VOLUME II NOS. 1-12 JANUARY-DECEMBER 1984 ISSN 0115-9097

III III m • I! II I II

PUBLIC FINANCE"PUBLIC FINANCE IN THE PHILIPPINES: A "EDITOR'S NOTE: Over' the years, PIDS has under-REVIEW OF THE LITERATURE" in PIDS SUR- taken several studies touching on various aspects ofVEY OF PHILIPPINE DEVELOPMENT RESEARCH public finance, notably on the Philippine tax systemII by Rosario G. Manasan, Research Fellow, PIDS and the budget process. This special issue of the

Development Research News (DRN) is devoted to_areview of some of these studies as well as studies

This study is organized into four main areas: conducted by other institutions.(1) taxation, (2) government expenditure, (3) the We wish to announce that thisp,ublication will nowbudget process,and (4) public debt. - .............come out every two months, although subscription

Issues on taxation discussed in the literature rates will remain the same. This move is prompted byinclude the following: tax performance, tax incidence, the increasing cost of printing. This special issue,allocation effects of taxation, taxation and inflation, however, covers the whole year of 1984.and tax forecasting. Tax performance is by far themost widely researchedtopic in the area of taxation, income groups.The surveytakes note of the study ofInter-country studies indicate that the Philippine tax Tan (1975) which, in general terms, concludes thatperformance may be characterized as low. A study the government sector, as a whole, hardly changedusingtime seriesdata did not only confirm this obser- the distribution of incomeandthat "the regressivenessvation but also pointed out the deteriorating Philip_ of taxes were (sic) just offset by the progressivenesspine tax performanceduring the period 1955-1970. of governmentspending."

On governmentexpenditures,the survey indicates On the budget system, the issuesmay be dividedthat there is a dearth of studies in this area. The few into: (1) the budget and economic developmentstudiestend to concentrate on: (1) the determinants and (2) administrative issues,in a study (Riha, 1975}of government expenditures, and (2) the incidence of which investigatesthe effect of budget changesongovernment expenditures. It is observed that the GNP, the author indicates that year-to-year changesexpansionof the economy generatesagreater increase in the budget exerted an upward push on GNP at ain governmental expenditures than in total taxes, rate of 0.63 percent on the averagefor the periodGovernment expenditures are also found to be prog- 1947-73.ressive in nature, that is, the ones benefitting most Regarding the administrative aspectof the budget,from government expenditures belong to the lower- Fernandez (1975) points out that the delineation of

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CONTENTS

SUMMARIES OF STUDIES ON PUBLICFINANCE .......................... 1-11 PRODUCTIVITY CHANGE IN PHILIPPINE

SEMINARS INDUSTRY .......................... 16PUBLIC POLICY AND THE PHILIPPINE

SMALL FARM MECHANIZATION ........ 11 HOUSING MARKET ................... 17FOREST RESOURCES MANAGEMENT ... 12 FORECASTING MONTHLY INFLATIONGOVERNMENT FINANCE STATISTICS ... 13 IN THE PHILIPPINES .................. 18FOOD AND EXPORT CROP INCOMES .... 15 DEVELOPMENT FINANCE AND STATEMONETARY AGGREGATES AND ECONO- BANKING ........................... 19MIC ACTIVITY ....................... 15 PIDS PUBLICATIONS ..................... 20

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PIDS DEVELOPMENT RESEAF-- NEWS 2 _-I JANUARY- DECEMBER 1984II I I I I1IL il I i_ III I JllllIll

budget expenditures into current operating and AN ECONOMETRIC MODEL FOR FORIECASTINGcapital outlays tends to be misleading inasmuchas NATIONALANDREGIONALTAX COL;LECTI_NS:current expenditures may contain a developmental A CONSOLIDATEDREPORT .... ,i=':;''_element, The need for medium-term and long-term by Rosario G. Manasan,:;Re_earchFellow, PIDS '/0fiscal planning (rather than annually) is also stressed

by somestudies(e.g.,Claudio, 1978). This isespecially Tax revenue forecasting is an essential input incritical if one considersthe time lagsinvolved, the budgetaryprocess.The ability to project and fore-

Existing literature on public debt in the Philip- cast future tax collections is an important elementpines have concentrated on two issues:(1) the level in the identification of future budgetary gapsand inof debt, and (2) debt and inflation. For the period the planhingof new tax measuresthat may be needed1950-1972, the Philippine ratio of public debt to to meet these needs. In addition, taxes play a majorGNP was considered low compared to that of the role in the financing of the country's economic andUnited States and those of other Asian countries, social development. The government'stax collectionWith regard to public debt and inflation, it isclaimed agenciesassumea pivotal role in this respect.A goodthat since money supply expansion is not a principal tax forecasting model may therefore be usedasgaugefactor in Philippine inflation as indicated by other against which to measure the government's taxstudies, public borrowings which contribute to collection efforts.increasesin money supply do not have a significant It is the purpose of this paperto develop,specifybearingon Philippine inflation. Of course, this is not and estimate a forecasting model for internal taxesthe best way to test the hypothesized relationship (i.e., taxes collected by the Bureau of Internalbetween public debtand inflation. Revenue). In particular, this paper attempts to

In retrospect, it is observedthat taxation attracts estimate a tax forecasting model that has a higherthe greatest amount of interest and work effort in level of disaggregation(both in the number of taxthe area of public finance, while the budget process categoriesstudied and in terms of a regional break-and public debt are the leastexplored topics. More- down), includes, in the specification, determinantsover, the bulk of the researchwork wasconducted in other than tax bases, and considers various proxythe period of the sixties. In the 1970s, interest in the variablesfor the tax bases.field appearedto be on the wane. Total tax collections fall into four general care- I

Based on the review of existing literature on gories, namely: (1) income taxes, (2) license andpublic finance, the following research projects are businesstaxes, (3) specific taxes, and (4) other taxes.proposed by the study: Some 70 sub-categories are divided into these four

main groupings in the national level.1. A more comprehensive study on fiscal incen- The study also attempts to do forecasting at the

tives. This should consist of a critical review of the regional level. However, since specific taxes areassumptions made in the previous studies with regard collected by the BIR Central Office only, the sameto the allocation of government expenditure benefits was not included in the forecasting work at theand tax burden to the various income groups as well regional level. Due to data unavailability, a moreas quantification of the incidence of other fiscal aggregated grouping of taxes was usedat the regionalpolicies like price control on certain consumption effort.goods, price support on certain outputs, subsidies Structural single equation forecasting models areon some inputs, etc. specified and estimated for a selected number of

these sub-categories for the period 1961-1978. The2. Study on government revenue forecasting, rest are estimated through the useof identities.

Previous efforts along this line made use of very In the regional level, however, the estimationlimited information, period is: 1975-1981 for revenue regions (RR) 1, 2

3. Substantive work on long-term budgeting. This and 9, 1976-1981 for RR-5, 1974-1981 for RR-7,should include the development of an econometric and 1972-1.981 for RR-8.projection model or programming model. The determinants used to explain and forecast the

movements of the tax variables may be classified into4. Study on the incidence of fiscal policy on two groupings: (1) variables that reflect the tax bases;

the different industrial sectors. This should include and (2) variables that reflect changes in the taxan investigation of the protective effects of internal structure and tax rates over time. A third group,

taxes on the different industries. Almost all of the variables that reflect the collection effort of the iprevious works on public finance are fragmented, revenue regions, is included in the regional levelin the sensethat only one sub-sector, e.g. taxation, is estimation.considered. A model of the public sector should This study also deals with the concepts of taxprovide the badly needed cohesivenessby accounting buoyancy and tax elasticity as measurements forfor the interrelationship among the different sub- assessing the responsiveness of tax reforms. Thesectors. • study relates these concepts to tax bases,and defines

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PIDS DEVELOPMENT NEWS 3 JANUARY- DECEMBER 1984

tax buoyancy as the ratio of the proportional change FINANCING THE BUDGETiDIEFICIT _' 'in tax revenues to the proportional change in the tax by Eli Remoiona, University ',ofthe Phllipl_es : /.base, with revenue change inclusive of the effects of School of Economics (UPSE) : _'"; ; j',,_';:the discretionary changes brought about by suchthings as the introduction of new tax measures. While the government has been incurring heavy

On the other hand, tax elasticity is defined as budgetary deficits, no well established guidelines onthe ratio of the percentage change in the tax revenue how to finance a budget deficit have beenformulated.to the percentage change in the tax base, with the One contribution to this area is this study by Eli M.revenue increase "cleaned" of the effects of discre- Remolona of the University of the Philippines Schooltionary factors (i.e., tax reforms). According to of Economics (UPSE), entitled "Financing thethe study, the internal revenue system during the Budget Deficit," which discusses a theory on theperiod 1961-1978 yielded a tax buoyancy estimate of optimal mix of policy instruments for financing the1.139, implying an increase of 1.139 percent in tax deficit of less developed countries like the Philip-revenues for every one percent increase in GNP. It pines.speaks well of the responsiveness of the overall tax The study discusses three different methods ofsystem to economic growth, financing a budget deficit, namely: (1) the creation of

The study also presents elasticity estimates for base money, (2)public borrowing either from domes-each of the major categories of taxes. For income tic or foreign sources, and (3) the imposition oftaxes, the elasticity estimate with respect to GNP was reserve requirements on financial institutions. Deter-placed at 1.179 for the period 1961-1967, and 1.114 mining the optimal combination of these methodsfor 1968-1978. This meansthat for every one percent is critical becausethey havefar-reaching implicationsincrease in GNP, tax revenuesfrom income increased on resource allocation and the overallstability of theby 1.179 percent during the period 1961-1967, and economy.by 1.114 percent in 1968-1978. Likewise, statistical Moreover, the government can also operationallytests show that there is no significant difference resort to drawing on its cash deposits as a temporarybetween the elasticity estimates of the two periods, measure. Normally, the government draws down on

Moreover, the elasticity of the individual income its deposit balances when it wishes to refrain from' tax with respect to personal income is in the vicinity issuing too much debt to finance a budget deficit.

of 1.30 - 1.46. In contrast, the elasticity of the cor- In practice, however, the Philippine government'sporate income tax with respect to corporate income debt issue has usually exceeded the budget deficit,is relatively lower ranging from 0.82 to 1.07. specially 16 times in the 12-year period under study

For license and business taxes, the study also (1970-81). During these times, the government issuedgives buoyancy estimates (which, aside from looking more debt than the deficit required and used the ex-into the responsiveness of these taxes to changes in cess funds to build up its deposits in the bankingtheir respective bases, also looks into their respon- system.sivenessaccording to changes in the tax rates imposed The study then further evaluates the threeon them). As a whole, license and businesstaxes are methods enumerated earlier, in the context of Philip-buoyant with respect to grossvalue added in the non- pine experience. Each of these methods is examinedagricultural sector, with a buoyancy estimate of from the standpoint of second-best policy with regard1.127. to the presence of distortions in the Philippine capital

However, if one disaggregatesbusiness and license market. These distortions take the form of financialtaxes into fixed and percentage types, there is a dif- repressions and tariff protection. The financialference between them. Percentage taxes are less repression is caused by various banking regulations,buoyant with regard to gross value added in the non- particularly usury ceilings, which have fragmentedagricultural sector than fixed taxes (which were financial markets and prevented interest rates fromestimated to havea buoyancy rate of 1.1745). reflecting the real scarcity value of capital. In terms

For specific taxes (i.e., those levied on tobacco of tariff protection, meanwhile, the tariff structure ofand petroleum products), the elasticity with regard the country has resulted in widely varying effectiveto their respective bases are considerably less than rates of protection and in over-investment in certainone. This evidence points to the inefficiency of the capital intensive industries.specific taxes in raising revenues. This is becausean Thus, for as long as these distortions exist,increase in the sales of the above products would not secondbest policies (or policies that do not discouragelead to a corresponding increase in the total revenues savingsany further nor reinforce the distorted patterncollected from the specific taxes levied on them. • of investment) are called for.

