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National Human Resources Development, Education, Training and/or Lifelong Learning Policies which Stress Importance of Innovation,Competitiveness, Productivity and/or Growth of the Economy, andthe Employability of Workers - Philippines
Source: National Economic and Development Authority
Tables and Graphs of the original document are excluded
T he Philippines, in its quest to become a modern and prosperous nation, has undergone some important social, political, and economic transformation over the past 50 years. It continues, however, to face several development challenges as the 21st century begins. The most formidable is the need to reduce the number and proportion of poor families.
Since 1986, following the restoration of democratic political institutions, three political administrations in succession have tried to address the poverty problem. The efforts of the Aquino and Ramos administrations helped reduce the incidence of poverty from about 44 percent in 1985 to 32 percent in 1997. Further advance in the fight against poverty slowed down, however, when in the second half of 1997, a financial crisis was triggered, engulfing East and Southeast Asia. The crisis persisted, ushering in, with few exceptions, a region-wide decline in national output and rise in unemployment in 1998. In the Philippines, the output decline was minimal, but the unemployment rate increased significantly, forcing several households to slip into poverty. In 2000, the poverty incidence rate was estimated to be about 34 percent.
In 1999, the Philippines recovered along with the other economies in the region. The country’s recovery, however, was lackluster compared to what the others managed to do. The problem was attributed largely to questionable governance and loss of control over the government budget deficit. The then president, Joseph Estrada, got embroiled in some procurement scandals and alleged insider trading in the stock exchange. It also incurred budget deficits way above targets for two successive years.
On November 21, 2000, the House of Representatives impeached Mr. Estrada for the crime of plunder, among other charges. The impeachment trial in the Senate failed to run its full course; but through the exercise of direct democracy by the people, popularly referred to as EDSA II, he was ousted from office. On January 20, 2001, the Chief Justice of the Supreme Court swore in then Vice President Gloria Macapagal-Arroyo into the presidency, an act that has since been unanimously confirmed by the Supreme Court.
Dubious governance under the deposed president brought a marked slowing down of the economy in the fourth quarter of 2000, kept the unemployment rate high, and impeded further decline in the incidence of poverty. Such regrettable state of affairs must not be repeated. Society demands that prosperity be broad-based and within reach of every Filipino. EDSA II is a reaffirmation of this demand and a reminder to present and future public officials of their historic responsibility to improve the quality of life of all citizens.
The world of the 21st century that the youth will inherit is truly a new economy where relentless forces, such as, capital market flows and advances in information technology, create both peril and opportunity. The Philippines had faced, for instance, the Asian financial crisis that was ignited in 1997. In the aftermath of the crisis, the need for stronger regulatory capability, more transparency, and more safety nets became urgent. Meanwhile, to tap the opportunities, it is important to have an economic philosophy of transparency and free enterprise, the catalyst that nurture the entrepreneurial spirit to be globally competitive.
The Macapagal-Arroyo administration is firmly committed to continue the battle against poverty and seeks victory within the decade. In this regard, lessons from past events and efforts are useful. Central to winning this fight is macroeconomic stability and sustained growth of income and employment across sectors, socioeconomic groupings, and regions. Reliance on free enterprise and markets is vital. Development efforts, however, must carry a social bias as a balance to progrowth policies.
Poverty stems from a variety of interrelated factors, including long-standing inequalities in the distribution of initial asset endowments; social, cultural, and political barriers; and governance and institutional failures. Reliance on mere trickle-down effects of growth does not help the poor much; the pursuit of development must address directly the needs of the poor. Overcoming poverty thus requires a comprehensive set of social and economic policies and programs with an equity orientation, underpinned by good governance and adherence to the rule of law.
The Medium-Term Philippine Development Plan (MTPDP) for 2001-2004 embodies the antipoverty and overall development framework of the administration. In preparing all Filipinos for the new economy, the Plan aims to expand and equalize access to economic and social opportunities, inculcate receptivity to change, and promote personal responsibility.
Macroeconomic Stability with Equitable Growth Based on Free Enterprise
The conduct of fiscal and monetary policy seeks a stable and predictable environment for the private sector. In this connection, the administration, in a sharp departure from policies of the deposed one, will implement a responsible budget deficit reduction program. Two years of large deficit spending under the ousted president left public finances in a precarious state. When the government borrows from the public to finance its budget deficit, it absorbs funds that otherwise go to private investments. Productivity gains are foregone and opportunities to create high-wage jobs are lost. A large budget deficit, therefore, will not be allowed to persist. Instead, the administration will aim for balance in the national government budget by 2006.
Much attention will be devoted to raising government revenues, of which taxes form the bulk, to support the spending priorities of government. The recent decline in the tax effort, defined as the ratio of total tax collection to the gross national product (GNP), must be reversed. It can be done in the near term through the strengthening of tax administration. To raise the efficiency of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC), several reform measures have been resumed, including activation of the large taxpayers’ unit at the BIR and acceleration of the computerization of the two agencies. In the medium to long term, the tax structure will be reviewed and geared towards broadening the tax base, say, through a modified gross income tax, so that even if average tax rates decline, tax revenues still increase.
The administration will pursue a prudent government expenditure program. It will protect society’s fundamental priorities, such as, the expenditures for basic education and training, health, agricultural modernization, and targeted poverty alleviation.
In addition, special fiscal incentives, which account for a large chunk of foregone revenues to the government, will be reappraised and rationalized. Proposals for expanding the scope of business activities eligible for such incentives will be subjected to rigorous cost-benefit tests.
Government corporations with functions that simply duplicate private efforts and pose recurrent fiscal burden will be privatized. Public corporations that are retained must produce surpluses and remit the warranted dividends to the national government. Throwing taxpayers’ money at the chronic deficit problems of some public corporations will be curtailed.
Monetary policy is geared towards price stability and efficient financial intermediation amid a flexible exchange-rate system with internationally mobile capital. The policy and instrument independence of the central bank will be preserved. As the central bank pursues price stability, the fiscal authority, composed of the Chief Executive and Congress, will observe fiscal discipline so that price stability is not compromised.
To strengthen the banking system, the central bank is committed to a regulatory framework aligned with international norms. The central bank will continue to encourage bank consolidation in line with prudential banking standards. To address the needs of microenterprises that have difficulties accessing commercial bank loans, the central bank has issued guidelines for microfinance. Meanwhile, government financial institutions will continue their lending programs in aid of small and medium enterprises (SMEs). The central bank will also pursue legislative reforms aimed at eliminating money laundering and, with the finance department, will rationalize taxation of financial intermediation. These financial reforms are expected to result in an efficient matching of savings and investments.
Joblessness lies at the core of the poverty problem. A stable macroeconomic environment is conducive to job creation. Stable prices and low interest rates, which can be achieved once inflationary expectations are clipped, stimulate investments and entrepreneurship, thereby enhancing productive capacity and worker hiring. But more importantly, the generation of full, decent, and productive employment hinges on policies that address concerns on both the labor supply and demand side. Investments in education and training broaden the skilled manpower base. Complemented with investments in technological progress, labor productivity rises resulting in the creation of high-wage, high-skill jobs. The employment relationship, however, has unique features. Working conditions, occupational safety, and harmonious employer-employee relations also matter. The administration is committed to raising the quality of life at the workplace.
At this stage, there are still many people who work and yet, are poor. These are the self-employed and unpaid family workers. The administration will help them by acquiring skills through vocational and technical training, and through livelihood and microcredit programs. Emergency employment programs for the out-of-school and out-of-work urban poor youth have been initiated with the help of local government units (LGUs) and business.
In aid of growth with equity, an economy-wide modernization is vital. Agricultural productivity must be improved to raise rural household incomes. To promote countryside employment and rural industrialization, skill-intensive tourism aligned with the infrastructure development program will be promoted. But as agricultural productivity rises, investments in industry and services must increase at a sufficiently rapid pace so that workers released from agriculture find gainful employment. This entails investments in human resource development and in technological advances by firms and households. A critical mass of scientific manpower is essential. The administration will thus promote science and technology (S&T) and research and development (R&D).
Firms and households need quality information that can be accessed while it is occurring. In this regard, the development of information and communications technology (ICT) will be hastened with the end in view of making the country a knowledge and software development center and an e-service hub of Asia. The administration is committed to building the physical infrastructure that will ensure wider, faster, reliable, and affordable access to ICT resources and to the Internet. Interconnectivity is a must. Legal and judicial reforms will be pursued to address problems related to intellectual property rights and in support of e-commerce. Building the human resource base is crucial for ICT development. Curricular reforms aimed at raising mathematics and science skills, along with specialized teacher training, will continue with vigor. Public schools will endeavor to equip pupils from poor families with ICT capabilities. Moreover, community ICT hubs will be established in the countryside.
Infrastructure facilities support private production and enable households to acquire a variety of goods and services. The financial requirements of modernizing the country’s infrastructure system and bringing it up to international standards are huge. Private participation in infrastructure is thus encouraged. When cost recovery is possible, private companies are likely to be interested. The private sector, however, will have no incentive to participate if cost recovery is precluded. In the case of socially desirable but not privately profitable infrastructure, such as, communal irrigation and rural electrification, the administration is committed to providing them.
Sustainable development, based on installing environmental safeguards and protecting the country’s natural resources for present and future generations, is fundamental to equitable development. Clean production technologies are mandated. Where feasible, the "polluter pays" principle is applied.
The administration relies on private enterprise and markets guided by the price system in the push for equitable growth. Private enterprise nurtures competition, innovation, and entrepreneurship in developing globally competitive enterprises. Hence, the administration will continue to liberalize trade and investments to reduce the cost of doing business and permit even microenterprises and SMEs to access least-cost capital equipment, raw materials, and components available in world markets. Other bottlenecks to investments are being removed. High electric power rates are taken care of by the privatization of power generation under the Electric Industry Reform Act of 2001 which, after nine years, was finally enacted into law under the Macapagal-Arroyo administration. The government, at both the national and local levels, pursues seamless, investor-friendly actions.
