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The Political Economy of
Reform during the Ramos
Administration (199298)
Romeo L. Bernardo
Marie-Christine G. Tang
WORKING PAPER NO.39
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WORKINGPAPERNO.39
ThePoliticalEconomyof
ReformduringtheRamos
Administration(199298)
RomeoL.Bernardo
MarieChristineG.Tang
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2008TheInternationalBankforReconstructionandDevelopment/TheWorldBank
OnbehalfoftheCommissiononGrowthandDevelopment
1818HStreetNW
Washington,DC20433
Telephone:2024731000
Internet: www.worldbank.org
www.growthcommission.org
Email: [email protected]
Allrightsreserved
1234511100908
ThisworkingpaperisaproductoftheCommissiononGrowthandDevelopment,whichissponsoredby
thefollowingorganizations:
AustralianAgency
for
International
Development
(AusAID)
DutchMinistryofForeignAffairs
SwedishInternationalDevelopmentCooperationAgency(SIDA)
U.K.DepartmentofInternationalDevelopment(DFID)
TheWilliamandFloraHewlettFoundation
TheWorldBankGroup
Thefindings,interpretations,andconclusionsexpressedhereindonotnecessarilyreflecttheviewsofthe
sponsoringorganizationsorthegovernmentstheyrepresent.
Thesponsoringorganizationsdonotguaranteetheaccuracyofthedataincludedinthiswork.The
boundaries,colors,
denominations,
and
other
information
shown
on
any
map
in
this
work
do
not
imply
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theendorsementoracceptanceofsuchboundaries.
Allqueriesonrightsandlicenses,includingsubsidiaryrights,shouldbeaddressedtothe
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Coverdesign:NaylorDesign
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The Political Economy of Reform during the Ramos Administration (199298) iii
AbouttheSeries
The Commission on Growth and Development led by Nobel Laureate Mike
SpencewasestablishedinApril2006asaresponsetotwoinsights.First,poverty
cannotbereduced in isolationfromeconomicgrowthanobservation thathas
been
overlooked
in
the
thinking
and
strategies
of
many
practitioners.
Second,
thereisgrowingawarenessthatknowledgeabouteconomicgrowthismuchless
definitivethancommonlythought.Consequently,theCommissionsmandateis
totakestockof thestateof theoreticalandempiricalknowledgeoneconomic
growthwithaviewtodrawing implicationsforpolicyfor thecurrentandnext
generationofpolicymakers.
To help explore the state of knowledge, the Commission invited leading
academics and policy makers from developing and industrialized countries to
explore and discuss economic issues it thought relevant for growth and
development, including controversial ideas. Thematic papers assessed
knowledgeand
highlighted
ongoing
debates
in
areas
such
as
monetary
and
fiscal
policies, climate change, and equity and growth. Additionally, 25 country case
studieswerecommissionedtoexplorethedynamicsofgrowthandchangeinthe
contextofspecificcountries.
WorkingpapersinthisserieswerepresentedandreviewedatCommission
workshops, which were held in 200708 in Washington, D.C., New York City,
and New Haven, Connecticut. Each paper benefited from comments by
workshop participants, including academics, policy makers, development
practitioners, representatives of bilateral and multilateral institutions, and
Commissionmembers.
The
working
papers,
and
all
thematic
papers
and
case
studies
written
ascontributions to the work of the Commission, were made possibleby support
fromtheAustralianAgencyforInternationalDevelopment(AusAID),theDutch
MinistryofForeignAffairs,theSwedishInternationalDevelopmentCooperation
Agency (SIDA), theU.K.Departmentof InternationalDevelopment (DFID), the
WilliamandFloraHewlettFoundation,andtheWorldBankGroup.
TheworkingpaperserieswasproducedunderthegeneralguidanceofMike
SpenceandDannyLeipziger,ChairandViceChairoftheCommission,andthe
Commissions Secretariat, which is based in the Poverty Reduction and
Economic Management Network of the World Bank. Papers in this series
representtheindependentviewoftheauthors.
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iv Romeo L. Bernardo and Marie-Christine G. Tang
Acknowledgments
Theauthorswould like tothankShaneeBerniceSia forresearchassistanceand
YhsaCabutajeforadministrativesupport.
