Economic cost of Philippine corruption

Government corruption has always been a staple story in the Philippines, but the ongoing political fights between previous allies the Marcos and Duterte camps are getting more attention. The exposé on the 40% t0 70% kickbacks on steel erosion holding mattings and “cat’s eyes” road reflectors are mind-boggling. The recent testimony in the congressional investigation on the ?50,000 monthly payola to undersecretaries and assistant secretaries of the Department of Education sourced from rigged biddings for equipment and supplies are more than eyebrow-raising. It is common knowledge that some congressmen, governors, mayors, and barangay leaders get a commission/kickback on projects and programs ranging from 10% to 40% of the budgeted amount. In fact, Baguio Mayor Magalong who also exposed these practices, suggested that maybe this should be standardized and limited to 10%, so that at least the projects/programs will not be sub-standard in quality and quantity.

In an appreciation dinner tendered by a major bank, I was in a conversation with big infrastructure contractors, and they lamented that the cost of sand and gravel is increasing because governors, mayors, and barangay leaders are increasing their fees officially and unofficially for their river concessions, and additional fees for their trucks traversing provincial roads, even for sand/gravel coming from other areas. They lamented that although their revenues are in the billions, these are gross revenues from which the expenses have to be deducted, while the billions of politicians are net revenues. So they should have been politicians.

Last week, the Congress and Senate approved the government budget or General Appropriations Act for 2025 of ?6.352 trillion. This is 24% of the country’s GDP which means that including the budgets of the local governments, 33% to 38% of the Philippine economy is coming from the government. As the government doesn’t collect enough taxes and other revenues to support the budget, it actually borrows from domestic and foreign lenders to fund the government and make investments. As the total Philippine public debt in 2024 is now $287 billion, the budget for 2025 is all borrowed money. How the government will pay this will have to be tackled in another column.

The World Bank, ADB, and IMF estimated that corruption in the Philippines diverts 20% of the budget to politicians’ pockets. At this rate, it means ?2 trillion of the ?6.352 trillion aren’t spent on operations, projects, and program expenses, but goes to certain government officials. On the production side of the GDP, this means that impact of the expenses on production and productivity is lessened since less roads, schools, bridges, and other hard structures are built which would have improved the production and productivity of the public and private sectors. These leakages also means lower salaries for government employees, including teachers which would have meant better training and competencies which redounds to better students and services to the public.

On the consumption side of the GDP, the money going to corrupt politicians doesn’t increase consumption expenditures as they are saved abroad, stashed at home, or used to buy luxuries. The Marginal Propensity to Consume (MPC) of rich people is less than the MPC of the poor and middle class. Had corruption money flowed directly to projects/programs that get to the people, they will spend them for domestic food and services that increases demand and supply of consumer goods that grows the economy. From both the supply and demand side of the GDP, it’s estimated the Philippine economy would grow 2% higher annually if the corruption is reduced in the Philippines. So, our annual GDP growth rate should have been 8% to 10% in the last 10 years, and we should have been a middle-income country this year. As 2024 to 2026, GDP growth rate is projected to be still in the 6% to 7%, this means Filipino voters should be electing less-corrupt politicians. If there are still any.