Decentralization, Local Government Fiscal Independence, and Poverty: Evidence from Philippine Provinces

Decentralization has become a popular development program among middle- and low-income economies worldwide. The rationale behind decentralization is the local government’s proximity to consumers gives it an information advantage over the central government on needs and preferences. However, the central government has economies of scale and has access to more resources. Using data from Philippine provinces, this paper studies the relationship between decentralization – as represented by local government fiscal independence and as measured by locally sourced revenues expressed as share of total revenue – and poverty incidence. It finds evidence that fiscal independence is associated with lower poverty, but the relationship is not linear. There is an optimal level of decentralization, beyond which, its relationship with poverty becomes positive. Moreover, the decentralization-poverty relationship is stronger in provinces with good governance, and weaker in provinces with lower income

Decentralization and Welfare: Theory and an Empirical Analysis Using Philippine Data

This study theoretically and empirically analyzes the relationship between decentralization and welfare. The model identifies conditions in which a decentralized government is utility-maximizing compared to a centralized one. The empirical analysis utilized data from Philippine provinces to study the relationship between several decentralization indicators and welfare, as measured by per capita income, human development index, and poverty. Results suggest that fiscal independence, or the ability of local governments to generate their own revenues to finance their own expenditures rather than relying on central government transfers, is positively associated with per capita income and HDI. Moreover, this relationship is stronger when governance is better and weaker among lower-income provinces. In contrast, a higher number of local government units per population is linked to adverse development outcomes, and this association is stronger among lower-income provinces and weaker among those with good governance

Reviving the Philippine Economy under a Responsible New Normal

After the reclassification of areas under enhanced community quarantine (ECQ) to general community quarantine (GCQ), the urgent task for the Philippine government is to provide an exit plan to revive the Philippine economy. Given the significant economic damage resulting from the shutdown of roughly 75 percent of the country’s total production in the National Capital Region (NCR) and in the CALABARZON and Central Luzon areas, a gradual reopening of the economy will be necessary to prevent further economic damage that could not only be difficult to repair, but also long to overcome. Indeed, based on recent directives from the government, a substantial number of industries and services have thus been allowed to operate in both the ECQ and GCQ areas. However, as the Philippine government begins to calibrate the opening of sectors, there remain concerns as to how this process will affect jobs and livelihoods now and beyond. In this context, an economic recovery plan that talks about short-term, a transition, and full recovery phases— encompassing a revision of the current Philippine Development Plan without losing sight of the long-term goals envisioned in Ambisyon Natin 2040— is still needed. Indeed, a key component of AmBisyon 2040 has been of building resiliency over the long-term, which includes resiliency in health and economic shocks apart from natural disasters. At the same time, this recovery plan should also be accompanied by structural reforms to enhance its implementation. The Department of Finance has crafted a four-pillar socio-economic strategy aimed at: (a) supporting the more vulnerable sectors of society; (b) increasing medical resources to contain the virus and offer safety to front-liners; (c) keeping the economy afloat through financial emergency initiatives; and (d) creating jobs and sustaining the economy. Yet while enumerating the costs of these plans, the said strategy lacked details on how the country could achieve some of the goals without the availability of widespread testing and adequate health facilities. Loan guarantees, cash transfers, and other forms of subsidies can revive disrupted supply chains but cannot restore productivity in the middle of a persisting health crisis, while the uncertainty of a possible outbreak can keep workers from supplying goods and services. It is crucial to have these programs and institutions in place since a number of cities, regions and provinces have started to reopen. A modified community quarantine without the necessary health system investments, protection measures, and economic recovery plan risks amounting to an unregulated herd immunity strategy. Opting for herd immunity allows governments to blame the failure of the health and economic system on the virus, rather than on bad governance. Under current GCQ protocols, the burden on containing the virus is mostly transferred to the public. Unless the government provides mass testing, the problem of information is aggravated, probably raising the transmission risks. Moreover, unregulated herd immunity will be differentially felt by the poor. As healthy workers may recover their earnings from the modified quarantine, the poor, who have limited access to the health services and are thus more susceptible to the virus, are unlikely to benefit from this system. In effect, this will only exacerbate the inequality that prevails in the country. Moving towards a responsible new normal requires a strategy that addresses both people’s wellbeing and the socio-economic weaknesses exposed by COVID-19. Thus, the strategy should have the following elements

The Effect of Ease of Doing Business on Firm Creation

This paper looked at the effect of ease of doing business on firm creation. Using a nine-year panel data of about 120 countries from the World Bank’s Ease of Doing Business Reports, results suggest that overall ease of doing business has a positive effect on business creation. This relationship is most strongly driven by the Starting a Business component, but Paying Taxes is also important. In addition, the effect of the Starting a Business component is driven by the financial cost rather than the time and administrative cost. Finally, results change when the analysis is applied to non-high-income countries only

The Effect of Revenue Shares on Local Government Spending: Evidence from Philippine Provinces

Intergovernmental fiscal transfer (IFT) is one of the several sources of funds of sub-national governments. There are two general types of IFT — conditional and unconditional. In many developing economies including the Philippines, the usual existing IFT is a form of unconditional fiscal transfer called revenue shares. In the Philippines, this revenue-sharing scheme is called the internal revenue allotment (IRA). Empirical literature says that unconditional IFTs are the type of fiscal transfers with the least effect on local government spending. The literature posits that the reason for this is that local governments use these transfers to substitute for own-sourced revenues such as local taxes. This explanation was formalized through a framework presented in this paper. Using panel data from Philippine provinces for the years 2001 to 2015, this paper attempted to determine the effect of revenue shares, in the form of IRA, on local government expenditures. Using different econometric methodologies, this paper arrived at several conclusions. First, IRA has a strong positive effect on total local government spending with a marginal effect slightly greater than one — much higher than what comparable studies found using data from other countries. Secondly, the effect of IRA on local government expenditures is even stronger for provinces with relatively greater ability to generate its own funds. Next, IRA and other externally sourced revenues have much stronger marginal effects on local government spending than do own-sourced revenues. Finally, IRA has widely varying effects on different components of local government expenditures

Decentralization and Development Outcomes: What Does the Empirical Literature Really Say?