This study further points out that since financialrepression is imposed mainly through ceilings onnominal interest rates, base money creation (to theextent that it is inflationary) can only make mattersworse. As such, inflation is a tax not only on real

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Figure I " GROWTH OF GOVERNMENT EXPENDITURES AND REVENUES, 1975-198:5

( In Million Pesos ) m7

:;0

LEGEND " _'

MILL|OK PESOS _ GOVERNMENT EXPENDITURES

70,000 F"

:i _ _OVER_IME_IT REVEPIUES

60,O001L-- '_. .

50,000

40pO00 i

o.ooo'°°°:LN IililNI)Iii)I/tJflIINIlillMIII!I )IINIILI)I.,,,

i975 1976 _.97T 197(I 1979 1980 t98 [ |982 1983

SOURCE : |9e4 I_IEDA sTAr[sTiGAL YEARBO0{<L

rib.

PIDSDEVELOPMENTRESEAR, INEWS 5 ")JANUARY-DECEMBER 1984IIII II III IIIII I II II III I

money balances but also on savingsdeposits. And it is ECTIVE PROTECTION RATES ANDa cruel tax because,as it lowers the real interest rates, [RNAL IND|RECTTAXES IN THEPHILIPPINE

it raisesthe subsidyon the already privilegedclassof SE_T|NG (Staff Paper Series No. 83@4)borrowers; while making the burden on small savers by;_=_eG.: Manasan, Research FelIow;PIDSevenmore oppressive. The objective of this study is to examine the

Meanwhile, with regardto public borrowing, the importance of indirect taxes in the measurement ofstudy differentiates between domestic and foreign effective protection rates under various schemes,andborrowing becauseof the importance to the country consequently to provide some guidelines on whichof balance of payments. By undertaking a public the government can base its action regardingthe so-debt, it must in one way or the other be servicedby Called"realignment" issue.taxes in the future. This will be equivalent to a tax The present thrust of the government on realign-on saving. In a regime of trade and financial repres- ment is to remove the protective effects arisingfromsion, sucha tax would only aggravatethe situation, the indirect tax system, and leave the "protecting"

Furthermore, the "crowding out" effect of public function to the tariff structure. The paper describesdomestic borrowing on private investment must be the operation of the existing indirect tax system andconsidered.In a repressedeconomy, the crowding out expounds on its protective nature. A theoreticalis not necessarily in the form of higher interest rates framework is also presented in which the protective(since those rates are largely controlled), but through effects of indirect taxes are separated from that o_reduction in the amount of rationed credit available the tariff system.to private investors. This amount is reduced not only For the purposes of the study, four types of in-because of what the government appropriates for direct-taxes are considered: the specific tax, the localitself but also because the flow of savings is reduced sales tax, the advance salestax, and the compensatingin anticipation of future tax liabilities. Therefore, tax. The specific tax is a tax equal to a_specifiedfinancing the budget by means of domestic borrowing amount per unit produced and applies to selectedshould be avoided, articles notably tobacco, petroleum and alcoholic

products. The rest are taxes levied on an ad valoremAnd, more so with foreign debt1 Servicing foreign basis. The local sales tax applies to domestically

debt somehow entails more burdensome taxes, and produced goods. The advance sales tax applies tohence more discouraging perverse tendency of a imported goods that will be subjected to furtherrepressed economy to incur current-account deficits, processing and/or those which will be resold. Thedefined as the difference between domestic invest-

compensating tax applies to imported goods forment and domestic saving. The study states that themore the government borrows from abroad, the personal use and which does not form part of anothergreater the current-account deficit, good for sale. Among others, it applies on imported

capital equipment.The study then points out that for a lessdevelop- The protective effect of the Philippine indirect

ed country, the last resort in financing a budget tax system, according to the study, is due to one ordeficit is the imposition of reserve requirements on a combination of some of the following features:

financial institutions. The reserve requirement serves 1. differential tax rates for imported and domes-as a tax on financial intermediations so long as forms tically produced goods;of government debt used as reserve assetsyield lower 2. timing of the tax payments for imported andrates of return than the rates that prevail in the domestically produced goods;market. 3, the valuation of the tax baseof imported and

The study notes that when the government domestically producedgoods;borrows by requiring financial institutions to hold its 4. the markup that applies to the tax base ofdebt as reserves,the effect is not to tax savingsbut to imported goods; andtax loans. By raising loan rates, the reservetax serves 5. the extent to which tax credits can be availedto soak up the rents accruing to the privileged classof of.borrowers who have accessto cheap credit. To measure the protection arising from differen-

The study expresses concern, though, that the tial sales tax rates that apply on imported andreserve tax be exercised with care. Furthermore, domestically produced goods, the study utilizes the

t reserve requirement should be phased out as soon as concept of effective protection rate or EPR. In con-liberalization is achieved. At this point, money trast to the nominal protection rate which measurescreation and public borrowing become the preferred in relative terms the excess of the domestic price of

a product over its border.price, the EPR is defined asinstruments to finance a budget deficit. •the percentage excess of domestic value added overthe free trade value added of a given activity resultingfrom the imposition of tariffs and other protectivemeasures.

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PIDSDEVELOPMENTRESEARI I NEWS 6 JANUARY--DECEMBER 1984I IIII III III 11111II

Under a value added tax system that operates up valorem tax on property which includes land, build-to the manufacturer's level (like that which is current- ings, machinery and other improvements attachedi y being enforced in the Philippines) where sales and or affixed to real property.specific taxes actually paid on intermediate inputs It is observed that the potential of the real pro_used are allowed as tax credits against sales tax due perry tax to meet fund requirements and operationalon the end product, EPR estimation should take needs of local units has not been fully tapped. There-account of said tax credit on inputs, fore, there is a need to administer this fund more

Four different EPR estimates are made based on efficiently, it being the second most important re-the 237 x 237 I-0 tables for 1974. The first estimate venue source of local governments. An improvement(EPRI) takes into account both the existing tax credit in its administration cou[d substantially lessen local(i.e,, a non-holding cost arising from advance pay- government dependence on the national authority.ments of sales tax on imports. The second estimate Real property is classified into residential, agri-(EPR2) considers the existing tax credit system but cultural, commercial and industrial. In the case ofassumes that the tax credit is obtained immediately land, the category of mineral land is also added,and costlessly in all cases.The third estimate (EPR3) Based on the classification, the appropriate appraisalassumes a uniform value added system and no addi- or assessment of the property is made to effect ational capital costs. The fourth estimate assumesa differential tax treatment in consideration of thehypothetical situation where the 1985 tariff rates and sharing of the tax burden.the 1983 internal tax rates are operative but where The study then proceeds to explain the actualno tax credit is allowed for taxes on imports, basis of assessment of the real property, the rate of

This analysis shows that (1) in general, the value the tax, the manner of computing for the tax, and theadded system has no protective effect if it treats collection process.imports and locally produced goods uniformly and if The literature on real property taxation, is alsoone abstracts from capital holding costs, (2) in the reviewed, starting off with the claim that the criteriacase of intermediate goods, a non-uniform value used for assessingreal property tax in lessdevelopedadded tax system has no protective effect regardless countries like the Philippines are based on considera-of the inclusion or non-inclusion of capital holding tions imposed on other policies like allocative of-costs, (3) in the caseof final goods, a discriminatory ficiency, distributive equity, economic stability (notvalue added tax scheme could have some protective that important here, though, as the other consider-effect regardless of the inclusion or non-inclusion of ations) and growth.capital holding costs. The literature normally touches on two aspects:

Finally, the study provides the following conclu- (a) the economic aspects of the real property tax, andsions on the protective effects of the different in- (b) the collection and administration of taxes as welldirect taxes: as the legal ramifications of various tax designs and(1) the protective effect of the additional capital hop costs of administering different tax packages.

ding costs is slight, In terms of the literature on economic aspects,(2) ignoring capital costs, the existing internal in- most of the studies on real property tax are pre=

direct tax system has no protective effect in the occupied with the question of allocative efficiencycase of intermediate goods, and goods which are and the incidence of tax and therefore the equity isubject to a uniform salestax rate, consideration. The question of altocative efficiency I

(3) the protective effect of the value added tax sys- enters the discussions primarily because the finaltem in cases where a good is subject to non- payor of the tax depends on how much of the tax canuniform rates is considerable, be shifted through adjustments in prices and quan- I

(4) the protective effect of the mark-up provision, if titles. This in turn depends on the different supply,in fact a source of discrimination, is not negligible demand and substitution elasticities so that shiftingalthough it is lessthan (3), and of taxes implies rearrangements in resource alloca-

(5) the protective effect of the shift from a single- tion.

stage sales tax to a value added tax system is not The studies on the incidence of real propertysmall. • taxes, meanwhile, can be divided into the "tradi-

R,EAL,,PROPERTY TAXATION IN THE tional" and "new" schools of thought or views. ThePHiL|_PiN,ES: ISSUES AND RESEARCH "traditional" view holds that the property tax wouldDIRE_T.IONS be divided into that imposed on land (site value) and(Staft_perSeries No, 84-01) that imposed on improvements. The tax on site values

would be paid by the land-owners through loweredW. Paderanga, Jr., University of the assets value ("capitalized") while that on improve-

SChool of Economics (UPSE) ments would be passedon to consumers of the finalproduct, The "'new" view, on the other hand, holds

This study starts with a description of the real that the tax is borne by owners of property (land andproperty tax. It defines real property tax as an ad improvements). According to this view, the main|1 , | ....

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PIDS DEVELOPMENT RESEA_ tNEWS 7 "-- _JANUARY - DECEMBER 1984...... IIII IIII I1[ Ieffect of the property tax is to reduce the rate of capacity of local governments while, on the otherreturn on capital -- both reproducible and non-repro- hand, there is an absence of adequate tools for theducible. Thus the current owners of all capital bear assessor like tax maps and appropriate training. Inthe tax in the form of a reduced income in their addition, there is confusion surrounding jurisdic-_ssets. tions and questions of ownership.

