (e.g. public sector several agenciesinvolved in farm tomarket roads). short-termactionstowardtheseendscomprisestrengtheningthe linkage between planning and budgetingwithin each agency in line with mFos and thefurther simplification of reporting systems. Inthe medium-term, budget control needs to bedecentralized away from agencies to lgUs,as capacity and accountability improve, andways found to make levels of lgU financingproportionatetodevolvedresponsibilities.Inthelonger term, a holistic PIP would require thatsector representation participate in the budgetsettingprocess.

4.3.6. ForprioritizingPaPs,keyrecommendationsforthe short term include the pursuit of a “plan-driven” approach to budgeting with strongeroutput-outcome linkages, and a systematicreviewofthekeyreasonsforreversionoffundsat year-end. In the medium term, there is aneed to strengthen strategic planning capacityin agencies and lgUs, and develop and usequantitative methodologies for prioritizingagencyandlgUPaPs,developandpilotsector-level,agencyandlgUperformancemonitoringand assessment methodologies. In the longerterm,thereisaneedtoadjustsectorallocationsbasedonsectorperformanceassessmentresults,

adjustmentofinteragencyandlgUallocationsbased on performance assessment results, anddevelopcongressionalcapacityformoreeffectiveoversight of the planning and budgetingprocess.

4.3.7. Inviewofthelevelsofexpenditureinagricultureandagrarianreform,keyactionsintheshorttermcouldcompriseamoredetailedreviewofapparentagencyandlgUunder-spendingonagricultureandagrarianreformbasedonaFma,agricultureandFisheriesmodernizationPlan(aFmP),andother objective criteria, exploring alternativemethods of financing; and implementing newlandacquisition.Inthemediumterm,areviewofagriculturesectorallocationsbasedonaFmalevels,buildinglgUcapacitytoaccessalternativefinancing schemes for agriculture and agrarianreformPaPswillbeneeded.Inthelongerterm,theemploymentofalternativefinancingschemesandmodalitiesfornewlandacquisition,andthedesign and implementation of alternative lgUfinancingschemesarerecommended.

4.3.8. allocatingresourcesbyfunction11andmeasuringthe impact of outcomes and service deliveryare also important in effective planning andbudgeting. In the short term, this wouldinclude strengthening the sector efficiency andeffectiveness Reviews (seeR) process and thecapacityoflgUsinagriculturesectorplanning,budgeting,andextension.Inthemediumterm,there is a need to pursue effective cost-sharingmechanisms for expenditures on infrastructure,research, development and extension, andproductioninputs.thereisalsoaneedtopursuethe convergence of PaPs across da, daR,lgUsandtheprivatesectorespeciallyinagrarianreformcommunitiesandconductofindependentimpactandoutcomeassessmentsatsector,agencyandlgUlevels. Inthelongerterm,itmaybenecessary to “mainstream” key issues regardingimplementationofexternally-financedprojects.

18

11anexample includestheworldBankdiversifiedFarmIncomeandmarket development project, which set budget targets by mFo/function (not commodity or programme) to meet better declareddapriorities inmarketdevelopmentunderaFma.theprojectalsoprioritized improved linkagesbetweenplanning andbudgeting.theproposedworldBankprojectsfordenRanddaRwillalsobebasedontargetedexpendituresupportbymFo.


importance of finance to other sectors, thepoor performance of agricultural banks andcredit lines, and moves against the use ofsubsidizedcredit.

4.4.2. thefocusofrecentBankoperationsisthereforeshiftingmoretocreditforagriculturalproductionand agribusiness, small loans for off-farmactivities, and savings services. although thesehavemetwithsomesuccess,thereisconsiderableneed tofind viablemechanisms to address thespecific demands for agricultural financing. tomeetthesechallenges,therefore,theworldBankadvocates12 anumberof innovative approachesincludingfinancialsystemsdevelopment,whichviewsagriculturefinancingaspartofthewiderrural finance market. the approach is basedon the premise that institutions adhering tocommercialprinciplesaremorelikelytoachieveoutreachandsustainability,whilstthattheroleofthepublicsectorshouldbefocusedonensuringthattheenvironmentremainsconducivefortheestablishment and growth of such institutions.the Bank also advocates the formulation ofa policy framework for the crucial role of thepublic sector in maintaining macroeconomicstability and establishing sound regulatoryprinciplesinthefinancialsector.tobeeffectivethis must be supported by accompanyingprovisions for secure property rights, financialtransactions, andmobilisationof savings. theBank further advocates credit focus for thepoor through microfinance and the provisionof subsidies, credit lines and guarantees undercertainagreeablecircumstances,whichwillnotdistortmarkets.

