A Federal Philippines: Naysayers Debunked

By Marcial Bonifacio

Second of 4 parts

Apart from the ostensible advantages of federalism, critics persist in their tenacity.  Their recalcitrance dissuades others from supporting or even learning more about federalism, hence perpetuating the status quo.  That is why I have addressed some of their criticisms below.

Economy May ‘Go to Hell’

Critics commonly point to the findings of DOF Secretary Carlos Dominguez III who stated that the national government may incur a 6.7% deficit, interest rates would rise by up to 6%, 95% of national government employees may be laid off, and the country’s investment-grade credit ratings may “go to hell.”  ConCom technical working head Wendell Tamayo estimates the cost of establishing 16 federated regions, Bangsamoro and Cordillera regions, four federal courts, and six constitutional commissions at P2.2 trillion, while Rosario Manasan of the Philippine Institute of Development Studies estimates that approximately P55 billion per year will need to be appropriated for the salaries of new federal state elected officials.

Some economists like Victor Abola (professor of the University of Asia and the Pacific) point to a few federal countries which are imperiled by hyperinflation and fear that a federal Philippines may be subjected to the same aftermath.  Due to Venezuela’s current inflation rate of 25%, things cost 250 times more today than a year ago.  Other federal countries like Mexico and Brazil have a similar result due to their localities’ reckless spending on elections, which Abola states is “the primary reason for their hyperinflation episodes . . . which exceeded 4,000% inflation.”

In spite of such negative financial analysis, there are potential measures which could preclude or mitigate some of the aforementioned effects.  For example, ConCom spokesman Ding Generoso has proposed the appropriations for implementing federalism emanate from one of several sources: regional taxes/fees, share of top revenue sources, share of equalization fund, the General Appropriations Act, or natural resources income.  Political scientist Antonio Contreras suggests that some of federalism’s additional costs can be compensated for by the lower costs of transactions, travel, and communication due to decentralization.

Another source would emanate from an expanded tax base due to increased domestic and foreign investments.  In order to be competitive, the American Chamber of Commerce (AmCham) suggests the corporate income tax (CIT) be lowered from 30% to 20%.  Although the Tax Reform for Acceleration and Inclusion 2 (TRAIN 2) law will lower the CIT to 25%, the average rate of the Philippines’ Southeast Asian neighbors is 22.7%.  Hence, a more competitive CIT would attract more investors and create more jobs which, in turn, would translate into more tax revenue.

Also, fiscal incentives for foreign investors in economic zones should be maintained.  For example, the Bases Conversion and Development Act of 1992 grants free port locators a 5% tax on gross income earned.  Unfortunately, TRAIN 2 will repeal such incentives, which the AmCham claimed would “lead to an end to expansions by many foreign investors and a reversal of the success in recent decades in attracting thousands of foreign firms to invest in the country.”

Indeed, this concern is shared by Subic Bay Freeport Chamber of Commerce President Danny Piano who fears the prospect of “capital flight” and Charito Plaza, director general of the Philippine Export Zone Authority, who will continue to defend the fiscal incentives.  Aside from retaining the 5% tax, the financial giant HSBC suggests loosening foreign ownership restrictions via charter change, which would increase the Philippines’ share (currently the lowest) in ASEAN’s “FDI windfall.”

Additionally, all business tax cuts and fiscal incentives should be made permanent, as well as repealing the protectionist clause of the 1987 Constitution in order to boost long-term commitments by investors.  Indeed, such “productive investment,” stated UP professor Maria Bautista, “will generate future streams of income that will not only increase domestic output and income, but also allow the country to service its debt.”  Perhaps the anticipated 95% of laid off national government employees can be reabsorbed into the revitalized private economy or continue their public service on a local level.  Either way, different economic opportunities will abound due to the reallocation of capital precipitated by tax reform and economic liberalization.

ConCom Atty. Rodolfo Robles points out that the national budget is approximately P3.75 trillion and that 40% of it is illegally misdirected.  “Sa simple arithmetic po,” stated Robles, “ayan ay 1.5 trillion, ang napupunta sa graft and corruption.”  He continued to say that at least half of it can be retrieved with a sufficient supply of attorneys.

Recently, in the U.S., Sen. Rand Paul and Rep. Mark Sanford introduced the “Penny Plan” or the “One Percent Solution.”  It mandates Congress to reduce federal spending in all departments by one cent on the dollar.  This would drastically curtail inefficiencies from wasteful spending and balance the budget over a period of five years.  Surely, the Philippines can adapt such a plan in order to cap or mitigate the anticipated deficit as a result of instituting federalism.  Call it the “Centabo Plan.”

I would add that with the regions assuming more fiduciary responsibility, the people will be able to retain more of their hard-earned income, while their region more effectively delivers services otherwise performed by the national government.  Such an arrangement would also allocate resources more efficiently and fairly, since taxpayers residing in Manila would no longer have to fund the Pantawid Pamilyang Pilipino Program (4Ps) or condoms for lazy, mendicant perverts residing in Zamboanga City (presuming 4Ps and the RH Law get repealed, or the regions have the option to nullify them by virtue of federalism, just as the U.S. is currently in the process of repealing the unconstitutional Affordable Care Act, putatively “Obamacare”).  Indeed, such decentralization echoes ConCom member Dr. Julio Teehankee’s sentiment that “the proposed draft federal constitution encourages the national government to go on a diet and the regions to go on a muscle-building regimen.”

