Sabal: Caution on federalism

Ceteris Paribus

THE House of Representatives passed a measure seeking to revise the 1987 Constitution into a Federal Republic of the Philippines last December 11, 2018. The bill is authored by no less than the classic politician herself, Gloria Macapagal-Arroyo. The bill received a vote of 224 against 22 (3 abstain) on its third and final reading.

For the record, I support any initiatives that seek to preserve the diverse socio-economic and cultural background of our regions. According to my Historian friends, even Dr. Jose Rizal once envisioned a Federal Republic of the Philippines. Different regions in the country should focus on their comparative advantage.

In Economics, we use the term comparative advantage to indicate that a country or place has a niche of producing on something because it faces lower opportunity costs than producing other goods. Opportunity costs, on the other hand, are costs foregone to obtain something.

In other words, if Region A is efficient in banana production, then it has to allocate most of its resources in producing banana than, say, computers. Producing the latter would mean higher costs than producing the former. Why is that so? Each region is unique in terms of the composition and skills of its laborers, its natural endowments, etc.

We should be supporting our local economies in achieving its potential growth trajectory. For instance, the beautiful island of Camiguin should remain as a tourist gem of Northern Mindanao. It should maintain the beauty of its natural resources, such as its mesmerizing white sand beaches and the likes. It can’t be patterned to Cagayan de Oro where there is sprouting real estate, shopping and financial centers.

The Island’s rich natural resources should be preserved at all costs because it’s its source of competitiveness in the region (same is true to Palawan and Siargao). The idea of transforming a place into a metropolitan center like Manila and Cebu is a distorted thinking of development. Other methods of development include supporting local-regional clusters and industries to grow and contribute to the gross regional domestic product (i.e. the Tuna Industry in General Santos City, Marikina shoe industry, etc.).

There is money and growth if there is regional productivity, which is spurred by investments, physical and human capital such as in education, health, and training. The concept of increasing returns-to-scale and economies-of-scale in microeconomics explain that if a process is repeatedly done, then that process becomes efficient –that is lesser inputs and costs utilized but more outputs produced.

What is disturbing in the government’s proposed federal set-up is the absence of a sensible plan for regional productivity. In 2016 alone, NRC still contributes 37% of our gross domestic product, followed by Calabarzon (17%) and Central Luzon (10%). Poorer regions should be growing faster than richer ones but from 2009-2016, Central Visayas is the fastest growing at around 70% followed by Caraga (67%) and Davao Region at 62%. Ironically for Armm, the region that enjoys higher autonomy than the rest, remains to be the poorest in the country.

Many economists warn that if federalism is not done properly, poorer regions will encounter greater challenges in competing with richer regions. Fiscal equalization is a popular solution, where there is intergovernmental transfers. Meaning, part of the taxes collected from richer regions will be transferred to poorer regions in need of fiscal assistance. This policy will, however, dis-incentivize richer regions to work more because part of their income won’t be returned to them in form of government services. It would also make poorer areas in the country become more dependent to higher income regions. Fiscal equalization might create stagnant regional economies.

Former Economic Planning chief Cielito Habito asks an important question that our leaders should ponder upon. Are we really for federalism or decentralization? Quoting from one of his articles in Inquirer last 06 March 2018, “Federalism does not equate to greater decentralization. There are federalized governments that are less decentralized than unitary ones. Malaysia is a centralized federalized system, where its constituents play limited roles in relation to the center. Indonesia, on the other hand, is a highly decentralized government under a unitary presidential system”.

Habito further explains that “Federal systems range from higher centralized (Venezuela) to highly decentralized (USA). Just as unitary systems range from highly centralized (Singapore) to highly decentralized (Norway)”.

As we approach to the campaign period, we should be keen in supporting candidates who use federalism as their political battle cry. As a responsible voter, we should understand “how” they intend to fulfill federalism. The Philippines will inevitably grow but the extent of its growth depends on the policies of our leaders and the strength of our institutions. If this shift to Federalism is not done properly, we will remain to be forever next in line to our already massively growing neighbors in Southeast Asia.

Jhon Louie B Sabal is the OIC-chairperson of the Department of Economics of Xavier University-Ateneo de Cagayan. Mr. Sabal is a graduate of MA in Economics at Ateneo de Manila University.


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