4.4.3. In the Philippines, a number of key reformswereintroducedinruralfinancialmarketsinthelate1990sinrecognitionofthefailureofearliersubsidized directed credit programs (dcP).to facilitate and consolidate programs, theagricultural modernization credit FinancingProgram (amcFP) was created under theaFmaandwasviewedasawholesalefinancingfacility for the agriculture sector. a numberof constraints, however, still persist in rurallending,chiefly:(i)somesubsidizedprograms

4.4. AgriculturalFinance

4.4.1. agriculturalfinanceiscriticaltoproducersformeetingarangeofproductionandmarketingneeds i.e. inputs, irrigation, technologies;transport and other marketing costs. suchfinancing enables producers to insure againstprice and/or yield fluctuations and investin value addition and agribusinesses. theinternationalexperienceofprogramsincreditandruralfinance,however,hasnotbeenoverlyencouragingasmanyschemeshavenotprovedto be neither financially nor economicallysoundand sustainable,principallydue to theprevalenceofsubsidies.consequently,lendingfor rural financing, like research, has beendeclining. this is attributed to the growing

19

MTPDP Thrusts - Planning and Budgeting

The main thrust in the medium term will be

on operationalizing the Medium-Term Public

Investment Program (MTPIP), to build on national

priority programs, activities and projects (PAPs) in

support of the MTPDP. The approach to planning

needs to be bottom up and participatory. The MTPIP

will be used to monitor NG targets, commitments

and resources, in terms of public investments, over

the medium term. It will also serve as a critical input

to the annual NG budget formulation, guided by

the Medium-Term Expenditure Framework (MTEF)

through the Development Budget Coordination

Committee (DBCC) and set the tone in resource

programming by the Investment Coordination

Committee (ICC). The program will be a three-

year rolling list of PAPs, which will be updated

annually to roll out over the succeeding years until

the end of the medium term. The MTPIP shall also

be consistent with the fiscal program, for which

the PAPs shall be prioritized through the Efficiency

and Effectiveness Review Criteria approved by the

planning committees. Initially, the 2005 budgets

of the 11-piloted departments with harmonized

major final outputs (MFOs), for which performance

indicators have been developed, will be submitted

to Congress.

12worldBankagricultureInvestmentsourceBook.


20

still remain in the da and its bureaus; (ii)the da and land Bank of the Philippines ofthe Philippines (lBP) have yet to developdetails of the amcFP and the strategies andinstrumentstobeusedforfinancingagriculturalmodernization; (iii) banking obstacles thatdo not allow land from agrarian reform tobe used as collateral for credit still exist; and(iv) the partnership between governmentfinancial institutions(gFIs)andprivate sectorinstitutions for on-lending remain very weak.oftotallending,therefore,little(lessthan10percent)goestoagriculture.[Figure25]

4.4.4.thefollowingareneeded:(i)therationalizationof directed credit programs in agricultureand the immediate termination of remaining(subsidized)creditprograms;(ii)thedownsizingofmorefundsneedtobechannelledthroughgFIsforon-lendingthroughtheprivatesector;(iii) the finalization by the land Bank of thePhilippines (lBP) and da, working with theprivate sector, of operational modalities forimplementing the amcFP in line with theaFma;(iv)makingmoreaccessiblefundingforlong-termcrops;and(v)increasingthefacilityfor small loans (150,000 -1 million pesos) asfinancingforexportorientatedcropsneedstobeencouragedandincreased.

MTPDP Thrusts - Rural Credit: To ensure efficient rural finance support to agriculture and agri-business development the plan advocates: (i) all directed credit programs will be rationalized by December 2005; (ii) public-private sector mechanisms to mobilize finance for the fisheries sector will also be established; (iii) legislation on the farmland as collateral bill will be expidited; and (iv) the Agriculture Competitiveness Enhancement Fund (ACEF) will be extended to 2015.