With regard to the literature on the collection and 4. For future research, studies on quantitativeadministration of taxes, the emphasis of the studies magnitudes of parameters which determine the extentis on the legality, equity and efficiency of methods of shifting should be encouraged. Studies dealing withand procedures. Among the topics of specific interest the supply of caloital - whether it is elastic orare: efficiency and costs of administration; quality of inelastic - should likewise be promoted. Also, em-assessmentand assessors;tools of real property taxa- pirical estimates on the economic effects of the realtion like tax maps; and the administrative implica- property tax.tions of tax laws. More specifically, the scope for research in the

The study observes that most of the studies on immediate future may be envisioned in two phases,the Philippine real property tax system are of the to wit:latter type. There are four groups which have been Phase I -- Empirical estimates of coefficientsmain centers of this type of research in the Philip- including:pines, namely: (a) National Tax ResearchCenter; (b)University of the Philippines Law Center; (c) Syra- (a) factor intensities of different industriescuse University Study Group commissioned by the (b) elasticities of substitution in production ofUnited States Agency for International Development the affected commoditiesto do a study of local government finance in the (c) elasticities of supply and demandPhilippines; and (d) Business Research Foundation of (d) lags in adjustmentthe College of BusinessAdministration of the Univer- Phase II - Implications of coefficients - coeffi-sity of the Philippines. cients can be used in a simulation model to answer

Providing a preliminary analysis of the incidence questions on:

and allocative effects of real property tax, the study (a) the incidence of the property tax and itssays that at first, it may be concluded that the real effect on equityproperty tax burden distribution is progressive since (b) land developmentincome from ownership of property is more im- (c) capital intensity of production, and otherportant to high-income than to low-income groups, topicseHowever, it says that it mav also be regressive since

it may be shifted forward to final consumersof busi- ENTERPRISE:IN THE PHILIPPINES INnessservicesand occupantsof housing. A DEFINITIONAL AND TAXONOMICAL

Thus, property values may increaseor decrease ClSE (Staff PaperSeries No. 84-02)and the tax burden may be progressiveor regressivewith the imposition of real property taxes, depending Manasan, ResearchFellow, PIDSon the counterbalancingof the taxand benefit effect The purpose of this study is three fold: (1) toand on the kinds of real property taxed, attempt to have a working definition of the term

The study brings out the following issues and "public enterprise"; (2) to establish and delimit thepoints that may be raised in future research as well perimeters of the existing Philippine public enterpriseas in discussing policies and programs for real pro- set based on the working definition adopted andperty tax improvements: consequently to provide a listing of public enterprises

1. Different levels of assessmentare used depend- in the Philippines in 1982; and (3) to classify anding on the type of use, resulting in the retardation of categorize the said set into smaller partitions mean-the conversion of real property from some uses to ingful for purposes of economic activity.others, e.g., from agricultural to commercial pro- The significance of this study can be viewed inperty as well as in the distortion of the combination the context of the role of public enterprises in aof reproducible capital (buildings and machinery) developing economy. In the Philippines, there hasand land away from the former, been a rapid expansion in the number of government

owned and/or controlled corporations. Citing various2. The standard of "actual use" instead of "best sources, the study reports that from only 13 state

use" for purposes of assessmentof real property may enterprises in 1951, the number grew to 37 in 1964.artificially prolong the devotion of real property to Figures from the Commission on Audit (COA 1973,one use even if conditions warrant its transformation 1982, 1983) show an increase from 70 in 1973 to_o a better use. 131 in 1982. The latter does not include the 53 state

3. Regarding administration, there seems to be universities and approximately 141 subsidiary cor-the presence of numerous special levieswith funds ear- porations of the government.marked for specific purposeswhich erodesthe taxing With regardto the definition of the term "public_ I IIII [ I I JII I II IIII I IIII

PIDS DEVELOPMENT RE NEWS B JANUARY - DECEMBER 1984

enterprise", the study reviews various definitions partially or fully, any one of the follow-of the term "public enterprise" and from the review, ing cost measures: current cost (i.e.,suggests that the following dimensions and elements variable costs), current costs plus capitalare essential, costs, or all costs including implicit andA. Dimensions of "Publicness" explicit subsidies.

1. Public ownership - This can either be direct 9. Profitability and Return on Investment- This(i.e., when the entity is set up by govern- implies expected return on the use ofment funds) or indirect (i.e., when the capital. However, this does not imply thatentity is owned by one or more entities all public enterprises have positive returnspartly or wholly owned by the govern- comparable to private enterprises.ment). 10. Separate management and account - This

2. Control - This implies that the government refers to the recording of businessactivitieshas the power to appoint top manage- in balance sheetsand profit and lossstate-ment or that the government directly ments.exercises top managerial functions like Based on the above mentioned characteristics, thethe formulation of investment, capital study presents two alternative definitions of "publicfinancing, pricing, and wage policies, enterprise".

3. Purpose and intent -- This refers to the One, public enterprise may be defined as a pro-motives with which public enterprises are ductive entity engaged in the production of a privateestablished (i.e., regulatory, developmem good without consumption externality whose outputtal/promotional, infrastructural and com- is actually marketed and which is owned and/or con-mercial), trolled by the government. Consumption externality

4. Autonomy - This relates to the question of exists when there are consumers who benefit fromwhether or not departmental/ministerial the enterprise (the so-called "free riders") withoutagencies engaged in some business under- paying the necessary cost.

taking should be excluded from the public Two, public enterprise may be defined as a pro-enterprise set, separate from public organi- ductive entity engaged in the production and/orzations and public corporations of other marketing of a private good with or without con-independent legal form. sumption externality whose output is actually mar-

B. Dimensions of Enterprise (i.e., business charac- keted and which is owned and/or controlled byteristics) the government. This second definition is broader

5. Nature of good or service provided - This than the first. The first excludes such private goodsrefers to the distinction between public subject to consumption externality like education,and private goods. Public goodsare charac- sewagedisposal and public health.terized by non-excludability (i.e., the cost Based on the broader definition, the study notesof the good should not prevent the pos- that the listing of public enterprises in the Philippinessibility of others from consuming the in 1982 would come up to 202 while the narrower orgood) and non-rivalry (i.e., an individual's more limited definition would yield a figure of 174.consumption of the good does not reduce In connection with the classification objective,the benefits simultaneously accruing to all the study presents a taxonomy of the Philippineother individuals from the same good), public enterprise set. The framework is derived from

A private good is one characterized by a scheme suggested by Diokno (1981) which presentsrivalry in consumption and excludability public enterprise cases with their correspondingin distribution, stated motives and the Pareto efficiency conditions

6. Field of activity - Some authors take the violated. The motives may be grouped on the basisofview that public enterprises should engage (1) allocative efficiency, (2) equity, and (3) publicin someeconomic activity like agriculture, sector revenue raising condition. "Market failures" ormining, manufacturing, utilities, construc- violations of the Pareto optimum criterion (that is,tion, finance, trade, communication and the best program of distributing income through theservices. Activities such as public admin- market is in the form of factor payments which tendistration, national defense, cultural and to increase the welfare of one group without neces-social services are deemed to have no sarily decreasing the welfare of another group) givebusiness flavor and thus are not included, rise to the allocative efficiency rationale for public

7. "Marketedness" of output - This implies that enterprises. These violations include increasinga price is placed on the output of the returns to scale resulting in the existence of naturalenterprise, monopolies, consumption and production externali-

8. Cost recovery - This may be partial or corn- ties, absence of a full set of markets, excesscapacityplete. Current revenue may cover, either and labor unemployment.

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PIDS DEVELOPMENT RESEAI_-- NEWS 9 JANUARY - DECEMBER 1984III I II I I I I

The study recommends that the following topics that the government corporation asa concept is rapid-be encouraged for future research on public enter- ly ce,,asingto exist.prises: The study also distinguishes the government

1. measurement and analysis of the profitability corporation from other governmental bodies or instru-and efficiency of Philippine public enterprises; mentalities which may exhibit corporate form or are

2. an analysis of internal control in Philippine endowed with some corporate powers. It dis-public enterprises, tinguishes it from municipal corporation, from

3. an analysis of external control in Philippine chartered universities, colleges or schools with theirpublic enterprises; own governing boards, from corporate agenciesper-

4. measurementand analysisof the contribution forming technical and specialist functions as well asof Philippine public enterprises to economic growth thoseconcernedwith cultural activities.in terms of value added, employment effects and the Likewise, the paper observes that the termlike.e "government corporation" should not be extended

to include a corporate enterprise of recent vintage --the government-sponsoredenterprises - which havetheir board directors appointed by the President but

._ _. _._. ,_.,_.. are nevertheless designated by law as "not an agency, i_,;:.: _.., , .;.Lq, and instrumentality of the government."

According to this study, there is a tendency toIn this paper prepared for the Presidential Corn- include all or almost all public instrumentalities with

mittee to Study Government Corporations in 1976, corporate form within the category of governmentthe late Abelardo Samonte attempts to define and corporation so that confusion has risen. Also, thecharacterize the government corporation as a concept proliferation of the government corporate form wasand as a specialized form of administrative organi- accompanied by an indiscriminate application of civilzation, and likewise presents the rationale for the service rules and administrative controls usuallycreation and disposal of government corporations, applied to regular bureausand offices.

The paper notes that the rapid expansion of The paper also enumerates the various ways bygovernmental activity in the economic sphere has led which government corporations are classified: (a)to a corresponding growth of the government corpo- those exercising governmental functions and thoseration. This especially true in the developing o_ exercising proprietary functions; (b)as quasi-publicnewly-emerging nations which generally lack private corporations and as private government corporations;capital and technical knowhow, and thus look upon (c) by functional classification;and (d) by the primarygovernment as the prime mover of development, purpose for which they were established and as to

According to the study, the government corpo- whether they are transitional or permanent.ration, as a concept and a specialized form of admin- The study claims that the generalizedtreatment ofistrative organization, is imbued with the following government corporations and the failure to differen-characteristics: (a) separate legal personality which tiate the various types has led to further confusionenables it to enter into contracts, to acquire and and inconsistency in public enterprise policy anddispose of properties, to sueand be sued,and generally administration.to transact business; (b) financial autonomy which In the context of contemporary Philippinegives it independence as far as annual government situation, the government may find it necessary orappropriations or subsidies are concerned in view of its desirable to create or take over the following enter-fluid capital as well as makes it enjoy less restrictions prises: (a) Basic public utilities; (b) Enterprises whichof government auditing and accounting since it keeps are pioneers or pace-setters in the national economy;cost records in the manner of a private business; (c) (c) Enterprises which provide vital activities andadministrative flexibility which frees it from regular services to lay foundation for accelerated economic_ivil service restrictions in personnel selection, corn- development; (d) Enterprises which are essential topensation and conditions of service and places it national defense or security; (e) Enterprises whichunder a pattern of overhead organization with a are necesseary to meet urgent economic or socialgoverning board; and (d)public accountability which needs; and (f) Enterprises which government mustenables the public corporation to pursue its mandate take over to protect its public investments.with minimum outside supervision but holds it Government should take overthe above mentionedpublicly accountable for its policy and overall per- enterprises only when private business is unable orformance, unwilling to undertake them at magnitudes and level

The paper, however, claims that today, many of of effectivenessas dictated by public interest, nationalthese characteristics are totally or partially lacking in welfare and security. The study, however, cautionsmany government enterprises here and abroad. It that entry into these enterprises should not meansays that government corporations of late have the automatic adoption of the corporate form.assumed a great diversity ofform and observersclaim The government corporation should be adopted

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PIDS DEVELOPMENT RESEARI tNEWS 10 -- UANUARY-- DECEMBER 1984IIIII I I I IIIIIII1|1 III

if the following conditions are present: (a) when was prompted by a perceived lack of a practicalthe enterprise is revenue-producing and potentially operational approach to making tax policy choicesself-supporting; (b) when the venture involves on the basis of their equity and efficiency impacts,a large number of business-type transactions with the and more particularly, the lack of a general equili-public; (c) when strict calculations and comparability brium framework for assessing Philippine tax policies.of costs can feasibly be made; and (d) when the A multisectoral computable general equilibriumactivity of the enterprises does not require close (CGE) model of the Philippine economy is construc-political and administrative control, and thus amen- ted to permit simulation of alternative tax policies,able to general public accountability consistent with with emphasis on indirect taxation. This followscorporate autonomy, from the observation that most developing countries

The paper also spells out the criteria to consider are constrained to rely more heavily on indirectwhen a government corporation is being considered taxes for raising government revenue, despite theirfor disposal or for sale to a private enterprise, namely: general tendency to be regressive. Because of this,

1. The corporation does not or no longer meet the need to determine the exact nature of the equity-any of the foregoing conditions for which an enter- efficiency tradeoffs that are usually associatedprise should be retained by the government, with indirect taxation becomes necessary.