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The Political Economy of Reform during the Ramos Administration (199298) v
Abstract
This paper is one of several case studies prepared for the World Bank. The
objective of the case studies is to provide the Commission on Growth and
Developmentinsightsonthepolicyreformprocessindevelopingcountriesthat
giverise
to
economic
growth.
In contrast to other countries where economic reforms ushered in a long
period of sustained growth, there is no such episode in Philippine economic
history. Since the restoration of democracy in 1986, the Philippines under the
Ramos administration came closest tobreaking out of its sick man of Asia
image. The confidence generated by the administration among local and
international players and analysts resulted from wideranging reforms rooted
primarily in a sound macroeconomic and investorfriendly regime as well as
globalcompetitiveness.
This study is not intended as a scorecard of the Ramos Administration.
Rather,
it
concentrates
on
three
specific
sector
reforms
during
the
Ramos
administration that demonstrate the elements of successful reform processes.
These reforms not only helped to free up demands on public finances then
considered, in todays parlance, the binding constraint on needed public
investment and reduced risk premium to encourage private investmentsbut
over time brought gains, some unforeseen and broader in terms of positive
spillovereffectsontherestoftheeconomy,andlinkagetooverallgrowthtoday.
Viewed under political economy lenses, the main point weaved from the
threestoriesistheimportanceofstrongpoliticalleadershipinacountrywitha
historically weak state where special interests hold sway over policymaking
processes.
Ultimately,
it
is
the
presidenthis
person,
character,
vision
for
thecountry,andabilityandwillingnesstospendpoliticalcapitalwhocanmuster
thenationalconsensus,clearroadblocks,anddrivethereformagendaforward.
Ongoing challenges in the three reformed sectors today, which some have
usedasargumentsagainstreform,shouldratherbeseenaspartandparcelofthe
reform process where rules that build on past successes and lessons learnt
continuallyevolvewithchangingexternalandinternalconditions.
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The Political Economy of Reform during the Ramos Administration (199298) vii
Contents
AbouttheSeries ............................................................................................................. iiiAcknowledgments ..........................................................................................................ivAbstract .............................................................................................................................vBackground.......................................................................................................................9 CaseStudiesofThreeReformExperiences ................................................................18PerspectivesontheThreeReformExperiences.........................................................22ReformOutcomes ..........................................................................................................27ReformasaContinuingProcess ..................................................................................43Conclusion ......................................................................................................................46PrincipalPlayers.............................................................................................................48 Annex1:OilDeregulation............................................................................................50 Annex2:DemonopolizingTelecommunications.....................................................55 Annex3:WaterPrivatization ....................................................................................... 61References .......................................................................................................................68
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The Political Economy of Reform during the Ramos Administration (199298) 9
ThePoliticalEconomyof
ReformduringtheRamos
Administration(199298)
RomeoL.Bernardo
MarieChristineG.Tang1
Background
The Long-Term Growth Context
Charting the Philippines economic growth record reveals aboombust picture
withthe
economy
unable
to
sustain
growth
of
over
5percent
for
more
than
six
years(figure1).Theonlytimethatgrowthstayedabove5percentforsixyears
was in the late1970s.Even then, theeconomicexpansion, financedbymassive
foreign borrowings (from 1975 to 1982, the countrys foreign debt stock
quintupled from $4.9billion to $25billion), paved the way for a deep external
paymentscrisisintheearly1980s.TheMarcosdictatorship(196586)endedsoon
afterinFebruary1986.
The first twelveyearsafter the restorationofdemocracy in thePhilippines
coincidedwithevenmorevolatilegrowth.Abriefboomtwoyearsofover5
percent growthwas followedby abust, where growthbecame flator even
negative.
While
this
was
a
period
of
significant
economic
reformsboth
the
AquinoandRamosgovernmentsespousedliberaleconomicpolicyandcapital
buildup, it was also a period marked by political difficulties (several coup
attemptsthrough1992);naturaldisasters(includingamajorearthquakein1990
and a devastating volcanic eruption in 1991); and, toward the end, the Asian
crisis. A debilitating power shortage moreover contributed to the economys
contractionin1991.
