SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES Realizing the Filipino Dream SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES for Realizing the 2040 0 0 Filipino Dream for 2040 0 0 Report No. 143419-PH SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES Realizing the Filipino Dream for 2040 0 0 Report No. 143419-PH ii © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover photo: Jed Regala/The World Bank Cover design: Christopher Carlos NASA Philippines satellite image (page 1): ©MODIS Rapid Response Team 2002 Children with Philippine flags, 117th Philippine Independence Day Celebration (page 3): ©USP Philippines 2015 SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 iii Acknowledgments The report was prepared by a World Bank Group team led by Gabriel Demombynes (Program Leader for Human Development) and Xubei Luo (Poverty and Equity) with a core team consisting of Lesley Cordero (Social, Urban, Rural, and Resilience), Souleymane Coulibaly (Program Leader for Equitable Growth, Finance and Institutions), Clarissa David (Communications), Marcelo Fabre (Social, Urban, Rural, and Resilience), Lewis Hawke (Governance), Sharon Piza (Poverty and Equity), and Rong Qian (Macroeconomics, Trade and Investment). Development of the Systematic Country Diagnostic (SCD) was led in its initial stage by Birgit Hansl (Country Manager, Thailand) in her previous role as Program Leader for Equitable Growth, Finance and Institutions. Contributions were made by the following: • Maria Theresa Quinones and Frauke Jungbluth (Agriculture), • Natasha Beschorner (Digital Development), • Andrew Ragatz, Sachiko Kataoka, Akiko Sawamoto, and Takiko Igarashi (Education), • Morten Larsen and Yuriy Myroshnychenko (Energy), • Stephen Ling (Environment and Natural Resources), • Robert Oelrichs, Tomo Morimoto, Netsanet Walelign Workie, Maria Vida Gomez, and Jewelwayne Salcedo Cain (Health, Nutrition, and Population), • Ahsan Ali (Procurement), • Pablo Acosta and Ruth Rodriguez (Social Protection and Jobs), • Marivi Amor Jucotan Ladia, Maria Loreto Padua, and Pia Peeters (Social, Urban, Rural, and Resilience), • Victor Dato (Transport), • Edkarl Galing and Christopher Ancheta (Water). The team received valuable feedback during “upstream” consultations in the early stages of the work in Dumaguete, Zamboanga City, Iloilo City, and in various parts of Metro Manila and at additional “downstream” consultations on the draft SCD in Makati, Quezon City, and Naga City. The events were organized with much guidance and support from our communications team consisting of Clarissa David, David Llorito, Stephanie Anne Margallo, and Joedie Perez. In Iloilo and Naga, multi-stakeholder consultations were organized in partnership with the Central Philippine University and Ateneo de Naga University Knowledge for Development Communities. The team received outstanding research support from Damaris Yarcia, Michael Dominic del Mundo, and Chiyu Niu, and administrative support from Regina Calzado and Mildred Gonsalvez. The report design and layout was done by Christopher Carlos. Peer reviewers for the report were Ambar Narayan (Lead Economist, Poverty and Equity), Bert Hofman (Professor, National University of Singapore), and Emilia Battaglini (Practice Manager, Climate Change Fund Management). iv Abbreviations ARBs agrarian reform beneficiaries LGC Local Government Code ASEAN Association of South East Asian Nations LGU local government unit ARMM Autonomous Region in Muslim Mindanao MILF Moro Islamic Liberation Front BSP Bangko Sentral ng Pilipinas MNLF Moro National Liberation Front BARMM Bangsamoro Autonomous Region in NEDA National Economic and Muslim Mindanao Development Authority BOL Bangsamoro Organic Law NPA New People’s Army BPO business process outsourcing NDC nationally determined contribution CDD community-driven development NGO nongovernmental organization CARP Comprehensive Agrarian Reform Program NTMs nontariff measures CAB Comprehensive Agreement NEET not in employment, education, on the Bangsamoro or training CCT conditional cash transfer PDP Philippine Development Plan CPSD Country Private Sector Diagnostic PPA Philippine Ports Authority DepEd Department of Education PISA Programme for International DENR Department of Environment and Student Assessment Natural Resources PFM public financial management DSWD Department of Social Welfare RRP Risk Resiliency Program and Development RHU rural health unit ECCD Early Childhood Care and Development SOGIE sexual orientation and gender identity ERC Energy Regulatory Commission and expression ENGP Enhanced National Greening Program SUCs state universities and colleges EITI Extractive Industries Transparency SLP Sustainable Livelihood Program Initiative SCD Systematic Country Diagnostic FDI foreign direct investment TVET technical and vocational education GHG greenhouse gas and training GDP gross domestic product TES Tertiary Education Subsidy GNI gross national income TFP total factor productivity HCI Human Capital Index TIMMS Trends in International Mathematics IPs indigenous peoples and Science Study IFC International Finance Corporation UN United Nations ISIS Islamic State of Iraq and Syria UHC Universal Health Care ISIL Islamic State of Iraq and the Levant WB World Bank LGBTI lesbian, gay, bisexual, transgender, WFP World Food Programme and intersex WGI Worldwide Governance Indicators IBRD IFC MIGA Vice President Victoria Kwakwa Nena Stoiljkovic S. Vijay Iyer Director Mara Warwick Vivek Pathak Merli Baroudi Task Team Leader(s) Gabriel Demombynes Tehmina Nawab Timothy Histed Xubei Luo Sandro Díez-Amigo Eugeniu Croitor SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 v Table of Contents Standard Disclaimer ii Copyright Statement ii Acknowledgments iii Abbreviations iv 1. Overview 1 1.1. Inclusive Growth and Jobs 3 1.2. Human Capital 4 1.3. Resilience 6 1.4. Governance 6 1.5. Priorities 7 2. Country Context 9 2.1. Economic Growth and Macroeconomy 10 2.2. Fiscal Situation 13 2.3. Monetary Policy and Financial System 14 2.4. Poverty, Shared Prosperity, and Inclusion 15 2.5. Key Drivers of Poverty Reduction 22 2.6. Composition and Future of Jobs 24 2.7. Future Trends 29 2.8. Philippine Development Plan and Ambisyon Natin 2040 31 3. Inclusive Growth and Jobs 32 3.1. Economic Competition 34 3.2. Labor Market Rigidities 37 3.3. Infrastructure Gaps 37 3.4. Natural Capital: Agriculture, Fisheries, and Natural Resources 41 4. Human Capital 46 4.1. Education and Skills 49 4.2. Health and Nutrition 53 4.3. Social Protection 57 5. Resilience 63 5.1. Conflict and Peacebuilding 62 5.2. Climate Change, Environmental, and Disaster Risks 69 6. Governance 78 6.1. Government Effectiveness 79 6.2. Control of Corruption 82 6.3. The Rule of Law 82 6.4. Voice and Accountability 84 7. Policy Priorities 83 8. Data and Knowledge Gaps 90 References 93 Annex 1: List of Consultations Conducted 99 Annex 2: List of Censuses and Surveys 102 vi Boxes Box 1 Migration and Remittances 27 Box 2 Country Private Sector Diagnostic 33 Box 3 Case Study: Tourism 42 Box 4 The Experience of Land Reform in the Philippines 45 Box 5 Other Social Protection Programs 65 Box 6 Women’s Health, Education, Employment, and Empowerment 61 Box 7 Conflict Actors in the Philippines 62 Figures Figure 1 Thematic Areas and Key Priorities 8 Figure 2 The Philippines has Achieved High Rates of Growth Since the Early 2000s 10 Figure 3 GDP per Capita 1960-2018 for Philippines and Regional Peers (constant 2010 USD) 11 Figure 4 Share of Sectors in GDP (%) 11 Figure 5 Share of Sectors in Employment (%) 11 Figure 6 Contribution to GDP Growth from the Demand Side 12 Figure 7 Contribution to GDP Growth from the Supply Side 12 Figure 8 Composition of Gross Goods and Services Exports, 2017 13 Figure 9 Destinations of Gross Goods Exports, 2017 13 Figure 10 Public Revenue as Percentage of GDP 14 Figure 11 Domestic Credit as Percentage of GDP, 2018 15 Figure 12 National Poverty Rates and Number of Poor 16 Figure 13 Poverty Trends Based on National and International Poverty Lines 16 Figure 14 GDP Growth and Poverty Rates by Region 16 Figure 15 Prosperity Over Time in the Philippines and East Asia and Pacific, 2002–15 18 Figure 16 Inequality Measures 19 Figure 17 Average Growth Rates of Various Measures, 2006-15 19 Figure 18 Access to Basic Services and Assets by Income Quintile, 2015 20 Figure 19 Distribution of Population by Region and Major Group 21 Figure 20 Access to Basic Services by Major Groups 21 Figure 21 Contributions of Household Income Growth and Change in Distribution to Poverty Reduction 22 Figure 22 Decline in Poverty Rate for Each 1 Percent Increase in GDP per Capita 22 Figure 23 Contribution of Income Sources to Poverty Reduction, 2006–15 23 Figure 24 Unemployment and Underemployment Rates 24 Figure 25 Composition of Jobs 24 Figure 26 Jobs in Business Process Outsourcing Services 25 Figure 27 Average Monthly Earnings of Employees in Asia-Pacific, 2016 (USD) 26 SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 vii Figure 28 Changes in Share of Jobs by Occupation and Skill Category, 2007–17 26 Figure 29 Locations of Filipino Migrants (in millions) 27 Figure 30 Remittances and Filipinos Living Abroad 27 Figure 31 Population Pyramids, 1950–2040 29 Figure 32 Past and Projected Urban and Rural Populations 30 Figure 33 Past and Projected Population of Cities with More than 300,000 Residents 30 Figure 34 Number of Procedures to Start a New Business, 2019 34 Figure 35 Net FDI as Percentage of GDP 35 Figure 36 Extent of Market Dominance in Selected East Asia and the Pacific Economies, 2019 36 Figure 37 Quality of Overall Infrastructure (rank out of 140 and score), 2018 37 Figure 38 Quality of Trade and Transport Infrastructure (rank out of 160 and score), 2018 37 Figure 39 Digital Adoption Index for the Philippines and Regional Peers 39 Figure 40 Average Retail Electricity Costs (USD/kWh), 2016 40 Figure 41 Access to Water and Sanitation by Income Quintile, 2017 40 Figure 42 Sources of Philippine Natural Capital, 2014 41 Figure 43 Employment Share by Sector, 2015 43 Figure 44 Commodity Price Support vis-à-vis Comparative Advantage 43 Figure 45 Human Capital Index 47 Figure 46 Human Capital Index by Wealth Quintile 49 Figure 47 Formal Employment Rate by Education Level, 2018 50 Figure 48 Poverty Rate by Education Level of Household Head, 2015 50 Figure 49 School Enrollment Rates by Age for the Poorest 20 Percent and Richest 20 Percent 51 Figure 50 Reasons for Not Attending Junior High School among 12- to 15-year-Olds in the Poorest Quintile, 2017 52 Figure 51 Gap between Expected Years of Schooling and Learning-Adjusted Years 52 Figure 52 Health Insurance Coverage and Out-of-Pocket Spending on Health, 2000–16 54 Figure 53 Time Trends for 2 Key Health Service Indicators 54 Figure 54 Stunting Rate by Wealth Quintile 56 Figure 55 Impact of 4Ps on Poverty Rate 58 Figure 56 Coverage of Contributory Pensions (%) 59 Figure 57 Natural Disaster and Conflict Risks 64 Figure 58 Socioeconomic Indicators in the Philippines, Mindanao, and ARMM 66 Figure 59 Interlinked Peacebuilding Challenges 68 Figure 60 Recent and Projected Increases in Temperatures for the Philippines 70 Figure 61 Recent and Projected GDP per Capita for the Philippines 70 Figure 62 Projected Economic Class Distribution for the Philippines 71 Figure 63 Flows of Plastic Waste in the Philippines 72 Figure 64 Philippines Greenhouse Gas Emissions by Major Source 75 Figure 65 Philippines Agricultural Greenhouse Gas Emissions by Source 75 Figure 66 2016 and Projected 62040 Greenhouse Gas Emissions by Fuel Source 76 Figure 67 2016 and Projected 2040 Energy Supply by Fuel Type, Thousand Tons of Oil Equivalent 76 Figure 68 Power Production under a 100 Percent Renewable Scenario for 2050 77 Figure 69 World Governance Indicators for Philippines and Regional Peers (Percentile Rank), 2018 79 viii Figure 70 Status of the Government’s Career Executive Service Positions, August 2019 80 Figure 71 Corruption Reports in the Enterprise Survey (Percentage of Firms), 2015 83 Figure 72 Percentage of Legislators Who Come from Political Dynasties 84 Figure 73 Percentage of Metro Manila Voters Offered Something in Exchange for Their Votes 85 Maps Map 1 Poverty Incidence by Province, 2015 17 Map 2 National Road Density 38 Map 3 Human Capital Index by Region 48 Map 4 Vaccination Rates by Region 55 Map 5 Mindanao, the Autonomous Region of Muslim Mindanao, and Marawi City 67 Table Table 1 Top 10 Countries in Number of Children Not Vaccinated for Diptheria, Tetanus, and Pertussis 54 Currency Equivalents Exchange Rate Effective as of August 31, 2019 Currency Unit = PHP (Philippine Peso) PHP 52.03 = USD 1.00 SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 1 1 OVERVIEW 2 OVERVIEW From its birth as an independent nation, the Philippines has held great potential. A 1960 World Bank report described the “dynamic qualities…of an economy in the ‘take off’ stage of development,” noting the country’s strong prospects due to its “good natural resources, a relatively high level of education, and political stability,” along with its government economic policies and close ties to the United States. Additional advantages are its links to China, strategic location in the heart of East Asia, and population of industrious people, evidenced by the high demand for Filipino workers around the world in a wide variety of professions. Despite these advantages, for decades the country’s 2010-2018 averaged 6.3 percent, one of the fastest economic performance remained disappointing while rates in the world. many of its neighbors became celebrated success stories and lifted millions out of poverty. In 1960, Decisions the country is making today will determine the Philippines was one of the wealthiest countries in whether the Philippines will start a third chapter the region, with a higher level of GDP per capita than in its development story and achieve its dream for China, Thailand, and the Republic of Korea. By the 2040. The government’s Ambisyon Natin 2040 vision, close of the 20th century, the Republic of Korea’s GDP which derives from a wide consultation conducted with per capita exceeded that of the Philippines by tenfold. the Filipino public in 2015, describes the kind of life The country failed to reach its potential, held back by the Filipino people aspire for themselves and for the a long period marked by martial law, corruption, coup country by 2040: a prosperous middle-class society attempts, and macroeconomic mismanagement. free of poverty. Achieving this long-term vision implies a tripling of per capita income by 2040. Steps taken during the 1990s provided the foundation for the Philippines to begin a second chapter in The Philippines will not achieve Ambisyon Natin 2040 its development story at the start of the new by simply riding its current wave of success. The millennium. During that decade, the country righted Philippines needs to prepare its people for a future its macroeconomic ship, achieved institutional stability, marked by technological change and the climate crisis. and pursued a series of structural reforms. The country Technology has given the country a thriving BPO opened up to trade, began to liberalize foreign direct sector, but technology may also take it away, as some investment (FDI), and expanded competition in the air tasks become increasingly automated. And global transport, oil, power, and financial sectors. Reforms in heating threatens to devastate the economy over the the telecommunications sector helped make possible long term in the absence of efforts to adapt. To achieve the flourishing of the business process outsourcing the country’s goals, policymakers will need to build on (BPO) sector, which has grown rapidly over the last 15 the country’s success with an eye to this future. years to comprise 8 percent of GDP today. Overseas remittances, equivalent to about 10 percent of GDP, Realizing Ambisyon will require an expansion of have provided a steady source of consumption-based inclusion. Only in the last few years has there been an growth. The foundation from the 1990s reforms in appreciable decline in the poverty rate, and about 20 tandem with these factors have generated substantial million Filipinos remain poor. Throughout much of its growth across the economy since 2003 and in history, the country’s institutions have been erected particular over the last decade following the global by and for a narrow slice of Philippine society, serving financial crisis. Annual economic growth rates over primarily its interests rather than those of the broader SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 3 populace. In particular, portions of Mindanao have 1.1. Inclusive Growth and Jobs suffered from neglect and exclusion, leading to a vicious cycle of poverty and conflict. The areas of Mindanao Growth in the Philippines has not been highly most affected by conflict stand out as the one part inclusive. Median incomes have grown much more of the country left behind in the country’s broader slowly than GDP per capita, while the wealth of the economic success. The highest levels of poverty are richest Filipinos has expanded much faster than the found in conflict-affected portions of Mindanao and overall economy. The pace of creation of good jobs areas at the eastern edge of the country that are highly also remains inadequate. Millions of Filipino workers vulnerable to typhoons. have moved out of low-productivity jobs in agriculture, and half of all workers now hold wage jobs with private This Systematic Country Diagnostic (SCD) identifies firms. But the large bulk of these jobs pay meager a four-part diagnosis of the constraints to the wages, and fewer than half offer basic benefits. Philippines achieving its Ambisyon Natin 2040 goals. First, the country can enact policies that maintain Historically, many policies have not favored broad- its high rates of growth but also make that growth based growth. Economic competition has been more inclusive and generate good jobs. Second, restricted by policies that favor existing conglomerates. investments in human capital can ensure that Filipinos Labor regulations have benefitted only those with can lead healthy lives and have the skills for those formal wage jobs—less than a quarter of the workforce. jobs. Third, the Philippines can build its resilience to Decades of underinvestment in infrastructure have natural disasters and the looming climate crisis, while limited possibilities for the private sector. And the continuing to build peace in Mindanao. The common country has failed to realize the promise of its natural thread across all these challenges is the need for resources; agriculture has been hampered by a heavy follow-through and implementation, which points to focus on rice to the detriment of other products with governance as the core cross-cutting challenge. The far greater potential. Confronting these constraints can SCD addresses these thematic areas—inclusive growth simultaneously help the country maintain its high levels and jobs, human capital, resilience, and governance— of growth, boost inclusiveness, and create good jobs. in turn. Further private sector growth will increase the demand 4 OVERVIEW for labor, which will in turn lead to more employment Restrictive labor regulations. In practice regulations and higher wages. Emphasis on addressing areas that make it very difficult and costly to dismiss regular most directly affect the less well-off can make growth employees. Consequently, many workers are employed more inclusive. informally or on short-term “endo” contracts without benefits and job protections. Limited competition. The Philippines has the highest level of market concentration and oligopoly power Weak infrastructure. International indices rank the among major countries in the region. One reason many Philippines as having the weakest infrastructure sectors are dominated by a small number of firms is that among major countries in the region. The country regulations create high barriers to entry. The Philippines has achieved some notable successes including near- is one of the most difficult countries in the world for universal access to improved water sources. But it launching a new business: only Equatorial Guinea lags peers in developing digital infrastructure, and the and Venezuela require more procedures to legally critical elements of connective infrastructure—ports, start and formally operate a company. Such barriers rural roads, and urban public transport—are deficient, particularly impede the growth of small enterprises that particularly in Mindanao. The government’s stated top can be engines of jobs and inclusion. The 40 percent priority is infrastructure, with a focus on Mindanao. foreign ownership cap in most sectors further limits competition. In recent years, the government has taken Underperforming agricultural sector. Longstanding steps towards improving competition: the Philippine agricultural policy has been singularly focused on Competition Commission was established in 2016, and promoting rice, a crop for which the country does not the Ease of Doing Business Law was enacted in 2018. have a comparative advantage. The Philippines was SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 5 until recently among a handful of countries with quota (HCI), which captures the impact of human capital on restrictions on rice imports. These quotas kept the price future growth prospects, is a useful starting point for of rice very high, benefitting only the small number considering the country’s human capital challenges. of farmers who were net rice sellers. The policies on The country’s HCI score of 0.55 indicates that due to rice also effectively discouraged farmers from moving shortcomings in education, health, and nutrition, the into other products, stifling the growth of agriculture. future productivity of an average child born today in The government recently enacted a law to convert the the Philippines will fall 45 percent below potential. quotas to tariffs and move away from the focus on rice. Two other major constraints for agriculture have been Absent interventions to shore up human capital lack of adequate extension services for farmers and investments in low HCI regions, the gaps between poor rural infrastructure. wealthy and poor stand to widen. Children from the wealthiest one-fifth of families accumulate 40 percent more human capital than those from the poorest 1.2. Human Capital one-fifth. Children born into poor families have less access to high quality education and are more likely Human capital is critical to both economic growth to suffer from health and nutrition deficiencies. They and inclusion. The prospects for continuing economic face an uphill climb through the education system growth in the Philippines will depend on harnessing partly because their families’ income is less stable and the rising tide of technological change and expanding disproportionately vulnerable to shocks resulting from its high-skill services sector. The Human Capital Index natural disasters and catastrophic health expenses. 6 OVERVIEW High level of child malnutrition. One in three children amplify levels of violent conflict. These risks highlight under 5 years old—and half of those in the poorest the need to ramp up a wide variety of measures for fifth of households—are stunted, a key marker of climate change adaptation and disaster risk reduction. undernutrition. Research tracking Filipinos from a The government has launched a Risk Resiliency young age has shown that children who are stunted at Program (RRP), but the program has yet to become an age 2 may struggle to learn in school, will be at greater effective vehicle for these efforts. The country can also risk to drop out early, and will be less likely to hold help lead the worldwide effort to slow global warming formal sector jobs as adults. The expansion of public by moving away from coal-fired power and tapping its insurance in recent years dramatically improved health high potential for renewable energy, particularly solar care access, but challenges remain in leveraging that and wind power. insurance to boost the quality of services. Continuing armed conflict. The multiple conflicts in Low quality of schooling. There have been huge the Philippines derive from a complex web of historical advances in recent years in the education system. drivers, led by historical and social exclusion of the Kindergarten was made universal and mandatory, and Muslim population in a portion of the Mindanao the basic school cycle was expanded from 10 to 12 region. Armed groups do not pose a threat to the years with the creation of senior high school. However, state. However, ongoing conflicts have paralyzed the quality of schooling is low, such that children development and poverty reduction in particular places, who attend 12.8 years of schooling in the Philippine with a secondary impact on the Mindanao region and system learn as much as a child in a high-performing the country as a whole. The recent formation of the system learns in 8.4 years. Boosting learning will Bangsamoro Autonomous Region in Muslim Mindanao require following through on plans to improve teacher (BARMM) as the result of a peace agreement offers training, instructional materials, curricula, and school new hope for peace in the region. The road to lasting infrastructure. peace will be long, and full implementation of the agreement will face challenges, among them the increasing terrorist threat posed by more radical groups. 1.3. Resilience Geography and history have saddled the Philippines 1.4. Governance with twin risks of natural disasters and conflict. Many countries have natural disaster hazards or conflict The Philippines faces a complex mix of governance hazards, but few face high levels of both. These threats challenges. These pose a primary impediment to have stifled development and poverty reduction in the addressing the constraints related to inclusive growth areas most directly affected. The enduring high level of and jobs, human capital, and resilience. There have these risks points to the critical importance of efforts to been promising developments on many fronts in recent enhance resilience. years. Almost every constraint has a corresponding existing program, law, or strategy intended to address Severe climate, environmental, and disaster risks. it. The challenge is largely a question of follow-through The Philippines lies within the path of Pacific typhoons and implementation. and along the Pacific Ring of Fire where the risk of earthquakes is high. It is one of the countries most at Difficulties in implementation of policies and risk for the impacts of climate change, which poses the programs to address constraints weaken government largest threat to the prosperity of the Filipino people effectiveness. Public administration challenges in the over the long term. Global warming will increase the Philippines include weak public financial management, intensity of typhoons, threaten agriculture yields, inefficient public procurement, overlapping agency decimate the coral and fish ecosystem, and curb responsibilities, limited civil service capacity, economic growth. Climate change also threatens to inconsistent decision-making over time, and excessive SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 7 caution of civil servants due to the personal liability and vote buying is pervasive. These twin phenomena they face. The government has taken steps to resolve stifle voice, discouraging active political participation by some of these challenges. those without family connections and wealth. They reduce incentives for policymakers, particularly A major rule of law concern in the Philippines is at the local level, to focus on improving the lives of weak judicial efficiency, which stymies economic their constituents. growth and regulatory effectiveness. The heavily overburdened judiciary suffers from significant Vote buying and political dynasties lie at the nexus governance challenges, with large backlogs at all between extreme concentration of wealth, oligopoly levels of the court system. Important reforms critical power, and the weak rule of law. Although systematic for economic and social development can face delays data is lacking, numerous case studies demonstrate of several years due to court battles. Due to poor how historically the political system in the Philippines performance of the judiciary, the Philippines ranks 152 has been hijacked by the interests of economic out of 190 countries in the “Enforcing Contracts” sub- elites. Politicians with money and the right family ties index of Doing Business. The court system is viewed as enjoy an edge in elections. Politicians often block favoring the wealthy and powerful. Substantial rule of implementation of policies and programs that threaten law concerns have also been raised about the deaths the dominant oligopolies and their owners, who may be resulting from the war on drugs. the politicians themselves, their family members, and others who fund their election campaigns. The weak Voice and accountability are limited by political rule of law also favors the elites, who can navigate the dynasties and vote buying. Members of political courts and use them to tie up legislation they oppose. families or dynasties hold most elected positions, 8 OVERVIEW Figure 1: Thematic Areas and Key Priorities Inclusive Growth & Jobs Open up economic competition Construct quality infrastructure Governance Upgrade governance institutions to be “fit for Human Capital purpose” for Ambisyon 2040 Resilience Tackle malnutrition Protect the country from climate & disaster threats Close the learning gap in basic education Build the foundation for peace 1.5. Priorities A strong consensus emerged in the consultation process and the Bank’s prioritization exercise that The SCD team identified seven priorities to achieve the overarching priority is upgrading the country’s Ambisyon Natin 2040, eliminate extreme poverty, governance institutions to be “fit for purpose” for and boost shared prosperity. The priorities were Ambisyon Natin 2040. Key steps include following determined by considering the steps needed in the near through on implementation of the budget reform, term to lay the foundation for achieving the long-term improving the function of public procurement, and vision for 2040 and beyond. Following the preparation boosting the capacity of the civil service. of the initial diagnostic analysis and extensive consultations with government, the private sector, civil The remaining six priorities were categorized by society, and academic experts, a prioritization exercise the level of additional policy effort needed. Two was carried out among the extended World Bank priorities are classified as “Get in Gear”, meaning that team. Drawing on the diagnostic analysis and input a major shift in effort is needed: tackling malnutrition provided in the consultations, the team rated candidate and protecting the country from climate and disaster priorities based on the extent to which addressing threats. Two fall into the “Press on the Accelerator” them will contribute to achieving Ambisyon Natin 2040 category: building the foundation for peace and closing and the World Bank’s goals of eliminating extreme the learning gap in basic education. These are areas poverty and boosting shared prosperity, the strength where the current policy direction is appropriate but of the evidence basis for the priority, and the extent of effort needs to be enhanced. The third category, “Keep complementarity between a given priority and others. Driving,” covers two areas where the existing policy is on the right track but continued follow-through The priorities are not intended to be a comprehensive is needed: opening up economic competition and set of areas for government action. They were constructing quality infrastructure. Figure 1 shows the identified as having the highest importance for seven priorities mapped to the four thematic areas of achieving Ambisyon Natin 2040. Many areas of more the SCD. near-term concern and those in which government action has been effective—such as macroeconomic and monetary management—are discussed in the SCD but were not identified as top priorities. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 9 2 COUNTRY CONTEXT 10 COUNTRY CONTEXT 2.1. Economic Growth and Macroeconomy Structural reforms played a key role in the growth recovery of the 1990s, establishing the underpinnings The Philippines has emerged as a sustained growth for strong growth in succeeding decades. During powerhouse. The country’s unstable macroeconomic the late 1980s and into the 1990s, the Philippine and political environment in the 1980s resulted in government took steps to liberalize trade and volatile growth rates that averaged just 2.5 percent per broadened its privatization efforts. The government year over the period 1980-1997, far below the average also liberalized foreign direct investment in select of 4.6 percent of structural peers and 7.6 percent of sectors and opened several industries—finance, air regional peers.1 Structural reforms and a commitment transport, oil, power, and telecommunications—to to macroeconomic stability helped the Philippines increased domestic competition. achieve relatively high economic growth after 1998 (Figure 2). Favorable domestic and external conditions The period of renewed growth has been accompanied supported growth to accelerate to an average rate of by an acceleration of the long-run shift of the 6.4 percent in 2010-2017, surpassing the average of economy away from agriculture. The sector’s both structural and regional peers. contribution to GDP declined from 13.3 percent in 1998 to 8.5 percent in 2017 and employment fell more The country’s recent success represents a substantial dramatically (Figure 4 and Figure 5). Labor productivity turnaround from its historical performance relative in the agriculture sector remains much lower than the to neighbors. In 1960, the Philippines was one of average among regional peers. Investment and growth the wealthiest countries in the region, not far behind in the agriculture sector was stymied by the country’s Malaysia, and with a higher level of GDP per capita vulnerability to natural disasters, a policy focus on than China, Indonesia, Thailand, and the Republic of rice self-sufficiency, the weakness of institutions that Korea (Figure 3). At the close of the 20th century, the support agriculture, and uncertainties generated by a Republic of Korea’s GDP per capita exceeded that of lengthy agrarian reform. the Philippines by tenfold. Figure 2: The Philippines Has Achieved High Rates of Growth Since the Early 2000s GDP Growth Rate External debt Coup Asian Global Poverty Rate 8% crisis attempts financial crisis financial crisis 70% 60% 6% 50% 40% 4% 30% 2% 20% 10% 0% 0% -2% -4% -6% -8% 1980 1985 1990 1995 2000 2005 2010 2015 Crisis Period GDP Growth $3.20-a-day Poverty Rate Source: World Bank (2018b). 1 Structural peers for the Philippines are defined as Bangladesh, Kenya, Morocco, Pakistan, Sri Lanka, and Vietnam based on the following criteria: lower middle-income countries with natural resource exports comprising less than 20 percent of experts, an above average score on the Natural Disaster Risk Index, a population of more than 20 million, an oil importer, exports not concentrated according to the Herfindahl index, and not landlocked countries, small states, or fragile states. Regional peers are China, Indonesia, Malaysia, Thailand, and Vietnam. Regional peers are used as the principal point of comparison throughout most of this Diagnostic. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 11 Figure 3: GDP per Capita 1960-2018 for Philippines and Regional Peers (constant 2010 USD) 14,000 12,000 Malaysia, $12,109 10,000 8,000 China, $7,755 6,000 Thailand, $6,362 4,000 Indonesia, $4,285 Philippines, $3,022 2,000 Vietnam, $1,964 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: World Development Indicators. Both the services and manufacturing sectors have of the total economy, and contributed an average of been expanding. The services sector’s share of GDP 75.2 percent of economic growth. Economic growth increased from 51.4 percent in 1998 to 57.5 percent is anchored on private consumption, owing to a large in 2017. Services grew annually at 5.8 percent in the domestic market, robust remittances, and a pickup in same period. Meanwhile, growth in the manufacturing investments in the services sector. Personal remittances sector also accelerated in recent years, growing at sent to the Philippines averaged 11 percent of GDP in an average annual rate of 7.6 percent in 2010-2017, 2000-2016, compared to 4.4 percent in lower middle- compared with 3.0 percent in 2003-2009. income countries on average, and 0.4 percent in East Asia and the Pacific. The favorable domestic policy From the demand side view, the Philippine economy environment and global liquidity opportunity stimulated is a consumption-driven economy. During 2000- investments, which averaged 21.4 percent of GDP over 2017, private consumption represented 71.4 percent 2000-2017. Figure 4: Share of Sectors in GDP (%) Figure 5: Share of Sectors in Employment (%) 70% 70% 60% Services, 57% 60% Services, 56% 50% 50% 40% 40% Industry, 34% Agriculture, 25% 30% 30% Manufacturing, 24% Industry, 18% 20% 20% Agriculture, 9% 10% 10% Manufacturing, 9% 0% 0% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: National Income Accounts, Philippine Statistics Authority. Source: Labor Force Survey, Philippine Statistics Authority. Note: Manufacturing is a sub-sector of the industry sector. Note: Manufacturing is a sub-sector of the industry sector. 12 COUNTRY CONTEXT Figure 6: Contribution to GDP Growth from the Figure 7: Contribution to GDP Growth from the Demand Side Supply Side Percentage point Percentage point 14 9 12 8 10 7 8 6 6 5 4 4 2 3 0 2 -2 1 -4 0 -6 -1 -2 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Household Consumption Government Consumption Agriculture Services Capital Formation Discrepancy Manufacturing Other Industries Net Exports Real GDP Real GDP Growth Source: World Bank staff calculations based on National Income Source: World Bank staff calculations based on National Income Accounts, Philippine Statistics Authority. Accounts , Philippine Statistics Authority. Note: Other industries are mining and quarrying, construction, and electricity, gas and water. In a decomposition analysis, capital accumulation External performance has been satisfactory although emerges as the main contributor to economic growth, deteriorating in recent years. The Philippines accounting for three-fifths of growth between 1981 maintained lower trade deficits over the past decade, and 2017. By contrast, expansion of the labor force owing to gradual export diversification and favorable accounted for less than one-third of growth, and its terms of trade. However, the current account and trade contribution to growth has steadily declined in the balances deteriorated, mainly due to export growth past three decades. The contribution of total factor slowing down while import growth accelerated. The productivity (TFP) to economic growth increased in deficit has been financed with remittances, transfers, 2000s, mirroring the path of overall economic growth. and foreign direct investments. TFP accounted for a third of growth in 2001-17. The contribution of TFP to growth was higher in the Philippines exports are concentrated in a few Philippines than in regional peers (except for China) and sectors and are principally directed towards East structural peers (except for Sri Lanka) between 1995 Asian neighbors. Total exports of goods and services and 2010. were equivalent to 31.7 percent of GDP in 2018. Traditionally, goods exports have been largely of The macroeconomic framework has strengthened electrical machinery and equipment. ICT exports— further in recent years. Strong macroeconomic principally business process outsourcing—have grown fundamentals supported rapid economic growth and rapidly since 2005 and now comprise more than a job creation. Indebtedness remains moderate with fifth of total exports. The composition of Philippines’ the public and publicly-guaranteed debt to GDP ratio goods export basket has not substantially changed at 34.9 percent in 2017. The fiscal balance improved over the past decade. China and Hong Kong SAR, significantly, after some adverse effects during the China together are the destination for 27 percent global recession. By 2015, fiscal balance turned into of Philippines goods exports. Other destinations in a surplus of 0.8 percent of GDP from a deficit of 2.7 Asia account for an additional 40 percent of goods percent of GDP in 2009. exports, 15 percent go to Europe, and 13 percent are to the United States. (Data on destinations for services exports are not available). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 13 Figure 8: Composition of Gross Goods and Services Figure 9: Destinations of Gross Goods Exports, 2017 Exports, 2017 Japan Other Asia 7.0% ICT China 11.2% 21.2% 21.0% Electrical machinery and equipment 35.4% Korea, Thailand Republic of 3.1% Singapore 4.3% Hong Kong SAR, China 6.3% Travel and Other services tourism 2.4% 11.3% 5.7% Taiwan, China 2.7% Metals Minerals 2.8% 2.5% Other countries 2.0% Industrial Machinery Agriculture 12.0% 7.1% United States of Other Other Europe Germany North 4.5% Vehicles Textiles America America 7.2% 2.3% 2.0% 13.0% 3.9% Chemicals Others Other machinery 2.3% 1.9% Netherlands 2.4% 2.9% Source: Atlas of Economic Complexity. Source: Atlas of Economic Complexity. 2.2 Fiscal Situation its physical and human capital investment. However, expenditure levels are still lower in the Philippines Prudent fiscal management in the early 2010s was compared to peers in the region, apart from Indonesia. critical to ensure macroeconomic stability, leading to improved fiscal space for the government to expand The government is increasing domestic revenue its expenditures in recent years. The government mobilization. In recent years, government revenue pursued a path of expenditure consolidation between increased gradually as a result of both tax policy and 2010 and 2015 to strengthen its macroeconomic administration reforms but is still considerably below fundamentals and achieve an investment grade credit the regional average. The government has initiated rating which would lower borrowing costs significantly.2 further reforms, and as a result, total revenues reached Lower borrowing costs freed up resources to increase 16.4 percent of GDP in the first three quarters of 2018. expenditure on key sectors such as social services. The Additional tax policy measures are currently undergoing government shifted to an expansionary fiscal policy review in the legislative branch of the government. stance beginning 2016 as the government benefitted Public expenditure is expected to increase to 20.3 from improved fiscal space, with the goal of making percent of GDP by 2021. growth more inclusive by addressing a large gap in both 2 From 2011-2015, the national government deficit averaged 1.5 percent of GDP, well below the government’s deficit target over the same period. By end-2014, the Philippines had received 15 positive credit rating action from multiple credit rating agencies. 14 COUNTRY CONTEXT Figure 10: Public Revenue as Percentage of GDP 28% 26% 24% Vietnam, 23.7% 22% 20% Thailand, 19.9% 18% Malaysia, 17.6% 16% China, 15.9% Philippines, 15.5% 14% Indonesia, 12.6% 12% 10% 8% 2003 2005 2007 2009 2011 2013 2015 2017 Source: World Bank staff calculations based on World Development Indicators. Note: Three-year moving average. 2.3. Monetary Policy and Financial System Monetary management has been critical to The Philippines’ financial system has been overall macroeconomic stability. Since 2002, the primary stable and resilient. The banks are well capitalized with objective of the Bangko Sentral ng Pilipinas’ (BSP) average Basel III capital adequacy ratio at 15.3 percent monetary policy has been to promote price stability as of March 2019, well above the 10 percent regulatory conducive to a balanced and sustainable growth in the minimum. In addition, the banking sector’s profitability economy. The BSP explicitly announces its inflation is moderate but stable with its return on equity at an target over a given period, and uses various policy average of 9.6 percent and its return on assets at an instruments, primarily the reverse repurchase facility, average of 1.2 percent. As of December 2018, gross to achieve its target. Prior to the adoption of inflation NPL ratio was at 1.8 percent and net NPL ratio was at targeting, inflation averaged 6.9 percent between 0.9 percent, better than pre-crisis levels (5.8 percent 1995-2001, declining to 4.7 percent in 2002-2008 pre-2007). Financial system assets were 121 percent of and 3.2 percent in 2009-2015. In 2018, the combined GDP with banking sector accounting for 82 percent of impact of rising global oil prices, excise tax on fuel, financial system assets. Total banking sector assets were rice supply shocks, and peso depreciation put pressure US$321 billion as of December 31, 2018. Core loans in inflation, boosted the inflation rate briefly to 6.7 (58.5 percent) and portfolio investments (20.3 percent) percent, but it has since declined and is expected to were main components of the banks’ assets. continue to fall. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 15 Capital markets are considered shallow, which Figure 11: Domestic Credit as Percentage of GDP, 2018 restricts the financing of infrastructure investments. 180% The Philippine market is considered shallow in terms 160% of financial depth of the primary market and available investment opportunities across asset classes. 140% Issuances of private capital market products and government bonds each totaled 4 percent of GDP on 120% average between 2013 and 2015. They are well under 100% the 9 percent threshold associated with capital markets of developed economies but not far from the 5-plus 80% percent level in China, Malaysia, and Thailand. Even 60% so, the development of the Philippine capital market lags behind these three Asian neighbors (McKinsey and 40% Company 2017). 20% The level of domestic credit to the private sector is 0% low compared with regional peers with firms relying Indonesia Philippines Malaysia Vietnam Thailand China heavily on internal funds. At 50 percent of GDP, credit Source: World Development Indicators. to the private sector in the Philippines is at the level been slower than that of other lower-middle income predicted by its income level but substantially lower countries in the region. Despite progress in terms of the than the average 119 percent of regional peers (Figure poverty rate, fairly rapid population growth has meant 11). Less than 7 percent of working capital of firms is that the absolute number of poor has remained roughly financed by banks, much lower than the 18 percent in constant over time. regional peers. Even for the country’s large firms, only 11.6 percent of funds used for investment originate Although regional differences persist, growth and from banks. poverty reduction in recent years have reached all major regions of the country. Growth rates during 2.4. Poverty, Shared Prosperity, 2010-17 were similar for all three major island groups, and Inclusion including Mindanao, which historically falls behind other regions (Figure 14). The one major exception to the country’s story of “spatially shared prosperity” is Following many years of minimal improvements in the conflict-affected Autonomous Region in Muslim the standards of living, the last decade has seen Mindanao (ARMM), which experienced minimal growth declines in poverty. The poverty rate using the national and saw a rise in its already high poverty levels.4 poverty line decreased from 26.6 to 21.6 percent Average GDP per capita in the region is one-fifth of 2006-2015, with the most rapid declines taking place the national level. One way to understand the size of since 2012, while the number of poor only started to that gap is to ask how rapidly the region would need decline in recent years (Figure 12).3 Measured by the to grow through 2040 merely to reach the 2018 level international poverty line and lower middle-income of GDP per capita for the Philippines as a whole. The class poverty lines, the trends are similar (Figure 13). region would have to sustain over two decades an Projections suggest that the poverty rate continued to annual GDP growth rate of 9.8 percent, which would decline through 2018. While this represents significant far exceed historical growth. progress on poverty reduction, the rate of decline has 3 The national poverty line is equivalent to $2.88 PPP. 4 The ARMM was replaced by the Bangsamoro Autonomous Region of Muslim Mindanao (BARMM) through a plebiscite in early 2019. The new region expands the previous ARMM to Cotabato City and 63 barangays in North Cotabato. The figures presented in this SCD are based on data collected before the formation of BARMM. Consequently, throughout the text discussions that involve data refer to ARMM rather than BARMM. 16 COUNTRY CONTEXT Figure 12: National Poverty Rates and Number Figure 13: Poverty Trends Based on National and of Poor International Poverty Lines Million Individuals 40% 25 40% 35% 35% 30% 20 27.0% 30% 25% 21.6% 25% 20% 15 20% 15% 10 15% 10% 6.6% 10% 5% 5 5% 0% 2006 2009 2012 2015 - 0% 2006 2009 2012 2015 $1.90-a-day National $3.20-a-day Number of Poor Poverty Rate Source: World Bank (2018a). Source: World Bank (2018a). Figure 14: GDP Growth and Poverty Rates by Region A. GDP Growth Rate B. Poverty Rate Metro Manila, 6.5% 7% Mindanao, 6.4% 60% ARMM, 54% 6% Luzon, 6.2% 50% 5% Visayas, 5.9% 40% Mindanao, 36% 4% 30% Visayas, 28% 3% 20% 2% ARMM, 2.0% Luzon, 13% 1% 10% Metro Manila, 4% 0% 0% 1980s 1990s 2000s 2010-2017 2006 2009 2012 2015 Source: Regional Income Accounts, Philippine Statistics Authority. Source: World Bank (2018a). Poverty rates increase with distance from Metro Mindanao, and (2) provinces at the far eastern edge Manila. Less than 5 percent of the population falls of the Visayas, which are most vulnerable to extreme below the poverty line in Metro Manila, and poverty weather arriving from the Pacific. A partial exception to rates are less than 20 percent throughout the south the center-periphery pattern is the subregion around and central portions of Luzon where Metro Manila is Davao City, which is quite distant from Manila but has located (Map 1). The poverty headcount exceeds 30 experienced strong growth. Overall, three-quarters of percent in eastern areas of the Visayas island grouping the poor live in rural areas. At the regional level, the and most portions of Mindanao. The highest poverty largest share of the poor lives in Mindanao, which is rates—exceeding half the population—are found in two home to just a quarter of the country’s population but areas: (1) conflict-affected areas of western Mindanao 39 percent of the poor. and islands of the Autonomous Region in Muslim SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 17 Map 1: Poverty Incidence by Province, 2015 POVERTY INCIDENCE <10% 10- 20% 20- 30% 30- 40% 40- 50% >50% LUZON Manila VISAYAS Cebu City MINDANAO Davao City Source: Philippine Statistics Authority. Poverty Statistics. 18 COUNTRY CONTEXT One of the most striking trends is the lack of Available measures suggest that the gap between the progress on eliminating poverty relative to regional rich and the bulk of the population in the Philippines comparators. While the poverty rate based on the is one of the largest in the world. The Credit Suisse international poverty line of $1.90 per day declined Wealth Report from 2014 estimates that the top 1 by 2 to 2.5 percent per year in China, Indonesia, and percent owns more than half of the nation’s wealth, Vietnam, it declined by only about 1 percentage point the fourth highest after the Russian Federation, Turkey, per year in the Philippines. In consequence, the share of and Hong Kong, SAR China. Another simple measure the economically secure and that of the global middle of wealth concentration is the ratio of the estimated class increased very little in the Philippines relative to wealth of the richest person in the country to the other countries in the region (Figure 15). GDP per capita (based on estimates the 2018 Forbes Billionaires list and World Development Indicators GDP Inequality remains high in the Philippines. The Gini per capita data.). The Philippines ranks fourth by this index, calculated from the survey-based consumption measure, behind India, Mexico, and Nigeria: the wealth data, shows a value of over 40, which puts the of the richest Filipino is 6.7 million times the country’s Philippines in the top third of economies for which GDP per capita. recent data is available and above others in East Asia apart from China. (Figure 16). Survey data, however, Economic growth also led to progress on shared has well-known limitations in capturing top incomes. prosperity. The bottom 40 percent of the population The highest earning households may be less accessible saw more rapid growth in income over 2006–15 than to enumerators, may be less likely to agree to respond, the average for the country as a whole (Figure 17). and may understate their incomes if they do respond. However, average income growth in the survey was far Various imperfect approaches have been adopted to below the 3.6 percent growth of GDP per capita. This assess inequality taking into account the high end of may be partly because incomes of very high-income the distribution. households are not captured in the household survey. Average wages grew in real terms at a rate of just 0.4 percent over the same period. Figure 15: Prosperity Over Time in the Philippines and East Asia and Pacific, 2002–15 A. Population distribution by economic class in the Philippines B. Population distribution by economic class in East Asia and Pacific 100% 100% Extreme Poor 90% 90% Extreme Poor 80% Moderate Poor 80% 70% 70% Moderate Poor 60% 60% 50% Vulnerable 50% 40% 40% Vulnerable 30% 30% 20% Economically Secure 20% Economically Secure 10% 10% Global Middle Class 0% 0% Global Middle Class 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: World Bank (2018a). Note: Extreme Poor (less than PPP $1.90 - a day); Moderate Poor (PPP $1.90-$3.10 - a day); Vulnerable (PPP $3.10-$5.50 - a day); Economically Secure (PPP $5.50-$15.00 - a day); Global Middle Class: PPP $15.00 and higher - a day. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 19 Figure 16: Inequality Measures A. Gini 70% 60% 50% Philippines, China 40% 40% Thailand Indonesia Vietnam 30% 20% 10% 0% B. Wealth share of top percentile 70% Philippines, 51% 60% Thailand Indonesia 50% Malaysia 40% China 30% 20% 10% 0% Source: PovcalNet for Gini (measured by household consumption per capita); Credit Suisse 2014 for wealth shares. Note: Regional peers are labeled and shaded yellow. Figure 17: Average Growth Rates of Various Measures, 2006-15 9.1% 3.6% 2.9% 2.2% 1.6% 0.4% Average wage Average income Median income Income of the GDP per capita Wealth of richest 15 bottom 40% (2006-2018) Source: World Development Indicators, World Bank staff estimates using the Family Income and Expenditure Survey, the Labor Force Survey, and Forbes wealth estimates. 20 COUNTRY CONTEXT Rapid economic growth has yielded small poverty and remained significantly below that of the national wage gains in part because of the low and declining average (Figure 18). share of income that has gone to labor. The share is estimated to have declined from 44 percent in 1995 The Philippines has a substantial population of ethnic to 36 percent in 2015. The share in 2014 is the 15th minorities, including Muslim ethnic groups and non- lowest among the 137 countries for which estimates Muslim indigenous peoples.6 The Philippines has 182 are available in the Penn World Tables The combination ethnolinguistic groups, 110 of which are designated of a high share of wealth concentration at the very top indigenous peoples. According to 2010 census data, and an increasing share of income going to the owners members of Muslim groups make up 5.5 percent of the of capital may have meant that much of the gains population and are highly concentrated in Mindanao, from the growth have been captured by the wealthy. particularly the Autonomous Region of Muslim Another piece of circumstantial evidence for this Mindanao (ARMM). Non-Muslim indigenous peoples hypothesis comes from changes in the wealth of the are spread across many regions in all three major island richest Filipinos. A comparison of wealth estimates from groups (Reyes, Mina, and Asis 2017). 2006 and 2018 shows that the wealth of the richest 15 Filipinos increased at an average rate of 9.1 percent per Indigenous peoples (IPs) are poorer and have less year (adjusted for inflation), far exceeding the growth of access to services than other Filipinos. IPs have been average income, median income, and GDP per capita.5 historically marginalized and often face exclusion, loss of ancestral lands, displacement, pressures to and Access to basic services and ownership of destruction of traditional ways of life and practices, communication and mobility assets significantly and loss of identity and culture. They have consistently improved over the past decade, but the poor still fared fared worse than others on basic measures of well- worse than the nonpoor. Among the 40% poorest being (Figure 20). households, the proportion with access to many assets Figure 18: Access to Basic Services and Assets by Income Quintile, 2015 100% 80% 60% 40% 20% 0% Owns phone Owns vehicle Owns durable assets Lives in quality housing Has electricity Poorest 2nd 3rd 4th Richest Source: World Bank calculations based on the 2015 Family Income and Expenditure Survey. 5 This analysis is based on comparing the estimated wealth of the richest 15 Filipinos in the Forbes 2006 list to the estimated wealth from the 2018 list of the same individuals (or their heirs in the case of those who died.) The Forbes estimates are based on a variety of information, and changes over time may reflect in part changes in the information available to Forbes and the methodology used to produce the estimates.” 6 The National Commission on Indigenous Peoples designates 110 ethnic groups as indigenous groups. Some Muslim ethnic groups are designated indigenous groups and others are not. “Muslim” is defined in this analysis by membership in a predominantly Muslim ethnic group. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 21 Figure 19: Distribution of Population by Region and Figure 20: Literacy and Access to Basic Services by Major Group Major Groups Millions 0 4 8 12 100% National Capital Region Cordillera Administrative Region 95% Ilocos Region 90% Cagayan Valley LUZON Central Luzon 85% CALABARZON 80% MIMAROPA Bicol Region 75% Western Visayas 70% VISAYAS Central Visayas 65% Eastern Visayas Zamboanga Peninsula 60% Northern Mondanao 55% MINDANAO Davao Region SOCCSKSARGEN 50% Caraga Literacy Rate Fraction with Fraction with Fraction with Safe Drinking Sanitary Toilet Electricity Autonomous Region of Water Muslim Mindanao Non-Muslim Indigenous Peoples Non-Muslim Indigenous Peoples Muslim Muslim Non-Muslim and Non-Indigenous Peoples Non-Muslim and Non-Indigenous Peoples Source: Reyes, Mina, and Asis 2017, based on 2010 census data. Source: Reyes, Mina, and Asis 2017, based on 2010 census data. Persons with disabilities continue to face barriers Lesbian, gay, bisexual, transgender and intersex to their full participation and inclusion in society. (LGBTI) people face challenges in education, A specialized survey conducted by the Philippine employment, healthcare, access to justice and other Institute of Development Studies in 2016 showed government services, and are subject to violence. significantly lower school enrollment and labor force Data on LGBTI people and their development outcomes participation rates for people with disabilities (PWDs). is sparse. Although sexual minorities (lesbian, gay, Low enrollment rates, especially among older children, bisexual) people are allowed to serve openly in the are due to environmental and financial barriers while military and transgender people are allowed to change low employment rates could be attributed to low their legal gender, discrimination remains a challenge education, lack of experience, and lack of employment (UNDP and USAID 2014). Local ordinances against opportunities (Agbon and Mina 2017). The Magna gender discrimination, promoting gender fairness, Carta for Persons with Disability and the Act Expanding and protecting the rights of LGBTI people including the Benefits and Privileges of Persons with Disability in employment, have been passed by numerous local seek to ensure that rights and privileges are given to government units. However, the Philippine Congress PWDs. However, monitoring is weak. has not passed national LGBTI employment anti- discrimination legislation. LGBTI Filipinos report 22 COUNTRY CONTEXT common experiences of sexual harassment in the Findex. In 2017, only 34.6 percent of adults had workplace (UNDP and USAID 2014). In 2017 the first accounts, up from 26.6 percent in 2011. Account openly transgender woman was elected a member ownership in the Philippines is lagging behind regional of Congress and successfully lobbied the House of comparators. Among adults in the richest 60 percent Representatives to unanimously pass a gender identity of households in the Philippines, 45 percent have an protection bill. Implementation of this law will be key account, versus 18 percent of those in the poorest as case studies have shown that transgender Filipino 40 percent of households. The unbanked in the women are denied the right to express their gender Philippines cite various barriers to getting an account, identity in the work place (UNDP and USAID 2014). including distance (41 percent), high costs (53 percent), While recent attitude surveys indicate that the majority and lack of documentation (45 percent). Limited and of Filipinos are accepting of LGBTI people, in one uneven access to financial services also hinders digital survey almost 30% of survey respondents thought payments of the country’s conditional cash transfer. that people should be charged as criminals for being in same-sex relationships (International Lesbian, Gay, Bisexual, Trans and Intersex Association 2017). The 2.5. Key Drivers of Poverty Reduction Philippine Congress in 2013 passed an anti-bullying law and the Department of Education issued regulations Over 2006-2015, growth in household income prohibiting bullying in schools on the basis of sexual contributed 60 percent of poverty reduction, with orientation and gender identity. The Department of the remainder from changes in income distribution. Education also issued in 2017 a Gender-Responsive The relative contribution of the two factors varied over Basic Education Policy which expands the definition the period (Figure 21). During 2009-2012, poverty of gender to encompass relations between same-sex reduction was at a low ebb, due to slow growth under partners, gender awareness, gender-based violence, the influence of the global economic crisis but also to gender-based discrimination, gender expression and much higher distribution effects (Figure 22). The main gender identity. drivers of poverty reduction over the period were an increase in wage income and movement of employment Another aspect of inclusion is access to financial out of agriculture, government transfers, and foreign services. Slow progress in financial inclusion has been and domestic remittances (Figure 23). observed in the Philippines according to Global Figure 21: Contributions of Household Income Growth Figure 22: Decline in Poverty Rate for Each 1 Percent and Change in Distribution to Poverty Reduction Increase in GDP per Capita 100% 1.0 80% 0.8 60% 40% 0.6 20% 0.4 0% -20% 0.2 -40% 2006-09 2009-12 2012-15 2006-15 0.0 Growth Change in Distribution 2006-09 2009-12 2012-15 2006-15 Source: World Bank (2018a). Source: World Bank (2018a). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 23 Figure 23: Contribution of Income Sources to Poverty Reduction, 2006–15 2 0 Change in Poverty Incidence -2 -4 -6 -8 Non-agriculture Government Domestic Agriculture Non-agriculture Foreign Others Agriculture wage transfer remittance wage enterprise remittance enterprise $3.20-a-day $1.90-a-day Source: World Bank (2018a). The shift of employment from agriculture to lowest paid of the manufacturing and industry sector services—and the resulting rise in non-agriculture jobs, while employment in the higher-paying subsectors wage income—was the largest factor in the decline changed little. The manufacturing subsector created of poverty over 2006-15. Those who transitioned 0.33 million new jobs over this period. to non-agricultural employment generally improved their incomes as lower-end industry and services jobs Transfers from government social programs were paid more than agriculture jobs. The movement out responsible for a quarter of the overall reduction in of agriculture is a continuation of a long-term trend. poverty. The national conditional cash transfer In the 1970s half of employment was in agriculture. program, Pantawid Pamilya, expanded rapidly during The share of workers in agriculture declined from 36 this period and now reaches about 1 in 5 Filipinos. It percent in 2006 to 28 percent in 2015 and 25 percent provides cash grants to 77 percent of poor households. of employment in 2017. The share of employment in The program reduced the national poverty rate by up to services rose from 30 percent of total employment in 1.5 percentage points, lifting 1.5 million people out 1970 to 56 percent in 2017. of poverty. New jobs in services were largely concentrated in Two-thirds of Filipinos (15 million households) receive lower-paying subsectors.7 A total of 7.5 million new domestic or foreign remittances. Although foreign jobs were created during 2006–17. The new jobs were remittances are of much higher value than domestic concentrated in the services sector and for workers remittances, both have similar impacts on reducing with at least a high school education. The subsectors the poverty rate. This is because domestic remittances in the services sector with the highest wages increased are more prevalent among the poor, while foreign slowly compared with those with lower wages. A remittances are more common among the non-poor. similar pattern holds for manufacturing and industry: The cost of sending international remittances to 81 percent of the new jobs were in construction (1.63 the Philippines is relatively high. Box 1 provides a million out of a total increase of 2 million), the second discussion on the impact of migration and remittances. 7 The subsectors refer to each of the 21 sections of agriculture, manufacturing and industry, and services of the 2009 Philippine Standard Industrial Classification (PSIC) by the Philippine Statistics Authority (PSA), which are mutually exclusive and exhaustive. 24 COUNTRY CONTEXT 2.6. Composition and Future of Jobs Figure 24: Unemployment and Underemployment Rates 25% Both unemployment and underemployment have Underemployment Rate, 16.4% 20% fallen over the last decade. The unemployment rate averaged 5.3 percent in 2018.8 Of those with jobs, 16.4 15% percent are underemployed, meaning that they would like to work additional hours (Figure 24). 10% Unemployment Rate, 5.3% Most working Filipinos are wage earners, but fewer 5% than a quarter hold jobs working for private firms with benefits. Close to two-thirds (63 percent) of employed 0% Filipinos, numbering 25.4 million in 2018, hold wage 2006 2008 2010 2012 2014 2016 2018 jobs. Half of all working Filipinos have wage jobs with Source: Labor Force Survey (various years), Philippines Statistics Authority. private firms (Figure 25). Of those, less than half have Filipinos will continue to move out of agriculture jobs with benefits. In all, just 8.8 million or 22 percent looking for opportunity in services and industry. of workers hold “modern” private-sector jobs that Where those opportunities emerge will depend first pay benefits. An additional two million are household on the impacts of technology and second on policy workers, and 3.5 million work for government at various choices. Breakthrough developments in information levels. Regular employees are entitled by law to social and communications technology are driving a global security and health insurance benefits. Those working “Fourth Industrial Revolution.” These have already wage jobs without benefits include those hired wrought huge changes in a portion of the Philippine without contract and those hired on probationary economy, and many believe a new wave of innovations contracts of less than six months (who are not entitled in artificial intelligence and robotics will drive to benefits.) The widespread use of such “endo” further transformations. contracts by employers has been a long-standing point of controversy. Thus far, the Philippines has dramatically benefitted from the technology advances that have catalyzed the What jobs will Filipinos have in 2040? While the future global services trade. The country’s BPO industry is inherently uncertain, it is very likely that Figure 25: Composition of Jobs Household employee (2 million) 4% 1% 4% 5% Government employee (3.5 million) Private company employee (20 million) 28% 22% Self-employed (14.7 million) 37% without benefits with benefits Source: World Bank staff calaculations based on 2017 Annual Poverty Indicators Survey data. Note: “Benefits” here refers to enrollment in either the Social Security System or its equivalent for government workers. Data is incomplete for the self-employed. Some self-employed workers are enrolled in the Social Security System. 8 Average of the first three rounds of the 2018 Labor Force Survey. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 25 has created roughly 90,000 new jobs each year since Figure 26: Jobs in Business Process Outsourcing Services 2004 (Figure 26). More than one million Filipinos— 1,200,000 about one in 15 of those working for a private firm—are 1,100,000 directly employed by a BPO services provider and 1,000,000 the sector has become the second largest contributor 900,000 to the Philippines’ foreign exchange earnings, after remittances. The Tholons Service Globalization Index, 800,000 which identifies preferred destinations for outsourcing 700,000 digital services, puts the Philippines as the No. 2 600,000 “Digital Nation” (after India) and five of its cities— 500,000 Manila, Cebu, Davao, Bacolod, and Iloilo—among the 400,000 top 100 globally (Tholons 2018). The country’s success 300,000 in the BPO industry is largely attributed to cultural 200,000 ties to the United States and the English skills of its 100,000 workers. Other factors include liberalization of the 0 telecommunications sector, which drastically reduced 2010 2011 2012 2013 2014 2015 2016 2017 costs in the 1990s, combined with tax incentives Source: Survey of IT-BPO Services, Bangko Sentral ng Pilipinas (Kleibert 2015). (various years). and disregard other factors, starting with the economics Looking toward the future, views on the global (Schlogl and Sumner 2018). A large number of jobs implications of digital and information technology could ultimately be done by robots, but that future fall broadly into two camps. One view is that with may remain on the horizon for the Philippines as long advances in artificial intelligence and robotics, as wages remain low in comparison with competitor machines will be able to do many jobs previously nations (Figure 27).  done by humans, displacing large numbers of workers. In support of this view, two studies estimate that In developed countries, recent employment growth half of jobs in the Philippines could be automated has followed a U-shaped pattern, with declining (Chang and Huynh 2016; Manyika et al. 2017). An numbers of medium-skilled jobs, which typically alternative view starts with the observation that fears involve routine tasks that are more easily automated about technology are nothing new. Periodic warnings (Autor 2019). In developing countries, the pattern have been voiced since at least the First Industrial is less marked and the Philippines only matches Revolution in the 1750s that machines were going to imperfectly to this pattern (Figure 28). The share of wipe out workers’ livelihoods. Waves of technology high-skilled jobs—including technician, professionals, have indeed eliminated whole classes of jobs but have and managers—increased during 2007–17, and the also generated new ones. Technological change has number of middle-skilled workers did decline. However, not produced mass unemployment as feared. Specific the decline chiefly reflected the drop in the “skilled jobs and even sectors of the economy can shrink or agricultural, forestry, and fishery workers” category. disappear entirely, but what has been true for one job The main occupational shift was from elementary or sector has not been true for the economy overall occupations to service and sales workers.9 This analysis (Autor 2015). In this light, historical experience suggests shows that the Philippines is not yet undergoing the that today’s fears of technology-driven dystopia may polarization seen in the developed world. However, it is be misplaced. There are reasons to be skeptical of the also not experiencing high growth in the middle-skilled eye-popping numbers from “jobs at risk” studies. They jobs that would be expected to fuel the growth of the are based only on technological feasibilty of automation middle-class. 9 Elementary occupations include the following subcategories: cleaners and helpers; agricultural, forestry and fishery laborers; laborers in mining, construction, manufacturing, and transport; food preparation assistants; street and related sales and services workers; refuse workers, and other elementary workers. 26 COUNTRY CONTEXT Figure 27: Average Monthly Earnings of Employees in Asia-Pacific, 2016 (USD) China 847 Maldives 700 Samoa (2012) 619 Malaysia 594 Fiji 534 Thailand 420 Mongolia (2015) 410 Timor-Leste 322 Philippines 257 Viet Nam 250 Lao PDR (2010) 193 Sri Lanka 186 Cambodia 184 Bangladesh 165 Pakistan (2015) 151 Indonesia (2015) 136 Myanmar (2015) 108 0 200 400 600 800 1,000 Source: ILOSTAT annual database. Note: Regional peers are shaded yellow. Figure 28: Changes in Share of Jobs by Occupation and Skill Category, 2007–17 8% 6% 6% 5% 4% 2% 1% 1% 1% 0% 0% -2% -2% -4% -4% -6% -7% -8% Elementary Service & Skilled Plant & Craft and Clerical Technicians Professionals Managers occupations sales workers agricultural, machine related trades support & associate forestry, & operators & workers workers professionals fishery assemblers workers Low-skilled Medium-skilled High-skilled Source: World Bank staff calculations based on Labor Force Survey data (various years). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 27 Box 1: Migration and Remittances Migration is a principal thread of the Philippine social in other countries (Clemens 2014).11 If it follows this and economic fabric. Filipinos from all walks of life pattern, the migration rate will begin to fall as domestic have been migrants themselves or have family and job opportunities improve. friends living abroad. The UN and World Bank estimate the number of Filipinos abroad at six million (United Remittances emerged as a cornerstone of the Nations, Department of Economic and Social Affairs, Philippine economy during the 1990s, climbing from Population Division 2017).10 About one-third of them 3 percent of GDP in 1990 to over 13 percent in 2005. are in the United States and a quarter in the Middle Remittances have continued to grow in absolute value East (Figure 29). The number of migrants has increased but have fallen as a percentage of GDP as the overall steadily, from 3 percent of the Philippine population economy has shown strong growth and become less in 1990 to 5 percent in 2018 (Figure 30). Philippines dependent on remittances. In 2015, 42 percent of all government programs that prepare migrants for work households received remittances from abroad (World overseas and protect their welfare are considered Bank 2018a). worldwide models (Testaverde et al. 2017). The impacts of overseas migration are complex. Emigration rates may decline as the Philippines The effects can be considered in five categories: reaches upper-middle income status. Emigration flows (1) consumption, investment, poverty, and labor force follow an inverted-U pattern, first rising as a country’s participation, (2) human capital, (3) social relations, income increases and then falling. The Philippines is at (4) macroeconomy, and (5) political institutions.12 the peak of the inverted-U observed historically Figure 29: Locations of Filipino Migrants (in millions) Figure 30: Remittances and Filipinos Living Abroad 14% United Arab Remittances Emirates 12% (% of GDP), 10.2% Saudi 0.54 Arabia 10% United States 0.58 Qatar Kuwait 0.15 of America 0.20 8% Filipinos living abroad 2.08 Bahrain 0.05 (% of total population), 5.4% 6% Japan Australia Other 0.24 0.23 countries 4% 0.40 2% United China Hong Italy Kingdom 0% Canada Kong SAR, Malaysia 0.07 China 0.10 0.15 0.14 0.53 0.12 Korea, Republic of Germany 1990 2000 2010 2020 0.05 0.06 Source: World Bank Bilateral Migration Database. Source: World Development Indicators and World Bank Bilateral Migration Database. 10 The UN and World Bank estimate the total migrant stock for the Philippines in 2017 at 5.68 million and 5.97 million, respectively. Counts of overseas Filipino workers (OFWs) are subject to substantial uncertainty. The Philippine Overseas Employment Administration (POEA) puts the number of “land-based” OFWs in 2016 at 1,669,511 and “sea-based” workers at 442,820. These figures only count temporary workers who have registered with the Philippines government. 11 The peak is at $7,000–8,000 GDP per capita in 2005 PPP terms. The Philippines GDP per capita was $7,599 in 2005 PPP in 2017. 12 It is difficult to draw conclusions about the impact of migration from simple observational studies. For this reason, this review emphasizes studies that use experimental or quasi-experimental approaches to identify impacts. 28 COUNTRY CONTEXT The main impact of migration and remittances is the nursing degrees (Abarcar and Theoharides 2018). improved welfare of migrant-sending households. Consequently, while roughly 3,000 to 8,000 Filipino Households that receive remittances are, on average, nurses move permanently abroad each year, the wealthier, but this is in part due to the remittances. Philippines still has 33 nurses per capita, more than Remittances have been found to reduce poverty among both China and Thailand and more than twice the migrant-sending households and even in households number of a typical country at its level of income. without migrants in areas that send migrants (Yang and Martinez 2006). For example, the addition of A third channel by which migration boosts human remittances to household income reduced the poverty capital is via “skill flow”. Millions of Filipinos have rate by 3.8 percent in 2015 (World Bank 2018a). An returned to their country with skills and know-how analysis of based on a lottery of temporary positions acquired abroad through formal education and on-the- in the Republic of Korea shows that migration had job training. In 2017, 16,578 Filipinos were studying large positive impacts on income and consumption of abroad, twice as many as a decade previous, according sending households. Contrary to concerns that those to data from the UNESCO Institute for Statistics. The receiving remittances may work less, the Republic of job experience of returning migrants is a form of human Korea study and an earlier analysis find no impact of capital. As the world shifts further toward an economy migration or remittances, or both, on the total labor built on knowledge, migration is a vital channel to bring supply of sending households (Yang 2008). Remittances ideas to the Philippines (Clemens 2009). rise after shocks such as typhoons, providing an important insurance mechanism for recipient Although the impacts of migration and remittances households (Yang and Choi 2007). are largely positive, they have two notable downsides. Migration has taken a toll on relationships between Remittances finance investments in human capital. migrants and the children they leave behind. Qualitative Concerns are often raised that migration depletes the studies document the hardship experienced by children country of its workforce. However, migration boosts who have one or both parents overseas. One study human capital through multiple channels. Evidence found that children with migrant mothers are worse from several studies demonstrates that migration off than those with migrant fathers (Cortes 2015). and remittances generate large increases in spending Another concern is that remittance inflows can cause a on health and education in the Philippines (Clemens version of “Dutch disease”—an appreciation of the real and Tiongson 2017; Theoharides and Yang 2018; exchange rate that makes exports relatively expensive and Yang 2008). Another study shows that each 1 and therefore less competitive. One simulation analysis percent increase in international migration from a shows that remittances have boosted the economy province results in a 3.5 percent increase in secondary but also explain the slow growth of Philippine exports enrollment (Theoharides 2018). (Bayangos, Veronica, and Jansen 2013). A second channel by which migration affects human Emigration affects institutions through multiple capital is by creating incentives to pursue education. channels. It provides people with an option to exit, The possibility of migration and earning high incomes changing their incentives to exercise their voice. as a result creates a powerful draw to Filipinos to Remittances may also act as a “safety valve” to alleviate complete more education. The combined impact economic, social, and political pressure for reform. On of emigration and this incentive effect is to slightly the other hand, emigration exposes a country to values increase the overall skill level of the population (Beine, and experiences in other countries, which could raise Docquier, and Rapoport 2018). Nursing is a good expectations and create more pressure for reform. The case in point. In the 1990s, the United States made it migrants themselves may become empowered political considerably easier for Filipino nurses to obtain work agents from abroad. One recent study found a positive visas. As a result, enrollment in nursing studies in the impact of migration on both political and economic Philippines increased dramatically. For each new nurse institutions for most countries, including the Philippines who moved abroad, two individuals graduated with (Docquier et al. 2016). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 29 2.7. Future Trends to its regional peers, the Philippines now has a demographic advantage: it still has a young population This section outlines trends in five areas—demography, and does not yet have the challenges of rapidly aging urbanization, technology, climate, and the role of population facing China, Vietnam, and Thailand. China—and discusses their impacts for the Philippines. Urbanization: In 1950, the Philippine population was Demography: The Philippines population will remain overwhelming rural. Today Filipinos are split roughly fairly young through 2040. Although the total fertility evenly between urban and rural areas. With continued rate continues to fall steadily, the current rate of 2.7 is migration, nearly all future population growth is higher than that of all regional peers. Given the large projected to be in urban areas (Figure 32). Both Metro number of people currently of childbearing age, even Manila and other cities of all sizes will expand. Today with continued fertility declines, the population will only Metro Manila and Davao City have populations continue to grow rapidly, reaching nearly 140 million over 1 million. By 2035, Metro Manila will be nearing by 2040 (Figure 31). By UN projections, the share of 20 million, Davao City will count 2.5 million inhabitants, the population under age 15 will drop modestly, from and five other cities will have populations exceeding 1 31 percent in 2020 to 26 percent in 2040. The share million population: Cebu City, Antipolo, Zamboanga of working age (15-64) will climb slightly, from 64 to City, Dasmarinas, and Cagayan de Oro (Figure 33). 66 percent, and the share over 65 will remain low but Around the world, productivity is much higher in grow, from 5 to 8 percent. Unlike some other countries cities than in rural areas, and urbanization is strongly in East Asia which have experienced rapid declines in correlated with economic growth (Glaeser and Xiong birthrates, the Philippines has had a long, slow drop in 2017). This suggests that the growing urban population fertility. As a result, it has not experienced a sharp bulge can be a positive force for achieving Ambisyon Natin in the share of people of working age and the resulting 2040. At the same time, it will amplify existing “demographic dividend.” On the other hand, compared challenges for infrastructure and basic service delivery. Figure 31: Population Pyramids, 1950–2040 Age 100 90 80 70 60 50 40 30 20 10 2040 2019 2000 1990 1980 1970 1960 1950 1950 1960 1970 1980 1990 2000 2019 2040 0 6 Million 5 Million 4 Million 3 Million 2 Million 1 Million 1 Million 2 Million 3 Million 4 Million 5 Million 6 Million Men Women Source: World Bank staff calculation based on United Nations (2019). 30 COUNTRY CONTEXT Figure 32: Past and Projected Urban and Figure 33: Past and Projected Population of Cities with Rural Populations More than 300,000 Residents in millions in millions 150 45 45,000 San Fernando Cotabato Batangas City 40 40,000 Iligan San Fernando Cotabato San Pedro Tarlac City Batangas Iligan Butuan 35 35,000 San Pedro Baguio City Tarlac Mandaue City Butuan 100 Lipa City Baguio City 30 30,000 Binan City Mandaue Cabuyao Lipa City Binan General Trias Cabuyao Iloilo City 25 25,000 SantaTrias General Rosa Iloilo City Lapu-Lapu City Santa Rosa Calamba Lapu-Lapu City 20 20,000 Angeles City Calamba 50 Basilan Angeles CityCity ImusCity Basilan Urban 15 15,000 Imus San Jose del Monte San Jose del Monte Bacolod Bacolod General Santos City Rural General Bacoor Santos City 10 10,000 Bacoor Cagayan Cagayan De de Oro Oro City City Dasmarinas Dasmarinas Zamboanga Zamboanga City City - 5 5,000 Antipolo Antipolo Cebu Cebu CityCity Davao Davao CityCity Manila Metro Manila 0 - 1950 1975 2000 2025 2050 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 1950 1960 1970 1980 1990 2000 2010 2020 2030 Source: United Nations, Department of Economic and Social Affairs, Source: United Nations, Department of Economic and Social Affairs, Population Division (2018). Population Division (2018). Technology: Technology will continue to enable job ecosystems. Climate adaptation—including restoring growth but may also replace some jobs. Information mangrove forests to protect coasts and switching to and communications technology made possible the climate-resilient crops—can lessen the negative impacts. spectacular growth of the IT-BPO sector, which now The country can also help mitigate climate change by employs more than 1 in 15 Filipinos working for a meeting its target under the 2015 Paris Agreement to private company. As the previous section highlights, cut emissions by 70 percent below business-as-usual advances in robot technology and artificial intelligence (BAU) by 2030. This would mean meeting growing have stoked global fears that many jobs may disappear, energy needs with renewable sources instead of coal. and two studies claim that half of jobs in the Philippines In particular, the country has high potential to expand are at high risk for automation. However, the decline solar and wind power. These topics are discussed in of “middle-skill” jobs seen in the developed world is greater detail in the Resilience section of the report not happening in the Philippines, and the country’s and under the infrastructure heading of the Inclusive low wage level will slow the rate at which technology Growth and Jobs section. substitutes for labor. Policies to boost the country’s digital infrastructure and worker skills can make The Role of China in the Global Economy: China’s technology more job enabling than job replacing. changing relationship with the United States may present an opportunity for the Philippines. Strained Climate: The Philippines is among the countries trade ties between China and the United States most vulnerable to climate change, in part due to may increase the costs of inputs and final outputs, its location in the path of Pacific typhoons and the dampening investor’s sentiments, and disrupting trade. sizable population living near sea level. Projections The Philippines is integrated to the world economy via suggest the economic impact could be massive for the trade, financial, and investment linkages. In the near Philippines. Climate change is projected to increase the term, increased U.S. barriers to China goods could frequency and intensity of extreme weather events, reduce demand for Philippine intermediate goods depress agricultural and fishery yields, and kill off vital exports (mainly electronics) that are inputs for exports SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 31 to the United States. In the medium term, they could options needed to realize the collective vision by 2040. lead to the relocation of direct investment away from An advisory committee composed of government China to countries that could produce the affected officials, the private sector, academe, and civil society products, including the Philippines.13 The Philippines has provided guidance throughout the visioning process. the capability to make many of the products targeted by the US tariffs on China. When deciding to relocate Ambisyon Natin 2040 describes the kind of life investment, investors consider other factors such as Filipinos aspire for themselves and for the country production cost including energy and logistic costs, FDI by 2040: a prosperous middle-class society free of restrictions and incentives, and ease of doing business. poverty. Achieving this vision of tripling GDP per capita Therefore, while the Philippines could potentially by 2040 will require maintaining average growth of benefit from the US-China trade frictions, it would 6.5 percent over the next two decades. This central need to address structural constraints in infrastructure vision will be the basis for development planning, and the business environment to take full advantage of under the leadership of the NEDA, over the next the opportunity. four administrations of the Philippine government through each administration’s Philippine Development 2.8. Philippine Development Plan and Plan (PDP). Ambisyon Natin 2040 Ambisyon Natin 2040 is supported by the current The government’s policy goals are encapsulated in Philippine Development Plan. The PDP outlines the long-term vision for the Philippines known as policy priorities for delivering inequality-reducing Ambisyon Natin 2040. Developed by the National transformation; increased growth potential; an Economic and Development Authority (NEDA), enabling and supportive economic environment; and Ambisyon Natin 2040 represents “the collective long- foundations for sustainable development. Central to term vision and aspirations of the Filipino people for the development agenda is an ambitious spending plan themselves and for the country in the next 25 years.” that aims to significantly accelerate investment in both The long-term visioning exercise began in 2015 and human and physical capital. This is integrated into the involved focused group discussions with 300 citizens national spatial strategy, which seeks to address spatial and a national survey with a sample of around 10,000. and socioeconomic inequality and improve connectivity Technical studies were prepared to target strategic to expand access to opportunity. 13 This paragraph is based on a World Bank analysis summarized by Cali (2018). 32 3 INCLUSIVE GROWTH AND JOBS SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 33 A combination of structural reforms and increasing Confronting these constraints can simultaneously help remittances has fueled the country’s high growth the country maintain its high levels of growth, boost rates. While growth has begun to generate broad- inclusiveness, and create good jobs. Further private based improvements in welfare, it has not been as sector growth will increase the demand for labor, inclusive as it might have been. Median incomes have which will lead to more employment and higher wages. risen much slower than GDP per capita, while the Within the broad constraints outlined here, emphasis wealth of the Filipino elite has expanded much faster on addressing areas that most directly affect the less than the overall economy. The pace of creating good well-off can make growth more inclusive. For example, jobs also remains inadequate. Millions of workers have reducing the barriers to creating a small business and moved out of low-productivity jobs in agriculture, and building and maintaining rural roads can boost half of all workers now hold wage jobs with private shared prosperity. firms. But the large bulk of these jobs pay meager wages, and fewer than half offer basic benefits. This chapter considers the constraints to inclusive growth and job creation across three areas: limited Historically, many policies have not favored broad- economic competition, rigid labor regulation, and based growth. Economic competition has been large infrastructure gaps. It also examines particular restricted by policies that favor existing conglomerates. challenges in agriculture, fisheries, and natural Labor regulations have benefitted only those with resources, which are given special attention because formal wage jobs—less than a quarter of the workforce. of the large share of the poor they employ. Further Decades of underinvestment in infrastructure have analysis of constraints to specific sectors can be found limited possibilities for the private sector. The country in the WB-IFC Country Private Sector Diagnostic. has also failed to realize the promise of its natural resources. In particular, agriculture has been hampered by a heavy focus on rice, to the detriment of other agricultural products with far greater potential. Box 2: Country Private Sector Diagnostic A Country Private Sector Diagnostic (CPSD) was and digital infrastructure. Poor infrastructure and recently completed by a WB-IFC team. The objective corresponding expensive utility costs discourage private of the CPSD is to identify cross-cutting and policy sector investment and subsequent job creation. constraints that hinder the expansion of market opportunities and subsequent private The CPSD also highlights the regulatory and trade sector investment. The diagnostic identifies restrictions that limit competition and investment inadequate infrastructure and lack of competition as more generally. Firms trying to enter markets the main constraints and offers an extensive sector-by- are discouraged by the complexity of regulatory sector analysis. procedures, administrative burdens on startups, and regulatory protection of incumbents. Similarly, firms The CPSD points in particular to the lack of requiring imports and wanting to export face high trade competition in most infrastructure markets. Limited costs. Over 93 percent of exporters and 98 percent competition has resulted in high costs and limited of importers report procedural obstacles as the main service quality for transportation services, electricity, barriers to trade, the highest among peer countries. 