Agriculture and Fisheries Modernization with Social Equity
Majority of the poor are in rural agricultural areas doing subsistence farming and fishing. To raise agricultural productivity and rural household income, access to modern agricultural inputs like high-yielding seed varieties and fertilizer, together with a robust infrastructure support that includes irrigation and farm-to-market roads, is essential. In this regard, the administration is committed to a meaningful implementation of the Agriculture and Fisheries Modernization Act.
As productivity in agriculture rises, some workers are rendered in excess. They turn to industry and services to be gainfully employed. However, they do not possess the skills and discipline required by the nonagricultural sector. Training and retraining are required. The administration will expand skill-acquisition programs to assist workers released from agriculture secure jobs in industry and services.
Furthermore, the administration will help farm and off-farm enterprises access credit at non-usurious rates. This is done through the microcredit and SME lending programs of government and private financial institutions. Import liberalization and tariff reforms, meanwhile, enable rural enterprises, whether farm or off-farm, to acquire least-cost capital equipment and other production inputs. Government training programs improve access of firms to skilled manpower, while agricultural extension work introduces them to modern production techniques.
To achieve the desired social equity in agriculture, asset distribution is a fundamental strategy. The administration is committed to the full implementation of the Comprehensive Agrarian Reform Act. Agrarian reform communities are targeted for convergent and integrated delivery of various support services from the government, including education and training, health, and credit. To ensure the flow of investments to agriculture, the reluctance of banks to accept land as a collateral will be addressed.
As agriculture is modernized, safeguards are put in place to guarantee that intensified production does not undermine the integrity of the environment. The administration espouses policies that promote environment-friendly technologies and sustainable farming practices that conserve natural resources.
Comprehensive Human Development and Protecting the Vulnerable
The social bias that underpins public policy under the administration is embodied in five core strategies for fighting poverty, namely:
To win the battle against poverty within the decade and improve income distribution while being reliant on markets, the administration is conscious of the fact that markets are hardly concerned with distributive justice. Markets tend to replicate the distribution of initial endowments of real and financial assets and to reward individuals who are skilled and well trained. The reforms aim to correct unequal distribution of initial endowments and access to economic opportunities instead of interfering with the workings of the market.
In line with asset reforms, the administration intends to complete land distribution within the decade, while strengthening the support services that agrarian reform beneficiaries need. It will also expand and equalize access to quality education and training. In addition, informal vocational and technical training will be provided to those unable to benefit from formal education. The returns from investments in education and training are difficult to capture if people live in unsafe and unsanitary living conditions, which is the lot of the poor. The administration will expand socialized housing and community mortgage programs under a sustainable housing finance scheme to address the unmet demand of the poor for housing and shelter. Land titling is integral to this program.
To make sure that the disadvantaged members of society, such as, agrarian reform beneficiaries, small fisher folks, and indigenous people are reached, the administration will institute targeted poverty alleviation programs. Targeting helps minimize leaks to unintended beneficiaries. Partnerships with LGUs and civil society will help identify the eligible individuals and families.
A binding constraint to the efforts of the administration in infusing a social bias to development is rapid population growth rate. To help ease this constraint, a population management program will be pursued. The program is based on sound reproductive health for women, men, and adolescents. It upholds freedom to choose from a menu of family planning services and respects cultural and religious beliefs in support of responsible parenthood. Poor couples are guaranteed access to family planning services. The national government will continue to forge partnerships with LGUs and nongovernment organizations to achieve the goals of its population management program.
The fight against poverty will not be complete unless existing regional disparities are narrowed down. Adequate resources will be directed to lagging regions to achieve balanced regional development. In addition, to reduce the pressure that rapid rural-urban migration places on the carrying capacities of major cities, rural industrialization based on vibrant small and medium off-farm enterprises will be pursued. Special attention will be paid to ensuring lasting peace and development in Mindanao. All efforts in this regard aim for unity amid the diversity in religion and culture of stakeholders.
The increasing integration of the Philippines with the rest of the world’s economies provides net benefits to society. The global environment gives new hopes to the poor as new jobs open up, offering earnings far greater than what their previous occupations in, say, traditional agriculture, could yield. However, many of the poor, such as those engaged in subsistence agriculture are vulnerable to displacement by globalization. The administration will institute a responsive social protection system. One way to do this is to reengineer the government agencies in charge of social insurance towards universal coverage. Eventually, even workers in the informal sector will be covered. All these give the poor a chance to emerge as winners in the 21st century.
Good Governance and the Rule of Law
Good and effective governance is vital to winning the fight against poverty within the decade. Such governance rests on a sound moral foundation, a philosophy of transparency, and an ethic of effective implementation. Leadership by example is indispensable. The politics of personality and patronage will be replaced with a new politics of party programs. Electoral reforms are a must for political stability. Computerization of the election process is vital. A process of consultation geared to consensus building will be put in place.
The administration is committed to simple, fair, transparent, and predictable rules. This will help reduce the cost of doing business in the country. This also goes some distance in eliminating graft and corruption, another objective of the administration. Procurement reforms that have been done so far have been shown to decrease the cost of delivering a given unit of public good, such as, textbooks for public schools.
The administration will also pursue regulatory reforms aimed at safeguarding consumer welfare. This is indicated in the water utility sector, which has been privatized. This will happen soon in the electric power utility. The administration will make sure that the private utility companies are not able to engage in cartelistic and monopolistic pricing.
Over the past few years, decentralization, as embodied in the Local Government Code, has been gathering strength. LGUs are in a better position than the national government in responding to the diverse needs of their constituents; hence, efforts to raise living standards are well served by the devolution of public goods and services that used to be delivered by national government agencies. The administration is committed to the full flowering of decentralization. In this connection, it will institute additional financial reforms to strengthen the support to a decentralized government structure.
Meanwhile, new partnerships between the government, on one hand, and business, civil society, and people’s organizations, on the other, will be forged so that as the bureaucracy is right-sized, the government is able to do more with less. This leads to a performance-based and results-oriented government. The compensation and incentive structure in government will be rationalized accordingly.
Peace and order, and security against terrorists and external aggressors, are prerequisites to growth and development. In this connection, the government has restarted the peace process with the Moro Islamic Liberation Front (MILF) and continues to implement the final phase of the Government of the Republic of the Philippines-Moro National Liberation Front (GRP-MNLF) Peace Agreement. It has also opened up peace talks with the National Democratic Front (NDF). The administration is firmly committed to the acceleration of the professionalization and modernization of the Philippine National Police (PNP) and the Armed Forces of the Philippines (AFP).
To forge consensus between the Executive and the Legislative on priority bills, the administration will rely on the Legislative-Executive Development Advisory Council (LEDAC). This council has been instrumental in the enactment of landmark legislation like the Comprehensive Tax Reform Law, the Oil Industry Deregulation Act, and the Electric Industry Reform Act of 2001. The government will continue to rely on institutional arrangements and governance structures that have successful track records.
The government recognizes the importance of international cooperation, and will abide by its commitments reached in summits held under the auspices of the United Nations. In the area of regional and international economic cooperation, the government will uphold its commitments under the ASEAN Free Trade Area-Comprehensive Effective Preferential Tariff (AFTA-CEPT), the Asia-Pacific Economic Cooperation (APEC), and the World Trade Organization (WTO). Under the leadership of President Macapagal-Arroyo, the government also stands ready to participate in international collective actions to promote peace, prosperity, democracy, and security on a global scale.
Part I: Macroeconomic Stability with Equitable Growth Based on Free Enterprise
Poverty and unemployment remain the country’s gravest economic problems. If the government is to win the war against poverty at the end of the decade, the economy must grow on a sustained basis and across all sectors, while generating the greatest employment. The industry and service sectors, which tend to grow faster in the course of development, offer vast opportunities for creating employment and for absorbing excess rural labor. Small and medium enterprises (SMEs) and high-growth business sectors that inherently draw on strengths in human resources such as information and communication technology and tourism, deserve attention for further development.
Macroeconomic stability is a necessary condition for sustained growth. Efficient investment and consumption decisions cannot be made in an unstable environment. Long-term stability is, however, being threatened by a large fiscal deficit and increasing public debt. Thus, the immediate task is to put the budget deficit of the national government under control. In a world where capital markets are integrated, fiscal, monetary and exchange rate policies also need to be coordinated to tap the opportunities from global markets while addressing the perils that come with internationally mobile capital.
Sustained and equitable growth entails nurturing the entrepreneurial spirit and making industries globally competitive. Hence, the government remains fundamentally committed to free enterprise and market reliance, and ensuring market-friendly regulation where indicated. To assist enterprises to become more globally competitive, the government will work to reduce the cost of doing business and remove key bottlenecks to investment. In this area, the government has already implemented various structural reforms such as the liberalization and deregulation of trade and investments and the restructuring of the power sector. However, reforms need to continue to enhance the competitiveness of Philippine industry by improving the state of infrastructure and upgrading the state of technology.
Chapter 1 Ensuring Sustained Growth with Equity and Macroeconomic Stability
Generating new jobs is key to winning the war against poverty. To enhance the capacity of the domestic economy to create jobs, competitive enterprises will be encouraged to flourish. Ensuring the stability of the macroeconomic environment is a must. A major challenge is ensuring that full-employment policies do not trigger inflation. A deficit reduction program will be pursued. Stable and low rates of inflation will be ensured through the shift of monetary policy to inflation targeting. A healthy external balance will be underpinned by a flexible exchange rate system. In addition, the national government (NG) will implement an expenditure program that preserves a bias for education, health, agriculture and other services for the poor. Regulatory agencies will be strengthened to provide the institutional framework for preventing and resolving corporate failures, and to reduce the vulnerability of the banking and corporate sectors to sudden shifts in internationally mobile capital. The capital market will be further developed to raise national savings including those required for the growth of small and medium enterprises (SMEs). This will be facilitated by regulatory reforms in the banking sector and equities market.