1RomeoBernardoisPresidentofLazaroBernardoTiu&Associates,Inc.,aconsultancyfirm.Mr.
BernardowasanalternatedirectoroftheAsianDevelopmentBankfrom1997to1998andFinance
UndersecretaryforInternationalFinance,Privatization&TreasuryOperationsoftheDepartment
of Finance of the Republic of the Philippines from 1990 to 1996. MarieChristine G. Tang is
ExecutiveDirectorofLazaroBernardoTiu&Associates, Inc. (since1999),previouslyworking in
variouscapacitiesintheprivate(brokerage,businessnewsreporting)andpublicsectors(planning,
centralbanking).Shehascoauthoredpapersinpublicfinance,pension,microfinance,andhousing
aswellaswrittenanalyticalreportsonthemacroeconomyandvariouseconomicissues.Sheholds
aCFAdesignationandanMAineconomicsfromtheUniversityofthePhilippines.
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10 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 1: Philippine Historical GDP Performance
10
8
6
4
2
02
4
6
8
10
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Import
substitution
Martial law
BOP crisis
Oil price
shocks
BOP crisis/debt
moratoriumEDSA 1
Asian crisis
-Arroyo-
-Estrada-
-Ramos--Aquino-- Marcos --Macapagal-
-Garcia-
EDSA 2
Fiscal
crisis
BOP, power
crisis/coup
Percent
Year
Source: http://www.imf.org.
While thegrowthepisodeswerebrief, thequalityofgrowth,groundedon
employmentgenerating investments in plant and equipment, maybe deemed
superiortothecurrentremittancecumconsumptiondriveneconomicexpansion.
Investment activity then wasbased on tremendous amounts of domestic and
international goodwill and, especially during the Ramos administration (1992
98),alotofconsumerandinvestorexuberanceandconfidenceinthePhilippines.
Asreported inone internationalmagazine,2newbusinesses,oncediscouraged
by the unfair domination of Marcos cronies, arebusting onto the scene, and
projects in the hundreds of millions thatbusinessmen could only dream of
beforebecame regular fare. The macroeconomic environment was moreover
characterizedbystablepricesandrecordtaxcollectionasapercentageofGDP.3Reformstrade and investments liberalization, tax policy reform,
privatization of government assets, restructuring of government enterprises
enabled investments to come in while improving governments financial
position.ThePhilippinegovernmentunderPresidentRamoswasfinallyseenas
one that could set its mind to do something and actually do it.4 Indeed, the
reformsbrought the economy within sight of newly industrializing economy
(NIC)statusandby1997thePhilippineswasonestepawayfromaninvestment
graderating.5
Philippinegrowthtodayowesmuchtothereformsintroducedoverthis12
yearperiod.
Outside
of
workers
remittances
that
have
allowed
the
economy
to
2DorindaElliott,FromtheAshes,Newsweek,25November1996.
3 Although inflow of shortterm hot money also rose, these were less than what other Asian
economiesreceived.4Ibid,quotinganADBeconomist.
5Standard&Poors inearly1997 issuedapositiveoutlookreporton thePhilippinesBB+credit
rating.
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The Political Economy of Reform during the Ramos Administration (199298) 11
tread a more stable growth path since 2002, some of the economys most
dynamicsectors(forexample,electronicsexports,telecommunications,business
processoutsourcing)wouldnothavebeenpossibleifnotforthereformsduring
this period. Likewise, in light of the present global rise of oil, food, and other
commodity prices, a number of the reforms during the period (for example,
removal
of
oil
subsidies,
creationof
an
independent
monetary
authority,
tariff
reduction)havedirectlycontributedtocurrentmacroeconomicstability.
The Reform Context
When the Ramos administration assumed office in 1992, the Philippines, in
analysts view, remained the sick man of Asia. Per capita income growth
continuedtolagversusneighboringeconomies(figure2).Inaregionwheremost
othereconomiesweregrowingrobustly,thedomesticeconomy,weigheddown
bya largepublicdebt inherited from theMarcosregime,coupattempts,anda
severe power shortage, had failed to keep up, with output even contracting in
1991.
