A few days ago, President Duterte’s political party bared the details of their proposed

overhaul to the Constitution.

Federalism, they say, will solve key economic problems that have long ailed our
country, especially the “imperial” nature of Metro Manila and the long-standing
“imbalances” and inequalities between the regions.

In this article I use data to show that many regions are indeed lagging behind Metro
Manila. But federalism will not necessarily solve these economic disparities. In fact,
federalism might worsen them.

Some regions are outpacing Metro Manila

The executive summary of PDP-Laban’s proposal for federalism begins by denouncing

the “imperial” status of Metro Manila.

They say that such an extraordinary concentration of political and economic power has
resulted in a “grave imbalance in the distribution of resources among regions and local
government units” over time. In turn, this has led to inequality, social unrest, and armed
uprisings like those in Mindanao.

Data confirm that Metro Manila is the country’s economic behemoth: in 2016 it
accounted for 37% (more than a third) of the country’s total output or GDP (gross
domestic product). Together with nearby regions Calabarzon (17%) and Central Luzon
(10%), these 3 regions accounted for 64% (or nearly two-thirds) of GDP.

But even if Metro Manila is the largest region, it’s not the fastest-growing. The orange
bars in Figure 1 show that this distinction belongs to Central Visayas (which grew by
74% from 2009 to 2016), followed by Caraga (69.9%), Central Luzon (66.5%), and
Duterte’s home region of Davao (61.9%).

Figure 1. Source: PSA. Regional GDP in 2000 prices.

NCR or National Capital Region came in at fifth (56.8%), followed by Northern

Mindanao (54.2%). This ranking is roughly the same if we look at the blue bars instead,
which represent the growth of average incomes (GDP per person).
But more regions are lagging behind

Although some regions are outpacing Metro Manila, many more are lagging behind.
This is where the real problem lies.

Figure 2 below shows that rich regions are seemingly growing faster than poor ones.
This is shown by the upward pattern of the dots.

This is not the pattern we’re supposed to be seeing: economic growth theory suggests
that poorer regions (like ARMM and Bicol) should be growing faster than richer ones
(like NCR or Calabarzon). This is otherwise known as “regional convergence.”

But instead, the dots show the opposite pattern. As long as many poor regions continue
to grow slowly, they will never catch up with Metro Manila. Rather than converge, the
regions will diverge.

Figure 2. Source: Author’s calculations of PSA data from 2009-2016. Values in log
terms. Note that the pattern is tenuous. If we remove ARMM, there seems to be no
relation between annualized growth rates and 2009 income levels (that is, there’s
neither regional convergence nor divergence).

Regional divergence is also shown by the increasing dispersion of average incomes

between the regions (statistically, the standard deviation of per-capita incomes has
increased by 11% from 2009 to 2016).

Federalism won’t ensure faster catch up

With many poor regions lagging behind, can federalism – as envisioned by Duterte and
his party – correct this? Will federalism make poorer regions catch up faster?

Not necessarily.

Economic growth occurs when people are more productive. Productivity, in turn, is
proportional to the degree of investments made by the private and public sectors,
whether in the form of physical capital (roads, bridges, airports) or human capital
(education, health, training).

Federalism won’t foster growth if the Regional Governments fail to promote investments
or raise people’s productivity. Here are two reasons why this is more likely to happen
than not.

1) Investments will still flock to richer regions

Duterte’s federalism will create 11 or so Regional Governments, each of which will have
the power to create its own laws, regulations, and taxes suited to the particular needs of
its constituents.

To promote growth, each Regional Government will have to boost investments, either
through tax revenues or by attracting private investors.

But poor regions are doubly at a disadvantage. Places like ARMM or Eastern Visayas,
for example, have small economies to begin with, and have fewer goods and services to
tax. Their small economies will yield little tax revenues they can invest for their future
growth.

By contrast, richer regions like NCR and Calabarzon already have large economies and
substantial tax revenues at the outset, which they can use to fund major public
investments or offer incentives to prospective investors (like tax holidays or subsidies).

Hence, even with federalism in place, investments could still end up flocking to richer
regions rather than poorer regions.

To remedy these initial imbalances, the proposed federal setup will include
“intergovernmental transfers”: that is, part of taxes from rich regions will be transferred
to poor regions in need of fiscal assistance.

But aside from the logistical challenges – Finance Secretary Sonny Dominguez says it
could be a “nightmare” – many studies have found that “fiscal equalization” of this sort
typically doesn’t encourage poor regions to be more productive. If anything, it tends to
make them more dependent on richer regions.