Policy Framework
A stable economic environment is essential to sustaining job and income generation. Macroeconomic stability is also important to battling poverty because in periods of economic downturn such as the 1997 Asian financial crisis, it is the poor who are hurt the most. Not only do they lack the assets – land, money and technical know-how – to cushion the fall in incomes arising from unemployment and inflation, they also cut down on expenditures such as education, which are essential for their long-term empowerment and their exit from poverty.
The pursuit of sustained and equitable growth requires consistent fiscal, monetary, external and financial sector policies. To achieve macroeconomic stability, the NG in coordination with monetary authorities shall pursue the following objectives:
Large fiscal deficits are inconsistent with macroeconomic stability because they result in higher domestic interest rates (if the deficit is financed by domestic borrowings) and inflationary pressures (if financed by borrowings from the monetary authorities). The fiscal position of the NG has deteriorated since 1997. To avoid a potential debt problem, the NG will pursue a fiscal deficit reduction program towards a balanced budget by 2006. Revenue collection efficiency will be improved to finance the government’s development projects, especially those intended to support the poor. Expenditure programs will be prudent, and place priority on expenditures that contribute the most to the anti poverty agenda.
Inflation reduces purchasing power. It also lessens the competitiveness of Philippine products in the global market by increasing cost of production and creates pressures for a weakening of the peso if the real effective exchange rate is to remain stable. Inflation also increases nominal interest rates, which dampen investment including those of the farmers’ and small enterprises that borrow to meet their working capital requirements. Thus, monetary policy will be anchored on achieving price stability.
Integration with the world capital markets results in greater economic efficiency because it enables domestic firms to have access to a wide variety of credit instruments. At the same time, however, an open capital market increases the vulnerability of the economy to sudden shifts in capital flows and foreign exchange rate volatility. Cognizant of the perils and benefits of integrated capital markets, the government and the Bangko Sentral ng Pilipinas (BSP) remain committed to the full and free convertibility of foreign currencies while pursuing measures to reduce exchange rate volatility and curb speculation. Fiscal and monetary policies, which simultaneously affect prices, interest rate and foreign exchange rate movements, shall be coordinated.
The banking system will be strengthened to make it an efficient and dynamic financial intermediary between savers and borrowers. Policies to make it more responsive to the needs of the SMEs and borrowers will be pursued. Since a sound banking system cannot exist when the corporate sector and corporate governance are weak, regulations that enhance corporate governance will be pursued to complement the banking sector reforms. Simultaneously, the government shall promote the growth of the capital market, which includes the development of new debt and equity instruments. The latter shall provide alternative sources of long-term capital to complement the short- and medium-term loans that are granted by the banking system.
Assessment and Challenges
The Philippine economy has shown resiliency in the past two years as it recovered from the 1997 financial crisis and the 1998 El Niņo drought. Buoyed by robust demand in the United States (US) and major trading partners, as well as stronger domestic demand, gross domestic product (GDP) grew by 3.4 percent in 1999 and 4.0 percent in 2000. Prices were also stabilized, with the inflation rate moderating to 6.7 percent in 1999 and further to 4.4 percent in 2000. The current account surplus rose to historical levels reaching 9.5 percent of gross national product (GNP) in 1999, and 11.8 percent in 2000. This was due to gross investment, which remained low at 17.8 percent of GNP in 1999 and 16.9 percent in 2000. The rosy current account surplus pushed gross national savings to 27.3 percent of GNP in 1999, and further to 28.7 percent in 2000.
Gross international reserves (GIR) was also boosted by the upturn in the current account. In 1999 and 2000, GIR was kept at around $15 billion, equivalent to 4.4 and 4.5 months worth of imports, respectively. Total external debt service remained at 12.3 percent of total exports of goods and services.
There are, however, areas which have remained weak, foremost of which are the fiscal sector, and the banking and corporate sectors. The NG’s fiscal deficit deteriorated to P111.7 billion in 1999 and further to P134.2 billion. Meanwhile, the nonperforming loans (NPLs) of the banking sector continued to inch up. In addition, the range of financial instruments for long-term financing of the corporate sector remained thin. This dragged the recovery of the corporate sector that is largely dependent of the banking sector.
Weakened Fiscal Position
The larger-than-targeted deficits of the NG were the results of weaker-than-expected revenue collections. Total revenues amounted to 15.2 percent of GNP in 1999 and went down to 14.7 percent in 2000. In both years, revenue collections were below the programmed collections because of lower tax efforts. Administrative measures were implemented at the Bureau of Internal Revenue (BIR) such as the establishment of Large Taxpayers Unit and the Excise Tax Unit but these were not enough to offset the overall decline of the tax effort to 13.7 percent in 1999 and further to 13.2 percent in 2000. Meanwhile, structural weaknesses such as the nonindexation of excise taxes to inflation dragged the ability of the tax system to yield revenues as the economy grew. The continued slowdown of some sectors such as banking and construction also weakened the tax collections in 2000.
Meanwhile, total disbursements were kept within the programmed levels, or 18.7 percent of GNP in 1999, and 18.6 percent in 2000.
Borrowing from the domestic market to finance the NG deficit declined from 54.4 percent in 1999 and 49.0 percent in 2000. Thus, the weighted average of the 91-day Treasury bill (T-bill) rates remained at 10.2 percent in 1999 and 9.9 percent in 2000. The large fiscal deficits have led to a substantial increase in the NG debt to P2.2 trillion in 2000 (65.3% of GDP). A continued deterioration of the fiscal deficit is expected to put upward pressure on interest rates, which may dampen a private sector-led recovery.
Continued Rise of Nonperforming Loans and Inadequate Regulatory Framework
The ability of the private corporate sector to clean up their debts with the banking sector was challenged anew with the spike in interest rates and the depreciation of the peso in the second half of 2000. As of December 2000, the level of NPLs stood at P245.8 billion, or 15.1 percent of total outstanding loans of commercial banks (KBs). Taking into account the real and other properties owned and acquired (ROPOA) of KBs, total nonperforming assets of KBs rose to P374.0 billion in the same period, or 12.4 percent of total assets.
Dragged by the rising NPL ratio due to private corporate debt, most of domestic credit in the past two years went to the public sector. Domestic credit rose by 13.1 percent in 2000, largely due to the 31.9 percent increase in public sector borrowings. Credit to the private sector increased by only 8.1 percent.
A number of reforms and legislation were passed in 2000 to strengthen the banking system against systemic risks. These include Republic Act (RA) 8791 or the General Banking Law (GBL) of 2000, which aligns domestic banking standards with international best practices and improves regulatory oversight. The GBL also allows foreign banks to acquire up to 100 percent of a domestic bank within seven years of the effectivity of the law. Various regulations were also passed by the BSP to improve asset quality and risk management which include:
Notwithstanding these reforms, there are still weaknesses in the banking system that need to be addressed. These are:
Underdeveloped Capital Market
The low savings rate of the Philippines is also a reflection of weaknesses in the nonbank sectors of the capital market. The country continues to have one of the lowest savings rate in Association of Southeast Asian Nations (ASEAN). If the Philippines is to post faster growth in investments without running into debt and balance of payments (BOP) problem over the long term, domestic savings must increase to finance growth.
The passage of the Securities Regulation Code (SRC) or RA No. 8799 in July 2000 is expected to strengthen the regulatory framework over the securities market. However, while this reduces the instances of market abuses, the government will support amendments to the SRC that will relax overlay restrictive provisions and promotes desirable market activity.
Major provisions of the SRC, which are expected to enhance corporate governance, include the demutualization (public listing) of the Philippine Stock Exchsange (PSE); the protection of minority shareholders; and the election of at least two independent directors to the board of the public corporation.
However, there remain issues to be addressed. The capital market continues to be characterized by a weak market of private bonds for long-term financing of the corporate sector. Taxes on secondary instruments such as the documentary stamp tax (DST) have also discouraged the development of the capital market. These constraints need to be addressed for the capital market to develop.
Challenges of Globalization
The growing integration of the Philippines in world trade, especially the new economy and global capital markets poses both benefits and perils. On the one hand, the global economy offers a bigger market for Philippine products. The Philippines has increasingly gained competitiveness in exports of electronics and semiconductors. In 2000, electronics and semiconductor exports accounted for 60 percent of total merchandise exports from only 34.3 percent in 1997. A sharper decline and a longer recovery of the global computer and telecommunications market pose risks to growth in 2001-2002. The integration of the Philippines in world capital markets also creates greater volatility in the foreign exchange market even as the Philippines benefits from equity foreign capital flows. Large and sudden shifts in capital flows, whether caused by changes in the underlying macroeconomic fundamentals, speculation or contagion require the pursuit of fiscal, financial, monetary and exchange rate policies that will increase the resiliency of the economy against volatile capital flows.
Targets and Strategies
Growth and Inflation Targets
Over the medium term, the government expects growth to accelerate through improvements in productivity, employment of greater manpower and physical capital. GDP will grow at the average rate of 5.1 to 5.6 over the period 2001-2006. Improvements in productivity, access to lower-priced products in the global market and the shift to inflation targeting will bring down inflation to 4.5 to 5.5 percent by 2006. Immediate policies will be implemented to put the economy back on a sustained growth path, foremost of which is the fiscal deficit reduction program. Measures that will address the recovery of the corporate and banking sectors and the strengthening of capital market reforms are indicated.
Growth targets
GDP growth is expected to accelerate from 3.3 percent in 2001 to 6.3 to 6.9 percent in 2006. This path hinges on the recovery and robust expansion in investments and exports as the economy benefits not only from greater renewed investor confidence and sustained macroeconomic stability but also from measures to improve overall governance and the competitiveness of the agriculture, industrial and service sectors. Investment demand will accelerate in 2002 with a 4.5 to 5.0 percent growth from the projected growth of 1.5 percent in 2001. Investments in durable equipment will be boosted by the continued strong growth in the telecommunications and the information and communications technology (ICT) industry, modernization of the agriculture sector and purchases of equipment in the power sector. New production capacity, especially in export-oriented areas, and the more favorable world economic growth prospects will bolster export growth to 9.5 to 10.0 percent by 2006.