2. Private enterprise is willing and able to take The study's model includes 18 producing sectors/over. goods and 11 income groups, from which an equity-

3. The price and terms of sale are satisfactory, efficiency locus defining a "frontier" for a fixed levelThe government should avoid selling at "bargain of real government revenues is derived. This trade-offprices", frontier represents alternative sales tax structures of

4. The personnel of the corporation prior to the varying degrees of progressivity/regressivity and itssale should be assured of equitable treatment, derivation can make the tax policymaker's task more

5. Safeguards are provided against private straightforward, requiring only a choice among amonopolistic or unfair business practices after sale. If menu of tax structures as against the usual theoreticalcircumstances later warrant the disposal of a govern- approaches requiring prior determination of appro-merit corporation, there must be reasonable assurance priate parameters of the perceived social welfarethat it will not lead to private monopoly or similar function.abuses. The study then examines three of the major tax

6. The sale will not contribute to alien domi- changes provided for in the amended National Internalnation of the business or industry. Revenue Code (NIRC) of 1977 for the Philippines,

within the framework of this equity-efficiency trade-The paper concludes that the functions, programsoff analysis. The observations/conclusions include:and objectives of each existing corporation as well as

conditions, circumstances and other questions of fact 1) The recent changes in the sales tax structureregarding each enterprise should be related and worsened the economy's position relative toevaluated in terms of the criteria mentioned. It notes the equity-efficiency frontier. The distri-that for some, the sale or disposal need not be for an butional impact of the sales tax system doesentire corporation. Moreover, some alternatives to not seem to be appreciably affected, butselling may be more feasible under certain circums- there is a clear efficiency cost. This hastances. The paper points out that there are a number apparently been caused by the further increaseof enterprises that the Philippine government must in the rate of petroleum product taxation,continue to operate in keeping with national develop- which had already sustained a dispropor-ment, security or public interest. It is particularly in tionately large share of indirect taxation priorthese latter areas of public enterprise where more to the tax reforms.

competence, integrity, responsiveness, and effective- 2) Value added taxes provide a more effectivehess of administration must be instituted if the means for using indirect taxes to promotenation's political aspiration and socioeconomic goals distributional objectives than sales taxes. Theare to be achieved. • NI RC provision for a standby value added tax

to augment existing sales taxes when revenueEO_',!,TY ANDJ needs arise affords a good instrument forPHILIPPINE , :',,,,_, improving the distributional effects of the tax,A,GEN, ERAL,,EQUIL,IBRIUM APPROACH ,,,,___' ,,,...... ,,_, system, by means of a value added tax (VAT)

:by.Cielito F,Iores Habito, College structure designed to be progressive in effect.E_onOmic$ artd Management (CDEM), 3) The recent shift to gross income taxation hasaf,,,i_e,_Philipptnes at Los Bathos ,; _ ",'_;.... -_._ increased the collectible revenues from the

income tax with little change in the efficiencyThis study, submitted as a doctoral thesis to the and equity impacts of the tax system. Thus,

Department of Economics at Harvard University, the change represents a positive reform,III II IIIIIIIIII

PIDS DEVELOPMENT RESEAR klEWS 11 --_JANUARY- DECEMBER 1984I.._ II II I III IIIII II II IIII .

especially becauseit permits an increase in the o Machines reduce overall labor requirements,role of the income tax without substantially principally family labor, but the use of hiredchanging perceived individual tax burdens, labor has remained constant or has increased.This has been accomplished mainly through o The incomes of landless households, rep-the improvement of administrative efficiency resenting up to 15 percent of the rural popu-and collection rates that the gross income tax lation, have not yet been de.gradedby mech-system permits, anization, although there Is concern that

The study stressesthat within the present frame of further use of machines may erode an alreadyanalysis, there is much scope for improvement of the declining real wage.Philippine tax system. Even within the constraint Q Tractors, power tillers and threshers appear toimposed by the inability to depend more heavily on be only marginally profitable, yet the numberdirect taxation, substantial gains in either equity, of machines has grown rapidly in the pastefficiency or both can be made simply by restructur- decade.ing the country's indirect tax system. By explicitly At the macro level, an assessment of the directderiving the alternatives defining an equity-efficiency and indirect impact of mechanization indicates that:frontier, the approach presented in the study can o There are significant multiplier effects onprovide government policymakers with the alternative income and employment achieved from localdirections tax policy can take to effect such an manufacturing which are not normally inclu-improvement. • ded in evaluating mechanization.

o Improved techniques are badly needed to,, _,.,..... properly assessthe impact of mechanization

_,:,:::_i:i_,:_ii_! at the regional and national levels and toharmonize these with development goals.

c Credit programs for mechanization aimed atthe small farmers have largely been ineffectivein improving equity, employment or output

SEMINAR ON SMALL FARM MECHANIZATION objectives.

A seminar-workshop on "The Consequences of c Distortions created through exchange ratecontrols, tariffs and pricing policies have

Small Farm Mechanization on Production, Employ- generally resulted in an inefficient allocationment, and Incomes in the Philippines" was sponsoredby PIDS, together with the National Economic and of resources in the use and ownership ofDevelopment Authority (NEDA), the Ministry of agricultural equipment.Agriculture (MA) andthe International Rice Research o Government should not participate directly inInstitute (IRRI). The seminar was held last December the provision of credit to farmers for farmat the Development Academy of the Philippines in machinery. Alternatives such as lending to

manufacturers or distributors through theTagaytay.

With participants from government, the private commercial banking sector at market rates ofsector, and the research community, the workshop interest should be explored.focused on four major issues: Conflicting views emerged on the role of govern-

ment in the promotion of farm mechanization.1) a review of empirical research on the impact Attention was called however on the following prog-

of farm mechanization on small rice farmers and ram and policy statements outlined in the 1983-1987landlessworkers, Philippine Development Plan which provide that (1)

2) the economy-wide methods for evaluating the "farm mechanization will be applied on a selectivedirect and indirect impact of mechanization on basis and will be adopted to local conditions andemployment and income opportunities in the availableresources;(2)thedevelopmentandutilizationeconomy, of farm implements to augment the farmer's pro-

3) a historical review of the impact of govern- ductivity will be encouraged and (3) mechanizationment policies and programs on agricultural will likewisu be adopted as a measure to minimizemechanization, and post-harvest losseswhenever possible."

4) the proper role of government in the identifi- There is a need to specify the implementingcation of plan, policy and program directions for details of these statements by concerned sectors and

p agricultural mechanization, agencies. However, avenues for government parti-A large body of empirical evidence was presented cipation and constructive contribution appeared to be

with the following major findings: favorable in the following areas:

o Mechanization of land preparation does not o Training of farmers, mechanics, drivers.increase yields or cropping intensity in rice c Technical assistance in the selection of appro-production, priate designs, testing and infrastructure

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PIDS DEVELOPMENT RESEAR JEWS 12 lJANUARY - DECEMBER 1984I in III I II IIII III II I I I

development, should be intensified. Studies on the system'so Fostering an environment for innovation in implementation should be conducted.

the design of equipment which can be manu- o The country's selective logging system (SLS) offactured domestically, timber harvesting incorporates a timber stand

o Providing needed incentives for local manu- improvement (TSI) phase which is difficult tofacturers of agricultural machineries, implement due to current restrictions on remov-

e Ensuring that the beneficiaries of farm equip- ing the products from logged-over forests. Re-ment are farmers and consumers, search on improving the feasibility of the SLS

o Supporting additional research to clearly through the modification of such restrictions, asidentify the needs of farmers by region, well as on alternative systems of management,crop and operation, including clearcutting with immediate replanting

o A careful review of existing policies affecting schemes,should be pursued.mechanization to ascertain requirements o Systems of including small-scale contract workersfor elimination.,modificationoradjustments, or allowing community concerns to manage

The appropriate mechanism for institutionalizing concessions should be evaluated in view ofthe use of agricultural machinery in government evidence that these can be as efficient as large-planning and policy development, including incor- scale concessions.poration in regional agricultural development stra- o The requirements for concessionaires to establishtegies, is currently under review. • wood processing plants in the concession and for

wood processors to establish tie-ups with conces-I i aliBi ii

sionaires should be studied in terms of marketing

SEMINAR ON FOREST RESOURCES MANAGE- efficiency.MENT On forest administration, some issuesdiscussed

were:A seminar on "Economic Policies for Forest

Resources Management" was sponsored by the PIDS o Forest renewal projects are long term and arehighly affected by seasonal changes. Thus, the

in February 1984 and was attended by represen- schedule of releaseof financial resources vis-a'-vistatives from various government, academic and climate conditions significantly affect the viabi-private institutions involved in forest resources lity of seedling survival and consequently, themanagement, success of reforestation and afforestation proj-

The seminar aimed to bring together specialists indifferent aspects of forestry development, for them ects. For more effective forest renewal andto discuss critical issues for policy research. Specifi- watershed development projects, longer budget-ary periods and improvements in fund allocationcally, the seminar came up with the following: 1) a and disbursements are recommended.consolidation of the issues from the literature and

o The need to pay equal attention to botl_ thefrom policy experience, 2) ah identification of exist- prevention of forest destruction and to foresting studies, approaches, and data sources which may renewal was reiterated. There is a need to explorebe used for further research, and 3) suggestions on

means of generating more funds for forest rene-areas needing further research. The output of the wal; potential sources which need to be studiedseminar will be used as the basis for a two-year include the special deposits required of conces-research program on forest policy and economic sionaires under Forestry Administrative Orderdevelopment. No. 64 in 1972.

The specific areasof forest resourcesmanagement On land-use allocation, the following discussionswhich were discussedin the seminar are: ensued:

1. The Commercial Logging Sector o While the sustainability of timber output will beof increasing concern in the next two to three

To limit the scope of the discussion, the commer- decades, the major problem for the future will becial forest firms were defined only as those firms fuelwood supply. Projected requirements of bothactually engaged in logging activities. Discussions household and industrial users are 63 and 106focused on: the optimal sustainable yield of the million cubic meters in 1990 and 2000, res-forest resource, the pattern of resource useimplied pectively.by the management program, and the amount of land o Current figures of ipil-ipil based agro-forestrythat should be reservedfor forest use. technologies which are potential fuelwood

The recommendations for this sector include: suppliers need to be evaluated. Recent researcho Current charges for forest exploitation are too findings indicate that ipil-ipil yields, which

low and the effort to pilot the stumpage appraisal were measured from actual plantation conditions,system as the basis for concession fees by the are only 35-50 percent of earlier official estimates.Natural Resources Development Corporation

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PIDS DEVELOPMENT RESEARw_NEWS 13 __ JANUARY - DECEMBER 1984

2. Upland Development 4. Watershed Management

The discussion here dealt on forest occupants or Apart from being a source of timber, forest re-dwellers who practice some form of shifting cultivation sources also perform the role of watershed protection.(including limited agriculture and animal husbandry) Logging activities therefore have important impli-and who, in some cases,are involved in joint activities cations in the quality of watershed. Increasedwith the commercial sector. Currently considered a incidence of floods, siltation of dams for irrigationpriority for research, these dwellers may have num- and power generation, soil erosion, and diminishedbered as many as 11 million families, domestic water supply are the major consequences

Some of the recommendations are: of forest degradation. For analytical purposes, the

o The challenge of upland development should deal discussions centered on effects of irrigation.with the egerJncreasing population becoming Some of the highlights of the discussions were:dependent on forest resources. Although up to o The experience with the Pantabangan and Magatone-third of all households might be directly Watershed Program shows that reforestation anddependent on the uplands for their livelihood, soil conservation projects can be very costly (updetailed upland population and migration studies to t_15,000 per hectare). On the other hand, theare lacking and should therefore be a priority for environmental costs of not properly managingresearch, watersheds are much greater.

