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The forum entitled “Constitutional Design and the Promotion of Economic Competitiveness” held last June 28, 2018 was the 4thin a series of Learning Sessions on Charter Change and Federalism jointly organized by the Congressional Policy and Budget Research Department (CPBRD) in partnership with the Institute for Autonomy and Governance (IAG) and the International Institute for Democracy and Electoral Assistance (IDEA).The forum aimed to discuss the importance of the constitution in promoting economic growth and competitiveness. In her opening message, Director Elsie Gutierrez of the Economic Policy Research Services (EPRS) of the CPBRD emphasized the vital role of constitutions in promoting economic growth to the extent that it promotes stability, accountability and credibility. Constitutions must provide a framework towards the establishment of important political and economic institutions that shield the people not only from abusive politicians, but also from strategic manipulation and wasteful rent-seeking by the elites. Moreover, constitutions should ensure that citizens are protected from retroactive legislations, taxation and government expropriation without full compensation.

Dr. Ronaldo Mendoza of the Ateneo School of Government highlighted the need for the Philippines to catch up primarily in attracting foreign direct investments (FDIs). The prolonged boom-bust cycle that characterized Philippine economic growth in the past partly explained why the Philippines lagged behind our neighboring countries in the region,for instance, Indonesia and Malaysia. Following the road to recovery, it is therefore imperative to sustain efforts towards the passage of key economic and political reforms to address the structural weaknesses in the economy, as well as in governance. Dr. Mendoza noted that rising inflation, worsening political noise and credibility issues facing some of our democratic institutions have weighed heavily on the country’s overall global competitiveness and performance. He made some reservations on the proposed removal of fiscal incentives under the second package of theTax Reform for Acceleration and Inclusive Growth (TRAIn) Law, as several high-value added manufacturing firms and industries have already shelvedtheir expansion plans given the TRAIN 2 law’s potential impact on their bottom lines. Alternatively, he expressed support on the proposal to lift the economic restrictions of the Constitution, as the country is among the few countries in the world that specifically placed economic restrictions in their constitutions. Lifting these economic restrictions, he added, will promote and facilitate the influx of FDIs as well as the much needed knowledge and technology transfer to prepare our workforce in the advent of the fourth industrial revolution (4IR). Ultimately, more FDIs could boost and strengthen the Philippines’ industrial competitiveness towards sustainable and inclusive economic growth.

Dr. Tom Ginsburg of the University of Chicago highlighted the importance of constitutions in setting up a framework for government to make policies and decisions which would have large effects on the economy. Constitutions do not generate wealth themselves but structure political outcomes that in turn affect markets. They reduce stakes of politics and incentivize investment by protecting core interests. Any kind of market economy depends on basic stability on property rights and institutions to enforce contracts and to keep government from interference and discrimination. Moreover, how the government powers are set up and defined in the constitution will determine the creation of public goods at different levels of government (local, regional and national). Obviously, government has to produce public goods (e.g., national defense, local parks, environmental protection), because if left to the market, the economy would not get enough of such public goods. Dr. Ginsburg stressed that constitutional stability is good for growth and investment. Older constitutions tend to promote stable environment for economic growth and higher levels of democracy. As constitutions usually last about 19 years, it is important to revisit and amend them to keep up with the needs of the time. On the debate on what is the ideal government system, citing a breakthrough in literature, Dr. Ginsburg explained that countries with presidential political regimes have smaller governments than parliamentary ones. Presidential systems produce stiffer competition among politicians, which in turn, induces them to spend less on every budget item, resulting in smaller size of government. Recent trends in constitutional design provides for the creation of anti-corruption institutions where powers are specified and stipulated explicitly, insulating them from political capture and putting them at a higher status than a mere legislation. In considering a federal constitution, it is important to clearly state the assignment of powers to certain levels of government. The proposed design should see to it that a particular government function is assigned to the level of government that has the best information, except when there are externalities and spillovers. He added further that federalism is good because of the following reasons: (i) it allows greater autonomy and independence by state governments, (ii) it protects state governments from abuse by the central government, (iii) it allows policy experimentation where good policies of one state may be replicated in other states and (iv) it promotes competition among states to produce optimum levels of regulation, as states will be competing for businesses and citizens.

Dr. Romulo Miral, Jr. of the CPBRD discussed fiscal arrangement and how it could promote regional economic development, which is important in the design of the federal constitution. He began with some basic concepts on federalism namely (i) the presence of two levels of government—i.e. the federal government and state governments, recognized in the constitution, (ii) principle of shared rule and self-rule built in under the federal system, and (iii) political and comprehensive decentralization under a federal system, which provides more powers (e.g. executive, legislative and judiciary) to state governments. Dr. Miral argued that poor governance is among the many factors explaining the widespread poverty, inequality and other development challenges (e.g. inadequate investments and job opportunities, poor infrastructure, weak human capabilities) facing the Philippines. He added that poor governance is a structural problem inherent to the country’s highly centralized form of government under a unitary system. In fact, despite decentralization, the share of local government to total government revenues and expenditures has been very minimal vis-à-vis that of the national government. With incomplete decentralization, power remains concentrated at the center, particularly at the executive which could lead to political instability, a highly sectoral government administration, and the common resource pool problems. Dr. Miral explained that the sectoral assignment of government agencies which tend to operate as independent silos failed to address the local geographic dimension of human development challenges (e.g. lost adult productivity and healthy days, missed school attendance, substandard agricultural yields, food insecurity, forfeited agglomeration economies, and lost growth). Federalism, therefore is key, in correcting these long-standing governance problems by allowing local communities to be more empowered and by bringing democracy and political accountability closer to the citizens. The reform towards federalism could also promote efficiency by managing diversity, allowing for experimentation, learning and replicating best practices in overall governance.