A modest economic growth is, however, expected in 2001 because of weak exports growth caused by the downturn of the world economy. Consequently, exports (in 1985 peso prices) are projected to contract in 2001.
The recovery in incomes, particularly in rural incomes arising from the development of the rural economy are projected to bolster the growth of private consumption from 3.4 percent in 2001 to 4.2 to 4.7 percent in 2006. Government consumption, however, will remain modest due to the government’s fiscal deficit reduction program.
The recovery of the global market, and the implementation of productivity enhancing reforms such as the Electricity Industry Reform Act will propel industrial growth from 2.3 percent in 2001 to 7.1 to 7.6 percent by 2006. Reforms in the housing finance system will also lead to the recovery of the construction industry beginning in 2002. Construction will also be boosted by the build-up in power plant capacity. Meanwhile, the services sector will track the growth of industry with growth accelerating from 4.0 percent in 2001 to 6.6 to 7.1 percent by 2006. Expansion will be strong in all subsectors except in government services. Government policies to support the growth of ICT (see chapter on ICT) and tourism (see chapter on Tourism) will lead to its double-digit growth rates. The banking industry is expected to rebound as stable interest and foreign exchange rates lead to greater bank lending.
Meanwhile, the implementation of the Agriculture and Fisheries Modernization Act (AFMA) will push agricultural growth from 3.1 percent in 2001 to 3.9 to 4.9 percent in 2006 (see chapter on Agriculture).
Gross national savings (as a percent of GNP) will average around 20 percent in the medium term. Public savings will increase to 4.1 percent of GNP in 2006 from -1.3 percent in 2001 as the consolidated public sector financial position (CPSFP) moves towards a surplus by 2006 (see section on Fiscal Sustainability).
Price stability
Inflation is targeted to decline from 6.0 to 7.0 percent in 2001 to 4.5 to 5.5 percent in 2006. The conduct of monetary policy will continue to be prudent. Adequate liquidity to support the targeted growth and inflation rates over the medium term will be provided. In 2001, the BSP will shift to inflation targeting so it will have greater accountability and flexibility in meeting inflation targets consistent with the government’s growth targets.
Improvements in the productivity of food production support the objective of price stability. Moreover, there will be timely importation of key agricultural commodities when domestic production falls short of domestic demand. At the same time, the reduction in tariff rates to 0 to 5 percent in 2004, which is consistent with the government’s international commitments, is expected to bring down inflationary pressures.
Strategies
Fiscal discipline and sustainability
The government shall engage in a deficit reduction strategy over the medium term to keep the debt burden to a manageable level. The consolidated public sector position will improve from a deficit of 4.3 percent of GNP in 2001 to a surplus of 0.4 percent by 2006. To achieve this target, the NG, which is the largest contributor to the total public sector position, will progressively reduce its deficit from P145 billion in 200l to achieve a balanced budget by 2006. The reduction in the deficit will be achieved through tax reforms and expenditure management. The government will ensure that the deficit is financed wisely.
With the decline in the NG’s borrowing requirements, the NG’s debt will also decline from 60.9 percent of GNP in 2001 to 44.4 percent in 2006. Accordingly, interest rates are expected to fall gradually from 11 to 12 percent in 2001 to 9.5 to 10.5 percent in 2006.
Tax reforms
Strengthening tax collection efficiency is a must in reducing the fiscal deficit and in implementing the government’s development projects. Total revenue is programmed to increase from 14.6 percent of GNP in 2001 to 16.6 percent in 2006 supported by an improvement in the tax effort to 15.6 percent of GNP in 2006 from 13.0 percent in 2001. Collections of the BIR is targeted to improve from 10.1 percent of GNP in 2001 to 12.4 percent by 2006, while that of the Bureau of Customs (BOC) will grow modestly from 2.7 percent in 2001 to 3.0 percent in 2006 in the light of the tariff reduction program. Nontax revenues will progressively decrease. Revenue from privatization will fall to about 0.02 percent of GNP throughout the medium term.
The improvement in tax collection efficiency will entail:
The BIR will continue implementing administrative measures such as:
In line with the recommendations of the Tax Study Group organized under the Development Budget Coordinating Committee (DBCC), administrative measures to improve collection from income taxes, value-added tax (VAT) and excise taxes were also identified as follows:
Income taxes. The implementing rules and regulations (IRR) governing the limits on certain deductible expense for tax purposes and the implementation of the accelerated depreciation and net operating loss carry-over (NOLCO) under the Comprehensive Tax Reform Program (CTRP) will be issued immediately. A more aggressive audit program for the payment of minimum corporate income tax (MCIT) will also be put in place. The capacity of the tax system to effectively cover hard-to-tax groups will be strengthened through audit of high profile hard-to-tax individuals beginning with the preparation of a list of these individuals. BIR will intensify the collection of delinquent accounts and the recovery of contested assets. Strict monitoring of compliance with the country’s withholding tax regulations by local government units (LGUs) and the national agencies shall be implemented;
Value-added tax. VAT administration has been seriously hampered by spurious claims for VAT credits. To address this, the BIR will conduct a profiling and benchmarking of the input structure by industry or sector. A closer tracking of the carry-over of excess input tax credits in succeeding years will also be undertaken to minimize fraudulent tax credit applications. In this regard, the tax form will be revised to differentiate credits for intermediate inputs from tax credits for capital equipment;
Excise taxes. The IRR governing the 12-percent adjustment of the per unit rates on alcoholic and tobacco products will be reviewed to ensure that all product classifications are covered by the adjustment. Additional measures shall include the use of fused-on stamps for cigarettes and alcoholic products and the conduct of random and surprise audits at the place of production. To capture the increase in price of tobacco and alcohol products in the collection of excise taxes, a price survey of tobacco and alcoholic products will be conducted immediately to permit the reclassification of said products based on their current prices;
Documentary stamp tax. Electronic metering in major offices of banks will be installed to plug leakages in the collection of the DST;
Border Taxes. The BOC will put in place measures to minimize revenue losses arising from the shift to transactions value. The BOC will also closely monitor trading warehouses and importers that are availing of duty exemptions under the AFMA. Close linkages among the revenue collecting agencies and periodic exchange of information among them will ensure that fraudulent practices will be minimized. An interagency team headed by the BOC and the Department of Justice (DOJ) has been formed to increase efficiency in arresting smugglers; and
Restructuring the tax system. Over the medium term, reforms will be undertaken to make the tax system simple and easy to administer, buoyant, equitable and less prone to corruption and tax evasion.
In the area of income taxation, the shift to gross income taxation is being considered as part of the administration’s long-term measures to raise revenues. The income tax will be reviewed for possible gains through modifications in the list of allowable deductions and rates. The income tax for corporations will be restructured to align the tax treatment of corporations and self-employed individuals, and rationalize the list of allowable business deductions, which have become regular sources of abuse.
Other reforms that the government will study include the rationalization of the taxation of financial intermediation, instruments and institutions (see section on Banking System); and the expansion of excise taxes on automobiles including all motor vehicles.
The organizational structure and processes of the revenue-collecting agencies will be studied, including the feasibility of creating an autonomous revenue agency wherein the Department of Finance (DOF) retains ultimate responsibility for the government’s fiscal and tax policies. The organization, processes and systems of BIR will be reviewed to identify areas where significant tax evasion, leakages and corruption exist. Organizational reforms in the BIR will include enhancing the professional skills of its manpower through the strict observance of performance-based merit systems, and continuing provision of training for upgrading skills and knowledge.
Rationalizing fiscal incentives
The government remains committed to support the development of globally competitive industries and to promote the country as an attractive investment destination. However, it needs to rationalize the grant of incentives to protect the revenue base. The fiscal incentives system will be simplified to further enhance the effectiveness of incentives as a tool for industry development without jeopardizing potential revenue sources.
The Investment Priorities Plan (IPP) will be highly focused and limited to a few industries. The process of selecting those to be included in the list will involve distinguishing between activities that need to be provided incentives and those that would be better supported by improving access to infrastructure or credit.
The definition of gross income and the allowable deductions in the computation of the 5-percent gross income tax enjoyed by enterprises operating in economic and free trade zones will be rationalized and defined clearly. Likewise, the tariff and related matters (TRM) process will address the concern of certain sectors related to the cost of capital equipment that are not locally produced and for which the tariff may be reduced to zero.
The medium-term thrust is to move towards the uniform application of incentives and rationalize the operations or mandate of agencies currently granting incentives. This would obviate the need for the government to choose favored sectors and enable the concerned agencies to focus on investment promotion. This move is also consistent with the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures, which prohibits certain types of subsidies.
Expenditure management
Disbursements are programmed to fall to 16.6 percent of GNP by 2006 from 18.4 percent in 2001. This will be achieved through: (a) immediate implementation of austerity measures; (b) institutional reforms in key aspects of public financial management such as budgeting, budget execution, procurement, accounting, and management of contingent liabilities; and (c) reforms related to public administration such as reengineering the bureaucracy, human resource development, compensation, performance accountability and transparency (see chapter on Governance).
An austerity program is being implemented in 2001 under Administrative Order (AO) No. 5 where savings target of 10 percent of nonpersonal services expenditures is imposed on all public sector entities. To preserve the priorities of the Plan, the targets savings for social services, tourism and agrarian reform is limited to 5 percent. In addition, AO 5 mandates the conduct of Sector Efficiency and Effectiveness Reviews (SEERs) by the National Economic and Development Authority (NEDA) and Department of Budget and Management (DBM) in coordination with agencies and departments. The conduct of SEER enables the identification of low priority activities of agencies which could be deferred, discontinued or scaled down. The government will also strengthen the shift towards performance-based budgeting through the continued implementation of the Medium-Term Expenditure Framework (MTEF).