Indeed,
a
lot
of
the
traditional
features
of
the
economy
that
observers
have
notedtobemoreLatinAmericanthanAsianpersisted.
Inflation rates and interest rates were at doubledigit levels; public debt
stock was high, which resulted in government devoting over a third of its
revenuesonservicinginterestpayments;anddomesticsavingswerelow(figure
4),inpartduetopersistentgovernmentdeficits,suchthatinvestmentfinancing
reliedheavilyonforeigncapital(figure5).Therewere,moreover,extensiveend
user subsidies inbasic sectors (for example, power, water, fuel, transport) that
not onlyworsenedpublic corporationsbottom linesbutalso, coupled with an
illdefinedregulatoryregime,discouragedprivateinvestments.
Figure 2: GDP per Capita Growth Rate, US$ Constant, Average 198691
0 2 4 6 8 10
The Philippines
Vietnam
India
Malaysia
Indonesia
Singapore
Hong Kong, China
China
Thailand
Percent
Source:Development Data Group, The World Bank.
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12 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 3: Fiscal Position and Inflation Rate
10
5
0
5
10
15
20
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Percent
Cons public sector position, % GDP
Inflation rate
Year
Source: Department of Budget and Management for CPSD; Bangko Sentral ng Pilipinas for inflation.
Figure 4: Savings and Investments, % of GDP
0
5
10
15
20
25
30
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Gross domestic savings
Gross domestic capital formation
Percent
Year
Source: ADB Key Indicators, various years.
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The Political Economy of Reform during the Ramos Administration (199298) 13
Figure 5: Current Account Balance, % of GDP
7
6
5
4
3
2
1
0
1
2
3
4
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Percen
t
Year
Source: Bangko Sentral ng Pilipinas (old BOP concept).
Political analysts today regard the Ramos administration as a reformist
government.Ayearbeforeitcametopower,thePhilippinesenatehadvotedto
rejectanewtreatythatwouldallowU.S.basestostayinthecountry.Expecting
dwindlingAmericansupportfollowingtroopwithdrawal,PresidentRamoshad
made Filipinos responsible for their own fate,6 fostering closer ties with
neighboringeconomies,andexploringotheravenuesforexpandinginternational
trade and investment (including accession to the World Trade Organization in
1995 and acceleration of tariff reduction to a uniform 5 percent rate under the
ASEANFreeTradeAgreement).
Theadministrations
vision
had
been
to
pursue
reforms
that
would
create
a
levelplayingfield,whichwasseenasthekeyforcompetitiontothriveandfor
thePhilippinestobegloballycompetitiveandprosperous.7PresidentRamoshad
abroadreformagendacoveringnotonlyeconomic liberalizationmeasures (for
example, continuing trade liberalization, privatization, dismantling monopolies
and cartels) but also institutional reforms (tax and customs administration,
bureaucracy, judiciary), redistributive reforms (social reform agenda), and
6Elliott1996.
7GeneralAlmontetracesthisvisiontowaybackin1956when,asCommandersofarmyplatoons
fightingcommunistinsurgentsinSouthernLuzon,CaptainRamosandSecondLieutenantAlmonte
beganaskingwhyFilipinosoldierswerebeingorderedtokillfellowFilipinos.Itwashoweveronly
much later that theywere able tosatisfactorilyanswer thisquestion.Observing theevents post
1986, General Almonte noted that unlike other societies that have used their freedoms tobuild
nations, Filipinos, especially their leaders, have failed to use the freedom acquired to transfer
power to the people and make the Filipino people wealth creators. As a result, without a level
playing field, the tendency is for everybody from top to bottom to exercise freedom for
themselves, creating an environment where peoplebecome poor. From this view of Philippine
developmentemergedPresidentRamossvisionofestablishingalevelplayingfield.
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14 Romeo L. Bernardo and Marie-Christine G. Tang
politicalreform(partysystem,electoralprocess).8Attheendoftheday,hehad
been most successful where the reform effort entailed liberalization and
deregulation,thatis,gettinggovernmentoutofthewaytofostermarketefficiency.