It’s always fun to spend money you didn’t earn. This same principle applies to Regional
Governments of various incomes.

2) Greater political autonomy could raise the cost of doing business

Local politics in the Philippines is chiefly characterized by “patronage”: local leaders see
themselves as patrons who provide various services for their constituents – like
basketball courts with their names on the roofs, or ambulances with their faces
plastered on the doors. In return, constituents pay back with their votes.

Patronage politics explains why many mayors and governors give special treatment to
businesses owned by themselves, family, and friends. They are also known to impose
strict standards, extract bribes, or even deny permits to businesses that threaten special
interests.
Duterte’s federalism will grant political autonomy to local officials, but given our political
culture this could also afford them more economic power in their respective jurisdictions.

This is worrisome for 3 reasons. First, local leaders and elites might capture larger
segments of their respective economies. This will defeat federalism’s ostensible
purpose of promoting inclusive growth.

Second, stifled competition could mean that constituents will face higher prices and
lower quality for the goods and services they buy.

Third, dealing with 11 different sets of laws, regulatory standards, and tax systems
nationwide – one for each Regional Government – could raise the overall cost of doing
business across the country. Small and medium enterprises (SMEs) wishing to expand
could hurt the most.

All in all, the proposals for federalism should not be blind to the political and economic
realities on the ground. Otherwise, federalism will only be fraught with many unintended
consequences.

Let’s read between the lines

It’s true that many regions of the Philippines are lagging behind Metro Manila in terms of
incomes and living standards.

But there’s simply no data or evidence to suggest that the proposed shift to a federal
system will make poorer regions catch up faster.

In fact, if we ignore the political and economic realities on the ground – like patronage
politics – federalism could even worsen existing regional inequalities.

Just look at ARMM: nearly 30 years since it gained autonomy and established its own
regional government, it has remained the poorest region in the country.

Many of the proposed changes to the Constitution also have nothing to do with regional
development at all. These include extending term limits (Duterte and all lawmakers
could serve for another 10 years), abolishing the office of the vice president, and
indefinitely postponing elections.

Truth to tell, if you carefully read the proposal, Duterte’s federalism looks less like a plan
to promote regional development, and more like a ploy to concentrate political power on
Duterte and his political party for the next 5 to 10 years.

Before it's too late, let us all read between the lines. – Rappler.com
The author is a PhD candidate and teaching fellow at the UP School of Economics. His
views are independent of the views of his affiliations. Follow JC on
Twitter: @jcpunongbayan.

Incoming President Rodrigo Duterte has repeatedly spoken about changing the Philippines’
form of government into federalism. According to the president-elect, a federal government can
help the Philippines improve and move towards real progress. A federal government will divide
the Philippines into states with the national government focused on nationwide issues such as
foreign policy and national defense. The autonomous regions or states will then be divided
further into local government units that will have primary accountability for their respective
territory’s safety, security, transportation, education, healthcare, culture, recreation and industry.
(Photo from joeam.com)
However, critics say that there are possible disadvantages if the country adopts a federal form
of government. Here are some of the biggest dangers of federalism in the Philippines.
1. It might create further division and rivalries Federalism could create a healthy competition
among states but it could also lead to more rivalries and worse disunity among the Filipino
people. Hostilities among ethnic groups could also increase due to federalism, according to
critics.
2. Some states might lag behind In the Philippines, there are some states that are probably not
as ready to be autonomous compared to other states. The states that would perform poorly –
probably those that lack natural resources and skilled laborers – under a federal government
would be in worse condition than before because the national government would not be there to
balance the situation and help out with their predicaments.
3. Jurisdiction issues A federal form of government might create a lot of confusion for both the
citizens and the governments. The amended constitution has to specify clearly the duties and
obligations of the local governments and the national government in order to prevent chaos and
confusion in running the country.
4. Big costs Transforming the government into federalism is going to be expensive. The
government would have to spend billions of pesos in setting up federal states and delivering
their services. The autonomous states will also have to spend a lot of money just to set up and
conduct elections for their new officials.
5. The Islamic separatists might continue to wreak havoc Some of the radical Islamic separatists
want to have their own country and not just a state. As a matter of fact, the formation of the
Autonomous Region in Muslim Mindanao (ARMM) did not stop some of the terror groups from
causing chaos and death in the country.
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