Expenditures that will directly benefit the poor will continue to be protected. Government spending on social services will get a bigger share in the budget throughout the medium term.
Other public sector reforms
The contribution of government corporations to the public sector borrowing requirement shall be reduced. The review and approval process for NG guarantees for government-owned and -controlled corporations (GOCCs) shall also be tightened. Reforms will be introduced to improve the pricing mechanisms of the GOCCs, especially those in water and electrification. Likewise, government financial institutions (GFIs) shall pursue programs to enhance their profitability such as the development of new products and services; disposition of nonperforming assets; and further strengthening of their lending policies. The government shall work towards the privatization of the National Power Corporation (Napocor), Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) and Philippine National Construction Corporation (PNCC). The restructuring of some GOCCs like the National Food Authority (NFA) will also be pursued. Private sector participation shall be sought in the rail transportation sector (see chapter on Infrastructure) while privatization in the water sector shall also be further pursued. Financing policies in the water and in rural electrification will be reformed to improve the performance of the consolidated public sector.
The government shall follow an optimal borrowing strategy which balances the cost of borrowing with the objective of lengthening the debt maturity structure to avoid refinancing problems. Over the medium term, the government will source its financing requirements from a balance of domestic and foreign sources with a growing share of funding from official development assistance (ODA). The government will increase the utilization rate of ODA by strengthening its monitoring and evaluation system and by setting up a performance rating scheme. The Investment Coordination Committee (ICC) will take a more proactive role by constituting a project action group that will interface with each agency’s project implementation officers for the timely implementation of the agencies’ projects.
New and creative debt and equity instruments will be issued to reduce the cost of borrowing and avail of the best terms for government. Hedging instruments will be tapped to minimize foreign exchange rate risks.
Sound external balance
The BOP is seen to improve from a deficit in 2001 to a surplus beginning 2002 as the economic conditions of our major trading partners improve, reaching around $2 billion by 2006. The current account is projected to remain in surplus, albeit moving towards a negative balance in terms of GNP to 0.9 percent in 2006. The expected recovery of the world economy in 2002 and the subsequent projected stronger inflow of direct investments in export sectors, particularly in ICT-related industries, are seen to boost exports over the medium term. However, the expected growth of imports arising from greater economic activity and falling tariff rates will lead to a smaller current account surplus.
An increase in capital and financial inflows of both direct and portfolio investments will support the improvement in the BOP. Capital inflows are expected to rise with greater macroeconomic stability and better system of governance in the corporate and capital markets.
The level of gross international reserves (GIR) will reflect the improvement in the external payments position. GIR will gradually rise to reach $20.4 billion by 2006. The 4.1 months import cover is expected to be maintained over the medium term.
Given the rise in exports, the debt service ratio (in percent of exports of goods and receipts from services) is projected to decline from 17.4 percent in 2001 to 14.1 percent in 2006.
Cognizant of the benefits brought of being integrated with world capital markets such as access to cheaper and appropriate sources of financing, the government adheres to a freely convertible peso and market exchange rates. However, to ensure macroeconomic stability, policies that strengthen the country’s external accounts position and reduce its vulnerability to sudden reversals of capital flows will be adopted. The exchange rate will continue to be market determined and foreign exchange intervention will be limited to cases where there is a need to smoothen sharp fluctuations in the exchange rate. Moreover, considering that some capital flows can be destabilizing, prudential regulations will be strengthened to curb speculative activity. The BSP will continuously review its foreign exchange regulations to closely monitor foreign exchange transactions without limiting transfers and payments of legitimate foreign exchange transactions. It will also accumulate adequate international reserves that will provide a prudent amount of buffer against shocks in capital flows in addition to meeting external obligations, especially short-term obligations.
Development of the banking and capital market
Banking system
The government will improve the environment for raising domestic savings by continuing to strengthen the financial sector, which includes the banking sector and the capital (equity and bond) market. Strengthening the banking system will require addressing the problem of rising NPLs in the short run. At the same time, prudential regulatory powers of the BSP will be strengthened while policies to enhance financial intermediation will likewise be addressed.
Addressing the NPL problem of banks. The government will address the NPL problem by supporting the creation of private asset management companies (AMCs). In view of the government’s fiscal constraints, the government will not infuse financial equity into AMCs. The BSP is supportive of the creation of private sector-led AMCs. A number of banks have already shown interest in setting up such AMCs. In this regard, the role of government would be in creating an environment that facilitates effective resolution of impaired assets by the banks themselves, including improved asset valuation rules and procedures, and bringing the prudential and regulatory environment in line with best international practice to encourage, among other things, private capital injections.
Addressing money laundering and preventing system-wide risks. The supervisory authority of the BSP has been hampered by the bank deposits secrecy law. Moreover, the law creates incentives for money laundering and impedes the speedy resolution of bank failures, as it prevents the Philippine Deposit Insurance Corporation (PDIC) from gathering information on individual depositors prior to the closure of the bank. To address this weakness, the BSP will work to restore its power to inquire into bank deposits above a certain amount as an exception to the bank deposits secrecy law, when probable cause of use of banking system to commit violation of banking laws and regulations has been established. The government shall also seek the passage of an antimoney laundering bill.
The regulatory powers of the BSP shall also be strengthened through the amendment of the New Central Bank Act. The amendatory provisions include:
The BSP will continue its efforts to shift to consolidated bank supervision and risk-based examination. To improve the settlements and payments infrastructure, the BSP is developing a real time gross settlements system covering the equities, fixed income, money and foreign exchange markets.
The authorities will continue to accelerate the rehabilitation of certain KBs to restore their viability and profitability at the soonest possible time.
The government will also seek the passage of the PDIC Act to strengthen the supervisory authority of PDIC over insolvent banks. To reduce excessive risk-taking of banks and mitigate the effects of moral hazard that arise from deposit protection, the PDIC shall move towards a risk-based assessment system over the medium term. PDIC currently provides a deposit insurance cover of P100,000 for each depositor and charges banks a flat rate of one-fifth of one percent (1/5 of 1%) of total deposits. Under a risk-based assessment system, insurance assessment shall be based on differentiated rates proportionate to the degree of risk that an insured bank takes.
Improving financial intermediation. Over the medium term, the BSP will work towards the reduction of the reserve requirements to bring down the cost of financial intermediation. The reduction in reserve requirement, however, will be carefully weighed against the broad policy objective of maintaining price stability.
Support shall be given to microfinance institutions to improve the mobilization of savings from small savers and the access of small-scale borrowers to credit. This will require a regulatory framework for microfinance institutions and capability-building of these credit intermediaries. Prudential measures shall also be undertaken so that the stability of the financial system will not be undermined. To ensure the sustainability of microfinance institutions and reduce risks, the government will adopt a risk-based supervision approach and will continue to support a market-orientated interest rate policy. To improve access of farmers to credit, the government will support policies making farmlands under the agrarian reform law acceptable as collateral.
Capital market development
The development of the capital market is critical to raising domestic savings. The government will work with the private sector on long-identified capital market reforms. The capital market shall be deepened through:
Financial taxation. The gross receipts tax (GRT) imposed on banks and other credit institutions, the VAT on preneed companies and other contractual savings institutions, and the premium tax on life insurance companies will be replaced by Financial Institutions Tax (FIT). The latter will closely approximate the VAT on financial transactions.
The DST will also be rationalized. The DST is paid as many times as the instrument is transferred or resold. Such imposition creates a cascading effect that distorts pricing and makes financial intermediation costly, thus prohibiting secondary trading and making the market uncompetitive. Eliminating the DST on secondary trading encourages the development of a secondary market and eventually increases tax revenues as more capital market instruments are issued and transactions flourish.
Use of new and creative debt and equity instruments. New instruments that offer buyers better reward for their investments while providing both the government and the private sectors with lower-cost financing shall be introduced. Along this line, asset-backed securities shall be promoted. A secondary housing mortgage market shall also be developed to enable the
government to meet its housing targets. To achieve this, the government will push for the passage of the Securitization Act, which will define the framework for the issuance, and trading of asset-backed securities.
The SEC shall issue revised rules on securitization to recognize the creation of special-purpose vehicle (SPV) for securitization. The Insurance Commission (IC) shall expand the coverage of admitted assets to include asset-backed securities. To promote liquidity and sound management of SPVs and institutions involved in the trading of asset-backed securities, the listing of asset-backed securities with the PSE shall be encouraged.
The government will work for the creation of a provident fund for overseas Filipinos and seek the passage of the Personal Equity and Retirement Account (PERA) Act to deepen savings mobilization.
Expansion of institutional players. New market players will be encouraged to participate in the capital market. Under the proposed Revised Investment Company Act (RICA), nationality requirements of mutual funds will be relaxed to encourage entry of new players. Investment companies will also be allowed to sell or purchase securities outside of the Philippines while foreign investment companies will also be allowed to sell or purchase securities in the Philippines.
Reforms will be introduced to make the different pension fund systems more efficient and financially sound in providing social insurance and protection. The recommendations of the Presidential Retirement Income Commission (PRIC) created through Executive Order (EO) No. 91 dated April 6,1999 will be taken into account in instituting changes in the mandatory pension institutions (e.g., GSIS, SSS, AFP-RSBS and HMDF). The recommended actions include a study on the merits of adopting a four-pillar pension system, which will encourage the entry of new players. The first pillar is envisioned to be a tax-financed social assistance program that would provide basic protection to the aged who could not afford in their working years a contributory program. The second pillar will consist of the existing defined benefit programs of the SSS and GSIS. The third pillar is a mandatory defined contribution program that would supplement the benefits provided by the second pillar. The target income replacement rate provided by the sum of the second and third pillars is one that will allow for further growth and development of the fourth (voluntary) pillar which currently includes the preneed and insurance companies, trusts, mutual funds and other financial institutions that offer both defined benefit and defined contribution plans.