Thesuccessrecordofhisprogramsforinstitutionalreformislessevident,partly
becausethesearebynaturemoreintractableandcomplexandrequiresustained
actionover
along
period,
perhaps
longer
than
apresidents
term.
Aswithmanyreformorienteddevelopingcountriesatthetime,theRamos
governments reform agenda hadbeen shapedby the stabilize, privatize and
liberalize9 doctrine of the Washington Consensus. Within this framework, the
government sought to achieve macroeconomic stability, accelerate trade
liberalization,andwhereandwhenitcould,deregulateandprivatizeindustries
(for example, oil, transportation, water), dismantle monopolies (for example,
telecommunications),andattractmoreprivateinvestments(forexample,through
thepassageoftheBOT(BuildOperateTransfer)Lawprovidingtheframeworkfor
private sector participation in infrastructure projects). These reforms were
moreover
embedded
in
the
Philippines
programs
under
the
InternationalMonetaryFund(IMF)andsuccessiveWorldBankadjustmentloans.
Thethinkingwasthatearlyvictorieswiththesesocalledlowlyingfruits
wouldwincredibilityforthepresidentsreformprogramandcatalyzeresponses
ofabroadernature(primarilybypromotinginvestorinterestandexpandingthe
economic growth frontier) and, with success, generate support for further
reforms.Whileinhindsight,manytodaywouldarguethatthegovernmentwent
too far, especially in the area of financial liberalization that increased the
economys vulnerability to the Asian crisis,10 the markets at the time were
warminguptothePhilippineswiththegovernmentseveryreformmeasure.By
themid1990s,theinternationalcommunityhadbeenalertedtotheemergenceof
thenextAsiantiger.11
The Washington Consensus
Fiscal discipline Trade liberalization
Reorientation of public expenditures Openness to direct foreign investments
Tax reform Privatization
Financial liberalization Deregulation
Unified and competitive exchange rates Secure property rights
Source: Rodrik 2006, p. 978.
8CategorizationofreformsbasedondeDiosandHutchcroft2003.
9Rodrik2006.
10Likemanyofitspeersintheregion.
11Elliott1996.
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The Political Economy of Reform during the Ramos Administration (199298) 15
The Political Economy Context
In contrast to the period immediately following the People Power Revolution
whenFilipinosgearedupforwidescalepolitical,economic,andsocialreforms,
thepoliticaleconomyin1992wasfarlessconduciveforreform.Itwaseasyatthe
time, especially in light of authoritarian rule in more successful neighboring
economies,
to
lay
the
Philippines
failure
to
keep
up
on
the
doorstep
of
democracy.12 Indeed, not only was there a lengthier process of consensus
building forreforms,but thesystemofchecksandbalancespatternedafter the
U.S.politicalsetupwassuperimposedbyasystemwherepoliticiansaspire for
office in order to protect particular interests. Hence, the situation was
inhospitable to reform, particularly reforms for leveling the playing field and
cultivatingcompetitiveness.
As may be seen in the first general election after the restoration of
democracy, elections in the country are fiercely fought. There were seven
aspirantstothepresidency,differentiatedmorebypersonalqualitiesratherthan
anyparty
ideology
or
platform,
afeature
of
Philippine
electoral
contests.
Fidel
Ramos had wonbut only with thebacking of then President Corazon Aquino
andonlybyasmallmargin24percentofthevotescastversus20percentofthe
next ranked. The narrow victory made it important for the president to form
alliancesandpartnershipsinordertobuildconstituenciesforhisreformagenda.
