Are We Ready for Federalism Are We Ready for Federalism? Examining the Economic, Social, and Political Viability of Federalism in the Philippines R.E. Miral, Jr. Philippine Economics Society 54th Annual Meeting 8 November 2016, 3:20 PM to 4:50 PM Novotel Hotel, Araneta Center, Quezon City

Why nations fail Rich countries are rich because they have inclusive economic and political institutions, while poor countries are poor because they have extractive economic and political institutions (p.1).   Inclusive economic institutions create incentives and opportunities necessary to harness the energy, creativity and entrepreneurship in society. Extractive economic institutions are the consequence of extractive political institutions. Extractive political institutions are made up of two important dimensions. First, they allocate political power narrowly. Second, they feature a central state that is not strong in the sense that it can provide key public goods. James A. Robinson (2013). Why Regions Fail: The Mexican Case

Philippines remains highly centralized LGUs remain relatively small actors in the Philippine economy: expenditures amounts to just 2.75% of GDP own-source revenues amount to only 1.20% of GDP Government expenditures and revenues have remained highly centralized even after the decentralization program. 3

Shares in Expenditure, by Government Level 4

Composition of Government Revenues, by Government Level 5

Common Pool Resource Problem The centralization of revenues created a common pool resource with its attendant problems: Weakening of fiscal discipline Weakening of allocative and operational efficiency (“Divide by N”) Increasing tolerance of corruption Patronage politics and political dynasties 6

Problem: Fragmented government services National Government Agencies/Departments PAPs Societal Goals Sectoral Outcomes Key Result Areas Major Final outputs Provinces Cities Municipalities Barangays Problem: Fragmented government services

Weak government coordination Coordination between and among different levels of government is weak. The requirements for strong coordination are lacking: clear division of responsibilities, adequate funding, and bureaucratic capacity (Balisacan, Hill and Piza, 2006). Moreover, the Philippines local government system is highly fragmented with no strong middle level government. 8

Highly fragmented local government system 9

Fragmented local government units + patronage politics = Fragmented government services Number of LGUs Provinces: 81 Cities: 145 Municipalities: 1,489 Barangays: 42,036 Notes: Provinces are fiscally, the weakest. Cities are fiscally, the strongest. Cities have the combined powers of provinces and municipalities.

Importance of Middle-level Governments It is important to recognize the critical role of middle-level governments. In countries with unitary government like the Philippines, there are usually no strong middle-level governments. However, the federal form that serves as model for government decentralization reforms is built on the presence of strong fiscally autonomous middle-level governments (e.g. states) that deal with the central government on even ground. Ultimately, the issue is not decentralization versus centralization, but of achieving the right balance and better coordination among different levels and units of government. 11

Shift to Federal Government?

Thank you and good day.

Subsidiarity “nothing should be done by a larger and more complex organization which can be done as well by a smaller and simpler organization” (Mele, 2004) Higher level governments should not exercise functions which can be carried out efficiently by lower level governments, but rather the former should support and help coordinate the activities of the latter. 14

Fiscal Equivalence: Vertical Fiscal Balance Correspondence between those who receive the benefits of a public good and those who pay for it Links cost to benefit Leads to congruence between deciding on expenditure and financing Prevents free riding 15

Fiscal Equalization: Horizontal Fiscal Balance Each unit within a particular level of government (or each state in a federal system) has the capacity to provide services at a comparable standard. 16