The last State of the Nation Address (Sona) of President Aquino was a valedictory speech extolling what he perceives as achievements of his administration. Tagged as daang matuwid, the programs of the Aquino administration were guided by a commitment to good governance and a strong political will. Indeed, the administration has implemented a series of reforms aimed at reducing corruption, and subsequent social programs that are well received broadly even by the international community.
While there is much to be admired in daang matuwid, weaknesses are present. Its shortcomings stem from a series of coordination failures: a state in which social forces have failed to coordinate the millions of transactions that interact daily through a web of interconnected markets and institutions. What Smith called the “invisible hand,” or Douglas North called the “rules of the game,” has not guided society to a condition where the benefits of the reforms are optimized. In other words, institutions have not changed adequately, and people are somehow led to act at cross purposes, failing collectively to take full advantage of potential gains from these reforms.
One clear case of these failures is the underspending of the government. The government’s budget deficit in 2014 was only 0.6 percent of the country’s gross domestic product (GDP), as the government missed its spending target for the entire year. However, the deficit even narrowed in the first quarter of this year to P33.5 billion, lower than the P84.1 billion recorded in the same period last year, and was far below the P98.1-billion target for the period. The main reason for the shrinking deficit is the government expenditures that fell below target. With government revenues reaching P470.5 billion during the three-month period, up by 18 percent from last year, expenditures in the first quarter only grew by 4 percent, and was 13 percent below what was expected. All of this occurred amid lower
interest payments.
The administration tries to justify this situation as a necessary part of a virtuous cycle that intends to root out any form of misdoing in the budget process. But what it all amounts to is the absence of fiscal stimulus that would otherwise have complemented the increasing domestic private investments that the country experienced in recent years. In the first quarter of 2015, for instance, private investments in durable equipment rose by 14.3 percent. The underspending then reflects a profound coordination failure in the bureaucratic system that cannot respond to the needs and requirements of an expanding economy.
Another important indication of this incapability to coordinate programs is the government’s poverty political platform itself. The Pantawid Pamilyang Pilipino Program is the government’s primary project in assisting the poor. Under the expanded Conditional Cash-Transfer (CCT) Program, children of the beneficiaries get cash grants until they finish high school. As of this year, roughly 4.4 million families have benefited from the program with a budget of P62.6 billion last year. In his Sona, the President said 333,673 student-beneficiaries of the expanded CCT have already completed high school this year. Further, it was noted that a significant decline in out-of-school children had been observed in the evaluation done by the government. Despite the increase in population, the number of out-of-school children declined from 2.9 million in 2008 to 1.2 million in 2013, a difference of 1.7 million. The evaluation has also noted significant improvements in the health conditions of mothers and children, another objective of the program.
While I am totally in favor of the CCT, and believe that budget for this program is money well spent, the important question remains: What is the effect of this program on poverty? Of course, as the administration will tell you, the CCT is based on human capital investments, such as health and schooling, which are long term in nature. Nevertheless, it is fair to ask at least if the local economy (where the beneficiaries reside) has improved, especially given the program’s huge budget.
In countries where the CCT has been proven to be successful, significant multiplier effects from the program have been observed in the local economy. In Mexico, for instance, they find that eligible beneficiaries in CCT (treatment) areas show significant increases in productive investment relative to eligible beneficiaries in non-CCT (control) areas. They are more likely to invest in land and livestock, effects that are more marked for households without agricultural assets. Beneficiary households are also more likely to engage in income- generating activities.
What these findings suggest is that, in these countries, other government programs, such as infrastructure and livelihood, were also earmarked in the CCT areas, which resulted in increased productivity, as well. These projects complimented the CCT, and provided the needed long-term growth that can be accessed by the beneficiaries. In turn, the coordination maximized and sustained the returns of the CCT. Households were able to invest their transfers to more productive ventures that would benefit them even at the end of the project.
Unfortunately, no such strategy seems to exist in the CCT program, especially since the growth remains situated mainly in the Luzon, Metro Manila areas. If ever such a synchronized plan exists, it would seem to be coincidental or at best unevaluated. In fact, public construction has been declining in the last few quarters.
Whether pro- or anti-Aquino, the next government will have to deal with these and other forms of coordination failures. Otherwise, valid and sound social reforms and programs, such as daang matuwid, will not reach their desired ends.
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Leonardo Lanzona Jr. is director of the Ateneo Center for Economic Research and Development, and a senior fellow of Eagle Watch, the school’s macroeconomic and research unit.