This article critically reviews the empirical literature on decentralization and its relationship with development outcomes. The analysis suggests that revenue decentralization and fiscal independence, or the ability of local governments to raise their own revenue rather than relying on transfers from the national government, are the decentralization types most positively associated with development outcomes. Expenditure decentralization has no clear trend. In terms of development outcomes, most of the studies reviewed found evidence that good governance is positively associated with decentralization; but the evidence is mixed on economic growth. Some suggestions were also made for future decentralization studies

Access to Information and Other Correlates of Vote Buying and Selling Behaviour: Insights from Philippine Data

Access to information is a key factor influencing political behaviour and decisions. Recent studies on vote buying and selling have tried to unpack the possible drivers behind this phenomenon; yet, few studies have empirically examined the role of different sources of information. This study contributes to the nascent literature in this area by turning to a unique dataset from a survey of low-income voters in Metro Manila, the Philippines. It empirically examined the relationship between access to information and vote selling behaviour by low-income voters. It also studied other correlates of vote selling and the possible factors linked to receiving an offer. The results suggest that the quantity of information has no significant relationship with the likelihood of accepting the offer and voting for the candidate for whom the offer was made. However, the quality of information does matter. In particular, access to sources of ‘good quality information’ is negatively associated with completing the vote selling transaction (i.e., accepting the offer and voting for the candidate). This study also found evidence that when money is used for vote buying, it appears to be targeted at those with greater needs, confirming the literature that vote buying activities tend to be well targeted at poor and low-income communities. Unsurprisingly, vote buying offers are more likely in areas where elections are closely contested, and they are also more likely in socially cohesive communities. Our findings also suggest that vote buying may not necessarily be effective in the sense that it encourages only few voters to change their candidate preference. This coheres with earlier studies suggesting that vote buying and selling merely caps a longstanding patron–client relationship between politicians and low-income voters

Revenue Sharing in Mining: Insights from the Philippine Case

Most mining operations in developing countries are de facto public-private partnerships, as the state typically owns the resources and partners with a company or consortium in extraction. Revenue sharing is a critically important element of such partnerships, and it is the starting point for any meaningful analysis of over-all costs and benefits from mining. As a contribution to the policy discussions on this topic, this paper tries to clarify issues in properly evaluating public sector revenues from mining, using data on the Philippines as a case. The main objective here is to illustrate the main differences between macro-level and micro (firm-) level data. We find evidence that macro-level revenue sharing indicators in the Philippines fail to capture a high degree of heterogeneity in micro- (firm-) level revenue sharing outcomes. A comparison of several Philippine versus foreign mining firms in our sample indicates that there is not much difference in their average tax payments (expressed as a share of total company revenue). Furthermore, these average tax payments are actually much higher than the industry-wide average reported by the government. Clarifying and explaining these discrepancies could help determine broader net benefits from extractive industries, and thus establish whether and to what extent mining operations provide enough net gains to the country

Does Competition Enhance or Hinder Innovation? Evidence from Philippine Small and Medium-Sized Enterprises

Competition has two possible contrasting effects on firm innovation. On one hand, it can force businesses to innovate to become more competitive. On the other, competition can shrink a firm’s market share, revenues and profit, making it difficult to implement costly innovations. Applying logistic regression on data from a survey of 480 small and medium-sized enterprises (SMEs) in the Philippines, this paper found evidence that there is a generally positive relationship between competition and innovation. The magnitude of the relationship, however, depends on the type of innovation. The form of innovation most strongly associated with competition is improvement in the production process, followed by improvement in marketing. It is most weakly associated with introduction of a product new to the market and with improvement of an existing product. There is also some evidence that the magnitude of the competition-innovation relationship varies across sectors and across firms of different sizes

Will access to information on political dynasties alter voting behavior? Evidence from a Philippine youth voting experiment

Many young democracies are characterized by the proliferation of political dynasties, i.e. elected politicians from the same clan spanning across time and across different elected positions. In the Philippines, there has been growing concern that political dynasties are on the rise, as more elected officials hail from political clans. Lack of information on political dynasties could be a potential reason behind this. Using a randomized control trial framework, this paper seeks to evaluate the impact of young voters’ access to information on political dynasties (i.e. the socioeconomic correlates of this phenomenon) vis-à-vis their voting choices for top local government positions and the Senate in the Philippines. The two main delivery systems for the information are: a) a five-minute cartoon highlighting the main findings of a study on political dynasties in the Philippine Congress; and b) a lecture by one of the co-authors of that study. This paper finds some evidence that the lecture and the cartoon had an effect in terms of reducing votes for dynasties. Second, the lecture has a much greater impact than the cartoon in terms of its estimated effect on the voting preference of the participants. The study findings suggest that access to information on political dynasties has potentially large effects on electoral outcomes, should the result hold for a large share of young voters. Based on a simplified illustration, the lecture on political dynasties could potentially result in about less than half a million fewer votes for dynastic politicians for the top senate spot; and up to five million less votes for dynastic senatorial candidates for the 12 slots. Again, it should be emphasized that this is a mere illustration and not a projection of effects on actual elections. Nevertheless, the results are compelling in their potential magnitude, should these estimates hold true for the larger youth population