The proposed reforms by the PRIC include the introduction of a mandatory defined- contribution program and measures to improve investment management through the use of reputable and professional external fund managers. The possible unification of the public pension institutions will also be studied. Part of the PRIC’s task is to define policy measures that would rationalize the cost of the mandatory programs of the SSS and GSIS such that the social protection provided by these institutions would be the same for workers in the private and public sectors.
Corporate recovery and governance
To strengthen corporate governance, the PSE has been demutualized or reorganized as a stock corporation last August 8, 2001. The demutualization subjects the PSE to greater market discipline and strengthens the investing public’s external control over the stock exchange.
The government will also work with the private sector and the Capital Market Development Council (CMDC) to institutionalize a corporate governance reform program and conduct a public information campaign to increase awareness on corporate governance principles.
The government will seek the improvement of the corporate debt resolution framework by supporting the amendment of the 1909 Insolvency Law or the passage of the Corporate Recovery Act. The Corporate Recovery Act puts in place procedures for liquidation that balance the rights of creditors and debtors as it allows both parties to initiate liquidation proceedings.
Chapter 2 Promoting Full Decent and Productive Employment
Despite the modest growth in 2000, there was an increase in the number of unemployed. This implies that economic growth per se, although a necessary condition, does not guarantee employment growth. The employment policy challenge to the Macapagal-Arroyo Administration, therefore, is to formulate effective strategies and identify employment-generating lead sectors under a unified policy framework to promote decent and productive employment for every Filipino worker as a means to alleviating poverty. Employment generation shall be enhanced through the modernization of agriculture, the strengthening of information and communications technology (ICT) and revival of tourism (see Chapters 7, 4 and 5). Measures shall be adopted to enhance harmonious worker-employer relationship, and maintaining existing jobs of local and overseas Filipino workers. The quality of the workforce in terms of competencies, productivity and work values shall be enhanced while better quality of employment opportunities in terms of work conditions, remuneration and welfare shall be promoted. Employment facilitation programs will develop and improve access of Filipino workers to employment opportunities and alternatives, whether locally or abroad.
Policy Framework
Promoting decent and productive employment means that rights at work are protected, adequate income is generated, social protection is provided for, and participation in the democratic process is guaranteed through tripartism and social dialogue. It also means sufficient employment, where all workers have full access to income-earning opportunities. Decent employment also entails the continuous improvement of workers’ personal capabilities through a build-up in competitive skills and positive work ethics. This will enable workers to fully participate in both economic and social activities, and maximize their human development potential even with the challenges posed by globalization.
Four major employment-promoting strategies shall be pursued more vigorously: employment generation, employment preservation, employment enhancement, and employment facilitation.
Employment generation involves creating, directly or indirectly, new employment opportunities in the domestic labor market especially in agriculture, tourism and ICT. The private sector is the primary engine for employment generation. The government, on the other hand, shall develop a competent, professional and productive bureaucracy that effectively enables the private sector to perform its role. Public spending and official development assistance will be focused and prioritized on programs that will have the most impact in promoting decent employment and improving the social and physical infrastructure.
Agricultural modernization shall be pursued, generating in the process one million new jobs from both agriculture and agriculture-related activities. The fast-growing ICT sector, where high-value jobs are most plentiful, shall be promoted. Skills development activities shall be pursued to meet the training needs of the knowledge workers of the new economy. Tourism shall also be promoted as a key employment generator. The provision of mass housing to the urban poor will also boost employment in the construction industry.
While employment generation is the overriding goal, employment preservation shall likewise be accorded priority. Measures that enhance harmonious worker-employer relationship and maintain existing jobs with remunerative terms and conditions shall be put in place. Privately-reached employment and wage contracts shall be respected while the rights of workers to collective bargaining shall be upheld. Minimum wage setting shall be rooted on the basic concept of providing workers with "safety net" protection against unjust low wages and protecting the lowest paid workers from the vagaries of the labor market. Above-minimum wages shall be determined through collective bargaining (in the organized sector) and employer-employee negotiations (in the unorganized sector).
Industrial peace, which significantly contributes to the preservation of employment, shall be achieved through freedom of association and free collective bargaining, continuing social dialogue, mediation and voluntary arbitration of conflict, and shared decision-making mechanisms at the firm, industry, sector, and national levels. These measures are expected to develop mutual trust and confidence among the parties. In the process, the industrial relations paradigm will shift from one based on confrontation to one based on cooperation. On the basis of this new paradigm, productivity and competitiveness can be achieved.
To upgrade the competitiveness of Filipino workers, the government shall pursue employment enhancement measures which focus on improving worker competency, productivity and work values. At the same time, work conditions, remuneration, and welfare shall be enhanced.
Government shall also engage in employment facilitation which refers to developing and improving access of Filipino workers to employment opportunities and alternatives, whether locally or abroad.
Overseas employment remains to be a legitimate option for the country’s work force. As such, government shall fully respect labor mobility, including the preference of workers for overseas employment. Protection shall be provided to Filipinos who choose to work abroad and programs to effectively reintegrate them into the domestic economy upon their return shall be put up. Better employment opportunities and modes of engagement in overseas labor markets shall be actively explored and developed, consistent with regional and international commitments and agreements.
Assessment and Challenges
Domestic Employment
In 1999, the number of employed people rose by 3.8 percent from 0.7 percent in 1998. Much of this growth was accounted for by the expansion in agricultural employment (6.3%) and services sector employment (3.5%). The growth exceeded the projected employment growth estimates of 2.8 to 3.2 percent in the Medium-Term Comprehensive Employment Plan (CEP).
Total employment decreased by 1.0 percent in 2000 as employment in the agriculture sector fell by 5.5 percent. Jobs were also lost in the industrial sector despite the growth in industrial production in 2000. The number of establishments which permanently closed down or retrenched workers almost tripled in 1998 (2,525 establishments) compared with the previous year’s figure (889 establishments), and the number has remained at that very high level in the succeeding years.
The services sector was the only source of employment growth for the year, posting a modest growth in employment of 2.9 percent.
Notwithstanding the employment growth in 1999, the one million jobs generated during the year were not enough to sufficiently bring down the unemployment rate. From a double-digit unemployment rate of 10.1 percent in 1998, the average rate in 1999 remained high at 9.8 percent but within the CEP target of 9.6 to 9.9 percent. This increased to 11.2 percent in 2000 exceeding the unemployment projections of 8.8 to 9.4 percent for the year.
Underemployment remained at close to 22 percent. If the unemployment and underemployment figures are summed up as a measure of labor underutilization, the labor underutilization rate inched up to 30.5 percent in 2000, from 29.7 percent in 1998.
Despite the stresses on the labor market, employers and workers worked together to preserve industrial peace. The number of strikes remained below the 100 mark, a record since 1994.
Over the medium term, the government is faced with the challenge of increasing the ability of the domestic labor market to absorb new entrants. The growth in employment in 1999 was largely due to good weather and fiscal pump-priming rather than an expansion in investments and exports, where sustainable jobs are created.
Another challenge is globalization. Globalization provides an opportunity for nations to access larger markets. However, workers need to compete in such an environment. At the same time, globalization can lead to the displacement of workers in uncompetitive sectors and the expansion of the informal sectors arising from new working configurations. Skills-training and provisions of safety nets are essential to meet the challenge of globalization.
Overseas Employment
Filipino workers continue to seek overseas employment. For many years, the number of Filipino workers deployed overseas has exceeded the increase in local employment, especially in 2000 although the growth of overseas deployment has weakened since 1999.
One benefit of overseas employment is that it is a source of foreign exchange. Dollar remittances grew from $4.9 billion in 1998 to $6.1 billion in 2000. As a percentage of gross national product (GNP), this increased to 7.6 percent in 2000 from 7.2 percent in 1998. During the Asian crisis in 1997-1998, the economy escaped a negative growth in 1998 as dollar inflows from overseas workers propped up domestic demand.
Overseas employment, however, has its costs on social structures and value systems. Working in a different society affects the individual worker’s value system. The worker’s absence from his family for long periods also affects the family and marital life. Cases of abuse have destroyed lives of workers and their families. Hence, the generation of domestic employment remains the major priority.
Targets and Strategies
Targets
In the medium term, domestic employment is expected to grow by 3.2 to 3.5 percent. From a level of 27.4 million employed in 2000, the number of employed will increase to 31.2 to 31.5 million by 2004. Average yearly net addition to employment is projected to reach one million. In addition, about one million workers per year will be deployed overseas.
The services sector shall continue to be the biggest employer, surpassing its performance in 1999-2000. The number of employed in the services sector shall expand from around 12.8 million in 2000 to an average of 14.3 to 14.4 million over the medium term, during which its share to total employment shall rise from 46.7 percent in 2000 to about 48.0 percent during the same period. In particular, tourism shall generate an additional 1.0 to 1.6 million jobs during the period. The bulk of employment creation will come from passenger transport, retail trade, hotel and accommodation, restaurants, travel agency and tour operations, and recreation and entertainment. The services part of the ICT sector, on the other hand, will generate an additional 52,000 to 57,000 high-value jobs.
For its part, the industry sector is expected to slightly increase its share from 16.2 percent in 2000 to around 16.5 percent by the end of 2004. Despite this conservative projection, the employment level in the industry sector will increase by 690,000 to 760,000 jobs over the period. ICT manufacturing, which is mostly for the export market, will generate 19,000 new jobs.
As the implementation of the Agriculture and Fisheries Modernization Act (AFMA) takes full swing, real productivity of the agriculture sector shall increase. Its share to total employment shall gradually decline from 37.1 percent in 2000 to an average of 35.6 to 35.7 percent during the medium term, but the magnitude of employment in the sector will increase from 10.2 million in 2000 to a range of 10.8 to 11.0 million by 2004. Agriculture-related construction and its multiplier effects in other sectors like retail trade will provide additional jobs for rural workers such that net job creation will average one million during the period.