Atthebeginningofhisterm,itappearedthatthecountryselitesrichand
powerful groups with deeply entrenched interests in major sectors of the
economydistrusted President Ramos, seeing perhaps that he was not cast in
themoldofthetraditionalpolitician.13AWestPointgraduateandcareermilitary
officerwhoheldMBAandcivilengineeringdegrees,hehadwonfamethrough
his
role
in
the
popular
uprising
that
toppled
Marcoss
over
20
year
authoritarian
rule(hewasthentheViceChiefofStaffoftheArmedForcesofthePhilippines)
and had garnered President Aquinos supportby thwarting some seven coup
attemptsagainstherwhileservingfirstastheArmedForcesChiefofStaffthen
her Defense Secretary. On the other hand, given the elites either direct
representation in Congress or rentseeking abilities, they were in a position to
obstructhisreformagenda.Indeed,whenPresidentRamosassumedoffice,only
two of the 24 senators (one of them his sister) and 38 of the 205 congressmen
belongedtohisparty.14
12 In a speech in Manila in 1992, Singapores Senior Minister Lee Kuan Yew blamed the
undisciplined and disorderly conditions brought by democracys exuberance for the
Philippinesbackwardness.13
Tiglao (1993d) narrated that when President Ramos started pushing for reforms in the
telecommunicationssector,thepatriarchofaprominentfamilydigressedfromapreparedspeech
andstated thatThere isadeterminedeffort,on thepartofsomeofficials insensitiveplaces, to
lookuponbusiness,particularlylargeandestablishedones,asdetrimentaltothenationalinterest.14
Interview withPresidentRamos, 14 February 2007, Ramos Peace& DevelopmentFoundation,
Inc.,ExportIndustryBankBuilding,GilPuyatAvenue,MakatiCity.
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16 Romeo L. Bernardo and Marie-Christine G. Tang
In this regard,PresidentRamoss tenure in theAquinocabinethadserved
himwell.Theexperiencegavehimaninsiderviewofthedifferentpersonalities
inside and outside thebureaucracy and insights on how to work within the
system. This was manifested for example in the way the president got things
accomplishedinthebureaucracy(requiringcompletestaffworkfromvarious
departmentson
each
issue
and
personally
following
up
the
work
by
due
dates)
as well as his dealings with Congress, where discretionary funds of legislators
(forexample,CountrywideDevelopmentFund)weregenerouslydoledout.By
thismeans, thepresident, togetherwithacloseally, theSpeakerof theHouse,
was able to obtain the lower housesbacking for many of his administrations
proposals.
OneofthefirstlegislativeprioritieswastheestablishmentoftheLegislative
Executive Advisory Council (LEDAC).15 The LEDAC, a coordination and
cooperationbodyamongtheexecutiveandthetwohousesofCongress,wasthe
presidents strategy to ensure policy consistencybetween the twobranches of
government.Over
the
course
of
his
term,
40
members
of
the
LEDAC
met
every
week whenever Congress was in sessionan estimated 30 meetings a year.16
Thus, the congressional agenda during the Ramos administration was more
aligned with the executivesalmost 60 percent of the laws passed during the
time were administrationcertified (versus 40 percent under the Aquino
administration).17
EvenwiththeLEDAC inplacehowever, thepresidentstillhad tocontend
withlessthanfullcooperationfromCongress,especiallyfromtheupperhouse,
andespeciallywhereproposedreformswouldhurtprotected interestgroups.18
Aswell,losingpartiesincreasingrelianceonthecourtsystemtosettledisputes,
even of the economic policy kind, wouldbecome a recurring problem for his
government(seetheoilderegulationcasestudy19).
President Ramos also sought to pacify other, more militant, elements of
society that had proved disruptive to political stability during the Aquino
administration.Veryearly inhis term,heforgedpeacepactswiththreeradical
groupsrebel soldiers, communist insurgents, and Muslim separatiststhat
haveinthepastposedthreatsofvaryinggravitytogovernmentauthority.Tothe
15 Created under RA 7640, the LEDAC was composed of 20 members with the president as
chairman and the following as members:the vice president, the President of the Senate, the
SpeakeroftheHouseofRepresentatives,sevenmembersofthecabinet(dependingonsectorbeing
tackled), three members each of the Senate and the House of Representatives (minority leaders,
others depending on sector), and one representative each from the local government units, the
youth,andtheprivatesector(maybedrawnfrombusiness,cooperatives,agriculture,andlabor).16
InterviewwithPresidentRamos,14February2007.17
Lumauig1998.18
Basedon theauthors interviews, thisbecame especiallyapparent duringdeliberations on the
1997taxreformprogramwhentheDepartmentofFinancefounditselfnegotiatingwithspecific
sectors whose representatives werebrought alongby legislators to discussions on the proposed
measure.19
DepartmentofEnergy2005.