o In conjunction with agro-forestry technology o Less expensive reforestation schemes are feasibleimprovements, the allocation of tenure or rights and should be evaluated for implementation; but,of accessto and use of upland resources need to they require special long-term budget allocation_be facilitated not only for the cultural minorities from the government to succeed.but also for migrant communities which have per- o Since data on several Philippine cases(and frommanently resided in the uplands. Care needsto be the experience of other countries) are alreadyexercised, however, so that land speculation and available, a comprehensive benefit-cost evaluationland rights conflicts and inequities in allocation of watershed management is required to setare minimized, standards for such projects. Such an analysisThe marketing component of upland based should concentrate on the external effects oftechnologies has not been adequately addressed watershed management on hydroelectric gene-to by early upland development project imple_ ration and on irrigation/flooding problems.

mentors. Since this is an important factor of the (The next issue of the Development Researcheconomic feasibility of upland cropping systems, News will focus on specific studies relating to forestmore researchneed to be conducted on it.

resources management.) •3. Macroeconomic Environment of Forest Use

Since a major source of demand for the products SEMINAR-WORKSHOP ON GOVERNMENT FI-)f the forest sector arises from international trade, NANCE STATISTICS]overnment regulation of trade also affects the_ctor significantly. For this reason, efficient forest'esource management requires a tie-up with an A seminar-workshop on "Government Finance,_valuationof policy on this macro level. Statistics" was jointly sponsored by the Development

Budget Coordinating Committee (DBCC) and theSome ofthediscussionscentered on the following: Philippine Institute for Development Studies (PIDS)National policy must continuously recognize that last December at the Central Bank Institute.the overriding goals in forestry management The seminar-workshop aimed to acquaint theinclude not only the efficiency and equity in pro- participants on the organization, analysis and linkagesduction but also conservation because of the of government transactions with the economy as amajor environmental effects of soil erosion. Eco- whole and its parts, and to elucidate the Internationallogical stability and the quality of environment, Monetary Fund (IMF) government finance classifi-in general, need to be more explicitly addressed cation system. The participants came from govern-in Philippine development planning, ment agencies involved in government accounting,A rational pricing and taxation package isrequired financial transactions and public finance statisticsand should include: a) removing the export tax like the Office of Budget and Management, Commis-on processed wood; b) rescinding the log export sion on Audit, Bureau of Treasury, Central Bank, thequota and imposing, instead, higher export taxes National Economic and Development Authority,on logs, and c) assessingforest concession charges etc.including more local government participation in The participants raised some issues which theytaxation, feel must be attended to in order to ensure a more

consistent, timely, and relevant set of governmentI_1lII I I IIII

PIDS DEVELOPMENT RESEAF "L NEWS 14 JANUARY- DECEMBER 1984L IIllllI IIIII I I

financestatistics.Among the issuesraisedinclude with nationalgovernmentfinancialoperations.Eachthe following: of these bodies of statistics has its own conceptual

framework, estimation methodologies and dataA. On the Coverage of Government sources. Therefore, a need exists for closer coordi-

*Regarding government finance statistics (GFS), nation among the agencies responsible for theseincome and expenditures of national government accounts to achieve a more effective financialagencies from small-scale business ventures that programming.are incidental to the exercise of their respective *Lastly, it was pointed out that the deficiency infunctions should be deducted from the national the compilation of government financial informationgovernment data. There is a need to look more is due to the implementation of the coding systemclosely into the operations of several agencies in the various accounting and statistical units whichperforming venture-like functions such as govern- leavessomething to be desired.merit printing, computer programming, and mass

media activities. D. On Non-financial Public Enterprises*The GFS conceptual framework classifies the

Bureau of Post as a non-financial public enterprise *The problem of how to properly treat the equityand not as part of the central government, contributions of the national government to govern-

*State colleges and universities function as Tent corporations was also raised.separate organizations. However, they derive income *At present, some corporations are reporting con-primarily from government appropriations since their solidated statements and some are not. For corpo-incomes only average about five percent of their rations whose major operations are being undertaken

by the subsidiaries, it is particularly important thatexpenses.*There is confusion about the coverage of govern- the subsidiary operations be consolidated with the

Tent public enterprises, particularly concerning the parent companies for more comprehensive reporting.treatment of various authorities and commissions After the discussion of the issues,a set of recom-which have been provided with a legal personality mendations was listed to be brought to theattentionseparate and distinct from that of the national of the authorities. These include, among others, the:government. These enterprises are in effect not *Proposal to set up a core group composed of theengaged in business-like ventures or marketactivities. Ministry of Finance (MOF), Bureau of Treasury,In addition, several government corporations, parti- Office of Budget and Management (OBM), Commis-cularly financial enterprises, are either owners or sion on Audit (COA), Central Bank (CB), and thepart-owners of subsidiaries and distressed companies. National Economic and Development Authority

*The inclusion of the Metro Manila Commission (NEDA) either under the DBCC or the Statisticalunder the national government was questioned Advisory Board (SAB) of the NEDAto:

particularly since it is essentially a local government 1) formulate the follow-up seminars for anentity, extensive familiarization with the various

B. On the Derivation of the Main Central Govern- aspects of the GFS system; and

mentAggregates 2) look into the existing classification system*Suggestions were put forward to consider govern- and pending proposals for classification

Tent capitalizations in public corporations as expen- improvements, and recommend necessaryditure and not as part of net lending since they are realignments that would be useful for econo-not meant to be paid back by such enterprises except mic, financial and accounting purposes.

in terms of dividend. *Inclusion of tax collections directly accruing to* It was emphasized that travel taxes, the coconut government corporations but which are currently not

levy, and similar receipts should be considered part incorporated in national government accounts, in theof tax revenues in spite of the legal provision that tax revenues of the national government. This wouldthese are not directly controlled by the natiol]al enable the national government to take account of allgovernment budget, tax impositions for economic purposes.

*Loans to public corporations coursed throughthe national government under the consolidated *Disaggregation of the cash operations of govern-foreign borrowings program of the Central Bank ment agencies considered as departmental enterprisesshould not be part of national government expen- for government finance statistics purposes.

ditures, although under the IMF concept, they could *Declassification of government corporationsbe considered as national government expenditure, which undertake substantial lending activitiesC. On ApplicationandAnalysis incidental to their primary function as financial

*The GFS relates the balance of payments, institutions, omonetary survey, and the national income accounts

PIDS DEVELOPMENT RESEARq"- NEWS 15 --_IANUARY- DECEMBER 1984I II ill IDle Ill nil iiii II

SEMINAR -ON FOOD AND EXPORT CROP IN- - This finding illustrates the possibility of a relative-COMES ly small cost, in terms of rural income instability, of

A lecture-seminaron the "Instability in Food and agricultural export expansion in developingcountries.Export Crop Incomes:The Philippine Case" was held The implications of this for agricultural developmentat the University of the Philippines School of strategy,accordingto Bautista,should not be lost toEconomics (UPSE) last January, with Dr. Romeo M. policymakers both in the Philippinesand other LDCs.Bautista (UPSE professor) presentingthe findingsofa paper (with the same title) he prepared for the Among the more specific observationsand sug-International Food Policy ResearchInstitute. gestionspresented by Bautista, based on the results

According to Bautista, the purpose of his paper of his empirical analysis,are:is to provide a systematicexamination or framework 1. In the 1970s, the variability of both food andfor analyzing relative income instability in food and export crop incomes decreased significantly inexport crop production, and to use such framework contrast with the increasedinstability in the country'sfor investigating the variability of total crop income foreign sector, particularly export earningsfrom agri-in Philippine agriculture and the manner by which it cultural crops.This is related to the greaterdegreeofhas been affected by the marked increase in the governmentintervention in the seventies,especially inshareof export cropsover the postwar period, the export sector,which apparently provided a partial

Bautista observes that in developing countries, offset to the foreign price fluctuations of primarythere is a common perceptionabout the vulnerability product exports during the decade.of agricultural exports to the inherent volatility of 2. The decline in export crop income instabilityworld commodity markets. Becauseof this, there is was not accompaniedby a continuation of increasinga prevalent apprehension among policymakers of export share in total crop income. The reason forless-developedcountries (LDCs)that a greaterexport this is that export crop production presumablyorientation of agricultural production or an increasing became lessattractive relative to food crop produc-shareof export crops in agricultural production may tion as a result of the changed policy environmentresult in increased instability in agricultural income (actively promoting food crop production at theand, hence, rural food insecurity, sametime that gainsto agricultural export producers

This concern representsone facet of the so<ailed from exchangerate liberalization and boom in worldfood-export crop tradeoffs indicating a conflict commodity prices were being siphoned off throughbetween the likely gains in efficiency and income various"stabilization" tax measures).from exploiting comparative advantagein export crop In short, the reduction in export crop incomeproduction and the greater instability in agricultural instability in the 1970s was achieveddue to heavierincome that may result from an increasingshareof export taxation in times of improved earnings,export crops, effectively reducing the average profitability of

Noting the fact that very few studieshave given export crop production.explicit attention to the linkage of export earnings 3. As regard the general finding that in termsinstability in primary-producing LDCs with agri- of rural income instability, the cost of agriculturalcultural income variability, and hence, rural food export expansion in LDCs is relatively small, Bautistainsecurity, Bautista presents an analytical discussion suggeststhat ,fJJrtherstudy should be made to in-- describing the conditions under which a rise in vestigatethe broader applicability of suchhypothesis.export sharewill increasetotal income instability and He suggeststhe inclusionof non=cropsourcesof ruralexamining how the variabilities of and correlations income and the examination of causalrelationships,among nominal food and export crop incomes and say, between price and quality of production andthe general price level affect real income instability between policy instruments and various components- and examines the caseof Philippine agriculture, of rural income, in the analysis. •

Bautista tries to assessthe extent of the effect ofthe marked increase in the share of export crops inthe Philippines in the 1950s and 1960s on real agri* SEMINAR ON MONETARY AGGREGATES ANDcultural crop income instability by applying the ECONOMIC ACTIVITYvariables considered in his analytical framework,i.e., relative variability of food and export crop A seminar on "Monetary Aggregatesand Economicincomes, their correlation and the initial crop value Activity" was held at the NEDA-Pasig, wherein Marioshares. B. Lamberte, PIDS research fellow, presented the

His general finding/conclusion is that while findings and recommendations of his study with theexport crop income has indeed been more unstable same title. The following summarizes the highlightsthan food crop income, the rise in total income of the seminar.instability resulting from the increased export *Monetary management in the Philippines canorientation of Philippine crop production is remark- more effectively support development objectivesably small through closer study and control of the growth rates

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PIDS DEVELOPMENT RESEAF NEWS 16 JANUARY - DECEMBER 1984I el III T II ill , _ .-

of monetary aggregates.Specifically, there is a need need to be monitored closely in View of the growingto determine whether a monetary aggregatecan serve importance of non-deposit money banks and theas an intermediate target of monetary policy. To do policy to encourage mergers among financialthis, two criteria may be used: institutions.

