To Pursue Federalism (or Not)and Why

Philippine Institute for Development StudiesSurian sa mga Pag-aaral Pangkaunlaran ng Pilipinas

Rosario G. Manasan, Senior Research Fellow9 March 2018

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Debate on a Federal PhilippinesAteneo de Manila University, School of Government

Questions

q Why adopt a federal system of government?

q Potential benefits from the adoption of federal system

q How to secure said benefits? § Adopt federal system of government § Amend 1991 Local Government Code

q Risks in adopting federal system

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“Wrong” vs. “right” reasons for adopting a federal system of governmentq Prof. Sureta is clear on “wrong” arguments used to

support adoption of federal system§ To eradicate poverty§ To transform Philippines to developed country level

q If the above are the wrong arguments, what are the right ones?§ Over-centralization of power in national politics (e.g., as

manifested by the non-representation of regions in Senate)o “Imperial Manila state of mind”

§ Present democratic system has remained elite centered, concentrating political and economic power in the hands of the few

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Over-centralization of power in “imperial Manila”q Real issue – concentration of power and resources

in the President§ provide the venue for legislators to access additional

budgetary resources in the common pool via transactional politics è typically in aid of moving President’s agenda through Congress

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Over-centralization of power in “imperial Manila”q concentration of power and resources in the

President § attributed by many experts to the “winner-take-all”

manner of electing the president, the loosely structured electoral parties in country and the plurality system of electing members of Congress

q If this is the correct diagnosis of the problem, § Solution likely lies in area of electoral reform and

party system reform (which by itself is dependent on electoral reform) rather than change in system of government

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Over-centralization of power in “imperial Manila”q What has the adoption of a federal system of

government got to do with it?§ Power of President/ Executive will be reduced to the

extent that under a federal system of government, he/ she will have to share some of his existing power and control over resources with state governments

§ Extent of reduction in power of President/ Executive :o distribution of power under proposed federal system of govt – how

much more decentralized will the proposed system be? o Concentration of power of president/ prime minister under

proposed semi-presidential parliamentary form of govt – will it further really reduce dominant power of Executive?

o Electoral rules and character of party system under proposed constitution – will it result in more program-oriented political parties? How quickly?

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Why adopt a federal system of government?

q There are potential benefits can be secured by adopting a federal system of government§ Increased efficiency è increased societal welfare to

the extent that …o Subnational governments being closer to the people are

better able to respond to needs and preferences of local constituents

§ Enhanced local accountability to the extent that subnational governments have some degree of revenue autonomy

§ Means of addressing ethnocultural conflict as it accommodates regional diversity

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Potential benefits of a adopting federal system of governmentq First 2 of these potential gains – gains largely a

function of the extent of decentralization (as per fiscal federalism framework)§ Said gains may be secured with greater fiscal

decentralization with or without shift to the federal system of government

q Countries with federal system of government are not necessarily decentralized to the same degree and some of them may be less than decentralized than those with unitary form of government§ Germany (federal) more centralized than Canada (federal)§ Malaysia (federal) more centralized than Indonesia

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Distinction between unitary & federal system of government

q Under multi-tiered unitary system - powers of subnational governments are based on national legislation

q Under federal system, division of powers between federal government (FG) an state governments (SGs) are guaranteed in constitution§ Precisely because of this, design of federal system should be

subject to careful study§ Otherwise, bad design gets enshrined in the constitution,

making it more difficult to correct mistakes

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If the objective is to secure the potential benefits from more decentralized governance

q Principles that guide design of fiscal aspects of federal form of government are just as relevant for reforming decentralized governance in a unitary form of government (i.e., amending of 1991 LGC)

q These principles are aimed at ensuring that the FG and SGs face the right incentives for an efficientand equitable delivery of public services so as to maximize social development outcomes.

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Design involves four pillars of framework of intergovernmental fiscal relations

1. Expenditure assignment – which level of government does what

2. Tax assignment – which level of government taxes what

3. Intergovernmental transfers

4. Subnational credit finance

§ Design of 4 pillars – define rules of the game (i.e., institutions) that affect behavior of politicians at both the national and local level as well as the behavior of voters o Behavior of actors/ players are based on available incentiveso Institutions define what incentives are availableo Institutions consist of formal and informal rules – political, legal, administrative,

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Overarching principles in design of fiscal features of federal system

q Importance of establishing clarity in expenditure assignment

q Importance of providing SGs a significant degree of revenue autonomy (i.s., SGs have raise revenues whose level they control)

q Importance of equalization grant to mitigate risk of worsening disparity in human development outcome

q Importance of ensuring that SGs face hard budget constraints for fiscal/ macro stability (pillar 4)

q Internal consistency/ coherence in design of four pillars

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Gross regional domestic product (GRDP), per capita household income and poverty incidence across regions

Shift to federal form of government comes at a costq Elements of this cost

§ Salaries of governors and vice governors of SGs and their staff as well as operating expense of their offices

§ Salaries of Senators (second chamber) and their staff as well as operating expense of their offices – 3 to 7 senators per RG as per PDP-Laban

§ Salaries of members of judiciary at the state government level, their staff as well as operating expense of their offices a/

a/ not included in estimates

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Shift to federal form of government comes at a costq Elements of this cost