The following discussions were also highlighted during the open forum:

Dr. Mendoza reiterated that big investors are wary in dealing with local governments, raising concerns whether the proposed federalism could really facilitate more FDIs in the country. For one, semiconductor industries, which constitute 90% of all locators and 70% of the country’s exports, prefer to engage with the centrally-oriented Philippine Economic Zone Authority (PEZA) rather than the local governments. The creation of special economic zone is a pragmatic strategy in developing countries, allowing for the creation of enclaves of manufacturing, including the protection of locator firms from red tape and the uncertainties introduced by the political environment, at large. Among others, these locators are concerned on how they will be treated and how well they could proceed and plan under the new federal government, as well as how the tax structure and investment procedures could change between jurisdictions. The long term strategy, however, is to fix the governance and accountability issues in all levels of our institutions. Strengthening the country’s institutions is imperative in bringing all these FDIs which could potentially create the millions of jobs the economy needs, and release the bulk of our population from poverty. 

Dr. Ginsburg clarified that the federal constitution need not be very rigid and should be allowed to evolve in addressing the needs of the time. If the writers of the federal constitution are confident that they have the right answers on some key issues constantly, then they could write it in the constitution. But there are some items in the constitution that must be stated in loose and flexible language to avoid “tying our hands” when the situation changes over time. He cited the case of the federal countries like the US and Canada wherethe distribution and assignment of powers between the federal government and federal states have changed dramatically over time—i.e. the US has now become more centralized while Canada is more decentralized. The Supreme Court also has played a vital role in allowing the evolution in the assignment of powers in federations, for instance in resolving disputes between levels of government. 

There is also danger in giving so much powers to the regional government under a federal setup based on international experience. In the United States and Canada, some states asserted domestic dominance over international treaties. In some other cases, the federal government was held liable for damages in a treaty arrangement. There may be a need to revisit and review investment treaties entered into with other governments and ensure that only legitimate local regulations that are harmonious with generally accepted international principles are allowed and adopted.

LGUs remain dependent upon the national government and they have regarded the Internal Revenue Allotment (IRA) as their major source of fund. The reason is partly due to the failure of many LGUs to update their land zonal value which could potentially raise local revenues. Under the federalism proposal, strengthening the taxing powers will drive regional economic growth, ensuring sound tax base among LGUs towards economic agglomeration. 

One of the reasons explaining the federalism initiative is the fact that somehow the government had lost track in addressing market failures to the detriment of the citizens. It is important, however, to emphasize that given recent trends on deregulation and privatization of many industries, the role of government in intervening in the market does not dissipate, but is elevated to a higher path instead. As a regulator of public goods and externalities, it is the duty of the government to ensure that there is adequate competition in the market, and that the welfare and interest of the consumers, and the citizenry, in general, is properly guarded.


PROGRAMME
9:00 AM - 9:30 AM                  Registration
9:30 AM - 9:35 AM Invocation and National Anthem
9:35 AM - 9:40 AM

OPENING REMARKS

MS. ELSIE C. GUTIERREZ

Service Director

CPBRD, House of Representatives

9:40 AM - 9:50 AM

INTRODUCTION TO THE LECTURE SERIES

ATTY. BENEDICTO BACANI

Executive Director

Institute for Autonomy and Governance (AIG)

9:50 AM - 10:50 AM

PRESENTATIONS

Economic Competitiveness of the Philippines and Its Regions: Key Issues for Reform

DR. RONALD U. MENDOZA,  Dean

Ateneo School of Government

 

Constitutional Design and the Promotion of Economic Growth: Key Insights from Comparative International Law

DR. TOM GINSBURG, Professor of International Law

The University of Chicago Law School

10:50 AM - 11:50 AM Open Forum (Working Lunch)
11:50 AM - 12:50 PM

PRESENTATIONS

Fiscal Arrangements for Regional Economic Development: Key Lessons for Designing the Philippine Federal Constitution

DR. ROMULO E. M. MIRAL, JR.,  Director-General, CPBRD

Key Messages

DR. TOM GINSBURG, Professor of International Law

The University of Chicago Law School

12:50 PM - 1:50 PM Open Forum
1:50 PM - 2:00 PM Closing

MODERATOR

MR. RICARDO P. MIRA

Supervising Legislative Staff Officer III, CPBRD

 

 

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