(1) the aggregatemust bear a close and predictable *The Central Bank, to be able to exercisegreaterrelationship to economicactivity, and control over monetary aggregates, can avail of at

(2) the aggregate must be controllable to a large least two alternatives. One alternative is to stabilizeextent by the Central Bank. money multipliers through (a) uniform reserveratio

*The existingmonetary aggregatescurrently usedand for all types of depositsregardlessof financial insti-recognizedby the Central Bank are M1, M2, and M3. tutions and (b) prescription of a ceiling on foreignM1 is currency in circulation, meaning the currency exchange holdings of commercial banks. Anotherissued by the Central Bank and the peso deposits alternative for greater control would be for thesubject to check by the monetary system, unused Central Bank to predict variations of money multi-over-draft lines, and managers'and cashier'schecks, plier, which would initiate offsetting actionsthroughM1 excludes cash held in vaults of the national the monetary baseto achievedesired growth ratesoftreasury and the commercial banking system. M2 the aggregate. However, this alternative can only beis M1 plus savings and time deposits of deposit pursued if the monetary multiplier is accuratelymoney banks, excluding national government de- predicted.posits, and M3 is the sum of M2 plus deposit sub- *Finally, there is a need to determine whetherstitutes of deposit money banks. The growth rates management of the monetary base is governed byof these aggregateshave diverged from each other, considerations other than monetary control, i.e.,thus there is a need to determine which amongthem Central Bank's provision of adequate funds forcan serveasintermediate target of monetary policy, priority areas determined by government and sales

or purchase of foreign exchange not intended for*Because of recent financial innovations, the control but stabilization of the exchangerate. Also,

rapid emergence of other financial intermediaries there are a number of influencesupon GNP excludedand changesin regulationswhich may haveexerted a from the model which may or may not alter thesignificant impact on the payments process and value of the coefficients of the growth rates of theobscured the link between monetary aggregatesand monetary variables.Still, resultsof the study remaineconomic activity, there is a need to construct instructive for policymakers and planners in mone-additional and broader monetary aggregatessuch as Carymanagement.•M1A, M2A, M3A and M4A. M1A is currency incirculation plus demand deposits of all financialinstitutions, M2A is M1A plus savings and time SEMINAR ON PRODUCTIVITY CHANGE INdeposits of all financial institutions. M3A is M2A PHILIPPINE INDUSTRYplus deposit substitutes of commercial banks andnon-bank financial intermediaries. M4A is M3A plus A seminar on "Productivity Changein Philippinemarginaldepositsof commercial banks. Industry: Implications for Development Strategy"

*The semestral growth rates of these seven sponsored by the Philippine Institute for Develolmmonetary aggregatesshowa perceptible upward trend ment Studies (PIDS) was held last July 25 at thealthough their growth rates markedly divergedfrom NEDA Operations Room in Makati. The seminareach other. To determine the relationship between focused on the results/findings of a staff paperGNP growth rate and the growth rates of the mone- entitled "Productivity Growth in Philippine Manu-tary aggregates, regressionanalysis was performed, facturing: Retrospectand Future Prospects" preparedThe analysis showed that the broader monetary and presented by Dr. Richard Hooley, researchaggregates (M3, M3A and M4A) predict future consultant atPIDS.economic activity more accurately and have better Among the objectivesof the seminarare:

1. To measure productivity change over theforecastingcapability over narrowly defined monetaryaggregates, period 1956-1980, both for the manufactuirngsector

as a whole and for two dozen individual industries*Controllability is interpreted here to mean closer at the three-digit level;

relationship between the monetary base, which in 2. To analyze causal factors behindproductivityessence constitutes Central Bank actions, and the change;andmonetary aggregate. In this respect, M3 bears a close 3. To analyze the processof diffusion on pro,and predictable relationship with economic activity ductivity gains.and is found to be controllable to a large extent.Although M3 has lessimpact on economic activity The following are some of the significantfindings:compared with aggregatesM3A and M4A, it neverthe- *Total Factor Productivity (TFP) --- or the ratiolesscould serveasan intermediate target of monetary of real production to the factor input --- grew by 0.3policy. However, the movements of M3A and M4A percent per annum for the aggregatemanufacturing1111 II I IIIII lill

PIDSDEVELOPMENTRESEAR, _IEWS 17 ANU RY-DECEMBER 1984J III I II J ..... II IIIII Isector between 1956 and 1980. The sub-periods *A policy of "laissez-faire" alone isnot sufficientreflected a higher rate of TFP growth in the late to improve the productivity performance of thefifties and sixties. During the seventies, there was a manufacturing sector to that required for sustainedsignificant decline .... from about 1.3 percent per development. Had interventionist economic policiesannum before 1970 to -1.3 percent per annum not existed, the productivity performance of theafter 1970. manufacturing sector would have improved. But the

*The broad decline can be traced to a number of degreeof improvement would not havebeen sufficientfactors, including the centralization of economic to attain a significant development thrust.decision-making in the economy, the shift in energy * A corrective strategy for declining productivitycosts after 1971, the failure of government policies in Philippine industry must touch on several levels:to stimulate "research and development", and the macro policy, industry policy and firm behavior.weakening of productivity growth in may western Analysis of inter-industry performance shows that acountries after 1970. more aggressive research and development program,

* In terms of inter-industry performance, there was the removal and/or restructuring of tariffs and otherconsiderable dispersion in the productivity record fiscal tools are necessary, along with efforts at theamong industries. Food, beverages,tobacco, apparel industry and firm level.and electric machinery all had averageannual rates of _Lgrowth of TFP of one percent or more per year. SEMINAR ON PUBLIC POLICY AND THEWood products, footwear, other chemicals, and PHILIPPINE HOUSlNGMARKETplastics recorded rates of about one-half of one

percent or less.The rest, however, which include over A staff seminar was held last July 31 at the PIDSone-half of the industries, registered negative rates of on "Public Policy and the Philippine Housing Mar-TFP growth, ket" which was presented by Dr. Edna S. Angeles, a

*There were some import-substitution and some research fellow of the Institute.export-oriented industries that were included among The objectives of the seminar are:those whose productivity-performance was better thanaverage. Yet there were also some industries of both 1. To analyze the major aspects of supply andtypes which performed poorly, demand for housing and identify specific

housing problems and their underlying causes;*The distribution of productivity gains occurs 2. To review the national shelter program and

through the price system in the form of lower prices other housing programs and policies under-to consumers. However, in the primary exports and taken by government; andhighly protected industries of the country, this did 3. To recommend alternative policies and pro-not occur. The tariffs imposed caused the TFP gains grams to better meet housing needsand pro-(when they do occur) to be passed on mostly to blems.entrepreneurs, in the form of windfall profits. Entre-

The study's findings and recommendations in-preneurs, therefore, in the protected industries werein effect allowed to retain the TFP dividend, clude the following:

*The resulting windfall was not accompanied by * Over the years, investment in housing haveany incentives that would encourage the proceeds to increasedtremendously, amounting to t=4.765 millionbe directed to research and development which would in 1983 and constituting about 4.8 percent of GNP.in turn help raise productivity in the next period. * There have also been significant increases in

*The Philippine tariff structure gave the entre_ the housing stock which grew from 4,790,954 dwell-preneurs wrong signals. The results of this can be ing units in 1960 to 8,767,694 in 1983 (an increasegleaned from: (a) the higher prices consumers have to of about 83 percent). There are more dwelling unitspay as well as the restricted output; (b) the slower in the rural areas (62.5 percent) than in urban areas.growth of employment's real wage rates; and (c) the Housing problems seem to be more acute in urbanweak backward linkage effects of the manufacturing areas.sector. * There is a need to differentiate approaches to

*Little relationship was found between real wage public policy on housing between rural and urban sec-rate changes and TFP. Hence, changes in money wage tors in view of the differing housing conditions ofrates will bring little improvement in the distribution each sector.of productivity gains. * The housing market is categorized into three:

*Productivity change is shown to impact on the owner-occupied, the rent-free, and the rented. Thebalance of payments, both through the trade account last one is the most predominant type, increasing byand the capital account. Recent negative TFP per- about 257.8 percent from 1960 to 1980. In 1980, theforrnance has significantly damaged the country's occupancy rate of households per dwelling unit wasbalance of payments performance and has also been estimated to be 1,012 HH/DU.an important factor in weakening the domestic * The cost of housing has gone up by 142.5financial system, percent over the last decade making it more difficult

IIII I IIIII III II lUll I nail m_

i A

PIDS DEVELOPMENT RESEA NEWS !8 JANUARY -- DECEMBER 1984.I IIII1|11 I I IIIIIIIIfor low and-middle income groups to afford I_ouse • Production of local housing models using I

construction. Rental prices have also increasedat an indigenous materialsand generation of self-helpacti* iaverage rate of 11.8 percent from 1972 to 1983. vities, i.e., "sweat equity" to bring down the cost ofHowever, the rate of increasein the cost of housing houseconstruction. •construction is much higher than rental increases.

* There is a need to review the provisionsofthe rent control law and how this hasaffected avail- SEMINAR ON FORECASTING MONTHLYable housing for rent. Should the rent control law be INFLATION IN THE PHILIPPINESlifted, there should be a ready policy or mechanismto deal with those sectorswhich may be displaced A seminar on "Forecasting Monthly Inflation inby such lifting, the Philippines" was sponsored last August 7, 1984

* There is a long history of government inter- by the Philippine Institute for Development Studiesvention in the Philippine housing market which is (PIDS) with Dr. Roberto S. Mariano, PIDSconsultant,evident not only in terms of the number of agencies as paper presentor. The discussionwas basedon theinvolved in this area throughthe years but also in the initial findings of a research project on short-termexpendituresincurred by government in the industry, forecasting model for inflation undertaken by

* At present, there is a need to reassessthe Mariano and his associates.national shelter program in terms of its overall impact Before commencing to discuss the forecastingon the housing industry and the economy. The fol- model that he and his associates developed, Marianolowing components of the program need further first traced the movements of the country's inflationscrutiny: rate since 1983. He observed that the record high

• The production and marketing of housing, inflation rates experienced in 1984 had its beginningsThere is a need to evaluate public and private in November 1983 and were spawned by the economicsector participation in these areas. Also, there crisis. After hovering in the 6 - 10 percent range foris a need to reassessthe effectiveness of pri- the first ten months of 1983, Mariano noted that thevate-public sector tie-ups in meeting housing domestic prices (based on a comparison with levels a

needsand quality standards, year before) rose by 17 percent in November and 26• The shelter finance system, There is a pressing percent in December.

need to reform the present lending system to For the first six months of 1984, the monthlymore equitably distribute financial resources inflation rates continued to climb progressively toamong homeowners and buyers. For example, higher and higher values: 33 percent in January, 37the Pag-ibig Fund which is a main source of percent in February, 39 percent in March, 41 percentfinance for housing has been found to havean :in April and 42 percent in May. Further inflationaryinequitable allocation of housing finance. A pressures, he said, would continue to persist for thebig proportion of its members (82.43 percent) rest of 1984 and these would come partly from theearn incomes f=l,000.00 or below which in- latest round of devaluation undertaken in June 1984capacitates them from getting the appropriate as well as from the succeeding adjustments in prices,amount of loan needed to build a house, the continuing balance of payments difficulties, un-considering the amount of loan allowed for certainties concerning the country's exchange rate,members in this income group and the exor- and the recent unavoidable rise in the money supply.bitant cost of house construction. Thus, their Mariano pointed out that as new developmentscontributions to the fund virtually support occur, such as the realignment of the peso, the con-those earning above P1,000.00 and who can traction or expansion of money supply, or adjust-afford higher amounts of loan. merits in the prices of foodstuffs, oil products, and

* In the final analysis, it is the people's low in- non-fuel raw materials, an adequate monitor on thecomes that is the source of failure to adequately meet likely consequent movements in domestic priceshousing needs. Therefore, the long-run solution to the would be of particular interest to policy makers andproblem lies in the ability to raise the real income of ordinary laymen alike.families. During the seminar, the author presented a statis-

The following are considered vital to plan and tical procedure for forecasting inflation rates, on apolicy formulation in the housing sector: monthly basis, as measured from fluctuations in the

