Are We Ready for Federalism?

Examining the Economic,

Social, and Political Viability of Federalism in the
Philippines
R.E. Miral, Jr.

Philippine Economics Society 54th Annual Meeting

8 November 2016, 3:20 PM to 4:50 PM
Novotel Hotel, Araneta Center, Quezon City
Why nations fail
Rich countries are rich because they have inclusive economic and political
institutions, while poor countries are poor because they have extractive
economic and political institutions (p.1).

Inclusive economic institutions create incentives and opportunities necessary

to harness the energy, creativity and entrepreneurship in society.

Extractive economic institutions are the consequence of extractive political

institutions.

Extractive political institutions are made up of two important dimensions.

First, they allocate political power narrowly. Second, they feature a central
state that is not strong in the sense that it can provide key public goods.

James A. Robinson (2013). Why Regions Fail: The Mexican Case

Philippines remains highly centralized
• LGUs remain relatively small actors in the Philippine
economy:
‒ expenditures amounts to just 2.75% of GDP
‒ own-source revenues amount to only 1.20% of GDP

• Government expenditures and revenues have

remained highly centralized even after the
decentralization program.

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Shares in Expenditure, by Government Level

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Composition of Government Revenues, by Government Level

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 Common Pool Resource Problem

The centralization of revenues created a common

pool resource with its attendant problems:

• Weakening of fiscal discipline

• Weakening of allocative and operational efficiency
(“Divide by N”)
• Increasing tolerance of corruption
• Patronage politics and political dynasties
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 National Government
Agencies/Departments
Societal Goals
PAPs
Sectoral Outcomes

Key Result Areas

Provinces
Major Final outputs
Cities

Municipalities

Problem: Fragmented government Barangays

services
 Weak government coordination
•Coordination between and among different levels of
government is weak.

•The requirements for strong coordination are lacking: clear

division of responsibilities, adequate funding, and
bureaucratic capacity (Balisacan, Hill and Piza, 2006).

•Moreover, the Philippines local government system is highly

fragmented with no strong middle level government.
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Highly fragmented local government system

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Fragmented local government units + patronage politics = Fragmented government services

National Government Number of LGUs

Provinces: 81
Provinces
Cities: 145
Municipalities: 1,489
Barangays: 42,036
Highly
Component Cities Municipalities
Urbanized Notes:
Cities Provinces are fiscally, the
weakest.
Cities are fiscally, the
Barangays Barangays Barangays strongest.
Cities have the combined
powers of provinces and
Population/voters municipalities.

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 Importance of Middle-level Governments
• It is important to recognize the critical role of middle-level
governments. In countries with unitary government like the
Philippines, there are usually no strong middle-level
governments.
• However, the federal form that serves as model for government
decentralization reforms is built on the presence of strong fiscally
autonomous middle-level governments (e.g. states) that deal
with the central government on even ground.
• Ultimately, the issue is not decentralization versus centralization,
but of achieving the right balance and better coordination
among different levels and units of government.

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Shift to Federal Government?

National Government

Provinces

Highly
Component Cities Municipalities
Urbanized
Cities

Barangays Barangays Barangays

Population/voters
Thank you and good day.
Subsidiarity
• “nothing should be done by a larger and more complex organization
which can be done as well by a smaller and simpler organization”
(Mele, 2004)

• Higher level governments should not exercise functions which can be

carried out efficiently by lower level governments, but rather the
former should support and help coordinate the activities of the
latter.

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Fiscal Equivalence: Vertical Fiscal Balance
• Correspondence between those who receive the
benefits of a public good and those who pay for it
• Links cost to benefit
• Leads to congruence between deciding on expenditure
and financing
• Prevents free riding

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Fiscal Equalization: Horizontal Fiscal Balance

•Each unit within a particular level of government (or

each state in a federal system) has the capacity to
provide services at a comparable standard.

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