§ Salaries of state legislators and their staff as well as operating expense of their offices under PDP-L DCo Regional Consultative Assembly (prior to enactment of

Organic Act) – 3 from each LGU comprising RGo Regional Assembly (after enactment of Organic Act) – 2 from

each province and one from each city

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Shift to federal form of government comes at a cost

q Elements of this cost§ Salaries of state legislators and their staff as well as

operating expense of their offices –other modelso RA 9054 - 3 legislators elected by popular vote in each

legislative district plus sector representatives whose number should not exceed 15% of total number of legislators elected by popular vote è total number of state legislators = 821

o Proposal of Sen Nene Pimentel – 3 legislators elected by popular vote in each province/ city plus 3 sectoral representatives in each province/ city = 1,356

o BBL model – at least 10 legislators per legislative district (40% of whom are elected by popular vote, 50% are party representatives, and 10% are sectoral representatives) = 2,380

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Shift to federal form of government comes at a cost

q Estimate of additional fiscal burden - ranges from PhP44 billion to PhP 72 billion depending on number of states, size of legislative body at SG level and size of second chamber

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Risks in adopting federal system of government

1. Getting design of fiscal aspects of federal system right§ Underprovision or duplication of efforts without clarity in

expenditure assignment

§ Accountability may weaken if there is low revenue autonomy

§ Regional disparities may widen if fiscal equalization is weak – risk is high given initial condition is bad to start with

§ Weakened macro/ fiscal sustainability without commitment to hard budget constraints

§ Lack of coherence and internal consistency in design of 4 pillars – poor service delivery

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Risks in adopting federal system of government

2. Even if initial design of federal model is coherent at the start, likelihood is high that initial model will be changed to reflect the particular interests of the framers of new constitution (ConAss vs ConCom)§ Congress as an institution not likely to be inclined to

expand resource base of LGUs (Matsuda 2011)o “Fiscally stronger LGUs depend less on individual

national legislators for financial assistance and hence would result in loss of political leverage for members of the Congress [over the LGUs within their districts]. …. . if more resources were made available to provinces, governors could emerge as strong political rivals, more so than they are already ….”

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Risks in adopting federal system of government

3. Acknowledging importance of political incentive structures on behavior of elected public officials, experts point to preconditions for success of federal system§ Reform of party system so as to institutionalized strong

political parties with “coherent ideological programs and policy platforms and internal organizational discipline” (Matsuda 2014)o Government budget support to political parties

§ Minimizing high barrier to entry in political arena, including presence of political dynasty (Pilapil 2016)

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Risks in adopting federal system of government

q Without pre-conditions, likelihood of elite capture large§ “Pre-condition” should be understood in the sense of

“occurring prior to event x” in a sequential manner

§ Problem with addressing preconditions and adopting federal system at the same timeo “Consolidation of a party system takes much longer than the

establishment of the constitutional structures” (Croissant and Merkel 2004) o Formal rules can be changed very fast; informal rules take a

far longer time to be changed

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Conclusion

q Two options to choose from§ Adopt to federal system of government or§ Reform fiscal aspects of LGC

q Choice depends on:§ One’s assessment of:

o Valuation of potential benefitso Risks involved

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Philippine Institute for Development Studies

Surian sa mga Pag-aaral Pangkaunlaranng Pilipinas

Service through policy research

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Thank you

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• Per capita household income in NCR continues to be the highest in 1985-2015 but disparity between other regions’ per capita HH income relative to NCR’s has narrowed

Per Capita HH income, in current prices (in pesos)Region 1985 1994 1997 2003 2006 2009 2012 2015

NCR 11,575 37,070 61,211 65,625 81,336 91,792 96,891 110,792CAR 6,880 15,457 25,544 36,240 46,788 55,167 66,453 69,814R I 6,005 14,233 23,019 29,925 34,658 46,530 53,736 59,704II 5,582 15,296 19,846 31,008 35,414 47,123 49,953 61,731III 7,642 18,481 28,119 37,590 46,296 53,227 62,348 73,230

IVA 6,900 21,875 32,651 44,876 50,393 61,555 71,952 81,075IVB 5,059 13,076 19,216 26,625 27,421 35,452 46,583 60,857V 4,210 11,227 16,591 26,071 30,450 35,763 39,536 45,877VI 5,132 13,418 19,411 27,273 31,815 40,450 52,811 55,881VII 4,332 12,254 19,549 28,341 33,601 43,902 49,061 58,621VIII 3,719 10,740 15,650 24,220 30,108 38,765 40,713 49,682IX 4,653 10,401 18,623 20,792 27,687 34,947 39,390 47,344X 5,266 12,254 20,030 26,173 32,905 39,405 45,757 54,468XI 5,700 14,713 20,239 27,492 32,676 41,188 48,840 64,072XII 4,966 12,802 18,072 26,612 27,239 37,454 40,154 48,001XIII 4,518 11,122 15,880 20,672 27,088 34,383 43,513 50,654

ARMM 9,661 14,611 17,722 18,106 23,996 25,244 26,437

Phil 6,294 17,564 27,303 35,597 42,372 51,489 58,583 67,622

Coefficent of variation 0.327 0.433 0.478 0.368 0.393 0.337 0.315 0.301