34 INCLUSIVE GROWTH AND JOBS 3.1. Economic Competition ranks 171 out of 190 countries. (It ranks 95th in the overall Doing Business rankings.) Thirteen procedures The Philippines’ unlevel economic playing field limits are required to start a business (Figure 34). Only two growth, inclusion, and job creation. Large, established, other economies in the world require more procedures. and well-connected firms have advantages that limit The Philippines also ranks very poorly in enforcing opportunities of newer firms and entrepreneurs contracts (152 out of 190), which may create particular without connections. A more level playing field would challenges for smaller firms. Product market regulation produce greater competition, resulting in lower prices (PMR) data show that the country’s regulatory for goods and services, higher quality, more innovation, environment is more restrictive than comparator higher growth, and more jobs. Competition pressures countries. Furthermore, price controls and other firms to become more efficient to avoid exiting the regulations that limit competition in input markets, such market. It also ensures that when more productive as professional services, hinder the competitiveness firms increase their market share, it is at the expense of downstream firms. World Bank (2018c) estimates of less productive ones. Greater competition erodes indicate that tackling the restrictions in the services the rents that otherwise accrue to firms with monopoly sector could boost GDP growth by 0.2 percent or oligopoly power. Additionally, the presence of only per year. a small number of employers, known as monopsony power, can repress wage growth. Given the dominance Public subsidies given to particular firms further of a single employer in many rural areas, monopsony limit competition. The discriminatory granting of power may be one factor limiting wage growth in government subsidies to firms, whether state-owned the Philippines. enterprises (SOEs) or private players, can uneven the playing field between competitors. World Bank research The unlevel playing field is largely the consequence of shows that 8 percent of product markets across sectors government regulations. One key barrier to inclusion reported at least one firm receiving a subsidy. In 40 and the formation of small businesses is the high percent of those markets receiving subsidies, just one regulatory hurdle to forming a new firm. The Philippines firm received a subsidy (World Bank 2018c). is one of the most difficult places in the world to start a business. In terms of the Starting a Business subindex High trade costs further restrict competition and of the 2020 Doing Business indicator, the country reduce opportunities for domestic firms to access Figure 34: Number of Procedures to Start a New Business, 2019 14 12 10 8 6 4 2 0 Philippines Indonesia Lao PDR Malaysia Cambodia Japan Vietnam Thailand China Australia Singapore Hong Kong Korea, New Zealand SAR, China Republic of Source: World Bank 2020. Note: Regional peers are shaded yellow. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 35 larger markets. Trade costs in the Philippines are among Months earlier, they ordered Angkas to stop ferrying the highest in ASEAN. Investors in the Philippines pay passengers because motorbike transport services were twice as much as those in Thailand to export or import not permitted. The Philippines’ youthful demographic a shipping container. In addition, the Philippines ranks and its large population make e-commerce an attractive lowest among peer countries on the World Bank’s investment opportunity, but regulations restrict foreign Logistics Performance Index; it scores especially low on investment in retail. connectivity to international markets.14 Besides tariffs, importing and exporting firms need to comply with A symptom of limited competition is that foreign nontariff measures (NTMs), which encompass a wide direct investment in the Philippines remains low range of requirements, including technical regulations, relative to its peers. Limited FDI results in part from product standards, and custom procedures. NTMs have restrictions on foreign investment. Such barriers include become an increasingly important obstacle to trade in explicit rigidity stipulated in the Philippine Constitution, the Philippines. A survey conducted by the International which imposes foreign investment restrictions Trade Center in 2015 shows that 60.7 percent of on natural resources, public utilities, mass media, Philippine exporters and 69.6 percent of importers educational institutions, and the practice of professions. reported obstacles due to NTMs. These figures are high In addition, the country’s foreign investment negative compared with peers. list puts a 40 percent cap on foreign equity ownership in most sectors. As a result, compared with its peers in Partly because of restrictions on competition, the the region, the country’s level of FDI is still low—2.6 innovation ecosystem lags behind ASEAN peers. percent of GDP versus 4.3 percent in Malaysia in 2016 Philippine start-ups raised a total of $28.8 million from (Figure 35). Moreover, a decomposition of net FDI into venture capitalists (VC) in 2018, the smallest amount direct-equity and intercompany borrowing reveals that among major ASEAN economies. Myanmar, a much direct-equity investment in the Philippines’ economic smaller economy with a lower per capita income, sectors fell from 0.8 percent of GDP in 2005 to 0.7 outperformed the Philippines with $32.8 million of VC percent in 2016. Most of the increase in net FDI has funding while Indonesia attracted $1.6 billion (Venzon been due to an increase in intercompany investment 2019). Philippine regulators recently denied the through debt instruments, which increased from 0.3 application of Go-Jek, an Indonesian ride-hailing firm, to percent of GDP in 2005 to 1.7 percent in 2016.15 enter the market because of its ownership structure. Figure 35: Net FDI as Percentage of GDP 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% Philippines Indonesia Malaysia Thailand Vietnam 1999-2004 2005-10 2011-16 Source: World Development Indicators. 14 The index measures the timeliness of deliveries, quality of infrastructure assets, logistics quality and competence, and the ability to track and trace shipments. 15 Debt instruments include the borrowing and lending of funds between direct investors and subsidiaries, branches, and associates. Debt instruments include loans, debt securities, financial leases, and suppliers’ credit (trade credit and advances). 36 INCLUSIVE GROWTH AND JOBS Among the 62 countries included in the Organisation A result of restricted competition is that across for Economic Co-operation and Development (OECD) many sectors the Philippine economy is dominated FDI Regulatory Restrictiveness Index, the Philippines by a small number of players. The Global Competitive is the most restrictive in terms of FDI regulation. Report (Schwab and Sala-i-Martín 2017) rates the The country belongs to the top five most restricted Philippines 119 out of 137 countries on the extent countries in almost all sectors and tops the list in terms of market dominance, making it one of the worst of equity restrictions. There are foreign investment performers in the region (Figure 36). Very high levels restrictions in several industries typically open to FDI, of market concentration are found in transport, including utilities, retail, and education. agriculture, wholesale and retail, and manufacturing, as measured by Herfindahl–Hirschman Index (HHI) Sectors that received FDI experienced the highest thresholds (World Bank 2018c). These sectors also productivity growth. The bulk of overall FDI over show high price-cost margins (PCMs), a proxy for lack of 2014–18 flowed to the metals, real estate, hotels competition. The average four-firm concentration ratio and tourism, food and tobacco, and coal, oil, and gas across all subsectors rose from 71 percent in 1988 sectors. The largest sources of FDI were China (20 to 81 percent in 1998 with the most concentrated percent of all FDI), Japan (16 percent), and the United subsectors involving the production of intermediate States (13 percent), according to data from IFC’s Cross- and capital goods such as machinery and transport Border Investment Tracker. Sectors that received FDI equipment (Aldaba 2008). in the form of direct-equity investment had either high productivity growth or high productivity levels. Firm- Major steps have been taken in recent years towards level evidence shows that regardless of the sector, firms improving competition. In 2016, the government with foreign capital are more productive than firms formed the Philippine Competition Commission with only domestic capital. In addition, firm productivity (PCC) to implement the 2015 Competition Act, which tends to increase with more foreign ownership. prohibits anticompetitive practices and regulates mergers and acquisitions. In 2018, an Ease of Doing Business law was signed. Figure 36: Extent of Market Dominance in Selected East Asia and the Pacific Economies, 2017-18 Japan Singapore Malaysia Hong Kong SAR, China China New Zealand Indonesia Lao PDR Australia Vietnam Cambodia Thailand Korea, Republic of Philippines 0 1 2 3 4 5 6 7 Source: Markets and Competition Policy Team elaboration on the World Economic Forum’s (WEF) The Global Competitiveness Report 2017–18 (Schwab and Sala-i-Martín 2017) and World Development Indicators (database, World Bank, Wasghinton, DC). Notes: A lower number indicates a greater level of dominance by a small number of firms. Regional peers are shaded yellow. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 37 3.2. Labor Market Rigidities 3.3. Infrastructure Gaps Labor regulations in the Philippines are relatively Weak infrastructure in many areas has been a primary restrictive. On the Global Competitiveness Index, the constraint to inclusive growth. Reliable quality Philippines ranked 77th out of 137 countries on the infrastructure is the foundation for private sector ease of hiring and firing, which makes it more restrictive growth and job creation. In particular, infrastructure than all of its regional peers: Malaysia, China, Indonesia, that connects the poor to opportunity or provides basic Thailand, and Vietnam. In practice, it is very difficult services to a wide swatch of the population can boost and costly for firms to dismiss regular workers. The inclusion. A study using province-level panel data for country’s minimum wage is considered high by several the Philippines shows that access to infrastructure measures, both relative to Filipino worker productivity significantly boosts growth of the nonfarm sector in and to the minimum wage of other countries with rural areas where most Filipinos below the poverty line similar income levels. Finally, redundancy costs are high live (Fuwa, Balisacan, and Piza 2016). in the Philippines at 27 weeks of salary, resulting in a rank of 118 out of 136 countries (World Bank 2018c). The Philippines has underinvested in infrastructure, leading to a large infrastructure deficit. The scale of The restrictive labor regulations may discourage the country’s infrastructure deficit is reflected in its employers from hiring workers on long-term regular poor rankings across various indicators. Out of 140 contracts. Among workers employed by private firms, countries included in the World Economic Forum’s only 44 percent report that they are enrolled in the 2017–18 Global Competitiveness Index, the Philippines social security system, a mark of long-term regular has the worst quality of overall infrastructure in East employment. The remainder are employed informally Asia (Figure 37). The World Bank’s latest Logistics or on short-term “endo” contracts without benefits and Performance Index ranks the quality of trade and job protection. transport-related infrastructure in the Philippines 67th out of 160 countries (Figure 38). Figure 37: Quality of Overall Infrastructure, 2018 Figure 38: Quality of Trade and Transport Infrastructure, 2018 Singapore (1) Japan (2) Hong Kong SAR, China (2) Singapore (6) Japan (5) Hong Kong SAR, China (15) Korea, Republic of (6) China (20) Taiwan, China (22) Korea, Republic of (22) China (29) Taiwan, China (23) Malaysia (32) Malaysia (40) Thailand (60) Thailand (41) Indonesia (71) Vietnam (47) Vietnam (75) Indonesia (54) Philippines (92) Philippines (67) 0 1 2 3 4 5 0 1 2 3 4 5 Score Score Source: Schwab and Sala-i-Martín 2017. Source: World Bank Logistics Performance Index. Notes: Regional peers are shaded yellow. Rank among 140 countries is Notes: Regional peers are shaded yellow. Rank among 160 countries is shown in parentheses. shown in parentheses. 38 INCLUSIVE GROWTH AND JOBS Map 2: National Road Density CONCRETE ROAD DENSITY km per square km of land <0.1 0.1- 0.3 0.3- 0.5 >0.5 LUZON Manila VISAYAS Cebu City MINDANAO Davao City Source: World Bank staff calculations using the Department of Public Works and Highways’ (DPWH) 2017 Road Atlas. Note: Kilometers of concrete road per square kilometer of land. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 39 Transportation infrastructure across the Philippines The country’s telecommunications sector is marked faces multiple weaknesses. The challenges include by high costs and low speeds. Two telecom companies chronic road traffic congestion, poorly performing own and control most of the existing telecom and seaports, and overcrowded airports. Urban transport Internet infrastructure. Consequently, these companies is characterized by traffic jams, a saturated transport dictate access and quality for telecom services. The system, and few alternatives. Metro Manila generates country has only 20,000 cell towers serving the entire approximately 13 million motorized trips per day and a population, compared with 70,000 towers in similarly total of around 19 million with the adjoining provinces. sized Vietnam. The Philippines lags behind the region in Only around 10 percent of the total daily trips for the mobile broadband penetration, affordability, and quality National Capital Region are serviced by rail, versus 25 of service. Download speeds for fixed and mobile to 75 percent in comparable world cities (IFC 2016). broadband are lower than in Malaysia, Thailand and This means that a majority of the country’s trips are Vietnam. Large portions of the country, including much made on the road. Rural road networks are insufficient, of Mindanao, have very limited broadband access. The particularly in Mindanao (Map 2). government has recently licensed a new full service operator which has not yet commenced service. Better The weak performance of Philippine ports is a regulation would create a more competitive market product of a restrictive and conflicting regulatory environment and thus increase access and affordability. framework. While the Philippine Ports Authority (PPA) has regulatory jurisdiction over most ports, a number The Philippines is behind most regional peers in fall outside its mandate and are instead overseen by a the adoption of digital technology. According to the myriad of regulators.16 Most of these authorities act as World Bank’s Digital Adoption Index (DAI), in terms of both regulators and port operators. As a result, they overall use of digital technology, the Philippines lags all have a tendency to approve policies and regulations regional peers other than Indonesia. The DAI business that may be beneficial to the terminal operators on the subindex shows that Philippine firms rank slightly one hand, but may hurt the logistics services providers above the regional peer average but below Vietnam and shippers on the other (Tongzon 2018). In 2017, in terms of digital technology use. The Philippines container cargo dwell times at the port of Manila scores low in digital technology adoption for use by ranged from five to eight days, compared with 3.6 days people and the lowest among regional peers in digital in Indonesia. technology adoption by government (Figure 39). Figure 39: Digital Adoption Index for the Philippines and Regional Peers 0.25 0.20 . 0.15 0.10 0.05 0.00 -0.05 -0.10 -0.15 -0.20 Malaysia Thailand China Vietnam Philippines Indonesia Digital Adoption Index Business sub-index People sub-index Government sub-index Source: World Bank Digital Adoption Index. Note: Values shown are deviations from the averages for the six countries. 16 These include the Cebu Ports Authority, Subic Bay Metropolitan Authority, Phividec Industrial Authority in Cagayan de Oro, ARMM Regional Port Management Authority, and local government units. 40 INCLUSIVE GROWTH AND JOBS Filipinos have high rates of access to electricity but between distribution and supply would reduce prices pay high prices. In 2017, 96 percent of the urban for consumers (Rudnick and Velasquez 2019). (A further population and 90 percent of the rural population discussion on energy and particularly the prospects had access to electricity, behind Malaysia, Thailand, for expanding renewable energy can be found in the and Vietnam, which have achieved nearly 100 Resilience chapter of this report.) percent access (World Development Indicators and 2017 Philippines Demographic and Health Survey). Significant gaps exist in the provision of water and Filipinos face some of the highest prices in the region, sanitation services for Filipinos. Although the large paying more than twice the rates in Indonesia and 50 majority of Filipinos have access to improved water percent more than those in Thailand (Figure 40). The sources, more than half of those in the poorest high cost of energy has been cited by investors as a quintile lack access to improved sanitation. Access central reason the Philippines is unable to attract more is far lower in ARMM, where just 71 percent have manufacturing investments (Joint Foreign Chambers of access to improved sources of drinking water and 35 the Philippines 2010). percent have improved sanitation. The large majority of improved sanitation facilities nationally are septic A major challenge in the power sector is the lack of tank systems, which can pose health hazards if not competition due to vertical integration. The Philippines properly maintained and during flood conditions. Only has made great strides in achieving a competitive 4.5 percent of Filipinos (6 percent in urban areas) energy market. However, there is no explicit have a toilet connected to a piped sewer system. prohibition on cross-ownership between generation Lack of access to adequate sanitation is one driver of and distribution, and many supply companies are the country’s very high level of child stunting. Lack of subsidiaries of distribution utilities. Cross-ownership water and sanitation infrastructure is also a constraint gives the distribution firm a substantial incentive to for water-intensive industries like food and beverage purchase power from its affiliated generation firm, manufacturing and for tourism, starkly illustrated by resulting in higher prices than a competitive market the closure in 2018 of Boracay due to inadequate would yield. Reforms to ensure vertical separation sanitation infrastructure and environmental compliance. Figure 40: Average Retail Electricity Costs Figure 41: Access to Water and Sanitation by Income (USD/kWh), 2016 Quintile, 2017 $16 100% 90% $14 80% $12 70% $10 60% $8 50% 40% $6 30% $4 20% $2 10% $0 0% Philippines Thailand Korea, Malaysia Taiwan, Indonesia Poorest 2nd 3rd 4th Richest Republic of China with improved, non-shared toilet facilities using an improved water source Source: International Energy Consultants 2016. Source: World Bank staff calculations based on the 2017 National Demographic and Health Survey. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 41 Closing these gaps is envisioned under the Philippine not factor in coastline and marine natural resources, Water Supply and Sanitation Masterplan being which yield fishery output and are responsible for much finalized by the government. Metro Manila has also of the country’s tourism potential. faced water scarcity that is affecting the population. The water demand for the city is increasing compared 61+16+852A Figure 42: Sources of Philippine Natural Capital, 2014 to the available supplies, creating water scarcity and highlighting the need to augment water supply by Fossil Fuel Energy 2.2% developing new water sources. In addition, more than Forests 5.1% 95 percent of the water is sourced from the Angat Pastureland dam which is located near a geological fault. In case of 7.5% an earthquake affecting the dam, there is a major risk that water supply will be interrupted to the city that is Minerals an engine of growth for the country. The Government 8.3% is considering preparation of a road map to ensure water security in Metro Manila which should include measures to reduce water losses and also increase the capacity to produce more water to meet the increasing demand. Protected Capital markets need to be better developed and Areas 16.4% leveraged to provide the required long-tenure finance Cropland for infrastructure projects. The amount of capital 60.5% available in the Philippines market is significant but not sufficient to keep pace with the actual demand Source: Lange, Wodon, and Carey 2018. for infrastructure financing. There is a need to deepen the capital markets by introducing new capital market solutions and products to promote local currency Underperformance of natural resource-dependent financing and project bond-issuance that create sectors leaves considerable unrealized potential long-term liquidity for new infrastructure and PPP for increasing the economic contribution of natural projects. These would need to be coupled with enabling capital. The agriculture and fisheries sectors perform regulatory reforms to maximize the mobilization of significantly below their potential. Forestry production capital from both domestic and foreign investors. is a fraction of former output following widespread deforestation and depletion of remaining timber stocks in the latter part of the 20th century. Although the 3.4. Natural Capital: Agriculture, Fisheries, Philippines is endowed with rich natural assets tourism can rely on, it ranks 75th out of 136 in World Economic and Natural Resources Forum’s (WEF) Travel and Tourism Competitiveness Index, significantly behind its regional neighbors. Box 3 Natural capital contributes significantly to the discusses the challenges the tourism sector faces. On Philippines’ wealth. A 2014 World Bank study the basis of geology, the Philippines is expected to have estimated that natural capital—as opposed to human similar mineral resources as its close neighbors such capital and produced capital—accounts for 18 percent as Indonesia and Papua New Guinea, but very little of the country’s total capital.17 Cropland accounts for exploration has happened in the last 20 years. the bulk of the natural capital in this measure (Figure 42). However, this is an underestimate because it does 17 Based on 2014 data from the Changing Wealth of Nations data set. 42 INCLUSIVE GROWTH AND JOBS Box 3: Case Study: Tourism The tourism industry provides a clear example of how constraints to the private sector have limited inclusive growth and the creation of good jobs. The Philippines has substantial natural advantages for tourism: some of the most spectacular beaches and most renowned diving spots in the world, natural sites such as rice terraces and mountains for trekking, a friendly and English-speaking population, a rich and fascinating history, and a vibrant and fun-loving culture. Yet relatively few foreigners visit the Philippines. In 2017, the Philippines received just 7 million international arrivals, a fraction of the arrivals to Vietnam (13 million), Malaysia (26 million), and Thailand (36 million). Tourism receipts and investment are also relatively low in the Philippines. The experiences of the Philippines’ neighbors suggest that tourism has high potential to sector in 2017, lagging far behind Indonesia ($12 generate inclusive growth and jobs. billion), Thailand ($7.7 billion), Malaysia ($5.3 billion), and Vietnam ($5.1 billion). The tourism sector only The poor performance of the tourism industry is the accounted for 2.4 percent of private sector investment result of factors that affect the private sector more in the Philippines that year. Investment is particularly broadly. Transport and energy infrastructure used lacking in the accommodations sector. Foreign by tourists is typically of low quality and high cost, ownership of tourism assets, particularly land, is making the Philippines an expensive destination restricted. compared with its neighbors. Restricted competition has limited investment, and limited government The provision of infrastructure is largely the capacity, most notably at the local level, has resulted responsibility of local government units (LGUs), which in haphazard planning and partial implementation of generally lack the capacity to deliver it. The Local tourism strategies. Government Code of 1991 was intended to provide greater autonomy, responsibilities, and resources to The sector faces critical sustainability concerns. LGUs. However, most LGUs lack the technical capacity In 2018, the government closed Boracay for to implement infrastructure projects and provide six months to address a range of issues such as services in a timely and quality manner. environmental degradation due to insufficient solid waste management. The law requiring establishments Despite the low level of investment and international to connect to sewage treatment plants has not been arrivals, the sector is growing, fueled by rising enforced, resulting in untreated water discharged into domestic consumption. In 2017, the Department of the sea. Similar problems affect other top tourism Tourism (DOT) recorded over 97 million local tourist destinations such as El Nido, Panglao, Coron, arrivals who spent ₱2.6 trillion in aggregate. During and Siargao. 2011-17, the sector grew at over 14 percent per year, reaching 21 percent of GDP in 2017. This suggests that The tourism sector is attracting far less investment addressing the constraints to the tourism industry could than its regional competitors, in part due to attract large numbers of international arrivals and make restrictions on competition. It is estimated that the industry an engine of inclusive growth and jobs. the Philippines invested $1.9 billion in the tourism SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 43 Figure 43: Employment Share by Sector, 2015 Poor 58% 12% 11% 6% 13% Non-poor 20% 17% 21% 9% 33% Agriculture Industry Trade Transportation and Communication Other Services Source: World Bank (2018a). Agriculture has greatly underperformed but has high quotas kept the price of rice very high, benefitting only potential. Agriculture’s share of GDP in 2017 was 9 the small number of farmers who were net rice sellers. percent and its annual growth rate lower than other The policies on rice also effectively discouraged farmers Southeast Asian countries. About 70 percent of the from moving into other products, stifling the growth of country’s poor reside in rural areas and depend on the agriculture sector. agriculture for their livelihoods and employment (Figure 43). The government recently enacted the Rice Liberalization Law which replaces import quotas with Longstanding agricultural policy has been focused tariffs. The Law has lowered rice prices for consumers. on promoting rice, a crop for which the country does It is expected to encourage farmers to move into other not have a comparative advantage (Figure 44). The commodities and should shift attention to addressing Philippines was until recently among a handful of other constraints faced by the sector. countries with quota restrictions on rice imports. These Figure 44: Commodity Price Support vis-à-vis Comparative Advantage With Comparative Advantage Without Comparative Advantage 70% Transfers to Farmers as Percentage of Gross Farm Rice 60% 50% 40% Receipts 30% Poultry Hogs 20% 10% Banana Corn Pineapple Coconut 0% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Philippines’ Comparative Advantage in Product (Below 1 indicates Advantage) Source: Briones 2014. 44 INCLUSIVE GROWTH AND JOBS An overarching challenge for agriculture is the prohibit foreigners from legally acquiring and fully looming impact of climate change. The country is owning land in the Philippines. Corporations with highly exposed to climate-related shocks, which often foreign ownership need to have at least 60 percent affect agriculture. Projected temperature increases domestic ownership to be able to acquire land. Issues of 3-4 degrees Celsius by the end of the century and linked to land tenure affect infrastructure investments associated changes in weather patterns threaten to through difficulties in legally acquiring right of way. dramatically disrupt agricultural production. While the Philippines remains a major fisheries Three other major constraints for agriculture have producer, production has declined. Annual losses been lack of adequate extension services for farmers, of ₱5.7 billion per year are estimated to be incurred poor rural infrastructure, and access to finance. due to illegal and unlicensed fishing, depleted stocks, Research and extension linkages are limited and not unsustainable coastal development, pollution, climate sufficiently focused on addressing identified gaps in change, and postharvest losses at around 40 percent of promoting value chains and climate risks. A barrier catch. As a result, the country fell from being the fourth to developing markets for agriculture products has largest global producer to the 12th in the past 20 years. been poorly developed infrastructure for transport, particularly all-weather farm-to-market roads, ports, The mining industry has dramatically contracted over and interisland shipping. As of December 2017, only the past 40 years. The Philippines has gone from being about 60 percent (1.89 million hectares) of potential one of the global top 10 exporters of gold, copper, irrigable area is irrigated. Irrigation infrastructure nickel, and chromite to a marginal producer of all has been primarily designed for rice cultivation, minerals except nickel. A combination of investment thus missing opportunities for crop diversification. restrictions, high taxation, and environmental and Additionally, existing governmental programs to social concerns has virtually halted new exploration support access to finance in agriculture and provide and mine development. A large number of operating crop insurance have limited outreach. The forthcoming mines and abandoned mine sites have caused negative Agriculture and Fisheries Modernization Plan is environmental and social impacts. Mining operations expected to outline strategies to improve address these are largely seen as enclave economies dissociated from and other constraints and support agri-food systems. public planning of infrastructure and social services in the areas of operation. A final challenge for agriculture—and for development more generally, particularly in rural areas—is the More recently, the Philippines’ successful weakness of land tenure. There are overlapping implementation of the Extractive Industries mandates between various institutions with authority Transparency Initiative (EITI) has created a platform over land administration. Issues for the reform agenda for dialogue between civil society, private operators, include establishing an integrated land information and government agencies. The Philippines is one of system for all types of land that integrates information only five countries worldwide fully compliant with EITI across agencies, simplifying procedures to transfer requirements concerning openness and accountability and document owners’ rights, and clarifying land of fiscal contributions from the industry. The EITI use regulations so they are clearly reflected in land presents an opportunity for the industry and decision documents and easily enforced. makers to engage in coordinated planning of the future role of the mining sector in integrated planning Land policy restrictions also limit investment and the of land and natural resources as well as provision of rollout of infrastructure. Constitutional restrictions infrastructure and social services. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 45 Box 4: The Experience of Land Reform in the Philippines The Philippines has launched multiple land reform initiatives over a period of decades. The most far-reaching was the Comprehensive Agrarian Reform Program (CARP) and its successor, the CARP Extension with Reforms (CARPer), which ended in 2014. Roughly 2.8 million agrarian reform beneficiaries (ARBs) have received land. Various evaluations find at best modest impacts of the land reform on poverty (Ballesteros et al. 2018, Ravago et al. 2018, World Bank 2009). A recent study estimated that the program reduced agricultural productivity by 17 percent on affected land (Adamopoulos and Restuccia 2019). Amid many competing views about land reform, there is a consensus that its results have not met expectations. What went wrong? The literature identifies five factors: Restriction on title transfer. Land titles issued under land reform cases. The low ceilings stopped farmers the program cannot be sold or leased for 10 years from adjusting the scale of their farms to achieve after the effective date of the transfer. Restrictions on efficiency, thus discouraging private investment.18 transfer continue even after this period has elapsed. As a result, titles have limited value as collateral. Undermining by elites. Owners of large plantations count among the economic and political elite. In many Collective titles. Almost half of the total number cases, they avoided the application of land reform of hectares (nearly 2.17 million hectares) of land to their land altogether or negotiated with tenants distributed were issued with collective land titles. to end up with arrangements highly favorable to the These titles have little or no collateral value and landowners. constrain options for farmers in choosing crops and technology. Lack of complementary support. Land reform was intended to be tied to technical and infrastructure to Excessively low ceiling. Landowners subject to farmers, including access to well-functioning irrigation the program could retain only five hectares, and systems and extension services for marketing and beneficiaries are allowed to own only three hectares. technical training. These services in practice have These limits are more restrictive than in most historical been limited. 18 Adamopoulos and Restuccia (2019) show that by a “restrictiveness ratio”—the land holding ceiling relative to the average farm size prior to the reform—CARP’s ceiling was more restrictive than those in Bangladesh, Ethiopia, the Republic of Korea, Pakistan, and Sri Lanka. 46 4 HUMAN CAPITAL SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 47 Human capital is critical to both economic growth child born today will be 45 percent below what could and inclusion. The prospects for continuing economic have been achieved with complete education and full growth in the Philippines will depend on its ability to health (Figure 45). The Philippines ranks 84th in the harness the rising tide of technological change and world and 14th (among 24) in East Asia and the Pacific expand its high-skill services sector. The Human Capital in the index. In terms of the HCI’s subcomponents, Index (HCI), which captures the impact of human capital the country ranks high in quantity (expected years) of on future growth prospects, is a useful starting point schooling but low in education quality—measured by for considering human capital challenges. The country’s harmonized test scores—and low in health and HCI of 0.55 indicates that the future productivity of a nutrition measures. Figure 45: Human Capital Index Human Capital Index Probability of Survival to Age 5 High Income 0.74 High Income 1.00 East Asia and the Pacific 0.61 East Asia and the Pacific 0.98 Upper Middle Income 0.58 Upper Middle Income 0.98 Philippines 0.55 Philippines 0.97 Lower Middle Income 0.48 Lower Middle Income 0.96 0.00 0.20 0.40 0.60 0.80 0.00 0.20 0.40 0.60 0.80 1.00 Expected Years of Schooling Harmonized Test Scores High Income 13.3 High Income 506 Philippines 12.8 East Asia and the Pacific 451 East Asia and the Pacific 11.9 Upper Middle Income 428 Upper Middle Income 11.7 Philippines 409 Lower Middle Income 10.4 Lower Middle Income 391 0 5 10 15 0 100 200 300 400 500 600 Adult Survival Rate Fraction of Children Under 5 Not Stunted High Income 0.92 High Income 0.94 East Asia and the Pacific 0.87 Upper Middle Income 0.87 Upper Middle Income 0.86 East Asia and the Pacific 0.78 Lower Middle Income 0.81 Lower Middle Income 0.73 Philippines 0.80 Philippines 0.67 0.70 0.75 0.80 0.85 0.90 0.95 0.0 0.2 0.4 0.6 0.8 1.0 Source: World Bank (2019b). 48 HUMAN CAPITAL Map 3: Human Capital Index by Region HUMAN CAPITAL INDEX <0.50 0.50- 0.54 0.54- 0.58 0.58- 0.62 >0.62 LUZON Manila VISAYAS Cebu City MINDANAO Davao City Source: World Bank (2019b). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 49 There is a wide disparity in human capital Figure 46: Human Capital Index by Wealth Quintile development in the country. Just as economic outcomes are widely disparate, human capital 0.70 development across regions varies greatly. Regions with higher rates of poverty have lower rates of 0.60 immunization and fewer years of schooling. As a result, children born in poorer regions have dramatically 0.50 lower opportunity to achieve their full potential. This perpetuates the vicious cycle that traps generation after generation in poverty. The lowest levels of human 0.40 capital development are found in the regions with the highest poverty rates: ARMM and Eastern Visayas 0.30 (Map 3). 0.20 Absent interventions to shore up human capital investments the gaps between wealthy and poor households and areas will widen. Children from the 0.10 wealthiest one-fifth of families accumulate 40 percent more human capital than those from the poorest one- 0.00 fifth of households (Figure 46). Children born poor are Poorest 2nd 3rd 4th Richest more likely to be undernourished and suffer from poor Source: World Bank (2019b). health. They have less access to high quality education and are less likely to complete high school. They face 4.1. Education and Skills an uphill climb through the education system because their family’s income is unstable and disproportionately Education is a path out of poverty. As in many other vulnerable to shocks resulting from natural disasters countries, more schooling leads to access to wage and catastrophic health expenses. employment and higher income in the Philippines. The probability of employment in the formal sector rises with high educational attainment (Figure 47). For each additional year of education, the potential to earn income increases by 15 percent for women and by 9 percent for men. The rate of return to education is higher for postsecondary and tertiary education, particularly for women. Almost no households headed by a college graduate are poor (World Bank 2018a), as shown in Figure 48. Compulsory basic education has expanded from 10 years to one year of kindergarten plus 12 years, supported with substantial increases in public education spending. Completion of kindergarten became mandatory for enrollment in first grade through the Enhanced Basic Education Act of 2013. In June 2016, the two-year senior high school program was implemented nationwide, admitting 1.5 million grade 11 students for the first time. That year, the Universal 50 HUMAN CAPITAL Figure 47: Formal Employment Rate by Education Figure 48: Poverty Rate by Education Level of Level, 2018 Household Head, 2015 National Level Poverty Rate College Graduate College Graduate Unfinished College Unfinished College Post Secondary/TVET Post Secondary/TVET High School Graduate High School Graduate Unfinished High School Unfinished High School Elementary Graduate Elementary Graduate Unfinished Elementary Unfinished Elementary No Schooling No Schooling 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 20% 40% 60% 80% Source: World Bank staff calculations based on January 2018 Labor Source: World Bank (2018a). Force Survey. Access to Quality Tertiary Education Act was enacted, struggling to complete basic education on time (World providing free tuition to Filipino students in state Bank 2018d). Among the bottom 20 percent, the main and local universities and colleges and subsidies to reason for not attending school is “lack of personal poor students in private higher education institutions. interest” for primary and junior high school age groups To implement these reforms, among others, public (Figure 50). About 65 percent of the total out-of-school education spending rose from 2.6 percent of GDP in children ages 5-15 in 2017 are boys. Especially when 2013 to 3.8 percent in 2017 (World Bank forthcoming). families are poor, boys are more likely than girls to drop out early because they can work for pay at an earlier The basic education reform has greatly increased age than girls. One out of four youths ages 15–24 enrollment rates. The enrollment rate of five-year-olds is not in employment, education, or training (NEET). increased from 57 percent in 2010 to 84 percent in Students in conflict-affected areas still have limited 2017. An impact evaluation shows an early childhood access to education: school closures are prevalent and development program (ECD) in the Philippines absence rates are high for both teachers (31 percent) significantly improved the cognitive, social, motor, and and students (29 percent) in ARMM (Australia DFAT language development and the short-term nutritional and World Bank 2015). status of children who lived in the program areas, particularly for those under age 4 (Armecin et al. 2006) The rapid expansion of the education system has At the primary level, enrollment among children in the not been accompanied by quality improvements. poorest income quintile improved to close to universal Despite a high level of commitment by teachers and an for those up to age 12 and exceeds 80 percent for improved learning environment, quality remains limited. those up to age 16. Nearly all Filipino children up to In terms of learning 12.8 years of education in the age 17 in the richest 20 percent of households were Philippines is equivalent to just 8.4 years of education enrolled in school in 2017 (Figure 49). in a high performing system (Figure 51). Poor education quality, alongside financial pressures on poor families, Pockets of low enrollment remain, and many contributes to loss of interest in schooling, which students drop out before completing compulsory causes many students to drop out early, particularly basic education. About half of Filipino students are among the poor. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 51 Figure 49: School Enrollment Rates by Age for the Poorest 20 Percent and Richest 20 Percent 2014 Poorest 20% Richest 20% Age 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 100% 80% 60% 40% 20% % % 20% 40% 60% 80% 100% Percentage of children attending school 2017 Poorest 20% Richest 20% Age 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 100% 80% 60% 40% 20% % % 20% 40% 60% 80% 100% Percentage of children attending school Post-High School Senior High School Junior High School Elementary Kindergarten Source: World Bank staff calculations based on 2014 and 2017 Annual Poverty Indicators Survey. 52 HUMAN CAPITAL Figure 50: Reasons for Not Attending Junior High Figure 51: Gap between Expected Years of Schooling School among 12- to 15-year-Olds in the Poorest and Learning-Adjusted Years Quintile, 2017 Lack of personal interest 14 12 Illness/disability Learning gap = 10 4.4 years High cost of education/ Financia; concerns 8 Employment/ 6 Looking for work Marriage/Family matters 4 2 Others 0 0% 10% 20% 30% 40% 50% 60% 70% 80% Expected Years of Learning-Adjusted Schooling Years of School Boys Girls Source: World Bank (2019b). Source: World Bank (2019b). A shortage of qualified teachers with adequate of a shortage of applicants with the necessary skills knowledge and skills is a core constraint to improving (Acosta et al. 2017). This signals a mismatch between learning outcomes. Teachers have on average skills supply and demand in the labor market, including insufficient knowledge of the subjects they teach and for traditional technical and cognitive skills as well as are poorly prepared in pedagogical techniques (Al- socioemotional skills. The mismatch is more acute for Samarrai 2016). Further, the demand of the public workers in skill-intensive occupations. Technical and school system for teachers has increased sharply, vocational education and training (TVET) and tertiary exceeding supply. Not enough teacher education education have largely been ineffective in imparting graduates qualify to take the annual licensure exam to students advanced technical knowledge and skills to allow the Department of Education a high level of relevant and responsive to the needs of technology- selectivity and competition in the hiring process (David intensive manufacturing and service-oriented industries and Ducanes 2018). Because of lack of administrative (Orbeta and Paqueo 2017). support, teachers are often overloaded with non- teaching tasks, eroding teaching quality. Socioemotional skills are highly valued in the job market in the Philippines. These skills are particularly The low quality of basic education means that even important for women and youth.19 As a partial Filipinos who complete secondary school may lack the compensation to traditional technical and cognitive skills they need for the job market. About 80 percent skills, socioemotional skills can offer a route to of unemployed workers have completed secondary higher earnings for workers with low levels of education or higher, yet one-third of employers in formal education. the Philippines reported unfilled vacancies because 19 One standard deviation in socioemotional skills is associated with a 9 percent increase in average daily earnings (approximately $2). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 53 The tertiary enrollment rate has increased rapidly expanded to include outpatient services. With these over the last decade, but with wide gaps between the changes, public expenditure on health rose from 0.5 wealthiest and poorest quintiles. The gross tertiary percent of GDP in 2013 to 0.9 percent in 2016. Health enrollment rate rose from 27.5 percent in 2005 to spending in the Philippines remains well below the 35.7 percent in 2014. Only about 10 percent of levels of regional and structural peers. college-age youth in the poorest quintile are enrolled in or have graduated from tertiary education, far from The quality and scope of coverage remain insufficient the 72 percent for those in the wealthiest quintile. to protect households from catastrophic health costs. The enactment of the Universal Access to Quality Out-of-pocket household spending remains high Tertiary Education Act in the 2018-19 school year— (Figure 52). The poor utilize PhilHealth less due both to which provides free tuition at state universities and lack of awareness of their eligibility and administrative colleges (SUCs)—could serve as a critical step toward challenges (Bredenkamp and Buisman 2016). The increasing enrollment of the poor in tertiary education. share of the population driven into poverty by health Nevertheless, concerns have been raised that the spending has doubled over the past decade. spending associated with the new law may go largely to wealthier students, who would have enrolled even The country still fares poorly on many health outcome without the free tuition, and the costs of the program indicators in comparison with peers. The Philippines may be unsustainable. was unable to meet the Millennium Development Goal (MDG) targets for child and maternal health in 2015. The Philippines’ higher education system faces Wide differences in access to good-quality health persistent issues, including rapid expansion—without care remain across socioeconomic groups, genders, quality monitoring, skills mismatch, low productivity and regions. Noncommunicable diseases contribute in research and development, and weak governance increasingly to mortality and morbidity, challenging the (Licuanan 2017). The TVET sector faces challenges health system to adapt to appropriate service delivery such as a huge loss of existing jobs due to innovation, modalities to manage chronic disease conditions in the technological advancements and the global transition to community. Communicable, maternal, neonatal, and the Fourth industrial revolution.20 A study on the TVET nutritional diseases continue to be very significant. system stresses the need to increase enterprise-based Given increasing levels of urbanization, government training, continuously update relevance of training to policy attention has also turned toward diseases industry need and increase performance-based funding associated with highly urbanized communities. (Orbeta and Esguerra 2014). The expansion of PhilHealth has yielded some tangible 4.2. Health and Nutrition gains. The combination of PhilHealth and the “No Home Birthing Policy” instituted in 2009 have boosted Access to health services has improved dramatically, the fraction of births that take place in a health facility particularly among the poor. Coverage of PhilHealth, from just 28 percent in 1993 to 78 percent in 2017 the national health insurance system, expanded from (Figure 53). However, the health system is still weak in 38 percent of the population in 2008 to 66 percent terms of basic service delivery, particularly in the areas in 2017 (Figure 52). The coverage rate for the bottom where poorer Filipinos live. quintile increased from 20 percent in 2008 to 59 percent in 2017. The benefits package was also 20 The Technical Education and Skills Development Authority (TESDA) is currently finalizing the National Technical Education and Skills Development Plan (NTESDP) 2018-2022. 54 HUMAN CAPITAL Figure 52: Health Insurance Coverage and Out-of- Figure 53: Time Trends for 2 Key Health Pocket Spending on Health, 2000–16 Service Indicators 80% 100% 70% 90% 68.3% 60% 80% 77.7% 53.9% 50% 70% 69.9% 40% 60% 30% 50% 20% 40% 10% 30% 0% 20% 2001 2003 2005 2007 2009 2011 2013 2015 2017 1993 1998 2003 2008 2013 2017 Out-of-pocket spending as a share of total health expenditure Births delivered in a health facility Percentage of population with any health insurance coverage Children with all basic vaccinations Source: WHO Global Health Expenditure, World Health Organization. Source: Philippines Demographic and Health Survey data. A key indicator of poor performance of the health Table 1: Top 10 Countries in Number of Children Not system is the low immunization rate. The fraction of Vaccinated for Diptheria, Tetanus, and Pertussis children who received all basic vaccinations fell 1998-2017 to 70 percent—dropping below the level Rank Country Not Vaccinated of 1993 (Figure 53). Basic vaccinations include BCG vaccine, which protects against tubercolosis; three 1 India 6,126,000 doses of DPT-containing vaccine, which protects against diptheria, pertussis, and tetanus; three doses of 2 Nigeria 5,740,000 polio vaccines; and one dose of measles vaccine. The 3 Pakistan 2,810,000 Philippines now has the fifth largest number of children in the world not vaccinated for diphtheria, tetanus, and 4 Indonesia 1,913,000 pertussis (Table 1), and the ninth largest number not vaccinated for measles. Much more effort and attention 5 Philippines 1,872,000 are required to expand the coverage of this very cost- 6 Congo, Dem. Rep. 1,129,000 effective childcare intervention. 7 Iraq 971,000 Vaccination rates, other outcomes, and the quality of health care overall are worse in poorer areas. Rural 8 Ethiopia 867,000 health units (RHUs) in poorer areas score low service 9 Angola 772,000 readiness. RHUs in wealthier municipalities have better basic infrastructure, more basic equipment, and higher 10 South Africa 716,000 diagnostic capacity than those in poorer municipalities (Morimoto et al. 2019) Source: Kenny, Snyder and Patel. 2018. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 55 Map 4: Vaccination Rates by Region VACCINATION RATE <60% 60- 65% 65- 70% 70- 75% >75% LUZON Manila VISAYAS Cebu City MINDANAO Davao City Note: 2017 National Demographic and Health Survey, Philippine Statistics Authority. 56 HUMAN CAPITAL Conflict-affected areas suffer from particularly weak Malnutrition in the womb and during the first two health outcomes and services. In ARMM, only two in years of life inhibits brain development. A study 10 children ages 12-23 months are immunized (Map tracking children born in Cebu has estimated the 4). Malnutrition is especially prevalent in ARMM, and long-term impact of malnutrition. Children who were levels of micronutrient supplementation are very low. not stunted in their early years performed significantly Nationally, 94 percent of pregnant Filipino women better in school. They started school at a younger age, access antenatal care from a skilled provider, but only learned more during each year of schooling, were less 69 percent of ARMM women do so. Infectious diseases likely to repeat grades, and stayed in school longer. such as tuberculosis and other respiratory infections Children who were better nourished also had a higher remain prevalent. ARMM has systematic gaps in the IQ at the age of eight. These effects endured into availability of key inputs to deliver services, including adulthood: those who were not stunted at a young significant gaps in essential medicines.21 age were more likely to hold formal sector wage jobs in their early twenties (Carba, Tan, and Adair 2009; The levels of child malnutrition in the Philippines are Mendez and Adair 1999). shockingly high.22 One in three children under the age of five is stunted—the principal marker of malnutrition— Figure 54: Stunting Rate by Wealth Quintile, 2015 and stunting rates have been stagnant for over a 50% decade. Malnutrition is particularly severe among children in poor households. Stunting in the Philippines 45% is not only above that of wealthier countries in East Asia, including Thailand, Malaysia, and China, but also 40% above that of Cambodia, Myanmar, and Vietnam. 35% Malnutrition is severe among poor households. Half 30% of children in the poorest income quintile are stunted, and one in five is severely stunted (Figure 54). In poorer 25% regions, particularly conflict-affected regions such as 20% ARMM, stunting rates are particularly high. These data points demonstrate one facet of intergenerational 15% poverty: children who grow up in poor households are often inadequately nourished and more likely to 10% suffer from limited cognitive and physical development, 5% putting them on a trajectory to poverty in adulthood. 0% Poorest 2nd 3rd 4th Richest Moderately stunted Severely stunted Source: 2015 National Nutrition Survey, Food and Nutrition Research Institute. 21 Results from a health facilities survey conducted in ARMM in 2017 were compared with the same indicators in the earlier national survey. ARMM scored lowest among the regions in seven out of eight tracer conditions that can be compared. 22 “Malnutrition” refers to a deviation from optimal nutrition status and includes both overnutrition and undernutrition. Overnutrition represents an oversupply of nutrients relative to the body’s physiological needs. Undernutrition refers to a state of nutritional deficiency and presents the most serious risks to health and development when experienced by women before and during pregnancy and lactation, and infant and young children. There are a variety of measures of undernutrition. This section focuses on child stunting, defined as low height-for-age in children under five years of age. Stunting results from chronic undernutrition and indicates a failure of a child to attain the height expected among healthy children. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 57 Poor health and nutrition of mothers before and Recent government initiatives provide opportunities during pregnancy is a key cause of child stunting. In to address the country’s health and nutrition 2015, one in four pregnant women in the Philippines challenges. The First 1000 Days Law of 2018 directs was categorized as “nutritionally at risk,” and a policy attention to address malnutrition. The new substantial number of mothers were anemic or iodine Universal Health Coverage (UHC) Law mandates deficient. International research shows that a child with insurance coverage for all Filipinos and will shift a low weight at birth (less than 2.5 kilograms) is at very greater element of health financing to the PhilHealth high risk of being stunted, and 14.5 percent of Filipino channel. The law can be the platform for the children had low birth weights. Low birth weight is government to leverage expanded access to improve principally a consequence of the mother’s health and the quality of service delivery, which is the core nutrition before and during pregnancy. challenge for the country’s health system. Stunting can be addressed at scale effectively While health care in the Philippines is principally through a multisector approach. Key interventions financed and delivered by the public sector, the include health and nutrition programs for pregnant private sector could fill some gaps. The private sector women, vaccinations to protect children from illnesses, can help by investing in digital initiatives such as monitoring the growth of infants and young children, telemedicine, private primary care networks, health and promoting feeding and hygiene practices at home infrastructure, and pharmaceutical manufacturing. (PSA and ICF 2018). The high rate of adolescent pregnancy is one 4.3. Social Protection contributing factor to the high rate of malnutrition. Women start childbearing in their teenage years, and Social protection programs have been critical for the country ranks high in Asia in terms of adolescent reducing poverty, empowering communities, and fertility rate. One in 10 girls ages 15–19 is pregnant building human capital. Over the last decade, the or has given birth. While the overall fertility rate has Philippines has been successful in establishing the main declined over time (3.7 in 1998 to 2.7 in 2017), the building blocks of a well-functioning social protection adolescent fertility rate remained unchanged (PSA and system. It has one of the most advanced social ICF 2018). Overall, women in the poorest 20 percent protection systems in East Asia, with more of the poor of the population have an average of 4.3 children, benefitting from at least one intervention. Government compared with 1.7 children for those in the richest transfers account for one-quarter of the poverty 20 percent. reduction in the past decade (World Bank 2018a). The national household targeting system, Listahanan, has Poor women and young girls have high rates of enabled the government to target programs to the poor unplanned pregnancies, reflected in the country’s high and vulnerable, increasing efficiency and effectiveness unmet need for modern methods of family planning. of public spending and improving governance. Twenty-two percent of married women want to delay childbearing (delay first birth or space another birth) for The national conditional cash transfer (CCT) program at least two years. Additionally, 49 percent of married has been important in increasing the human capital women do not want any more children (PSA and ICF of beneficiary children and reducing the extent and 2018). The total demand for family planning among incidence of poverty. The beneficiaries of the Pantawid married women ages 15–49 is 71 percent, but only Pamilyang Pilipino Program are objectively selected using 57 percent satisfied their family planning need by a survey of the physical structure of the house, number modern methods. of rooms and occupants, access to running water, and other living conditions. The poverty targeting system, Listahanan, is one of the most comprehensive 58 HUMAN CAPITAL databases in the world, covering 75 percent of the Figure 55: Number of People Kept Out of Poverty by country’s population. Aside from the CCT, it has Pantawid Pamilya been used extensively to identify poor and near-poor beneficiaries of national government (e.g., PhilHealth) 1.5 Million and LGU programs. 1.4 Million The national CCT program expanded rapidly over 2007-2015. Coverage increased from 6,000 1.1 Million households in 2007 to 4.1 million in 2019, making Pantawid Pamilya the primary government social assistance program for the poor. The program extends cash grants to 77 percent of poor households and contributes both to reducing poverty and to building human capital. Its budget accounted for 0.5 percent of GDP in 2018. Pantawid Pamilya has made a large contribution to reducing poverty. The grant received by beneficiary households every month allowed them to deal with one-fifth of their current income shortfall. Without the 2012 2013 2015 cash assistance, poverty among beneficiaries would Source: World Bank staff calculations based on various rounds of FIES have been higher by 6 percentage points. Thus, the and APIS. program kept nearly 1.5 million poor beneficiaries out of poverty in 2015. At the national level, the cash The Pantawid Pamilyang Pilipino Program was recently grants filled 3.7 percent of the income gap of poor institutionalized by law. The government is launching households and helped reduce the poverty rate by 1.5 an updated Social Protection Framework and Strategy percentage points in 2015 (Figure 55). While the real to enhance its labor market and social insurance value and progressivity of the program’s cash grants components, as well as coordination across multiple have declined over time, the latest National Household agencies besides those that work on the CCT. The Survey shows that it remains an important resource for updated framework seeks to improve delivery aspects poor households. of social protection interventions, including targeting, payments, links to identification (National ID), and new expanded roles of the system in terms of more integral Pantawid Pamilya has multiple beneficial impacts on response to shocks and disasters. behavior changes that improve human capital building and stimulate local economies. It has improved school enrollments among older children, encouraged early Social insurance and active labor market programs childhood education, and increased the health-seeking behaviors of beneficiaries. Studies show that gross The Philippines has one of the most advanced social enrollment rate for the CCT beneficiary high school protection systems in East Asia, with more of the poor students is 6 percent higher, and the CCT contributes benefitting from at least one intervention. Other social to reducing severe stunting among beneficiary children protection programs are discussed in Box 5. by up to 10 percentage points. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 59 Box 5: Other Social Protection Programs Sustainable Livelihood Program (SLP): The program rapidly, from 1 million in 2015 to 3 million (40 percent has two tracks. The micro-enterprise development track of total elderly) in 2018. supports poor households in their self-employment efforts. The employment facilitation track focuses Disaster Relief: The Department of Social Welfare on skills development training. Since 2011, SLP has and Development (DSWD) is responsible for disaster served 1.3 million people, a large majority of whom are relief and early recovery. It has taken significant steps beneficiaries of Pantawid Pamilya. to strengthen its capacity to effectively perform its disaster risk reduction management functions. Super Community-Driven Development (CDD) Program: Typhoon Yolanda in 2013 brought attention to the lack This program, in existence since 2002, serves as an of a flexible emergency income support program for infrastructure and service delivery and empowerment affected households, which the government is trying to program at the local community level. It has helped address. DSWD also coordinates cash-for-work, food, enhance the supply side of health and education and temporary shelter assistance with LGUs. services needed for the CCT. Social Care: Delivery of the programs devolved to Social Pension: In 2011, the Senior Citizens Act was local governments has remained an important concern. amended to provide a ₱500 monthly social pension to These programs include the provision of social work poor elderly not receiving a pension through the social and care services for the homeless, orphans, and security system. Initially, this benefit was granted to victims of abuse and trafficking through the local social those ages 77 and over, but the age was lowered to welfare offices. However, the resources and capacity of 65 in 2015. The number of beneficiaries has expanded local governments remain underdeveloped. The role of social insurance, remains limited. As the the country coverage continues to be lowest among country moves toward upper-middle-income status and the poorest 20 percent of the population (Figure 56). as the population ages, the role of pensions need to Pensions account for a small share of total household be strengthened, particularly for the poor. Coverage is income, particularly for the poor. comparable to its Southeast Asian neighbors, but within Figure 56: Coverage of Contributory Pensions (%) 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% China (2013) Indonesia (2015) Malaysia (2008) Philippines (2015) Thailand (2013) Vietnam (2014) Overall Poorest Richest Source: The Atlas of Social Protection: Indicators of Resilience and Equity, World Bank. 60 HUMAN CAPITAL The Philippines faces a challenge to improve social out of reach for most people, except those in the top security coverage of workers and to increase the 20–30 percent of the income distribution. Despite income protection coverage of the elderly. The efforts to improve them, labor market programs— pension system consists of nationwide compulsory including many livelihood support programs—remain contributory programs for wage employees in the small, fragmented, and poorly coordinated. formal sector (the Social Security System) and for government employees (the Government Social The social protection system has helped as a response Insurance System). About 31 percent of elderly persons to calamities and natural disasters. The Philippines are covered by such pensions. Contributory pensions has introduced some cash transfers for emergencies also include disability, temporary work stoppage, as part of its disaster response toolkit, which consists and life insurance for formal sector and government of a number of relatively small-scale programs (such employees. The contributory system is complemented as emergency public works employment and relief by an old-age noncontributory social pension (Social services) that can be expanded rapidly in the event Pension for Indigent Senior Citizens), which has of natural disasters. In addition, the country uses an expanded to reach another 30 percent or 3 million adaptive system whereby standing programs can be elderly (but with low generosity, just $10 a month). ramped up quickly to cover large numbers of additional beneficiaries in response to disasters. The most Labor market policies and programs have yet to reach notable large-scale use of cash transfers to respond the population beyond the formal sector (about a to emergencies was in 2013 when Super Typhoon quarter of employment). Performance of the labor Yolanda left massive devastation, killing 6,300 people market regulation and policies as social protection and affecting more than 1.4 million families. The instruments has been constrained by the structure of government is considering institutionalizing the use the economy where low-productivity, precarious jobs of emergency cash transfers as a main instrument to in the informal sector dominate and poor-performing respond to disasters. agriculture is still a major employer. Thus, they remain SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 61 Box 6: Women’s Health, Education, Employment, and Empowerment The Philippine government and nongovernmental organizations have taken steps to improve women’s lives in various ways. The overall gender gap is small in the Philippines by global and regional standards. Challenges, however, lie in two critical areas: health care and equal pay. Voice and agency. Women have steadily improved Life expectancy at birth in the Philippines is higher their agency in Philippine society. Although women still for females than for males but below the average of have limited property rights, they have good control developing countries in the region. Nearly 20 percent over their own resources and spending, regardless of of women in the Philippines do not access family their level of household wealth. Women’s participation planning because of opposition by the woman, her in business ownership is unusually high—69 percent partner, or religion. However, over 60 percent lack of firms. The share of women with political power has relevant knowledge about family planning, also among increased. The proportions of seats held by women in the highest for all countries with data. This high level the national Congress reached nearly 30 percent in of unmet needs for family planning also reflects the 2017, compared with the world average of 24 percent. challenges of women’s agency. The country’s high Women also participated in the peace negotiations fertility rate continues to drive high population growth between the government and the Moro Islamic relative to the regional average (1.7 percent per year Liberation Front (MILF). compared to 0.7 percent for the region). Adolescent pregnancy—57 births per 100,000 population in The role of women in business leadership, however, 2017, an increase from 46 births per 100,000 in remains a challenge. Women tend not to occupy 1998—is particularly high. Adolescent pregnancies middle to high management positions; only 30 percent have implications for poor health of newborns and of firms report women in top management positions. contribute to high infant mortality. The Philippines is among the best countries in low vulnerability of violence at home. Still, almost 5 percent Education and labor market. The government has of Filipinas surveyed concurred that wife beating was carried out ambitious basic education sector reforms justified for arguing with the husband, refusing to have in the past decade and increased public spending sex, or burning food. on education. Enrollment and completion rates at all levels have improved over the period with women’s Health. The government has upgraded national and enrollment at all levels exceeding that of men. Primary local government health facilities to support the and tertiary enrollment is close to the regional average, provision of maternal health care services and has but secondary enrollment falls far below it. Higher expanded PhilHealth coverage, especially to poor returns accrue for educational attainment among households. Still, household spending on health females: An additional year of education offers a remains high, and the quality of health services is 16 percent rate of return for women compared with uneven. Recent data indicate that health outcomes for 9 percent for men. the poor have improved little, and rates of maternal mortality, infant mortality, and malnutrition among The average daily wage by sex over time reveals children remain high. The Philippines did not meet the a greater increase for females compared with the Millennium Development Goal (MDG) targets for child increase for males. The average daily wage of females and maternal health by 2015. increased by 15 percent, after adjusting for inflation, from 2006 to 2017. The average wage for men did 62 HUMAN CAPITAL not increase significantly during that period. In 2006, other regions in the country (76.8 percent on average). males earned more than females, but starting in 2012, However, its women’s labor force participation rate females earned more than males for two main reasons. (28.6 percent) is significantly lower than in the other First, there was a larger improvement in education regions (50.6 percent on average). One recent labor among female workers. The share of female workers market initiative for women is maternity leave, which with tertiary education grew 5.7 percentage points was enacted in February 2019. This allows female from 32.7 percent in 2006 to 38.4 in 2015. In contrast, workers to enjoy 105 days of maternity leave in both the share of male workers with tertiary education the public and private sectors, with an option to extend increased by only 2.6 percentage points from 22.2 to additional 30 days without pay. percent in 2006 to 24.8 percent in 2015. Second, there was a higher increase for employed women While more women entered the higher-paid sectors, taking more well-paying jobs than for men. The share a significant share remained in low-paid jobs, of professional to total female workers increased by 2.5 particularly low-end services jobs. Most females percentage points from 16.2 percent in 2006 to 18.7 (73 percent) are employed in the services sector, in 2015; for males it only increased by 1.3 percentage compared with only 44 percent for males. Among points from 8.8 to 10.1 percent. Interestingly, females employed females, 10 percent are in manufacturing more commonly work as professionals in information, and industry and 17 percent in agriculture, compared communication, finance, education, and science (about with 21 percent of males in manufacturing and 19 percent) than males (10 percent). Women are also industry and 35 percent in agriculture. Within the a higher share of the government workforce, which services sectors, about 29 percent of the females are typically offers higher wages. involved with wholesale and retail trade, compared with only 12 percent for males. About 15 percent of Still, women have much lower levels of labor force the females work in other services activities (the lowest participation than men and earn less than men paid), compared with only about 3 percent of males. for every single level of education. While half of As a result, women have lower wages for any given working-age women participate in the labor market, education level. For workers with less than a tertiary three-quarters of men do. The ratio of employment to education, female wages are only 65 percent to 80 working-age population is nearly 60 percent, but only percent of those for males with similar education; 45 percent for women compared with 70 percent for for workers with a tertiary education, the wage gap men. ARMM, the most conflict-ridden region, has a between female and male narrows to 92 percent. typical male labor force participation rate like that of SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 63 5 RESILIENCE 64 RESILIENCE Geography and history have saddled the Philippines with twin risks of natural disasters and conflict. Many countries have natural disaster hazards or conflict hazards, but very few face high levels of both. The INFORM Global Risk Index identifies the Philippines as having the highest level of natural hazard risk in the world. The country’s level of human hazard risk declined in 2019 following the formation of the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) but remains high (Figure 57). These ongoing threats have stifled development and poverty reduction in the areas most directly affected by conflict and disasters. The enduring high level of these risks points to the critical importance of efforts to enhance resilience, principally through effective implementation of a range of climate adaptation measures and follow-through to ensure the success of the 2014 peace agreement with the Moro Islamic Liberation Front (MILF). Figure 57: Natural Disaster and Conflict Risks Natural Hazard Index 9.0 Philippines 2020 Philippines 2019 Bangladesh 8.0 Japan 7.0 Somalia Afghanistan 6.0 5.0 4.0 3.0 Central African Republic 2.0 1.0 Finland 0.0 0.0 2.0 4.0 6.0 8.0 10.0 Human Hazard Index Source: 2020 INFORM Global Risk Index. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 65 5.1. Conflict and Peacebuilding The roots of the Mindanao conflict stretch back several centuries, with a modern phase growing from The Philippines has a complex multi-layered history developments in the 1960s. The area was historically of conflict that has involved armed groups including largely Muslim due to influence from the Malay Muslim separatists, communists, clan militias and Archipelago predating Spanish colonization. During the criminal groups. Although a long-running conflict with 1960s, the national government pursued a policy of the communist New People’s Army (NPA) simmers at a fostering development in Mindanao and integrating its low level in rural areas across the country, the principal indigenous inhabitants to mainstream Philippine society. peacebuilding challenges involve a limited geographic A core element of that policy was resettlement of area in western Mindanao. Conflict has been an acute people from elsewhere in the country. The resettlement obstacle to development and poverty reduction in policies eventually resulted in a Christian majority in directly affected areas. It has also had some impact Mindanao overall, with Muslim-majority areas limited on the broader Mindanao region and the Philippines to the western portion of Mindanao. Social exclusion overall. While they disrupt development, none of the of Muslim residents fomented conflict, which led to the conflicts pose a risk to the Philippine state. The various founding of the Moro National Liberation Front (MNLF) conflict actors are outlined in Box 7. in 1971 with the goal of fighting for an independent Muslim state in Mindanao. Box 7: Conflict Actors in the Philippines Muslim armed groups: The two main groups are the peace efforts in recent years, the CPP-NPA has Moro National Liberation Front (MNLF), founded in continued to commit acts of violence in various parts of 1971, and the Moro Islamic Liberation Front (MILF), the country. The CPP-NPA was designated as a terrorist established in 1984 as a breakaway group from the organization by the government in 2017. MNLF. A peace agreement between the MNLF and the government led to the establishment of the Banditry by armed criminal groups: Occurrence of Autonomous Region in Muslim Mindanao (ARMM) banditry in certain areas of Mindanao is evident. in 1990. A final peace agreement between the These groups engage in sea piracy, extortion, government and the MILF signed in 2014 led to the smuggling, human smuggling and trafficking, creation of the Bangsamoro Autonomous Region in kidnapping for ransom, drug and arms trade, and other Muslim Mindanao (BARMM) in 2019. criminal activities. Radical Islamic groups: Abu Sayyaf has links to the Clans: Interclan feuds, called “rido,” are pervasive Islamic State of Iraq and the Levant (ISIL). It has carried and have a long history in western Mindanao. Rido out kidnappings for ransom and bombings, which have is triggered by offenses that tarnish “maratabat,” or been condemned by both the MNLF and MILF. Abu deep sense of clan honor, and can morph into vertical Sayyaf and another group (the Maute) were responsible conflict when feuding clans have links to larger for the conflict in the city of Marawi in 2017. armed groups. Communist insurgency: The New People’s Army Political actors: Assassination and armed conflict (NPA) was founded in 1969 as the military wing of between rival political groups have long been a feature the Communist Party of the Philippines (CPP). Despite of Philippines politics, particularly at the local level. 66 RESILIENCE The complex roots of violence in Mindanao resist in 2011 showed that four in every 10 households in simple explanation. While the core conflict has been central Mindanao had been displaced at least once between Muslim armed groups and the government, it between 2000 and 2010 and one in 10 forced to is not primarily religious. A list of the endemic drivers of leave their homes five times. Displacement disrupts all violence in the region would include (1) social injustice aspects of the economy, to the detriment of livelihoods, and alienation, and exclusion of Muslim and indigenous welfare, social cohesion, and service access. The impact peoples, (2) suppression of Muslim and indigenous of displacement does not end when people return traditions, customs, and institutions, (3) interethnic home: returnee households were almost as vulnerable conflicts, (d) rido, or clan wars, and revenge killings, (4) as those who were still displaced at the time of land tenure and ownership disputes, (5) competition for the survey. scarce natural and mineral resources, (6) local election disputes, (7) ineffective governance and lack of rule of Conflict-affected areas of Mindanao have followed law and service delivery, and (8) widespread poverty a pattern different from Mindanao as a whole. and lack of job opportunities. Historically and up through the 1990s, economic growth in Mindanao overall lagged far behind the The principal impact of conflict has been in the areas country as a whole. Consequently, the level of which now make up BARMM. Those areas lag the rest economic output in the region is far below that of of the country in delivery of basic social services as Luzon and Visayas, and poverty rates are much higher. electricity, education, health, water, and sanitation. One Since the turn of the millennium, however, growth rates estimate puts the direct costs of conflict in Mindanao in the region have matched the high rates in the rest at two to three billion dollars for 1970-2001 (Schiavo- of the country, and poverty has started to come down. Campo and Judd 2005). Conflict’s nonmonetary ill Growth has been buoyed by the performance of Davao effects also take the form of the loss of cultural identity City and its surrounding region. The glaring exception and social cohesion, loss of personal dignity, prejudice, within Mindanao has been the conflict-affected areas, ethnic and social tensions, and a rise in kidnapping, which have seen little improvement since 2000. Across drug trafficking, and other illegal activities. all indicators of service access and well-being, ARMM stands out as worse than Mindanao and much worse Conflict-related displacement has had high costs. A than the Philippines overall (Figure 58). World Bank and World Food Programme (WFP) survey Figure 58: Socioeconomic Indicators in the Philippines, Mindanao, and ARMM 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Children who are Children with all Population with Population with Households with Net enrollment rate for not stunted basic immunizations improved water improved toilet electricity secondary schooling source facilities Autonomous Region of Muslim Mindanao Mindanao Philippines Source: 2015 National Nutrition Survey for stunting and 2017 Demographic and Health Survey for other measures. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 67 Map 5: Mindanao, the Autonomous Region of Muslim Mindanao, and Marawi City MINDANAO NORTHERN MINDANAO CARAGA ZAMBOANGA PENINSULA Marawi City DAVAO REGION AUTONOMOUS REGION OF MUSLIM MINDANAO SOCCSKSARGEN Note: The former Autonomous Region in Muslim Mindanao (ARMM) is shown in red and Marawi City in yellow. The new Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) includes the ARMM and other areas, including Cotabato City. The conflicts have had some impacts beyond the most The latest Global Terrorism Index ranked the affected areas in western Mindanao. Other areas in Philippines among the top 10 countries affected Mindanao and elsewhere have had to absorb refugees by fatal terrorist attacks. Villages in some areas of and have experienced spillover incidents of violence, Mindanao are reportedly under threat from ISIS- including a bombing at a market in Davao City in inspired local groups. The occurrence of ISIS-linked or 2016. Foreign government advisories discourage travel -inspired violence in Jakarta, Mindanao, and Puchong, to all of Mindanao, which is likely to have reduced near Kuala Lumpur, has raised fears of a new era of international tourism and investment in the region. transnational jihadist terrorism in Southeast Asia. While it is difficult to draw definitive links, the conflict may also have reduced tourism and investment for the Protracted, low-intensity conflicts generate a fertile Philippines as a whole. Activities of the NPA in various ground for the violent radicalization of tired and parts of the country, although limited in scale, have disenchanted fighters. The Marawi crisis typifies the also disrupted economic activity and government risks present in conflict-affected Mindanao. The five- service delivery. month-long siege in that city started on May 2017, 68 RESILIENCE between Philippine’s government security forces and Figure 59: Interlinked Peacebuilding Challenges militants affiliated with the ISIL, including the Maute and Abu Sayyaf Salafi jihadist groups. The siege resulted in the destruction of 95 percent of the Formation of effective infrastructure in the main battle area and displaced over BARMM administration 350,000 inhabitants. Persistent security risks illustrate how quickly a protracted sub-national conflict in otherwise a stable Mindanao Marawi development recovery and middle-income country can be captured by violent agenda reconstruction extremists, putting additional burden on the region already constrained by weak institutions, fragile conditions, and widespread poverty. The growing influence of violent extremist groups further highlights Normalization process the need to deliver on the “peace dividend” for for ex-combatants conflict-affected communities in Mindanao to stem the escalation of violence. Prevention of violent extremism has become an important global agenda that requires cross-regional and global collaborations. structure is critical to avoid a return to conflict. BARMM will need resources along with the trust and The Peacebuilding Agenda for the Bangsamoro support of the national government if it is to succeed. Autonomous Region Successful normalization of ex-combatants is another The year 2019 is an important milestone in the critical ingredient for peacebuilding. A recent profile peacebuilding process. In 2014, the government and found that while they are poor in material terms and the MILF signed the Comprehensive Agreement on have limited access to government services, they have the Bangsamoro (CAB), ending decades of conflict. The on average fairly high levels of education. Overall, ex- MILF promised to decommission its troops and end the combatants are optimistic about the future and aspire decades-long rebellion once the national government to help build peace and stability in their communities delivers its commitment of a new Bangsamoro region. (Institute of Bangsamoro Studies 2018). The government approved the law creating the new region in 2018, and a related plebiscite was held in The recovery and reconstruction of Marawi also early 2019. constitute a vital step to build the peace. Two years after the start of the Marawi siege, little progress has Implementation of the peace agreement will be been made on reconstruction, and the most affected fraught with challenges and uncertainty. The peace area of the city remains uninhabitable. There is a process has created the BARMM, superseding the substantial danger that if Marawi is not adequately ARMM region created by an earlier peace agreement rebuilt, the enduring spectacle of its desolation could and covering a larger geography. Among the challenges make it a breeding ground for resentment and thus are creating a new and effective bureaucracy, recruitment of militants. the recovery and reconstruction of Marawi, the normalization process for former combatants, and The cessation of armed conflict has brought enormous advancing the broad development agenda for the expectations as well as widespread hope to the region. region (Figure 59). If the implementation of the Comprehensive Agreement on the Bangsamoro (CAB) between the government Ensuring that the Bangsamoro Autonomous Region and the MILF is successful, the resulting peace dividend in Muslim Mindanao (BARMM) develops an effective has the potential to free up significant public and SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 69 climate change as one of the main challenges in achieving inclusive rapid and sustainable growth. At least 74 percent of Filipinos are vulnerable to natural disasters, which have killed 33,000 people and adversely affected 120 million in the last 30 years (GFDRR and World Bank 2011). The Philippines has experienced more than 90 destructive earthquakes and 40 tsunamis in its history (Philippine Institute of Volcanology and Seismology 2013). The most frequent of the 2,754 natural hazard events that took place during 2005–15 were climate-related. Around 90 percent of damage in recent years has been from typhoons. In September 2009, typhoon Ketsana (Ondoy) struck Metro Manila, flooding parts of the city and leading to significant economic losses. Since then, the Government has been taking measures to reduce flood risks in the city and is now considering building a dam on the Marikina river to reduce flood risks. The country and particularly Metro Manila are at high risk of a major earthquake. Disasters have major economic impacts. Expected annual asset losses for the Philippines are ₱233 billion on average, 75 percent of which are due to typhoons and the remaining to earthquakes (AIR Worldwide 2018). In 2013, Super Typhoon Yolanda private resources for more productive use, secure large alone killed 6,300, wounded 28,689 persons, and territorial areas for settlement and investment, reduce caused ₱571.1 billion in damage, according to data uncertainties in future planning, ease crippling social from the Philippines Statistical Authority. A projected hardship, and enable more geographically equitable 7.2-magnitude earthquake on the West Valley Fault, provision of public and infrastructure services. which crosses Metro Manila, could have catastrophic impacts, including 48,000 fatalities and $48 billion in economic losses (Philippine Institute of Volcanology and 5.2. Climate Change, Environmental, and Seismology 2013). Disaster Risks The agriculture sector is highly affected by extreme The Philippines’ very high exposure to natural hazards climate events. Non-typhoon-related floods are poses a principal threat to economic growth and common during the southwest (summer) monsoon. inclusion. Natural disasters generate large costs for When the monsoon coincides with a shift of the the economy, which are borne disproportionately by intertropical convergence zone over the Philippines, the poor and vulnerable. In the absence of mitigation such as in 2014, flood-related economic damage spikes. and adaptation measures, climate change may have Conversely, droughts and dry spells linked to El Niño massive impacts on economic growth and welfare by cause significant economic damage to agriculture, accelerating myriad disaster and environmental risks. including 42–50 percent of total weather- and climate- The Philippine Development Plan (PDP) identifies related damages in 2010, 2013, 2014, and 2016. 70 RESILIENCE Several parts of the country already have chronic Climate change may have already reduced economic water supply deficits. Current unmet water demand is growth and could have very large economic impacts estimated at 32 percent nationally, mainly due to the in the future. Temperatures in the Philippines have 33 percent water supply gap for agricultural purposes. risen by 0.68°C since 1950 and are projected to rise by more than 3°C under a high emissions scenario The impacts of disasters on the poor are severe. Poor (Figure 60). Climate change thus far may have reduced people are more likely to depend on disaster-vulnerable economic output in the Philippines by a cumulative livelihoods and live in unsafe areas. They invest less in 25 percent (Diffenbaugh and Burke 2019). Projections reducing their risk, lose more when they are hit by a suggest that without mitigation and adaptation, disaster, and receive less support to cope and recover. future climate change could have a huge impact on Farmers and fishers are particularly exposed to climate the country’s economy, stifling all growth by 2075 impacts. In barangays that have experienced a typhoon (Figure 61). Under a “no climate change scenario” the within the previous six months, household consumption fraction of the population who are poor or vulnerable falls by 6.7 percent and protein consumption by 10 by current standards will fall to zero, and most Filipinos percent, aggravating malnutrition in these areas. The will join the global middle class by 2075. In contrast, poorest fifth of households suffers 9 percent of the under a climate change scenario, without mitigation total asset losses from disasters, but 31 percent of or adaptation, most Filipinos will never reach the the total welfare losses. In the most exposed areas at global middle class (Figure 62). This threat highlights the eastern edge of the country, over a third of the the critical need for the Philippines to take climate nonpoor population is at risk of being pushed into mitigation and adaptation measures to avoid poverty by typhoons (Skoufias et al. 2019; Walsh and this scenario. Hallegatte 2019). Figure 60: Recent and Projected Increases in Figure 61: Recent and Projected GDP per Capita for Temperatures for the Philippines the Philippines 40C $70,000 $60,000 3C 0 $50,000 $40,000 20C $30,000 $20,000 10C $10,000 00C $0 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 No climate change scenario No climate change scenario Climate change scenario Climate change scenario Source: World Bank staff analysis of data from Carbon Brief (2018). Source: World Bank staff analysis. The 2010-18 GDP per capita numbers Note: The climate change scenario corresponds to representative are from World Development Indicators. Subsequent figures are concentration pathway (RCP) 8.5. The no climate change scenario here projected based on growth rates from Burke, Hsiang, and Miguel (2015). corresponds to RCP 2.6. Temperature changes are relative to the 1951- Note: Figures are in 2010 US$. The climate change scenario corresponds 1980 average. to representative concentration pathway (RCP) 8.5. The no climate change scenario corresponds to temperatures remaining fixed at their 1980-2010 average. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 71 Figure 62: Projected Economic Class Distribution for the Philippines Without Climate Change With Climate Change 100% 100% Extreme Poor Extreme Poor 90% Moderate Poor 90% Moderate Poor 80% 80% 70% 70% Vulnerable Vulnerable 60% 60% 50% 50% 40% 40% Economically Secure Economically Secure 30% 30% 20% 20% 10% 10% Global Middle Class Global Middle Class 0% 0% 2015 2025 2035 2045 2055 2065 2075 2085 2095 2015 2025 2035 2045 2055 2065 2075 2085 2095 Source: World Bank staff calculations. Notes: Figures show the fraction of the population projected to be in each economic class under scenarios with and without climate change. The projections are based on a microsimulation of household income growth, assuming GDP per capita growth rates as shown in Figure 61, the same “pass-through” rate of GDP per capita growth to average household income growth observed for 2006–15, and an equal rate of income growth across all households. Economic classes are defined in terms of household income per person as follows: Extreme Poor (less than PPP $1.90 a day), Moderate Poor (PPP $1.90-$3.10 a day), Vulnerable (PPP $3.10-$5.50 - a day), Economically Secure (PPP $5.50-$15.00 a day, Global Middle Class: PPP $15.00 and higher a day. The projected economic impacts reflect a cascade of Warmer waters associated with the El Niño event climate change effects. Projections indicate climate in 2016 led to documented declines in seaweed change will generate a drier dry season, wetter wet and farmed fish production of up to 16 percent season, and wetter northeast monsoon season. The in Palawan due to disease, mortality, and reduced frequency and severity of typhoons will increase growth rates. A simulation analysis of the effects (Crepin 2013). Sea levels will rise, and an increase of of climate change on small fish suggests massive 1 meter in sea level may submerge many small islands. declines in catch value, leading to a total economic Sixty percent of Philippine cities and municipalities are loss estimated at $165–700 million per year located along coastal areas; many will be at high risk of (Briones et al. 2005). coastal flooding and coastal erosion. • Ecosystems. Around 1 million hectares of forest are Climate change will have a variety of impacts. vulnerable, with natural forests in the provinces of Davao del Sur, Leyte, Sarangani, Sultan Kudarat, • Agriculture. Rice yields may fall by up to 75 percent and Zamboanga del Norte projected to experience in the Philippines by 2100 compared with 1990 reduced rainfall and increasing frequency of (Asian Development Bank 2009). Pest infestations drought conditions (Philippines Climate Change are also expected to increase. Assessment 2017). Climate impacts on coral reefs have been documented. The longer-term risk to • Fisheries and aquaculture. The seas around the the estimated $4 billion per year provided by coral Philippines are expected to be severely affected reef ecosystem services through coastal protection, by changes in temperature, precipitation, ocean fisheries, and tourism is high (Tamayo et al. 2018). acidification, oxygen depletion, and sea level rise. 72 RESILIENCE • Health. Climate change is expected to The Philippines also suffers from a range of risks increase malaria, cholera, diarrhea, dengue, due to environmental degradation and pollution. Air and cardiovascular and respiratory issues. The pollution is estimated to cause more than 150 deaths Philippines will be one of the countries most per day in the Philippines, and the total welfare loss affected by increasing deaths from heat waves due from air pollution is estimated to be 4.3 percent of to climate change, with mortality rates more than GDP (World Bank and IHME 2016). The urban poor doubling in the “best case” scenarios (Guo et al. are typically at greatest risk from exposure to both air 2018). pollution and solid waste, as well as the impacts of flooding arising from drainage channels clogged • Conflict. Although the precise mechanisms are with waste. not well understood, global evidence suggests that climate change is likely to increase violent Solid waste management is a growing problem, with conflict. Overall, for a one standard deviation global implications due to marine plastic pollution. increase in temperatures or extreme rainfall, the Solid waste in the Philippines, which is mostly disposed frequency of interpersonal violence rises by 4 of in environmentally noncompliant landfills, is expected percent and the frequency of intergroup conflict to increase from 14.6 metric tons per year in 2016 by 14 percent (Hsiang, Burke, and Miguel 2013). In to 29 metric tons per year in 2050 and (Kaza et al. the Philippines, negative rainfall shocks have been 2018). Only 31 percent of barangays have access shown to increase conflict incidents initiated by to a materials recovery facility, a key component of insurgents (Crost et al. 2018). an effective solid waste management system. The Philippines is among the top five emitters of plastic wastes in the ocean (Figure 63). Figure 63: Flows of Plastic Waste in the Philippines 2.7 Million Tons Total Plastic Waste 84% 16% 2.27 Million Tons Collected 432,000 Tons Not Collected 70% 14% 5% 11% 1.88 Million Tons Not Leaked 386,000 Tons Leaked 135,000 Tons Leaked 297,000 Tons Not Leaked to Ocean to Ocean Source: Ocean Conservancy and McKinsey Center 2017. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 73 Manila Bay is central to the economic development of more intense typhoons, coastal flooding, and stress the country but is suffering from acute water quality on marine ecosystems. Climate scenarios project issues. Manila Bay directly supports the lives of some potential losses of 52.3 percent of coastal GDP with 30 million people and functions as the country’s main intensification of storm surges by 2100. Meanwhile, port. Its beaches, once a recreational resource for pollution and overexploitation of coastal ecosystems greater Manila’s 13 million residents, are littered with affect their economic functions and resilience to climate garbage, much of it plastic (Parker 2018). A Supreme change. Mangroves reduce coastal flooding by about Court ruling in December 2008 required all relevant 20 percent, averting around $1 billion of damages to government agencies to undertake the cleanup, 613,000 people annually. If restored to 1950s level, rehabilitation, protection, and preservation of Manila mangroves would avert another $0.5 billion, but they Bay as part of their statutory responsibilities, but there are still being lost—by around 2 percent from 2000–15. has been little improvement in the ensuing decade. A The recent closure of Boracay to tourism due to severe Manila Bay Sustainable Development Master Plan is water quality issues—mainly inadequate wastewater being formulated. treatment—came at great economic cost. Environmental, climate, and disaster vulnerabilities The Philippines has demonstrated a strong exacerbate one another. Droughts and more commitment to addressing climate and disaster risks, erratic rains intensify the impact of poor land and but implementation challenges remain. The Climate water management on soil health. Water scarcity is Change Act of 2009 paved the way for the adoption aggravated by the deterioration of water quality due to of a long-term roadmap for climate action, focusing on pollution from untreated domestic sewage, industrial building an enabling environment and scaling up climate wastewater, agricultural runoff, and urban runoff. investments. The Philippine Disaster Risk Reduction Widespread mining and deforestation in Mindanao and Management Act of 2010 emphasized a substantial were blamed for the 2011 and 2012 flash floods policy shift from emergency response to disaster when typhoons Sendong and Pablo hit the country preparedness, resilience, and financial protection. The and took the lives of about 1,000 people. Neglect Philippines has had a strong performance in some areas of drainage systems and lack of long-term planning of disaster risk management. Government response and enforcement exacerbated the flood in 2012 that in the wake of natural disasters such as typhoons has swamped nearly all of Manila. Projected increases in generally been well managed. And the government extreme rainfall events, alongside the historical loss has managed the fiscal risks well with a disaster risk of forest cover from 90 percent of total land area to insurance program. 23 percent in 2010, compound the risk of landslides (GFDRR and World Bank 2011). The impact of the The high level of current disaster risk in tandem massive 2006 landslide in Leyte was exacerbated with the looming threat of climate change points by extensive logging along mountain slopes. Rising to the need to ramp up disaster resilience and temperatures will also intensify the health impacts of climate adaptation efforts. The Philippines has put air pollution. in place the key building blocks for such an approach. Government policy recognizes the need for a long- This negative confluence of environmental and term roadmap for climate action as well as efforts climate-related risks is acute in coastal areas. More for disaster preparedness and resilience rather than than half (55 percent) of municipalities and major disaster emergency response alone. The government cities are close to coasts, and approximately 16.7 is considering establishing an agency to lead disaster percent of the total population live in low-elevation response as well as integrate climate and disaster coastal zones.23 Climate change is expected to lead to resilience programs at the national and local levels. 23 In 2000, low-elevation coastal zones (LECZs) represent less than 6.8 percent of the total land area of the Philippines. The share of the national population located in LECZs (16.7 percent) is much larger than the relative area of the zone. The coastal population is projected to approximately double by 2060 (ADB 2017). 74 RESILIENCE Current efforts are insufficient to address growing 2. Climate-resilient agriculture. Examples of climate- climate and disaster risks. Climate change expenditure resilient technologies include the adoption of tagging (CCET) has been carried out on the national stress-tolerant varieties of crops and the use budget since 2015 and has shown an increase in the of alternate wet and dry techniques for rice allocation to projects and programs linked to climate cultivation to reduce water consumption. Many of action from 4.5 percent in 2015 to a proposed the actions in the agricultural sectors are ‘win-win’ 6.5 percent of the national budget in 2019. Local for both adaptation and mitigation. For example, government units (LGUs) have a high level of demand alternative watering and drying (AWD) for rice is a for additional investments in climate resilience, and key adaptation measure as it reduces overall water struggle to effectively access those funds that are consumption, but it also leads to reduced intended to support them such as Disaster Risk methane emissions. Reduction and Management funds and the Peoples’ Survival Fund. Many national agencies and LGUs 3. Management of water resources. Such efforts have not substantially integrated risk-informed and encompass introduction of water-efficient prioritized investments into their programs, and there irrigation, increasing water storage capacity, and have not been effective mechanisms for coordination or restoring forest cover and natural function of evaluating progress. watersheds. The government’s Risk Resiliency Program (RRP), 4. Infrastructure. Transport, water, and other resources established through the Program Convergence in both rural and urban areas can be made climate Budgeting (PCB) approach in 2015, requires resilient. Farm-to-market roads can be made strengthening. Incentives for national agencies to more resilient through raising road levels and participate in the RRP lack clarity. The criteria and concretizing and expanding road drainage systems. procedures for RRP investments are inadequate. Technical standards for lifeline infrastructure like Resilience investment needs at the local level should water supply, drainage, wastewater, transport and be systematically identified and prioritized for electricity can be revised to reflect that extreme integration into the national budget and mobilization weather scenarios now occur more frequently. of external funding. Boosting education levels can also help enhance Many different types of investments can make the climate and disaster resilience. Globally, higher levels Philippines more resilient to climate change. Four key of education (especially for girls) are strongly associated categories of intervention where more investment is with lower levels of fatalities from disasters. Filipinos required are as follows: with higher levels of education are more likely to prepare for disasters (Hoffmann and Muttarak 2017; 1. Coastal protection. Restoration and protection of Lutz, Muttarak, and Striessnig 2014). Additionally, mangrove forests and coral reefs, combined with education can help drive public concern about climate sea walls and engineered coastal defenses, reduce change. When asked “How serious of a threat is vulnerability to storm surges. Good examples global warming to you and your family?” 37 percent of of what can be done include the restoration of Filipinos with primary education or less and 60 percent mangroves on Siargao Island in Surigao del Norte of those with tertiary education said it was a “very and Calbiga, Samar under the DENR’s Enhanced serious” threat (World Bank staff analysis of Gallup National Greening Program (ENGP). Mangrove World Poll data from 2010.) restoration has also benefitted local communities on Siargao by increasing shellfish availability. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 75 Further efforts are needed to improve earthquake Intended Nationally Determined Contribution (INDC) preparation for Metro Manila. The top need is as part of the international Paris Agreement, to reduce strengthening and retrofitting public buildings and GHG emissions by 70 percent relative to a “business structures such as schools, hospitals, bridges, and as usual” scenario by 2030. The Philippines is currently flood control structures. Other areas for attention are revisiting its INDC in view of finalizing the Nationally updating building standards, enhancing emergency Determined Contribution. management systems, and developing government service and business continuity systems. Development Agriculture currently accounts for about one-third of additional water sources is needed to make the city of the country’s GHG emissions. Emissions stemming earthquake resilient. The city currently depends on one from agriculture are roughly on par with those from the source for 97 percent of its water. power sector and greater than those from the transport sector. Agriculture-sector emissions are principally As one of the most climate-affected countries in due to rice cultivation. In the future, agriculture GHG the world, the Philippines also has a strong interest emissions are likely to grow at most modestly and to be in joining worldwide efforts to cut greenhouse gas overtaken by emissions from the power and (GHG) emissions. The demonstration effect of the transport sectors. Philippines can help spur other countries to action on climate mitigation, and many countries are working to If the Philippines builds new coal-fired power plants, chart a “low carbon” future. Costa Rica, for example, it is unlikely to meet its INDC commitments for 2030. has launched an economy-wide plan to achieve zero GHG emissions in the energy sector are projected to net emissions by 2050. Cutting GHG would also have increase substantially under both the “business-as- large public health benefits by reducing air pollution, usual” and “clean energy” scenarios developed by the which reduces worker productivity and is responsible Department of Energy (DOE). Under the BAU scenario, for nearly 64,000 premature deaths per year in GHG emissions due to power generation from coal the Philippines (Health Effects Institute 2019). The alone would more than quadruple by 2040 (Figure 66). Philippines has a stated target, made in the form of its Figure 64: Greenhouse Gas Emissions by Major Source Figure 65: Agricultural Greenhouse Gas Emissions 63+13+137A by Source Synthetic Agriculture 53 Crop Fertilizers Residues 7% 3% Power 48 Burning 1% Enteric Transportation 30 Fermentation 13% Other Energy 27 Industrial Processes 16 Manure Management 11 13% Waste 0 10 20 30 40 50 60 Rice cultivation Metric Tons of Carbon Dioxide Equivalents 63% Source: World Resources Institute: CAIT Climate Data Explorer, Source: FAOSTAT. 2014 estimates. 76 RESILIENCE Figure 66: 2016 and Projected 2040 Greenhouse Gas Figure 67: 2016 and Projected 2040 Energy Supply by Emissions by Fuel Source, Metric Tons of Carbon Fuel Type, Thousand Tons of Oil Equivalent Dioxide Equivalent 500 160,000 140,000 400 120,000 Natural Gas 100,000 Wind/Solar 300 Oil Hydro 80,000 Coal Natural Gas 200 60,000 Biomass & Biofuels 40,000 Geothermal 100 Coal 20,000 Oil 0 0 2016 2040 2016 2040 Source: Department of Energy 2017. Note: Projections in both figures for 2040 correspond to a “business as usual” scenario. Total energy use is projected to nearly triple by energy demand, the country can develop a mix of 2040. To meet demand for the power component of renewables, including solar, wind, small hydro, biomass, energy consumption, the Philippines has been rapidly and geothermal. Under one highly ambitious roadmap, expanding coal-fired power production. Oil-based fuel with major investment in renewables, the country could is used for only a small portion of power but accounts achieve zero-carbon power production by 2050 (Figure for the dominant share of fuel for transport and other 68). This would require major shifts including revamping energy consumption. The Department of Energy the grid system and building storage capacity. This projects that both coal- and oil-based fuel consumption scenario highlights that prospects are bright for solar will greatly increase by 2040 (Figure 67). to become a major power source for the Philippines. Other recent studies have noted the large untapped Worldwide the cost of renewable energy—and potential for rooftop solar, which is discouraged by particularly solar—is falling rapidly, making coal-based regulatory requirements (Ahmed 2018; IFC 2019). power more expensive. Globally, in 2018, the cost of electricity declined 26 percent year-on-year for The Philippines can meet ambitious NDC concentrated solar power (IRENA 2019). Likewise, commitments and mitigate climate change through construction of coal power plants around the world is action by the government and the private sector. slowing rapidly, with new construction dropping by 84 This will require integrating climate change throughout percent between 2015 and 2018 (Shearer et al. 2019). government planning. While simultaneously satisfying Power plants in the Philippines are typically built with growing energy demand, the country can avoid the long-term purchase contracts, by which the plant owner construction of any new coal-fired power plants is guaranteed to be paid a set price over many years. and transition rapidly to renewables. Given the fast- There is a very high risk that new coal-fired power declining price of solar and the country’s untapped plants will become “stranded assets” that will lock potential other renewables a low-carbon future is Filipinos into paying high rates when renewable energy possible. Other key measures will include improving has become cheaper (Ahmed and Logarta 2017). energy efficiency in public buildings and improving transportation infrastructure. With efforts by the The Philippines has high potential to move more government and the private sector, the Philippines aggressively toward renewable energy. The can chart a course for green growth and a government has programs to encourage renewables, sustainable future. but these have stalled in implementation. To satisfy SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 77 Figure 68: Power Production under a 100 Percent Renewable Scenario for 2050 2050 Residential rooftop solar Commercial & government 15.5% rooftop solar 29.6% ENERGY MIX UNDER 100% RENEWABLE Solar plants Wave devices 9.6% 0.6% SCENARIO Concentrating solar plants Geothermal 10.1% 11.2% Onshore wind Hydroelectric 7.7% 3.9% Offshore wind Tidal turbines 11.5% 0.3% Source: Jacobson 2017. 6 GOVERNANCE SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 79 The Philippines faces a complex mix of governance 6.1. Government Effectiveness challenges that span across inclusive growth and jobs, human capital, and resilience. The Philippine Government effectiveness is limited by a range of Development Plan has adopted the Worldwide public administration challenges. In combination, these Governance Indicators (WGI), which provides a rough profoundly limit policy and program implementation. snapshot view of governance concerns for the country. The institutional structure emanating from the 1987 The Philippines ranks above regional peers in Voice and Constitution and subsequent legislation and regulations Accountability and Regulatory Quality but below them has been characterized by overlapping responsibilities in Government Effectiveness, Control of Corruption, and duplication between agencies. This is exemplified and Rule of Law (Figure 69).24 Limited government by the roles and responsibilities of financial effectiveness results in poor implementation of the management and accountability institutions of the government policies and programs. More than one- Department of Finance, the Department of Budget and third of firms identify corruption as a major constraint, Management, and the Commission of Audit. Differences suggesting that it stifles economic growth and poverty in views and approaches to financial management and reduction. Weak rule of law in the form of judicial fiscal governance among agencies have resulted in inefficiency both delays policy implementation and delays in development and implementation of reform favors powerful firms over those without connections. agendas, mixed signals to line agencies about what is Voice and accountability are limited by the twin required, and reinforcement of a culture of phenomena of family political dynasties and vote- excessive caution. buying, which limit incentives for policymakers to seek votes through programs and policies that serve constituents and reduce poverty. Figure 69: Worldwide Governance Indicators for Philippines and Regional Peers (Percentile Rank), 2018 70 60 50 40 30 20 10 0 Voice and Government Control of Corruption Rule of Law Regulatory Quality Accountability Effectiveness Philippines Regional peer average Source: World Bank 2019a. 24 The Philippines Development Plan does not monitor the Political Stability and Absence of Terrorism/Violence indicator. This report does not discuss that indicator or the indicator for Regulatory Quality. 80 GOVERNANCE +3729A 34 Public financial management (PFM) has been Figure 70: Status of the Government’s Career Executive incrementally strengthened through successive Service Positions, August 2019 administrations, and improvements in transparency and regulatory arrangements are evident. Nonetheless, Non-political Vacancies there remain areas where additional reform has appointees 29% 34% further potential, particularly in budget utilization, procurement, financial reporting, and parliamentary oversight of financial management. Better use of technology can improve PFM. The government is implementing a new financial management information system across all agencies to improve the reliability and timeliness of financial information. Public procurement outcomes may not be achieving best value for money, based on a joint 2014 World Bank and government empirical study of infrastructure Political contracts. Data extracted from PhilGEPS, the appointees 37% government e-procurement system, indicate a high level of fragmentation of contracts into a plethora Source: Data provided by the Career Executive Service Board. of very small contracts, with about two-thirds being Note: There were a total of 2,716 positions as of August 2019. under $1 million. This imposes a large administrative burden on government and bidders and undermines Weak arrangements for strategic human resources the potential benefits of economy of scale. Part of the management offer little support for career and reason for breaking up procurement requirements into succession planning. This is a necessary foundation to smaller-value contracts could be that larger contracts nurture the leadership and management cadre of the require greater scrutiny through a more stringent future and address the challenge of an aging workforce approval process. Furthermore, the procurement where more than 70 percent of executives are over process for larger-value contracts takes substantially 50 years old. In addition, the Philippines will need to longer to complete. Contracts exceeding $1 million on expand use of digital technology within administrative average take 60 percent longer than smaller contracts. activities, civil service processes, and service delivery. Added to this, the time taken for contract signing is The Philippines lags far behind all regional peers in unusually long, sometimes up to three months. There the adoption of digital technology for use by the is also a high percentage of unsuccessful procurement government. (Figures for the World Bank’s Digital processes, the extent of which varies across agencies, Adoption Index can be found in the Inclusive Growth but some experience more than 30 percent of bidding and Jobs chapter.) failures by value, even on low-value tenders. Inconsistent development and reform agendas Civil service capability is weak, and it lacks leadership, between political administrations constrain progress management, and motivation. Strengthening the civil on government reform initiatives. There has been service can start with having a leadership cadre whose a strong tendency for each new administration capacities are rigorously demonstrated through relevant to announce ambitious agendas that are neither competencies and skills. This will require developing fully implemented nor continued by subsequent a strong alignment between such competencies and administrations (Teehankee 2012). political appointments, which make up over one-third of senior administration positions (Figure 70). SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 81 Another constraint is the lack of legal protection for than currently provided. The ruling, which takes effect bureaucrats in the conduct of their duties. Officials in 2022, has raised concerns about the absorptive are personally liable for decisions taken, or for acts capacity of LGUs and other impacts on public services of commission or omission in the conduct of their and the economy more generally. duties, even where they did not make the decisions (for example, where their subordinates made the LGUs lack the capacity to effectively plan for decisions) and even after they have left or retired from development. Despite decentralization, national line the service. This is a strong disincentive to autonomous agencies retain a substantive role in the provision of decision-making, informed risk-taking, and innovation. subnational infrastructure and services, resulting in Officials who may have served on an evaluation fragmented planning and diffused accountability. Local panel for a sizable procurement contract could be governance faces the challenge of achieving coherence personally liable to respond to legal action taken by in vertical planning and resource-sharing among the unsuccessful bidders or other aggrieved parties. They provincial, municipal, and barangay LGUs. In general, will be expected to retain legal counsel at their own they lack sufficient technical capacity to implement expense, defend themselves in court, and be personally infrastructure projects and provide services in a timely responsible for any damages awarded. In most and quality manner, perpetuating dependence on the countries, civil servants are protected from personal national line agencies. liability for actions or decisions taken in the conduct of their official duties and cannot be sued in their personal Local governance in conflict-affected areas is often capacity for reasonable behavior. In these countries, weak. Of the 123 LGUs in the ARMM, only 30 percent legal actions are typically brought against the state passed the 2014 Good Financial Housekeeping (versus rather than individual civil servants. a standard national average of 91 percent) and none received the 2015 Seal of Good Governance (versus The challenges facing public sector governance in the a standard national average of 15 percent). Fiscal Philippines are greater at local government levels. The resources are limited (low revenue collection means Local Government Code (LGC) of 1991 devolved many that many conflict-affected areas rely on the national service delivery responsibilities and was intended to government for 99 percent of revenues) and most likely provide greater autonomy, authority, responsibilities, inefficiently spent (the number of qualified audit reports and resources to local government units (LGUs). The tends to be high in conflict-affected areas). intention was to improve local services by bringing resource allocation and prioritization close to the Establishment of the BARMM offers many challenges citizens, making it easier also to hold the government and opportunities that will have lessons for adoption accountable. Nearly 30 years on, however, the impacts of greater devolution of autonomy and responsibility of decentralization on poverty reduction and access to subnational governments. The Bangsamoro to services remain uneven across the country. Limited Organic Law will provide greater flexibility to the good governance remains a defining factor in the regional administration in allocating block transfers development of communities, including the progress in from the national government. It does not change poverty reduction. Several studies have shown that the the relationships between the regional government levels of fiscal transfers from the national level to LGUs and lower-tier governments. LGUs will continue to are not sufficient for poor municipalities to assume the be strongly dependent on the national government costs of devolved basic services. Previous and current for their funding and operational framework. The administrations have taken initiatives to increase fiscal disconnection between regional and local governments transfers from the national level to LGUs, with a bias creates the potential for inefficient and conflicting for the poorer municipalities. In 2019, the Supreme activities while eroding accountability because of the Court affirmed a ruling that LGUs are entitled to a lack of clear responsibility and contribution to regional, much larger “internal revenue allotment” (IRA) transfer local, and national goals. 82 GOVERNANCE 6.2. Control of Corruption In large metropolitan areas, including Metro Manila, Cebu City, and Davao City, issues such as The Philippines ranks at the 34th percentile among congestion and flooding often span administrative countries in the WGI for control of corruption. The boundaries. There is no effective coordination of average percentile rank among regional peers is 45. urban development in the Philippines. The limited A principal challenge for evaluating the extent of capacity and resources available for the Metropolitan corruption is the lack of publicly available data. Most Manila Development Authority mean that it is analyses of corruption rely on perception surveys. unable to meet the needs of the region’s expanding population, let alone play a leading role in national Data from surveys of firms confirm that corruption urban planning and management (World Bank 2017). affecting the private sector remains widespread. In the The challenges facing urban areas are exacerbated by 2015 Enterprise Survey, 35 percent of firms identified weak land administration arrangements, conflicting corruption as a major constraint, more than double the intergovernmental responsibility and accountability, average among countries in East Asia and the Pacific. and lack of comprehensive preparedness for handling The fraction of firms reporting that gifts are expected natural disaster and other risks to sustainable for various government transactions is also high but in urban growth. most cases below the average for other countries in the region. Particularly high rates of expected gift-giving are “to get things done” (59%), to get a construction permit (40%), and to secure a government contract (21%) (Figure 71). Figure 71: Corruption Reports in the Enterprise Survey (Percentage of Firms), 2015 Identifying corruption as a major constraint 35% 16% 59% Expected to give gifts to public officials “to get things done” 50% 11% Expected to give gifts to get a water connection 27% 20% Expected to give gifts to get an electrical connection 21% 40% Expected to give gifts to get a construction permit 41% 21% Expected to give gifts to secure government contract 41% 0% 10% 20% 30% 40% 50% 60% 70% Philippines East Asia & Pacific average Source: 2015 Enterprise Surveys. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 83 6.3. The Rule of Law existing oligopolies and discourages small and medium enterprises (SMEs). A major rule of law concern in the Philippines is weak judicial efficiency, which stymies economic growth Important reforms critical for economic and social and regulatory effectiveness. Stable economic growth, development often face fierce challenge in the courts. trade, and industry require an efficient judiciary to High levels of uncertainty in the integrity and timeliness protect agreements, create an environment where of decisions can significantly undercut potential contracts are enforced, settle disputes, and backstop benefits for growth and development. For example, regulators in implementing their mandates even in the two challenges to the Reproductive Health Act of 2012 face of strong commercial vested interests. Businesses delayed full implementation for five years. need assurance that contracts are going to be honored and enforced, that government policies are consistently Substantial rule of law concerns have also been raised and transparently applied, and that decisions on about the deaths resulting from the war on drugs. The disputes that reach the courts will be rendered in a Philippine National Police (PNP) report that more than timely manner and will not unduly extend uncertainties. 6000 people were killed in police anti-drug operations between July 1, 2016 and July 31, 2019 (Philippine In the Doing Business subindex measure for News Agency 2019). This figure excludes those killed “Enforcing Contracts,” which measures the time and by unidentified gunmen. cost of resolving a commercial dispute in court, the Philippines ranks 152 out of 190 countries. Limited court automation and case management systems mean 6.4. Voice and Accountability courts do not report the time it takes to dispose of a case, do not provide single case progress reports, and Voice and accountability are limited by political are opaque about the age of pending cases. In a 2013 dynasties and vote-buying. These twin political survey, 68 percent of enterprise managers said they do phenomena stifle voice by discouraging active political not believe the rich and poor receive equal treatment in participation of those without family connections court (Social Weather Stations 2014). and the ability to raise the funds. They limit the accountability of elected officials by weakening The heavily overburdened judiciary suffers from competition. In the economic sphere, limited significant governance challenges. The Supreme Court competition is a constraint to inclusive growth. In the was weighed down with a total caseload of 14,411 political sphere, political dynasties limit competition, cases in 2017, including 8,726 pending cases. The stunting government performance, particularly at the backlog at all levels of the court system is high. For local level. instance, the Court of Appeals had close to 20,000 pending cases at the end of 2016 and the lower courts Political dynasties are uniquely prevalent in the had over 800,000 cases pending in 2017. Philippines. A political dynasty is a family that retains political power by maintaining control over at least Judicial inefficiency hampers inclusive growth by one elective position over successive generations. The favoring established and well-connected firms with Ateneo School of Government has documented the the resources to engage in protracted court battles. extent of political dynasties in the Philippines and their Managers and owners from medium-size firms are impact. The share of Philippine legislators who hail from nearly twice as likely as those from large firms to dynasties is three in four, far higher than in Mexico, identify the court system as a major constraint to Thailand, and other countries for which estimates are business.25 A poorly functioning judiciary helps entrench available (Figure 72). Eighty-five percent of provincial governors are from dynasties. 25 Based on data from the World Bank’s 2015 Enterprise Survey. 84 GOVERNANCE Figure 72: Percentage of Legislators Who Come from Political Dynasties 80% 70% 60% 50% 40% 30% 20% 10% 0% Philippines Thailand Mexico Japan India Ireland Argentina Greece USA Source: Mendoza et al. 2016. Note: Regional peer is shaded yellow. The share of positions held by members of political are related, for example, expenditure decisions will be dynasties has increased in the last decade (Mendoza strongly influenced by a single family. Political dynasties and Banaag 2017). Concern about the impact of can potentially take advantage of state power for political dynasties is long-standing, and the Philippine self-serving interests without fear of replacement or Constitution enacted in 1987 prohibits political administrative sanctions. dynasties “as may be defined by law.” A law to define dynasties and enable this provision has yet to Academic research suggests that vote buying, be passed. which occurs in many countries, is widespread in the Philippines. One detailed study based on a 2016 There is a positive correlation between the extent survey of low-income voters in Metro Manila found of strong political dynasties and poverty in the that attempts at vote buying were widely prevalent: Philippines. This relationship is particularly strong in 100 percent of respondents were offered something in Visayas and Mindanao (Mendoza et al. 2016). There is exchange for their vote (Canare, Mendoza, and Lopez also a correlation between low political contestability 2018). Vote buying consisted of an offer of money, and poor socioeconomic welfare in conflict-affected food, other material things, or favor in exchange for areas of Mindanao. The scholarly literature identifies a vote (Figure 73). The sums voters received are how a deterioration of political competition as surprisingly high: in one recent study, they range from a consequence of dynasties may result in poor $20 to $50 per household in local elections (Cruz et al. socioeconomic outcomes. The principal mechanism 2018). Politicians who can buy votes have less incentive is that dynasties may erode checks and balances, to seek votes through programs and policies that serve weakening accountability and auditing mechanisms constituents. International research has observed that that are supposed to police the behavior of public in areas where vote buying is prevalent, the delivery officials, particularly in the way they manage public of primary health services and health outcomes are resources. In situations where the provincial governor, weaker than elsewhere (Khemani 2018). district representative, and several municipal mayors SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 85 Figure 73: Percentage of Low-Income Metro Manila Voters Offered Something in Exchange for Their Votes 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Help or favor Food Money Other goods Anything Source: Canare, Mendoza, and Lopez 2018. Vote-buying and political dynasties lie at the nexus Politicians often block implementation of policies and between extreme wealth concentration, oligopoly programs that threaten the dominant oligopolies and power, and weak rule of law. Although systematic data their owners, who may be the politicians themselves, are lacking, numerous case studies demonstrate how their family members, and others who funded their the political system in the Philippines has historically election campaigns. The weak rule of law also favors been hijacked by the interests of economic elites the elites, who can navigate the courts and use them to (Hutchcroft 1998; McCoy 2009; Studwell 2013). tie up legislation they oppose. 86 7POLICY PRIORITIES SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 87 The Philippine SCD team identified policy priorities for priority. Candidate priorities were assessed and achieving Ambisyon Natin 2040 and the World Bank’s identified based on three criteria: global twin goals of reducing poverty and boosting 1. The impact that addressing the priority will have on shared prosperity. The priorities were determined reducing poverty and boosting shared prosperity. based on the diagnostic analysis which forms the core (These are the World Bank’s global “twin goals”, of this report, along with stakeholder consultations. and they are closely aligned with the Philippines’ Ambisyon 2040 vision.) An extensive series of “upstream” consultations 2. The strength of the evidence base for the priority. were conducted in the initial stage of the SCD. These 3. The extent of complementarities with consultations informed the selection of topics for the other priorities. diagnostic. Consultations were held in Luzon, Visayas, and Mindanao with officials from several government Based on this assessment, the analysis in the agencies, academic and think tank experts, civil society diagnostic, and the consultations, the World Bank organizations, development partners, and the private Group experts identified seven priorities. The seven sector. The team greatly benefitted from the insights priorities are not intended to be comprehensive. provided in the consultations. They do not address many areas in which existing policies and programs have been effective, such as In all the consultations there was a strong consensus macroeconomic management. about the critical importance of governance. Participants noted that many well-intended programs Following this process, a series of “downstream” and policy reforms had not realized their promise due consultations were held to receive feedback on to weaknesses in implementation. They mentioned the the priorities. These consisted of three events with lack of policy predictability, weak civil service capacity, a variety of stakeholders. Participants endorsed the and political dynasties as particular concerns. Examples overall priorities and provided comments which Check if they had decided not to use “overarching” were cited in the areas of inclusive growth and jobs, informed the fine-tuning of the priorities. Clarissa’s comment: human capital development, and resilience. Of the seven priorities, one is tagged as an Other key issues noted by participants covered a overarching priority and the rest are grouped in three broad terrain. Issues that were highlighted repeatedly categories defined in terms of the need for additional in consultations included weak infrastructure, policy effort. The “Get in Gear” priorities are those cumbersome business regulations and the lack of for which extensive policy and program reform will be competition, the need to improve the quality of needed. “Press on the Accelerator” priorities are those education and provide skills to youth, service delivery for which the direction of current policy is appropriate, for health and nutrition, how to bring urban women but additional efforts are needed. Finally, for “Keep into the labor force, the balance between labor Driving” priorities, current policy is largely on the right regulation and labor rights, wealth polarization, the track, and follow-through is needed on current efforts. spatial dimensions of inequality, and environmental risks and climate change. Following the consultations, Overarching Priority these issues were all explored in the diagnostic analysis. Upgrade public administration to be fit for purpose to After the completion of the diagnostic analysis, the meet the objectives and challenges set out in Ambisyon SCD team drew upon the diagnostic and input from Natin 2040 the consultations to identify a candidate list of key priorities. World Bank Group experts with knowledge The Philippines has a policy or program to address across a variety of subject areas, gathered at a nearly all its critical constraints. What is needed is workshop to assess the importance of each candidate principally not policies or programs but follow-through and successful implementation of existing efforts. 88 POLICY PRIORITIES Strengthening public administration in multiple ways also provides a critical opportunity to address nutrition to establish strategic human resources management and broader weaknesses in health care access and and leadership development across the civil service quality. Finally, a wide public campaign and possibly could make the government more effective. This a targeted funding mechanism could drive action to priority covers a wide agenda, including boosting reduce malnutrition by local governments. the effectiveness and capability of the civil service, increasing competition and contestability in public Protect the country from climate, environmental, and procurement, improving the functioning of the judiciary, disaster threats and developing more effective and accountable local Over the long term, climate change poses the largest governments (including through participatory and threat to the prosperity of the Filipino people. Under community-driven mechanisms.) a pessimistic projection, climate change could end all economic growth in the country by roughly 2075, Priority should also be given to improving the and the median Filipino would never join the global effectiveness of budget planning and management middle class. by aligning it more closely with national and regional plans while strengthening accountability for efficient A wide variety of climate adaptation efforts can financial and nonfinancial performance. Additionally, reduce the impact. These include helping farmers while the bond between political and economic power shift to climate-resilient cropping systems, protecting which undermines voice and accountability is inherently mangroves and sensitive coastal areas to reduce difficult to break, implementing the constitutional ban the impact of typhoons, and better managing water on political dynasties and strictly enforcing the existing resources. The Philippines has a Risk Resiliency Program prohibition on vote-buying would be meaningful steps. (RRP) to enhance the integration of climate adaptation priorities into the national budget, but the program has Group 1 Priorities: “Get in Gear” not yet become an effective vehicle for action. For priorities in this group, current policy has The Philippines also has a strong interest in joining been insufficient to confront the magnitude of the worldwide efforts to cut greenhouse gas emissions corresponding constraint. Extensive policy and program and move towards a low-carbon future. The key step reform will be needed. is to develop renewable energy sources and move away from reliance on coal-fired power plants. The Reduce child malnutrition government can work with the private sector to tap the The high level of malnutrition threatens the economic country’s high potential for solar and wind power. future of the country and the prospects for poor Filipino children to achieve a better life as adults. In terms of disaster risk management, the Philippines Countries that have improved nutrition have done so has a mixed record. On the one hand, it has generally with a multipronged approach. managed post-disaster response well and managed the associated fiscal risks smartly through a disaster risk Key action points for reducing malnutrition in the finance and insurance program. On the other hand, country are efforts to improve maternal and child it is weak in its efforts to mitigate the risks posed health, increase consumption of healthy foods by by a potential large-scale disaster, particularly the young children and mothers, and expand access to possibility of an earthquake in Metro Manila. Efforts sanitation facilities. The Pantawid Pamilya conditional to improve preparation for disasters, in particular to cash transfer program, by promoting the demand for make critical infrastructure and buildings more resilient health services and making food more affordable, to earthquakes, are needed. Emergency cash transfer can be leveraged to increase its impacts on nutrition. mechanisms should be further developed to allow an Implementation of the Universal Health Coverage Law efficient response that can help affected populations bounce back quickly after disasters. SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 89 Group 2 Priorities: “Press on the Accelerator” Group 3 Priorities: “Keep Driving” For priorities in this group, the direction of current For “keep driving” priorities, current policy is largely on policy is appropriate, but additional efforts are needed. the right track. What is needed is follow-through on current efforts. Strengthen peacebuilding The poorest parts of the Philippines are the areas most Build quality infrastructure affected by conflict, principally in western and southern Infrastructure investments have been neglected for Mindanao. The country will not succeed in freeing itself many years. Only recently has overall infrastructure from poverty unless it is able to build peace. spending been ramped up, with a focus on transport infrastructure in Luzon. Better infrastructure is Passage of the Bangsamoro Organic Law (BOL), which critical to boosting agriculture and tourism, which led to the creation of the Bangsamoro Autonomous have not achieved their potential. Developing digital Region in Muslim Mindanao (BARMM), is a huge infrastructure will also help the economy continue to step forward. A sustained peace will require effort to generate new jobs. address multiple challenges: (1) creation of an effective bureaucracy for the BARMM to deliver basic services in Infrastructure planning should be conducted with an health, education, and other areas, 2) the recovery and eye to ensure that new works benefit broad segments reconstruction of Marawi, 3) the normalization process of the population and address the full gamut of needs, for ex-combatants, (4) handling the threat of resurgent including water and sanitation. Development of rural violence, and (5) advancing the broad development roads, which can be carried out through a community- agenda for the Mindanao region to help it catch up with driven development approach, remains an effective way the country’s broader success. to connect farmers to markets and boost incomes for the rural poor. Close the learning gap in basic education The Philippines has made huge progress in expanding Open the economy to competition access to education through the provision of universal Limits to business competition have restricted private kindergarten and the creation of senior high school sector growth and favored the entrenched elite over in recent years. The core challenge will be making new market entrants. Concentrated market power sure that students learn while they are in school and raises prices, harming all Filipinos. acquire foundational skills, particularly basic literacy and numeracy along with socioemotional skills like The government has taken several major steps perseverance, creativity, adaptability, and team work, to improve competition, including passage of the which are essential to ensure a productive life and Philippine Competition Act in 2015, the Ease of Doing success in the labor market. The principal point of Business Law in 2018, and the Rice Liberalization Law action will be improving the quality of teaching, mainly in 2019. Following through with the implementation through improved teacher professional development. of these measures could markedly advance shared Parallel efforts are needed to improve access to prosperity. Complementary actions that can foster teaching and instructional materials and improve greater competition include amending the Public school infrastructure. Services Act, loosening restrictions on foreign direct investment, and reducing nontariff trade barriers. Improving basic education can be the core of the broader agenda of preparing Filipinos for the economy of the future, through basic education as well as early childhood education, higher education, technical and vocational training, and lifelong learning. 90 8 DATA & KNOWLEDGE GAPS SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 91 The World Bank Group team identified areas where More generally, available data on school quality and there are gaps in data and in knowledge in the learning are limited. The upcoming releases of the 2018 Philippines. In alphabetical order by subject, these are PISA (Programme for International Student Assessment) as follows: and 2019 TIMSS (Trends in International Mathematics and Science Study) data will provide an opportunity Education: There is little information on the senior to better understand the constraints to learning. If high schools, which were created in 2017, or the the Philippines’ National Achievement Test (NAT) is experiences of graduates. An extended study would conducted on a timely basis, student-level results be helpful to understand the impacts of senior high could be highly useful as a planning and research tool, school and formulate improvements to the system. particularly if the data are linked to student, teacher, The analysis could detail transition rates and flows and school characteristics. Although the Department between different education levels, the pathways of Education (DepEd) collects a range of detailed of mobility of students inside the tertiary education administrative data, the data are only used in a limited subsector, especially between technical and vocational way, and little is released publicly institutions and universities, the degree of curriculum integration, the degree of flexibility of the curriculum, Employment: Although a regular Labor Force Survey and the degree of inequality of the education system, (LFS) is collected, understanding of the labor market including access, retention, and completion. A better and informal work is limited by the absence of data on understanding of tertiary education could help devise job characteristics such as the size of the employer, policies to boost human capital, increase country job tenure, whether the employee has a labor contract, competitiveness, and improve the country’s capacity and what benefits he or she receives. There is also to transform its economy in the midst of the fourth substantial policy interest and little recent work on industrial revolution. many interlinked issues related to the future of work 92 DATA & KNOWLEDGE GAPS in the Philippines: the skills needed for future jobs, Migration and remittance: In-depth analysis on existing labor market policies and programs, and the migration trends, remittance dynamics, and the role of technical and vocational education and training (TVET) the Filipino diaspora is limited. A migration diagnostic, system. A more updated and in-depth labor market including taking stock of migration trends, governance, analysis could help identify the skill sets for future and regulatory structures, and analysis of challenges jobs in light of the agenda of the World Development and opportunities can help devise solutions to harness Report 2019. the benefits of migration and support the execution of migration-related SDGs. Gender: Information on gender-based violence is lacking, particularly for conflict-affected regions. Pensions: There are gaps in understanding of public and Additionally, insufficient work has been conducted private pension systems. A full-fledged pension reform on gaps in wage gaps and labor force participation analysis, including scenarios simulations, could help between men and women. inform evidence-based policy-making, particularly in view of the Social Security Bill. Governance: Further analytics on various aspects of public administration would be useful, including Private sector: Data on innovation, gross capital comprehensive assessment and data analytics of the formation by sector, tourism statistics, and the public procurement system. There are also gaps in contribution of small and medium enterprises (SMEs) to understanding the links between the concentration of exports are limited. political and economic power. Vulnerable groups: There is relatively little work in the Infrastructure: Information on the state of infrastructure Philippines on the situation for people with disabilities is sparse. An infrastructure diagnostic study and (PWDs); members of the lesbian, gay, bisexual, associated data collection would be useful, given transgender, and intersex (LGBTI) community; and the current government focus on infrastructure indigenous peoples (IPs). investments. 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SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 99 Annex 1: List of Consultations Conducted Stakeholder Agency represented Date of consultation Upstream consultations Government National Economic Development Authority March 12, 2018 Department of Finance March 12, 2018 Department of Education March 13, 2018 Department of Health March 15, 2018 Department of Budget and Management March 16, 2018 Department of Social Welfare and Development April 5, 2018 Development Partners Department of Foreign Affairs and Trade – March 16, 2018 Australian Embassy British Embassy Canadian Embassy Chinese Embassy European Union French Development Agency German Embassy Japanese Embassy Japan International Cooperation Agency Korean International Cooperation Agency Spanish Agency for International Development Cooperation United Nations Development Programme United States Agency for International Development Academics and Think Tanks Manila March 19, 2018 Dumaguete City March 20/21, 2018 Civil Society Organizations Dumaguete City March 20/21, 2018 Manila March 22, 2018 100 ANNEX 1 Stakeholder Agency represented Date of consultation Downstream consultations Iloilo March 14, 2019 Multi-stakeholder Central Philippine University National Economic Development Authority – Region VI Makati May 10, 2019 3M Philippines AIM Policy Center BDO Unibank, Inc. BMP Environment, Inc. CCI France Philippines China Banking Corporation Department of Budget and Management Department of Finance Department of Health Department of Labor and Employment Department of Public Works and Highways Department of Trade and Industry Department of Transportation European Chamber of Commerce of the Philippines Far Eastern University Policy Center Food and Agriculture Organization Food and Nutrition Research Institute IOM Philippines Manila Water Company Maynilad Water Services Metro Manila Development Authority National Anti-Poverty Commission National Nutrition Council Pasig River Rehabilitation Commission Philippine Business for Education Philippine Business for Social Progress Semiconductor and Electronics Industries in the Philippines Senate Economic Planning Office Technical Education and Skills Development Authority Canadian Chamber of Commerce of the Philippines Philippine Exporters Confederation, Inc. World Health Organization SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 101 Stakeholder Agency represented Date of consultation Downstream consultations Multi-stakeholder Quezon City May 14, 2019 Action for Economic Reforms Asian Federation Against Involuntary Disappearances American Chamber of Commerce of the Philippines Asia Foundation Asian NGO Coalition Child Rights Coalition Asia Foundation for the Development of the Urban Poor Institute for Climate and Sustainable Cities Institute for Philippine Culture International Center for Innovation, Transformation and Excellence in Governance Migrant Forum in Asia Philippine Partnership for the Development of Human Resources in Rural Areas Philippine Support Service Agencies Population Commission Rappler Right to Know Right Now Coalition Multi-stakeholder Naga City June 13, 2019 Ateneo de Naga University Central Bicol State University of Agriculture Municipal Local Government of Libmanan Naga College Foundation PAMANA, Migrant Workers Sangunniang Kabataan (Milaor, Pili, Manalabac) Unibersidad de Sta. Isabel Business Sector Baguio City May 25, 2019 Philippine Chamber of Commerce and Industry, Baguio-Benguet Chapter Government National Economic Development Authority June 3, 2019 Department of Finance Department of Budget and Management 102 ANNEX 2 Annex 2: List of Censuses and Surveys Type of census/survey Latest available Second latest Frequency of data period available period collection Censuses Census of Population and Housing 2015 2010 Every 5 years Census of Agriculture and Fisheries 2012 2002 Decennial Census of Philippine Business 2018 2012 Every 5 years and Industry Surveys: household based Household surveys on income/consumption Family Income and Expenditure 2018 2015 Every 3 years Survey (FIES) Annual Poverty Indicators Survey 2017 2016 Annually in between FIES years Household Energy Consumption Survey Household survey on labor and employment Labor Force Survey April 2019 January 2019 Quarterly Household survey on education Functional Literacy, Education and 2013 2008 Every 5 years Mass Media Survey Household surveys on health and nutrition National Demographic and Health Survey 2017 2013 Every 5 years National Nutrition Survey 2018 2015 Every 3 years Global Adult Tobacco Survey 2015 2009 Ad hoc Household surveys on agriculture Backyard Livestock and Poultry Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Costs and Returns Survey 2018 2017 Annually Crops Production Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Farm Prices Survey June 2019 May 2019 Monthly Palay and Corn Production Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Quarterly Inland Municipal 2nd Quarter 2019 1st Quarter 2019 Quarterly Fisheries Survey Other household surveys Survey on Children 2011 2000 Decennial Survey of Overseas Filipinos 2018 2017 Annually Household Survey on Domestic Visitors 2016 2012 Ad hoc National Migration Survey 2018 Ad hoc National Disability Prevalence Survey 2016 Ad hoc SYSTEMATIC COUNTRY DIAGNOSTIC OF THE PHILIPPINES | REALIZING THE FILIPINO DREAM FOR 2040 103 Type of census/survey Latest available Second latest Frequency of data period available period collection Surveys: establishment based General Annual Survey of Philippine Business 2017 2016 Annually and Industry Monthly Integrated Survey of June 2019 May 2019 Monthly Selected Industries Input-Output Survey of Philippine 2012 2009 Every 3 years Business and Industry Establishment surveys on prices Consumer Price Survey July 2019 June 2019 Monthly Producer Price Survey July 2019 June 2019 Monthly Retail Price Survey July 2019 June 2019 Monthly Wholesale Price Survey July 2019 June 2019 Monthly Establishment surveys on labor and employment Integrated Survey on Labor 2016 2014 Bi-annual and Employment Labor Turnover Survey 4th Quarter 2018 3rd Quarter 2018 Quarterly Occupational Wages Survey 2016 2014 Bi-annual Establishment surveys on agriculture Commercial Livestock and Poultry Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Survey of Slaughterhouses and Poultry 2nd Quarter 2019 1st Quarter 2019 Quarterly Dressing Plants Dairy Production Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Quarterly Aquaculture Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Quarterly Commercial Fisheries Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Quarterly Municipal Fisheries Survey 2nd Quarter 2019 1st Quarter 2019 Quarterly Other establishment surveys Survey on Tourism Establishment in 2014 2009 Every 5 years the Philippines Survey on Information and 2015 2013 Ad hoc Communication Technology Survey on Energy Consumption 2010 Ad hoc of Establishment