Is federalism the key to economic development and competitiveness?

MANILA, Philippines — More than political, the driving force in the move to shift to a federal system of government is economic. More than the redistribution and rebalancing of government powers, it is the correct distribution and balancing of economic power and economic development that proponents of federalism seek.

The proposition is that the overconcentration of governmental powers – more importantly, control over the financial and other resources of government – in the central government in Manila is, to a great extent, to account for the lack of economic growth and development in most parts of the country and the persistence of poverty for over a century.

If we look at the economic growth and development of the country, we will readily note the concentration of development and economic power in Metro Manila, parts of Central Luzon and Calabarzon, and a couple or so major cities in Visayas and Mindanao.

Metro Manila, Calabarzon and Central Luzon account for 62 percent of the gross domestic product. Metro Manila, home to just 15 percent of the total population, corners 37 pesos for every P100 of GDP.  The remaining 14 regions have to divide among themselves the remaining 38 percent of GDP, so that most of them have two percent share or less.

Reversely, poverty incidence is lowest in Metro Manila (4.5 percent) and the two other adjoining regions. Poverty incidence goes higher in regions farther away from the center of political and economic power – rising to 22 percent in Cordillera, 31 percent in the Bicol Region, 39 percent in Eastern Visayas, and 53 percent in ARMM. These regions each has only two percent share of GDP or less.

Investments are also lopsided. In 2015, 64.6 percent of investments went to NCR (32.6 percent), Calabarzon and Central Luzon.

It was against this economic backdrop that the Consultative Committee drafted a Federal Constitution with an eye to balancing the country’s economic development by spreading investments across the land and redistributing the powers, functions and resources of the national government to the regional governments of 18 Federated Regions proposed to be created. (The existing regional structure is proposed to be retained but Negros island and Siquijor will comprise the 18th.)

The idea is to turn each of these regions into economies as progressive and vibrant as Singapore or other comparable states.

To make this happen, most of the powers and functions given to the proposed Federated Regions were economic in nature. Under the draft charter, planning a region’s economic development shall rest exclusively with the regional government. 

Thus, a Federated Region shall also have the power to establish and manage its own economic zone, generate investments, preside over tourism and trade development, build its own regional infrastructure and public utilities, determine land use. It will manage its own finances, collect revenues, and appropriate its own funds through its Regional Assembly.

Control over regional budget is a key power given to the Federated Regions to free them from the stronghold of the national government (both the executive and legislative branches) – which has stymied development in the regions and led to a great economic imbalance.

Financing the federated regions

One question that has been raised, of course, is where will the money for the regions come from and will they be sustainable?

While taxation and fiscal policy remain primarily a power of the Federal Government, the regional governments are also given power to generate sources of revenue and collect certain taxes already enumerated in the draft constitution and those that Congress may later allow or assign to them by law, provided that there shall be no double taxation.

Initially, the draft constitution transfers to the regional governments the collection of a set of taxes and fees presently being collected by national government agencies. 

Based on a study of the national government revenues from these sources in 2017, each of the regions will be able to generate from these taxes and fees anywhere from P1 billion to P36 billion depending on the size of their economy.

In addition, the regions shall receive 50 percent of the revenues of the national government from its top four sources – income, excise and value-added taxes and customs duties.  The 50 percent share of the regions shall be divided equally among them, and shall be automatically released without need of Congressional appropriation. Based on the 2017 collections of the Bureau of Internal Revenue and Bureau of Customs, which totaled over P3 trillion, the regions shall get at least P57 billion each.

This gives each federated region initially P58 billion to P96 billion as start-up funds that are all within their exclusive control to appropriate and use as they deem fit for their own development.

More important, regions will get 50 percent of the revenues derived by the government from the exploration and utilization of the natural resources, which their regional governments may apportion among their constituent local government units or use for development programs within the region.

Investment and level playing field

With so-called “restrictive economic provisions” of the 1987 Constitution long  viewed as a hindrance to foreign investments and economic growth. The Consultative Committee – while retaining the 60-40 capital requirement for foreign investments in public utilities and exploration and utilization of natural resources – empowered the Congress to modify the capital ratio as it may deem fit and necessary by passing appropriate legislation. This gives the government flexibility in crafting policies on foreign investments as it may deem appropriate in the future.

Also, the exploration and utilization of natural resources is a joint power of the Federal and Regional Government under which both are empowered to enter into agreements with foreign corporations involving technical or financial assistance for large-scale exploration and development.

Strengthening competition and leveling he business playing field have also been a concern for long. The draft Federal Constitution contains stronger provisions prohibiting monopolies and restraint of trade, thus existing Philippine Competition Commission is elevated to the level of an independent Federal Competition Commission with broad powers.

In sum, proposed changes in the Constitution are seen as a means to boost regional economic development and enable all regions to contribute to national growth. In the process, this will enhance the country’s overall economic and business competitiveness in the international arena. - Ding I. Generoso

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Ding I. Generoso served as senior technical officer and spokesperson of the Consultative Committee headed by former Chief Justice Reynato Puno, which reviewed the 1987 Constitution and put together the Bayanihan Federalism draft Constitution.  The draft was submitted to President Duterte in July last year but remains to be submitted to the Congress for consideration.