The unemployment rates will steadily improve in the medium term. From 11.2 percent in 2000, the unemployment rate will further go down to 7.6 to 8.6 percent by 2004. In nominal terms, the number of the unemployed shall decline from around 3.5 million in 2000 down to a range of 2.6 to 2.9 million by the end of the medium term.
Real labor productivity (computed as real gross domestic product divided by total employed) will steadily increase in the medium term from P34,740 in 2000 to P36,780 to P37,110 in 2004.
Strategies
To achieve the employment goals, four major employment strategies shall continue to be adopted: employment generation; employment preservation; employment enhancement; and employment facilitation.
Employment generation
To generate the one million jobs in agriculture and agri-related industries, a more meaningful pursuit of the agriculture and fisheries modernization program shall take place. Programs shall focus on increasing employment productivity to raise incomes. These programs shall be complemented by efforts to generate off-farm employment. Alternative livelihood activities shall be promoted for subsistence farm workers during nonplanting and nonharvest seasons. The development and integration of farm workers in off-farm livelihood activities, where alternative sources of incomes can be realized, shall be explored and facilitated.
Agriculture shall be a priority in the allocation of budgetary resources to expand the construction of irrigation and postharvest facilities, farm-to-market roads and other infrastructure projects, credit facility, and research and development.
To enhance employment in industry and services, globally competitive industries shall be developed. The country’s national competitive edge in tourism shall be maximized. The government will focus its efforts on supporting the development of tourism hubs, such as Manila, Cebu, Davao and Laoag by upgrading airports, seaports, and roads, and securing greater involvement of local government units in tourism development. The development of tourist destinations in the countryside will boost the growth in the retail trade sector and handicraft industries leading to increased employment and livelihood opportunities for communities and cooperatives.
ICT capabilities across a broad range of economic activities and income groups shall be developed. Operational telecenters in all municipalities and public payphones in cluster of barangays shall be established. Broadband services in cities, identified growth centers and priority areas shall be provided. The country’s competitive niches in software development and e-services shall be secured and enhanced by seizing local and overseas market opportunities in developing strategic partnerships for major ICT development initiatives.
Labor-intensive activities in infrastructure development, particularly in the construction of mass housing, shall be further explored to increase employment generation.
Self-employment shall be promoted as an important employment generation strategy. Self-reliant communities shall be developed by providing adequate and sustainable sources of livelihood for its members and their families. Likewise, full support for the development of small and medium enterprises (SMEs) shall be pursued. The government will implement programs for the informal sector to improve their access to productive resources, protection and social security. Microfinancing will be made available for 300,000 women entrepreneurs every year. Social safety nets, including the provision of emergency employment programs, shall be provided.
Employment preservation
Employment preservation shall be promoted in all sectors. Industrial peace, which is necessary for the growth and development of private enterprise, shall be maintained. In addition, the employment impact of economic restructuring policies and programs shall be assessed. Commitments on measures to mitigate the negative social and employment consequences obtained through social dialogues shall be put in place.
To ensure the preservation of existing jobs the following specific strategies shall be pursued:
Employment enhancement
The skills of workers which will enable them to compete in the global economy will be enhanced by:
Core labor standards shall be observed even with flexible work arrangements, and productivity improvement programs shall be implemented in both private and public enterprises. These shall be complemented by welfare programs for both local and overseas workers. Provision of social protection, other than those already available under the present systems, shall be explored to benefit the formal and informal economy workers.
Equal employment opportunities shall be given to special groups, which include women, youth, elderly, and persons with disabilities. The prohibition on the employment of children below 15 years old in any public or private establishment, and of those 15-17 years old in hazardous occupations shall be strictly enforced in accordance with national laws and international covenants on child labor. This is to ensure that young workers, if they have to work, are not exposed to hazards and risks that may jeopardize their future.
For overseas employment, the government shall:
With new issues emerging in employment and work relations, the legal framework for labor or the Labor Code shall be amended and made more attuned to the realities and challenges of the present times. This is to keep the legal framework abreast with the changing world of work configured by fast technology changes and highly integrated markets. While the focus is to be responsive to the demands of a globalized regime, the legislative reforms should equally given importance to the welfare and protection of the workers.
Employment facilitation
The employment facilitation strategy shall focus on measures that:
Measures that will facilitate the matching of available supply and demand in the labor market to realize higher employment levels include:
In the context of the United Nations Convention on the Protection of Migrant Workers, overseas employment will continue to be tapped to take advantage of job opportunities in the world market. Specifically, efforts will focus on identifying selective deployment to more labor-friendly host countries. Government shall use diplomacy to ensure equal protection and safe working condition for OFWs, particularly the women migrant workers. But more importantly, a shift to higher skill and knowledge-based categories of jobs in the new economy is anticipated, taking full advantage of the opportunities brought about by the General Agreement on Trade in Services, the Association of Southeast Asian Nations (ASEAN) Framework Agreement on Services, and the Asia-Pacific Economic Cooperation’s Mutual Recognition of Skills and Professional Qualifications projects. Programs shall be instituted to tap decent employment opportunities of the new economy.
To realize the general thrust of the State on overseas employment program, the government shall:
Chapter 3 Enhancing Competitiveness of Industry and Services
Competitive industries and service sectors are sustainable sources of stable and remunerative jobs. Hence, enhancing the competitiveness of these sectors is crucial to sustained job generation and poverty reduction. Liberalization and regulatory reforms, clear and simplified rules and regulations, investments in science and technology (S&T) and research and development (R&D), continued infrastructure development and industrial peace, as well as a stable macroeconomic environment are important in ensuring long-run growth of industries and services.
The benefits from globalization shall be balanced with stronger regulatory capability, more transparency, and effective implementation of safety nets. The development of micro- as well as small and medium enterprises (SMEs) will be stepped up so that these can ultimately be linked to the global economy. Fast growing sectors like the information and communications technology (ICT) sector, where high-value jobs are most plentiful, will be promoted. Philippine foreign trade policy will be designed in the context of the Association of Southeast Asian Nations (ASEAN), while economic relations with the United States and Japan will be strengthened. A clear antitrust policy regime will also be put in place and enforced.
Policy Framework
In light of the greater integration of the Philippines with the world economy, the philosophy of free enterprise shall continue to underpin government policies and programs in stimulating business activities and promoting competition. Of particular importance is the promotion of technology that will be the foundation of the country’s future economic development.
The private sector will be the main driving force of the economy, playing a strong and leading role in generating productive employment opportunities and improving access of Filipino consumers to less expensive, more varied, and better quality goods and services. Government’s task will increasingly be to make markets work by simplifying bureaucratic procedures and promoting market-friendly regulations to reduce the cost of doing business, and protect the interest of consumers and sectors vulnerable to global integration. Sustainable development and gender-sensitive practices will be emphasized.
The long-term competitiveness of industry and services will be enhanced by liberalization and regulatory reforms. Investments in S&T, and an R&D culture will be fostered to ensure long-run growth of enterprises. Agricultural modernization and diversification of the rural economy will be supported along with continued infrastructure development, industrial peace, and stable macroeconomic policies. Policies to improve domestic trade linkages such as transport systems will be aggressively pursued.
Firms, especially microenterprises and SMEs, shall have access to skilled workers, least-cost capital equipment and power, credit, advanced managerial techniques, as well as new and advanced technologies. These will further broaden the local product range, generate employment, especially in the countryside, and increase the purchasing power of the domestic market.
Capacity building will be a priority to better prepare the industry and services sectors for global competition and technological change. Information and communications technology will be promoted to take advantage of the country’s competitive edge in the sector and harness productivity and efficiency gains for industries and services, especially SMEs.
The country will capitalize on market and investment opportunities offered by participation in bilateral, regional, and multilateral trading arrangements. Foreign trade policy will be designed in the context of ASEAN to push a common agenda for the region’s development consistent with national interest. Economic relations with the United States and Japan will be enhanced.
Assessment and Challenges
The industry and services sectors grew modestly in 1999 and 2000 tempered by the economic slowdown of some of the main trading partners, the lingering effects of the Asian financial crisis, and domestic socioeconomic and political developments in the country, particularly during the last quarter of 2000.
Manufacturing growth picked up during the period but its competitiveness has been hampered by a narrow export basket, low productivity in the nonexporting sector, rising cost of labor and electricity, hesitation of domestic market-oriented manufacturers to compete in their home ground, and underdeveloped backward and forward linkages. These have been compounded by high interest rates toward the latter half of 2000.
The services sector recovered steadily in 1999-2000, buoyed up by rising demand for telecommunication services. However, the performance of financial services remained weak in view of the nonperforming loan problem of the banking sector (see Chapter 1).
The growth of the country’s industry and services sectors also lag behind some of its ASEAN neighbors. Among the key structural weaknesses that need to be addressed to improve competitiveness are the gaps in infrastructure, regulations, and training of workers.
SMEs, which constitute 99 percent of all firms and employ 67 percent of the labor force, only account for 33 percent of total economic output. Their potential to contribute to higher output, widening of the export base, and increased employment has been constrained by limited access to credit, underdeveloped sources of raw materials, limited access to modernizing technology, and lack or low level of market information.
The export sector remains dependent on electronics as a vehicle for growth. The narrow export base, decelerating export growth, and concentration in a few markets indicate the need to improve product quality, diversify exports and markets, and strengthen the domestic market through the removal of domestic trade constraints and bottlenecks, and diversification of the rural economy. The accession of China to the World Trade Organization (WTO) poses a major challenge to the country’s ability to compete globally over the long term given China’s potential to access new markets. A serious and real challenge for local producers is to compete with their foreign counterparts in a regime of low tariffs.
Future expansion in mining and quarrying and the development of new areas will depend on the Supreme Court decision on the ownership of minerals. Antimining sentiments of some local governments and nongovernment organizations (NGOs) arising from past failures to minimize environmental damage, and misconceptions about the environmental effects of mining, have constrained investments in mineral exploration and development.