• A more systematic mechanism for evaluation consumer price index (CPI) for the entire Philippines.of existing housing programs and policies to orient The procedure centers around a statistically estimatedthese to housing needs and problems, price equation which explains the dynamic behavior

• A more efficient and equitable intrasectoral of monthly CPI levels in terms of its own past valuesallocation of resourcescurrently devoted to housing, and, as economic theory suggests, cost-push and

• A regular housing survey undertaken to gene- demand-pull factors. More specifically, the pricerate better and more accurate information on equation relates monthly CPIs to the followinghousing, explanatory variables:

I lllllIll IIIIIII IIIIIIIII

PIDS DEVELOPMENT RESEARI NEWS 19 A_3ANUARY- DECEMBER 1984| I

1. the values of CPI itself in the two immediately arising if total liquidity is to expand faster than realpreceding months, output. One would expect this variable to have lagged

2. the average wholesale posted price of petro- effects on prices. The choice of the particular lagleum products as determined by government structure - a four-month moving average,with equalpolicymakers, weights up to the current month - is settled at the

3. a black market premium for the US dollar, empirical level and is based on the various regressionsmeasured in terms of the Hongkong peso- and lag structures that the author and his associatesdollar banknote rate relative to the official experimented with.exchange rate, The price equation is estimated by ordinary least

4. a peso-denominated import price index for squares over the period January 1972 to Decembernon-fuels, adjusted for tariffs, 1983. The estimated equation shows a very close fit

5. total domestic liquidity relative to real out- over the sample period and most of the regressionput, with lagged effects extending up to three coefficients are statistically significant. (The excep-months, tions are the price-control and legislated wage varia-

6. price ceilings imposed by the Price Stabili- ables which have t-values of around 1.4) Whenzation Council, and subjected to a series of validation tests, the equation

7. legislated minimum wage and cost-of-living adequately tracked the monthly CPI levels and theallowance, annualized monthly inflation rates including those

This price equation parallels earlier models for over the critical period of November 1983 to JunePhilippine inflation in that it incorporates standard 1984.cost-pushand demand-pull variables as item 2, 4 and In terms of inflationary effects (measuredby the5. The novel features of this equation comefrom the elasticity of inflation with respect to the variableshort-term nature of the equation, the incorporation - i.e., the percentagechange in the inflation rate dueof institutional realities, and the presence of the to a one-percent change in the variable), the authors'dollar black market premium. The equation deals estimated equation shows that changes in petroleumwith inflation on a monthly basis whereas most product prices have the biggest immediate impactstudies, except for the National Economic and Devep- followed (in descending order of elasticity magnitude)ment Authority's (NEDA) Input-Output Price Model, by the dollar black market premium, then by theare more concerned with the long-term annual price import index for non-fuels, then by the liquiditymovements, variable, and finally by the price ceiling and the

Official exchange rate fluctuations enter the legislated wagevariables.equation indirectly through the peso-dominated In the long-run, however, liquidity assumes aimport price index for non-fuel imports and the more prominent role. In fact, together with petroleumposted petroleum product price. The black market prices, the liquidity variable shows the highest long-premium for the dollar serves to reflect the rising run elasticity. For the remaining variables, the rank-costs of imports sourced through pre-paid letters of ordering of long-run elasticities follows that for thecredit as well asto capture inflationary expectations short-run: the variable with the next highestlong-runfueled by recent political andfinancial developments, elasticity isthe dollar black market premium, followed

In an attempt to incorporate the inflationary by the import price index for non-fuelsand then byeffects of fuel price changes,the author considered the priceceiling and legislatedminimum wage.two alternative variables - the import price of crude The forecastingequation yields estimated annualoil and the average wholesale posted price of petro- inflation rates for 1984 ranging from a low of 45 per-leum products asset by the Board of Energy. Given cent to a high of 53 percent under alternative assump=the Philippines' price control system, one would tions about the behavior of the study's explanatoryexpect the latter variable to have a more significant variables for the second semester of 1984.eeffect on price changes. Higher costs of importingcrude oil would impact on consumer prices only tothe extent that government authorities would allow SEMINAR ON DEVELOPMENT FINANCE ANDthese increases to filter down to the domestic prices STATE BANKINGof petroleum products.

Moreover, in the absence of any fluctuations in A seminar on "Development Finance and Statethe import price of crude oil, domestic prices can still Banking: A Survey of Experience" was sponsored onincreaseas a consequenceof changesin the exchange October 30 by the Philippine Institute for Develop-rate or in the tax (for example, note the oil price ment Studies (PIDS). During the seminar, Dr. Editaincreaselast May) or special fund componentsof the Tan of the University of the Philippines School ofwholesalepostedprice. Economics (UPSE) presenteda paper with the same

Total liquidity relative to real output, meanwhile, title. The reactors/discussantswere Bienvenido M.is usedas a proxy for excessdemand in the economy Noriega Jr. of the Philippine National Bank (PNB),- with additional inflationary pressureson prices Ben Hur Manalo of the Development Bank of the

, I I I lillll ill iilllili I .

PIDS DEVELOPMENT RESEA[ NEWS 20 JANUARY - DECEMBER 1984I II I I II IIII II II

Philippines (DBP) and Jesus Estanislao of the rates, how it has permitted or encouraged loose orBankers' Association of the Philippines (BAP). lax management of credit, and how it has permitted

The following summarizesthe findings and recom- the availment of excess funds from artificial sources.mendations of the study as well as of the seminar Given such a facility, there is also a need to evaluatediscussions: the successand viability of projects financed through

*Among the developing countries, government the rediscounting window of the Central Bank.finance institutions (GFIs) have been established to *There is a need to reassessthe financial inter-expand the banking system and enhance the develop- mediation function of GFIs, i.e., whether savingsment of the financial market and its intermediary mobilization is still a priority activity or whether thefunction. GFIs help in savingsmobilization and in the thrust has shifted to lending activities.implementation of a selective credit policy to finance *There is need to ascertain the effect of interestpriority areasfordevelopment, rates on overall bank portfolio. Do increases in

*Selective credit controls (SCCs) as a policy are interest rates contribute to higher savings and timeutilized by GFIs becauseof externalities, indivisibilities deposits, thereby enhancing the savings mobilizationand imperfections in the capital market. As a general function of banks? Likewise, do these increasescoperule, GFIs, in implementing the SCCs, provide credit with inflation rates?to private activities which have obvious externalities *There is a need to identify the particular exter-or projects with high social returns, nalities, indivisibilities and imperfections in the

*There are generally two types of SCCs: Type I capital market to ascertain the rationality of GFIwhich consists of interest rebates given to borrowers decisions in the use of SCCsover the years. •at low interest rates and tax incentives, transfers,

development support for infrastructure build-up and I_DS _1

technical assistance. Type I SCCs do not generallyinterfere with the intermediation function of banks.Type II SCCs consist of supply intervening controls i P_i i_-Lm mA-_ a-pm_-_., _._ Ilike interest rate control on loans and deposits, dif-ferentiated rediscounting, reserve requirement andloan targets and ceilings. Type II SCCs inhibit finan-cial intermediation or savings mobilization; yet ENERGY AND STRUCTURAL CHANGE IN THEdespite this, they are unfortunately used by most ASIA-PACIFIC REGION (PAPERS ANDdeveloping countries including the Philippines. PROCEEDINGS OF THE THIRTEENTH PACIFIC

*A comparative study of financial development TRADE AND DEVELOPMENT CONFERENCE)among developing countries shows the performanceof the Philippines paling in comparison with those of Romeo M. Bautista and Seiji Naya (editors),Korea and Thailand. This is reflected in the low

M2/GNP ratio which is 22.0 per cent for 1982, about This book summarizes the proceedings of and con-half of those of Thailand which had an M2/GNP ratio tains the papers presented during the 13th Pacificof 45.5 percent for 1982, and Korea which had a Trade and Development Copference (PAFTAD), heldratio of 41.2 percent for 1982. in Manila last January 24-28, 1983. Twenty-one papers

*In the Philippines, SCCs are implemented via were presented in this conference dealing with thepreferential loan rates and rediscounting facilities following topics: the relationships among energyextensively burro loosely undelineatedloan categories, prices, economic growth and comparative advantage;

*Philippine GFIs composed of the Development the economics of energy resources; country caseBank of the Philippines (DBP), the Philippine National studies; and international energy and financing issues.Bank (PNB), the Land Bank of the Philippines (LBP), Since the quadrupling of oil prices administeredand the Philippine Amanah Bank (PAB) have the fol- by the Organization of Petroleum Exporting Coun-lowing characteristics: tries (OPEC) in 1973-74, energy issues have become

an important, if not a dominant, concern of policy-© They comprise a fairly lal'ge segment of the makers in both developed and less developed coun-

financial market and own about 40 percent of tries. This would seem attributable in part to govern-the total assetsof the financial system, ment perception of the intensity and pervasiveness

© They never took savings mobilization as a of the effects of increased oil prices on the nationalmajor objective of credit policy, economy and in part to the recognition that struc-

© They have easily availed of rediscounting rural adjustments need to be undertaken to cope withfacilities of the Central Bank at low cost or the new circumstances. The second oil price shocklow-deposit rates, of 1978-80 (which was triggered by the Iranian revo-

*There is a need to reexamine the rediscounting lution) only served to give added urgency to the re-policy of the Central Bank on the following: how the quired structural changesand the adoption of policiespolicy..... has contributed to the accelerated inflation to bring these changes into action.

III II II I I II I

PIDSDEVELOPMENTRESEAR_- NEWS 21 -_JANUARY-DECEMBER 1984I III illlll II li" i mill .

ECONOMIC EVALUATION OF THE 1960s with recent industrial promotion policies andPHILIPPI N E ALCOGAS AND COCODI ESEL manufacturing performance is presented.PROGRAMS (PIDS MONOGRAPH SERIES NO. 3) On the basis of this comparative analysis, the

Armando Armas Jr., and Denise Joyce Cryde study recommends more permanent industrialpromotion policies in the country, amongwhich aretariff reforms that would bring about a strong cor-

This study is an attempt to look into the economic relation between domestic resourcecostsand effectiveviability of the alcogasand cocodieselprogramsof rates of protection. Fiscal incentives to encouragethe government which were officially launched in investmentswithout a bias on employment, favorable1982 with very optimistic prospectsbut which were, financial policies, encouragement of small-scalein the immediate year after, shelveddue to exogenous enterprisesand regional-basedindustries,and in-depthfactors. It is also an attempt to see how these pro- studies on industries and shadow prices are alsograms fit into the overall energy development plan recommended.of the country. This isthe secondprinting of the book.

In particular, the study aimsto identify scenarios

that would make cost of implementing the programs JOURNAL OF PHILIPPINE DEVELOPMENT, Vol-competitive and socially profitable. Moreover, it ume X, No. 1, First Semester, 1983tries to determine the threshold prices of petroleum,foreign exchange, and domestic indigenous resourcesrequired for the program's social effectiveness.