Fig. 25: share of Total lending to agriculture

source:creditPolicycouncil


5.governance,PolicyandRegulationsFurtherprogressisessentialonthegovernment’splans for providing incentives for exit packages(eo 366) and ensuring that related costs arefiscally manageable and that there are minimalabuses through re-entry. Reducing the numberof presidential appointments to civil servicepositions would also send a strong signal ofgovernment commitment to strengthening civilservicemeritocracy,professionalismandmorale.

5.2.1. specificallyinruralinstitutions(da,denRanddaR),theproblemsofalargebureaucracyareexacerbatedbyoverlappingmandates,functionalduplication, and incomplete functional andfiscal devolution to local governments. theseinefficiencies add substantially to the costof running institutions and substantiallycompromises service delivery. to redressthese inefficiencies will require greater efforts,outlined in the mtPdP, at forging agencyconvergence on planning and implementationof rural development activities, rationalizingoverlapping functions and strengtheningdevolutiontolgUsfordevolvedpublicserviceslike infrastructure. caution in the devolutionprocess,however,isneeded,asexperienceshowsthatalthoughsomelgUshaveperformedwell,others have not. Improving service deliverythrough improved lgU performance calls forgreater local resource mobilization and theimplementation of procurement and financialmanagementreformscoupledwithinstitutionalstrengthening,betterlocalbudgeting,andmoreeffective management of human and financialresources and assets. key areas which need tobe addressed to make decentralization moreeffective include:(i)designofdecentralization;(ii) lgU revenue mobilization; (iii) lgUfinancing;and(iv)lgUbudgeting14.

5.3. PolicyandRegulation

5.3.1. Poor, conflicting and inconsistent policies andunnecessarilycomplexregulationscansignificantlydistort economic signals and markets and addconsiderably to the cost of doing business. thiscanleadtosubstantialmisallocationofresources;deter investment, and compromise innovation,diversification and ultimately growth. In thePhilippines,thepreponderanceofregulations(that

21

Inspearheadingeconomicgrowth,thegovernmenthastomaintainaconduciveandcompetitivemacro-economic,policy and regulatory environment thatwill encouragegreater inflows of aggregate foreign and domesticinvestments.Inadditiontophysicalinfrastructure,thiswillrequireittosendtherightandsustainedpolitical,fiscal,expenditure,policy,institutionalandgovernancesignals.strengtheningtheoverallinvestmentclimate,providingthe required infrastructure, improving fiscal disciplineandrationalizingpublicsectorexpenditurearediscussedabove.theremainingissuesinclude:(i)governanceandcorruption:(ii)bureaucraticandinstitutionalefficiency;and(iii)“good”policyandregulations.

5.1.GovernanceandCorruption

5.1.1. efforts by the administration in strengtheninggovernance in public institutions and reducingcorruption will go a considerable way indeterminingoverallinvestorconfidence.However,thePhilippineshasbeenrankedpoorlybytheworldeconomic Forum at 100 out of 104 countriesworldwide for widespread corruption in 2004.13thisexternalperception isconsistentwiththatofdomestic investors, a large proportion of whomconsidermostpublicinstitutionsasbeingcorrupt.althoughanumberofinitiativeshavebeeneffected,thesewillneedtobesustainedandfollowed-uptohave real impact. these include: (i) procurementand financial management reform under theProcurementReformactof2003;and(ii)greaterdecentralizationofservicestolocalgovernments.

MTPDP Thrusts - Corruption: The main strategies are: (i) zero corruption tolerance; (ii) minimize opportunities for misconduct in government; (iii) improve audit of systems and procedures; and (iv) further strengthening procurement reforms.

13worldeconomicForum:globalcompetitivenessReport2004-2005-competitiveIndexsurvey2004.

5.2.BureaucraticandInstitutionalEfficiency

5.2.1. In addition to rationalizing costs throughrightsizing, efforts at making the civil servicemore merit-based, improving the structure ofsalariesandremunerationandingrainingstrongerintegrityinpublicofficeareessentialtoimprovingoverall public servicedelivery andperformance.


environment,strongfinancesandservicedelivery,a well functioning and transparent regulatory,policyandlegalsystem,andgoodinfrastructure.