In terms of hyperinflation, it is highly misleading and even disingenuous to attribute it to federalism per se.  Indeed, Venezuela’s centralized federalism (an oxymoron) is simply a euphemism for its federalized socialism, whose perpetual budget deficits and inability to borrow money, has resorted to excessive printing of increasingly devalued money.  Consequently, hyperinflation has become pervasive.  In the case of Brazil and Mexico, it is ostensibly due to poor management and or flawed public policy in election campaign financing which has led to such high inflation rates.  That could be remedied by transparency legislation or strict penalties for exceeding a fixed limit on campaign financing or outright privatization of campaign financing.  Ergo, hyperinflation need not be attributable to federalism.

Comparing the Philippines to the U.S. and Germany an Apples to Oranges Comparison

Some opponents assert that presenting the economic success of advanced, western, federal countries like the U.S. and Germany is disingenuous, since the Philippines is generally still a developing, Asian country---an apples to oranges comparison.  However, the eastern, federal states of India and Malaysia more closely resemble the Philippines and have a relatively stable government and growing economy.  Malaysia’s economic growth is at 5% with a GDP of $863.3 billion and foreign direct investment (FDI) at $9.9 billion.  India, whose history is also influenced by colonialism and the English language, has a growth rate of 7.3% with a GDP of $8.7 trillion and FDI at $4.5 billion.  Compare those economic indicators to that of the Philippines with a 5.8% growth rate, a GDP of $805.2 billion, and FDI at $7.9 billion.

Increased Power to Local Dynasties and Oligarchs

Apart from the ostensible advantages, some are fearful that federalism will enable political dynasties to dominate the regions.  However, a vigilant and informed citizenry can prevent such occurrences or take counter measures after the fact, such as passing and enforcing anti-dynasty and transparency laws as Senator Nene Pimentel suggests.  However, as I wrote in my commentary entitled Why Manny Pacquiao’s Defeat Could Be a Win for the Country, “I do not oppose dynasties, insofar as their members are fairly and democratically elected and serve the interests of their constituents. However, when they are self-serving or hold power only for namesake, I oppose them and any office holder—dynasty clan or not.”

Anyway, should all remedies fail, citizens and businesses can simply migrate to another region, which is more congenial to their own interests, values, economic preferences, or lifestyle.  Over whom would the dynastic oligarchs rule and depend on for tax revenue, if everyone migrated elsewhere?  Would they then not be compelled to compete with other regions by providing quality government services, e.g., infrastructure, public safety, property rights protection, and contract enforcement?

 Federalism Too New and Foreign to the Philippines

Some opponents stress that since federalism is a foreign concept or that the Philippines lacks historical experience in regional autonomy (in contrast to the U.S., Malaysia, and Germany), such a system would be inappropriate or not viable.  However, I contend that El Filibusterismo, a sewer system, jeepneys, smart phones, and a Red Cross did not always exist, and, indeed, did change Philippine life for the better.  Hence, should we have opted to never have introduced them as well?  A prosperous nation demands openness to positive change, and education can accommodate any kind of change, despite its drastic implications.

Anyway, as Chief Justice Artemio Panganiban points out, “The idea of federalism is not really new to us. Salvador Araneta, a delegate to the 1971 Constitutional Convention (ConCon), proposed it in his ‘Bayanikasan Constitution.’ Jose Abueva, the secretary of the same ConCon, has written several papers detailing his version of federalism.”  Even as early as 1900, an Ilocano intellectual named Isabelo de los Reyes, envisioned a federal constitution with seven states comprising the Philippines.

 A Sufficient Government Local Code

In terms of regional autonomy, critics point out that the Government Local Code renders federalism obsolete, since the Code is intended to devolve power and disburse internal revenue allotments (IRAs) to localities.  “And yet,” stated Panganiban, “these do not seem to be enough because our Constitution mandates one national police to which the local police are legally beholden, and the Department of Budget and Management which could withhold IRAs.”  Such local autonomy “with strings attached” makes them prone to corruption, or, at least, apathetically unresponsive to the demands of their populace.  Federalism will cut those strings and enable the regions or states to determine their own future.

Neglected Poor Regions

Naysayers of federalism also raise the issue of impoverished regions worsening due to reduced national support.  However, I contend that such dependency or mendicancy is precisely what has retarded their capacity to cultivate their own resources in order to produce prosperity.  It is conventional economic wisdom that prosperous economies consist of most, if not all, of the following key variables: few or no entry barriers to trade, an educated labor force, natural resources, adherence to the rule of law, sustainable infrastructure, and high-scale technology.  Those variables can be cultivated by an efficient, corrupt-free government, quality educational institutions, economic liberalization, and pro-growth tax policy.

Recent history is certainly instructive in providing the proper perspective.  Consider the economic development and growth in post-World War II Japan after the atomic bomb converted its cities into ruins, yet the nation is currently the world’s third largest economy.  Within our own borders, after the recall of American naval bases in Subic Bay and the eruption of Mount Pinatubo in 1991 (wherein the territory was reduced to an ash heap), it was shortly transformed and lauded by various world leaders as a successful trade port and a paragon for economic growth.  I elaborate on Subic in my commentary entitled Why the Senate Needs More Dick.  If Japan and Subic can prosper, under such overwhelming odds, why not any other region or state in the Philippines?

Perhaps special concessions can be made to the more disadvantaged regions like Mindanao, which should be targeted and temporary as an incentive to be self-sufficient.  Indeed, I would not be averse to Chief Justice Reynato Puno’s concept of “evolving federalism” by which the lesser developed regions remain in the status of “autonomous regions” until they are capable of graduating to the status of “full states.”  In that case, benchmarks should be established instead of a timeline.

This is excerpted from “The Philippine Case for Federalism, Its Form, and Its Safeguards” by Marcial Bonifacio.  Parts 1, 2, 3, and 4 are accessible by clicking on their links.