This issue of the Journal features articles on sec-

THE CONSEQUENCES OF SMALL RICE FARM tor sources of Philippine postwar economic growth;the role of trade and industrial statistics in policyMECHANIZATION IN THE PHILIPPINES: WORK-

SHOP PAPERS formulation; the identification of major determinantsof oil exploration drilling costs; outputs and inputs of

This volume contains the papers presented in a Philippine commercial banks; proposals for effectingworkshop of the same title which was jointly spon- a major revamp in the system of establishmentsored by the International Rice Research Institute enquiries;and family income and expenditures.(IRRI), the Philippine Institute for Development Among the contributors are Professor Harry T.Studies (PIDS), the National Economic and Develop- Oshima, Commissioner Chulia Azarcon of the Tariffment Authority (NEDA), and the Ministry of Agri- Commission, Mr. Gary Makasiar of the Ministry ofculture (MA). Energy, and Dr. Mario B. Lamberte of the Philippine

The objectives of this workshop were: (1) to Institute for Development Studies.evaluate the available evidence relating to the use ofmechanization (what has its impact been on employ- JOURNAL OF PHILIPPINE DEVELOPMENT Vol-ment, income and income distribution? Has it ume X, No. 2, Second semester, 1983produced a measurable change in the level or com-position of output?); (2) based on a review of

evidence, to evaluate the strategies adopted in the This special issue of the Journal presents theintroduction and use of machines which maximize proceedings of the NEDA-PIDS Seminar- Workshoppotential benefits and at the same time minimize the on the Philippine System of National Accounts. Thiscosts to the country and to the people; and (3) to seminar is already the third of a series since 1971 andexplore the public and private sector initiatives that 1976. The series of seminars are being held to revieware needed to meet the requirements of an efficient and improve the Philippine system of nationalnational mechanization strategy, accounts, which captures and monitors the changes in

the economy.INDUSTRIAL PROMOTION POLICIES IN THE

The objectives of the third seminar were:PHILIPPINES. Second Printing 1984

1. To review and assess the system of nationalRomeo M. Bautista, John H. Power andAssociates accounts in the context of the emerging needs of

planning and policymaking, with special focus ongovernment and foreign transactions;

This study deals with a quantitative description of 2. To identify and prepare short- and long-termrecent economic policies affecting the performance of improvements in data inputs, estimation metho-the Philippine manufacturing industries and recom- dology, and presentation of the nationalmends certain modifications in the country's indus- accounts; andtrial promotion policies. 3. To bring about a strong linkage among the data

A comparative study of economic policies and producers, national accounts statisticians, andindustrial development in the 1950s through the national accounts users.

mill II illllll iii iii i

PIDSDEVELOPMENTRESEAF NEWS 22 --- JANUARY-DECEMBER 1984IIIIIIIIII

This volume contains the four papers presented National Accounts, Commission on Audit and Officeduring the seminar, namely: "Towards a More of Budget and Management Reports" by J. Amatong;Articulated and Relevant System of National and "The Reconciliation of Foreign TransactionAccounts" by P.Q. Samson andd T.P. Africa; Statistics: National Accounts and Balance of Pay-"National Accounts Linkages" by M. Ono; "The Tents" by A.M. Tetangco Jr. and C.M. Arenas.Reconciliation of Government Transaction Statistics:w

IIIIIIII Jl ii IIIIII Ililil II

PIDS PUBLiCATiONS AVAILABLE

Price

1. INDUSTRIAL PROMOTION POLICIES IN THE PHILIPPINES 1_125/$17.50Romeo Bautista, John Power and Associates

2. SURVEY OF PHILIPPINE DEVELOPMENT RESEARCH I 1_313_00/$8.003. SURVEY OF PHILIPPINE DEVELOPMENT RESEARCH II f_30.00/$8.004. SUMMARIES OF COMPLETED RESEARCH PROJECTS, VOL. I _'20.00/$7_005. INTEGRATION, PARTICIPATION AND EFFECTIVENESS;

AN ANALYSIS OF THE OPERATIONS AND EFFECTS OFFIVE RURAL HEALTH DELIVERY MECHANISMS 1_2B.00/$7,50

Ledivina Carifio and Associates6, ESSAYS IN DEVELOPMENT ECONOMICS IN HONOR OF _'55.00/$18.50

HARRY T. OSHIMA (Paperbound)I_125.00/$22_50(Bookbound)

7. HOW PARTICIPATORY IS PARTICIPATORY DEVELOPMENT? 1_86_25/$19,00Celia T. Castillo

8. THE SPATIAL AND URBAN DIMENSIONS OF DEVELOPMENT t_125.00/$18.50IN THE PHILIPPINES

Ernesto Pernia, Cayetano W. Paderanga,Vietorina Hermoso and Associates

9. ENERGY AND STRUCTURAL CHANGE IN THE ASIA-PACIFIC 1_200.00/$25.00REGION (PAPERS AND PROCEEDINGS OF THE THIRTEENTHPACIFIC TRADE AND DEVELOPMENT CONFERENCE)

10. PHILIPPINE EMPLOYMENT IN THE SEVENTIES 1_75.00/$12,50Rosa Linda P. Tidalgo and Emmanuel F. Esguerra

11, MONOGRAPH NO. I: A STUDY OF ENERGY-ECONOMY _'15,00/$3.50INTERACTION IN THE PHILIPPINES

Leander Alejo12, MONOGRAPH NO I1: INDUSTRIAL POLICY AND _'18.00/$3.80

DEVELOPMENT IN THE ASEAN COUNTRIESRomeo Bautista

13, MONOGRAPH NO, II1: ECONOMIC EVALUATION lP50.00/$10.00OF THE PHILIPPINE ALCOGAS AND COCODIESELPROGRAMS

Armando Armas and Dennis Joyce Cryde14. MONOGRAPH NO. IV: A SURVEY OF MATERIALS 1_32.00/$8,50

IN INTRODUCTORY ECONOMIC EDUCATIONGerardo P. Sicat

15, JOURNAL OF PHILIPPINE DEVELOPMENT _'35,00/$6.00 per copyt_60.00/$10,00 annual subscription

illli I lilli III I

PIDS DEVELOPMENT RESEAR( qEWS 23 "_ANUARY- DECEMBER 1984II III11 IL III II III I III I

t,

PIDS WORKING PAPERS PIDS STAFF PAPERS

1. W,P. # 8301 Studies on the Wood-Based Furniture, Leather 1. S.P. # 8201 An Analysis of Fertilizer Policies in the Philip-Products and Footwear Manufacturing Industries pines. Cristina C. David and Arsenio M, Balisacan.in the Philippines. by: Niceto Poblador, Adriano (Printed also in J,P.D, 1981)Soils, Roy Ybaffez, and 8ienvenido Aragon. 2. S.P. #, 8202 Credit andPrice Policies in Philippine Agriculture.

2. W.P. # 8302 Economic Policies and Philippine Agriculture. Cristina C. David,by Cristina C, David, 3. S,P. #8203 Government Policies and Farm Mechanization

3. W.P. # 8303 Changing Comparative Advantage in Philippine in the Philippines, Cristina C. David.Rice Production, Laurian J. Unnevehr and Arse- 4. S.P. #8204 Shadow Prices of Goods and Resources in thehie M. Balisacan. Philippines An Assessment, Erlinda M. Medalla,

4, W.P. _ 8304 The Impact of Government Policies on Philippine 5. S.P. # 8205 An Analysis of the Behavior of the CommercialSugar. Gerald Nelson and Mercedita Ageaoili. Banks, Marie B. Lamberte

5. W.P. # 8305 Comparative Advantage and Government Price 6. S.P. # 8301 Exchange Rate Flexibility and InterventionIntervention Policies in Forestry, John H_ Power Policy in the Philippines, 1973-1981, Filologoand Teresita Turnaneng. Pan:e, Jr.,

6. W.P, # 8306 Government Expenditures of Agricultural Poll- 7_ S,P, # 8302 On the Use of the DRC Criterion in Selectingcies in the Philippines 1955-1980. Manuel S.J. de Projects, Erlinda M. Medalla.

Leon. 8. S,P. #8303 Monetary Aggregates and Economic Activity.7. W,P. # 8307 Economic Incentives and Comparative Advantage Marie B. Lamberte.

in the Livestock Industry. Liborio S, Cabanilla. 9. S.P. # 8304 Effective Protection Rates and Internal Indirect8, W,P. # 8308 An Analysis of the Economic Policies Affecting Taxes in the Philippine Setting_ Rosario G.

the Philippine Coconut Industry. Ramon Clarete Manasan.and J. Roumasset. 10. S.P. # 8305 Response to Balance of Payments Crises in the

9. W.P, # 8309 Economic Incentives and Comparative Advantage 1970s Korea and the Philippines, John H, Power.in the Philippine Cotton Industry. Arsenio 11. S.P. # 8401 A Study of Philippine Real Property TaxationBalisacan. Cayetano W. Paderanga, Jr.,

'10. W.P. _ 8401 Intersectoral Capital Flows and Balanced Agro- 12. S.P. # 8402 Public Enterprise in the Philippines in 1982 AIndustrial Development in the Philippine_ Ma- Definition and Taxonomical Exercise_ Rosarionuel S.J. de Leon. G Manasan.

11. W,P. # 8402 Forest Land Management in the Context of Na- 13. S,P. # 8403 Estimating the Shadow Exchange Rate, thetionalLand Use. AdolfoV. Revilla, Jr. Shadow Wage Rate and the Social Rate of

12. W,P. '-- 8403 Policy Issues on Commercial Forest Management. Discount for the PhHippinc& Erlinda M. Medalla.Cerenilla A, Cruz and Marian Segura-delos 14. S.P. #8404 Development Finance and State Banking: AAngeles. Survey of Experience. Edita A, Tan.

13, W.P. # 8404 The Impact of Government Policies on Forest 15. S.P. # 8405 Derived Protection for Nontraded PrimaryResources Utilization, Gerald C, Nelson. Product_ Erlinda M, Medalla.

14. W,P, _=8405 Population Pressure, Migration and Markets: 16, S.P. #8406 Modelling the Effects of Devaluation on Prices,Implica[ions for Upland Development. Ma, Output and the Trade Balance: The PhilippineConcepcion Cruz. Experience_ Ma. Cecilia Gonzales.

15. W.P. #8406 Tenure, Technology and Productivity of Agro- 17. S.P, #8407 The Development Bank of the Philippines andforestry Scheme& Ana Doris Capistrano and the Financial Crisis, A Descriptive Analysis,Sam Fujisaka. Marie B. Lamberte.

16. W.P. #8407 Environmental Effects of Watershed Modifica. 18. S.P. #8501 The Protection Structure, Resource Flows and:ion& Wilfredo P. David. the Capital-Labor Ratio in Philippine Manufac-

17. W.P. _8408 Management and Cost of Watershed Reforesta- turing: A Short Empirical Note. Erlinda M.tion: The Pantabangan and Magat. .JoseA. Galvez. Medalla.

18. W.P. # 8409 Workshop Papers on "The Consequences of Small 19. S.P. # 8502 A Decomposition Analysis of Philippine ExportRice Farm Mechanization in the Philippines'; and Import Performance, 1974-1982. Ponciano

"19. W.P. # 8501 A Review of Welfare in the Coconut' Industry, S. Intal, Jr.,Sylvia N. Guerrero. 20. S.P. # 8503 Philippine Export and Terms of Trade Instability,

1965-1982 Ponciano S_Intal, Jr.,21. S.P, # 8504 Methodology for Measuring Protection and Com-

parative Advantage. Erlinda M_ Medalla andJohn H. Power.

*22. S.P. # 8505 Food, Fuel and Urbanization in the Philippines,Alejandro N Herrin, Manuel F. Montes, RodolfoF. Florentine,

*Still in the reproduction unit.

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PIDS DEVELOPMENT RESEAll I NEWS 24 JANUARY - DECEMBER 1984I IIIIll

DEVELOPMENT RESEARCH NEWS is a publication of the PHILIPPINE INSTITUTE FOR

DEVELOPMENT STUDIES (PIDS). It highlights research findings and recommendations, seminars,publications, on.going and forthcoming projects which are of interest to policymakers, planners,administrators and researchers.

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term policy-oriented research.

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