Meanwhile, industrial progress and high population growth have also put pressure on the environment. Air quality in urban centers has deteriorated due to emissions from motor vehicles and industries. Water quality in rivers and coastal waters has declined due to industrial and domestic waste, and indiscriminate dumping of solid, toxic, and hazardous wastes in the water system.
The services sector will have to continue gearing up for a more competitive market. The challenges to upgrade the quality of existing services and introduce new, more responsive, value-added services must be met.
Targets and Strategies
Targets
The growth of industry over the medium term is premised on higher manufacturing output, increased private sector-led infrastructure activities, higher demand for utilities, and better prospects for mining operations. Transportation and communications, trade, and finance are expected to lead the services sector’s expansion during the period .
Strategies
Accelerating the development of SMEs
SMEs are a potent force in the war against poverty. They disperse economic activities to the countryside, and thus contribute to a more equitable distribution of income. A vibrant SME sector provides a strong domestic supply base for globally-competitive industries.
Since access to financing has always been a major roadblock to SME development, government will work to improve the banks’ capability to understand and service the special needs of small borrowers. With greater understanding of these needs, banks may be encouraged to reduce their requirements and give SMEs access to available funds.
At the same time, innovative alternative sources of financing will be pursued. For instance, the recent launching of the SME Board by the Philippine Stock Exchange will help address small business financing requirements. The growth of microfinancing services, especially to the disadvantaged sectors, will be encouraged. Lending programs that employ the guarantee mechanism will continue to be implemented.
Faster development of SMEs in the rural areas will also be promoted through industry clustering which will facilitate the provision of cluster-specialized resources such as technology, knowledge, skills or networking infrastructure, both physical and social, as well as marketing and distribution support system to SMEs. In areas where large industries or firms operate, the government will give adequate focus to the needs of the supporting industries.
Government will rationalize, in coordination with the private sector, the many existing training programs for SME entrepreneurs, managers, and workers to avoid duplication, improve content and delivery, and ensure that the actual needs of SMEs are met. Distance-learning modes such as correspondence and computer-based or online training will be further explored to improve SME access to training programs. Up-to-date and relevant information will be provided to enable SMEs to make strategic business decisions. Franchising fairs and consulting caravans will be held to give SME clients on-the-spot consultation and avoid shuttling them among government offices.
The existing provincial SME Development Centers will be a coordination point for access to information, training, and advisory services. The government will also put in place a National Business Registry to track all business firms from start to closure, giving an up-to-date picture of the status and location of business establishments at any time.
The full potentials of ICT and e-commerce will be tapped for the benefit of SMEs. Existing SME laws, policies, and programs will be reviewed with the end in view of creating an environment that will enable these enterprises to become more competitive. Local government units will also be encouraged to provide an environment conducive to SME development. Line agencies, on the other hand, will give due consideration to the constraints faced by SMEs in the implementation of policies and regulations pertaining to their sector or functions.
Promoting competition
Effective competition will continue to be promoted to facilitate the provision of adequate, varied, and reasonably-priced goods and services. Trade and investment liberalization, deregulation, and facilitation will continue to be pursued to stimulate trade, investments, and production. In 2004, tariffs on most products except for sensitive products will range from 0 to 5 percent. To help local producers prepare for regional and global competition, the Philippines will continue to participate in trade and investment liberalization and facilitation initiatives under the auspices of the WTO, ASEAN, and the Asia-Pacific Economic Cooperation (APEC) forum.
The improvement of domestic trade linkages will facilitate the flow of goods and services between and among regions of the country, as well as production and market centers. This can be achieved by fostering competition in the telecommunications sector, encouraging the entry of new technology, modernizing shipping, speeding up delivery and lowering the cost of postal communications, constructing feeder roads and rail systems connecting key areas, and liberalizing the airline industry.
The privatization and participation of more players in the operation of government ports will improve the turnaround time of shipment and cargoes while rationalized rates will reflect the cost of providing the service. Executive Order No. 59 will be thoroughly reviewed and a new executive issuance will be formulated in consultation with the private sector to liberalize port management policies and significantly improve efficiency in the transport of goods, cargoes, and passengers. Foreign air carriers will also be encouraged to operate in the Philippines under bilateral agreements and in accordance with existing laws to ensure that adequate and affordable international air services are provided.
Local retailers, which link products to markets, will be introduced to innovative products and modern retail or distribution formats that offer a wider range of services. This will promote consumer welfare by giving consumers access to a wider variety of reasonably-priced products. Measures will be adopted to ensure that the competitivenessof small local retailers will be enhanced with the entry of foreign players in retail trade activities.
Improving the business environment
The government will continue to simplify and streamline business procedures and the issuance of licenses and permits. This will be done by cutting processing time in half and utilizing, as much as practicable, online services (e.g., One-Stop Special Investors’ Resident Visa, Business Name Registration System). Customs administration will be modernized and customs procedures will be simplified to facilitate international trade and collect the correct taxes.
The government will continue to implement measures to further improve the delivery of services, based on comparable benchmarks of countries with perceived low costs of doing business. The early resolution of pending court cases will be pushed while administrative reforms that will facilitate multiagency decisions will be institutionalized, such as those involving issues on land use. Red tape and corruption at national and local levels will be addressed to encourage investments.
Local governments will be encouraged to reduce and standardize their business requirements and application procedures; set a more reasonable cap on fees charged from business; and set a deadline for the release of government approvals, licenses, and permits. In streamlining bureaucratic processes, the government will seek the assistance of the private sector and civil society in monitoring its performance and in exacting accountability from public officials.
Promoting investments
To attract long-term domestic and foreign direct investments, attention will be given to macro measures and concerns. A focused active search of prospective investors will be conducted with the consolidated efforts and resources of the Board of Investments, Philippine Economic Zone Authority, Clark Development Corporation, Subic Bay Metropolitan Authority, and Cagayan Economic Zone Authority. This will be complemented by efforts to push the clustering of horizontally- and vertically-linked industries to accelerate investments in the countryside.
A stable policy environment and enhanced investor services shall be put in place. Investment laws will be interpreted in favor of the investor. To attract investments to the countryside, local governments will be encouraged to be investor-friendly.
Key bottlenecks to investments will also be addressed such as expensive power, high cost of capital, and deficiencies in the incentive structure that discourage investments in agriculture. The incentive system will be simplified and clarified to make the incentives structured, performance-based, uniform in application, competitive with those offered in the region, and simple to administer.
Promoting an efficient and responsive banking system
The government shall continue to enhance the growth of the banking sector in view of the need for credit as well as various forms of financial products, instruments, and services. The important role of microfinance institutions and small banks will be strengthened as these are expected to become niche players, assuming significant roles in
intermediating funds for particular segments of the economy, particularly the SMEs or the informal sector. The increased participation of foreign banks will continue to be promoted to provide additional impetus needed to sustain as well as enhance the competitiveness and efficiency of the banking system.
Electronic banking will be promoted to reduce information and transaction costs and enable clients to get wired into the sources of funds. As the volume of e-banking transactions increases, the identification, assessment, management, and control of the attendant risks will be properly evaluated.
To further strengthen the stability of the banking sector, the monetary authorities shall continue to introduce prudential regulatory reforms.
Developing and diversifying products and markets
The export of goods and services will continue to be a major vehicle to accelerate the economic development of the country. Government will regularly assess the country’s export development thrust to respond to changes in the global and local environments.
The opportunities offered by bilateral and regional trading arrangements and free trade areas, as well as those identified in the updated Philippine Export Development Plan will be explored to diversify the Philippine export market. Philippine foreign trade policy shall be designed in the context of ASEAN. Economic relations with the United States and Japan shall be enhanced. At the same time, government will put more effort into the diversification of export products to reduce the country’s dependence on electronics. As the agriculture sector becomes more competitive, it can also contribute to the growing diversification of the export basket. The country’s advantages in providing ICT and related backroom services for multinational firms will be promoted.
Strategic partnerships to support identified sectors will be maintained. Emphasis will be given to bringing in new technologies and skills to improve quality, productivity, and competitiveness. Participation in industrial complementation programs will be intensified and an aggressive international subcontracting program undertaken to expand export markets. If necessary, support to the private sector for the establishment of certain industries will be provided.
Technological innovation will facilitate the shift in production from low- to high-growth business sectors such as ICT. The private sector will be encouraged to develop an aggressive attitude towards technological innovation and adaptation to be competitive. The government will encourage cooperation and networking between and among firms to share information and expertise to reduce the uncertainties involved in developing new products and markets. Science and technology institutions, especially those in the academe, will be tapped to ensure synergy and optimization in the use of resources in developing technology-based and high-value products.
Efforts will likewise be exerted to improve Philippine product standards to conform to international standards. For this purpose, product testing and quality control services of concerned government agencies and private entities will be enhanced.
Improving productivity through research and development
S&T will be further harnessed to make industry and services more technologically competitive. Programs that will attract students to pursue careers in mathematics, science, and engineering with industrial applications will continue to be implemented.
In carrying out government-sponsored and university-based R&D, the needs and priorities of industry and services will be considered. Specific collaboration programs will be undertaken to ensure the cooperation of key sectors. Science and technology services that will allow firms to better select and acquire needed technologies will be provided.
Developing the country’s knowledge base provides leverage to improve local access to global sources of knowledge. The country’s innovation system will be improved to meet the challenges of globalization. Intellectual property rights will be protected in a manner that will both stimulate technological innovation and encourage technology diffusion throughout the economy. Scientific research in areas strategic to national development, such as ICT, biotechnology, materials science, and manufacturing technologies will be pursued based on the inputs and priorities of the private sector, academe, and civil society.
These initiatives will be accompanied by improvements in the technical skills and productivity of the labor force that will entail the expansion and improvement of public education and employment systems (e.g., PhilJobNet), and equivalency and accreditation for technical-vocational educ