5.3.3. thePhilippines lags significantlybehindmanycompeting countries in providing for theseveryclearneeds,makingthecountrymuchlesscompetitive and responsive to fast emergingglobal trade and market opportunities.Unaddressed,thegapwillsimplygetlarger.topromotebetterpublic/privatecooperationandpartnership in agribusiness development, thefollowingareadvocated15:16:

• thepublicsectorshouldnotdowhattheprivatesector can do better (e.g. direct provision ordistribution of agricultural inputs - seed orfertilizer);

• Publicinterventionsshouldgotoactivitiesthathave the highest potential for economic andsocialbenefitsandnotwherepowerfulpoliticallobbyistswantittogo;

• the use of input and credit subsidies, wheretheyexist,needtobephasedout;and

• greater consultation should be encouraged inpreparation and implementation of new rulesand regulations related to the agricultural(domesticandinternational)trade.

oftenfacilitaterentseeking,andpoliticalandjudicialinterferenceinregulatorydecisionsaredetrimentalto policy credibility. conversely, if public sectorservicedeliveryisimprovedandaccesstoeconomicopportunity enhanced, public confidence ineconomicpolicywould strengthen.Furthermore,thewillingnessofcitizenstopaytaxesinexchangeforimproveddeliveryofpublicgoodsandserviceswouldalsoimprove.taxes,expendituresandpublicservicesarethereforeinextricablylinkedviaasocialcontractlinkingeconomicandgovernanceagendas,providingasustainableapproachtoeconomicandhumandevelopment.

5.3.2. PolicyReform&Agribusiness:agribusinessisveryhighontheagendaforpromotingsectorandgeneral economic growth in the Philippines. toachieve thiswill requirewell functioningmarketsandanengaged,innovativeandcompetitiveprivatesector.loweringdistortionsandpricesignals(seeabove)andfacilitatingefficientagriculturalmarketswillprovidethecrucialplatformforinvestmentandcapitalizingonmarketopportunities.tomeettheneeds of the private sector, the government, asdiscussedthroughoutthispaper,hastobeproactiveinprovidinganenablingandstablemacroeconomic

22

MTPDP Thrusts - Bureaucratic Reform: The main strategies are the: (i) elimination of irrelevant functions; (ii) consolidation of duplicated functions; (iii) improving of salary structure and merit based promotions; and (iv) ensuring of continuity in public sector staffing and reduction in the number of political appointees. Specifically in the agriculture, agrarian reform and natural resources (AARNR) sector, the emphasis of reforms will be on: (i) greater functional compliance with the provisions under the LGC, AFMA and the Fisheries Code; (ii) improving efficiency and convergence and reducing overlaps in the three agencies; (iii) implementing AFMA provisions for rationalizatinon and consolidation of the system of agriculture and natural resources research, development and extension; (iv) integrating various agencies involved in the land titling; and (v) shifting further the orientation of DA toward functional lines and away from commodities.

14worldBankReport(32055-PH)Philippines:shorttermgrowthtosustaineddevelopment.april2005.

MTPDP Thrusts - Agribusiness: The principal plan goals are to substantially increase aggregate production (2 million hectares), raise productivity, particularly of high value and export crops, and improve access to food markets. The related thrusts are: (i) fostering greater public/private partnership to facilitate the transformation of farming to agribusiness; (ii) implementing specific programs for intensifying crop, livestock and fisheries production, especially high value products; (iii) transforming idle lands and resources into productive agribusiness enterprises; (iv) promoting off- and non-farm enterprises; and (v) making Mindanao the country’s main agro-fishery export zone. In raising productivity the plan focus is to: (i) raise factor productivity — to regional average levels in 6 years; (ii) improve the effectiveness of transport and logistical systems; and (iii) implement critical governance reforms to make the public sector and policy less distortive15 and more responsive to enterprise and private sector needs.

15worldBankagricultureInvestmentsourceBook.16thisincludesfurtherrationalizationofgraintradingandreorganisationofnationalFoodauthority(nFa).

The World Bank Group

World Bank Office Manila23rd Floor, The Taipan PlaceF. Ortigas Jr. Road, Ortigas CenterPasig City, PhilippinesTelephone: (632) 637-5855Internet: www.worldbank.org.ph

World Bank - Headquarters1818 H Street N.W.Washington, D.C. 20433 USAInternet: www.worldbank.org

Documents

RURAL GROWTH AND DEVELOPMENT REVISITED