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The Political Economy of Reform during the Ramos Administration (199298) 17
firstgroup,hegrantedamnesty.To thesecond,heassuredpoliticalspaceby
repealingthelawoutlawingtheCommunistParty.20Withthethird,heresumed
peacetalksthat ledto the1996peaceagreementandtheendofmorethantwo
decades of conflictbetween the Philippine government and the Moro National
Liberation Front (MNLF).21 As a result, during his presidency, the strength of
Muslimseparatist
groups
and
the
New
Peoples
Army
waned.
Finally,deservingmention is thepresidentsparticipatory leadershipstyle,
with a noted penchant for summitry. These summits, where stakeholders
gathered to discuss issues on specific topics, may not have always produced
much substancewisebut created a lot of goodwill and gave people a sense of
ownershipandanopportunitytobuyintothereform.
Figure 6: Trends in New Peoples Army Strength
0
5,000
10,000
15,000
20,000
25,000
30,000
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Membership
Year
Source: Independent Insights, Inc.
Figure 7: Aggregate Strength of Muslim Separatist Groups
Year
0
5,000
10,000
15,000
20,000
25,000
30,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
- Combined MNLP/MILF - - MILF only-
Members
Source: Independent Insights, Inc.
20FidelRamos,APeacewithHonor,2September1992.
21SeeIribani2003.
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18 Romeo L. Bernardo and Marie-Christine G. Tang
CaseStudiesofThreeReformExperiences
De-monopolization of Telecommunications
AttributedtoSingaporeSeniorMinisterLeeKuanYew,thelinethePhilippines
isacountrywhere98percentoftheresidentsarewaitingfora telephoneandthe
other 2 percent are waiting for a dial tonebest describes the situation of thedomestictelecommunications industryin1992.Anestimated800,000applicants,75
percentinthecountryscapital,MetroManila,werequeuingforatelephoneline.
At the time, the Philippine Long Distance Telephone Company (PLDT),
which owned the only nationwide transmission backbone, was a virtual
monopoly, controlling over 90 percent of the countrys telephone lines. Its
controllingshareholder,theCojuangcofamily,waspoliticallywellconnected,its
influence extending across the three branches of government as well as the
media.22In1986,governmentsequesteredPLDTsharesfromMarcoscroniesbut
overthenextsixyears,theinfluenceoftheCojuangcofamilyinthelegislature
andthe
bureaucracy
and
its
control
of
a
majornewspaper
turned
government
policies more favorable toward PLDT and ensured that the Presidential
CommissiononGoodGovernmentrepresentativesontheboardsofPTIC23and
PLDTremaininactive.24
Accordingtoreports,noneofthetelephonecompaniesoperatingatthetime
were in a position to challenge PLDTs leadership. Following news accounts,
PLDT,insteadofexpandingitsnetworktomeetservicedemand,spentheavily
for the protection of its market share.25 For instance, when the previous
government decided to open up the sector to competition, reports indicate that
PLDT was able to secure as needed favorable legal rulings toblock prospective
entrants.26
It
had
apparently
been
arisky
venture
for
the
president
to
go
after
PLDT.
Ifhe loses in thisduelwith theCojuangcoclanthepresidentscredibilityasa
strongleaderwillbeseverelydented,observedonereportatthetime.27
22ThroughthefamilyownedManilaChronicle,oneofthebiggestnewspapersatthetime.
23PhilippineTelecommunications InvestmentCorp., the largestshareholder inPLDTat the time.
(Tiglao,1993d)24
Esfahani,1994.ItisnotaltogetherclearwhattheroleofPresidentAquino,herselfaCojuangco,
was in the case. Rigoberto Tiglao (On the Hook, FEER, March 1993c) reported that then
ChairmanofthePresidentialCommissiononGoodGovernment(PCGG),JovitoSalonga,distanced
himselffromthecaseafteraconversationwithPresidentAquino,Antoniosaunt.Aquinosaidthat
theAntonioCojuangcofamilyisnotthatbad,andisdifferentfromDandings,hercousinwhose
sharesinSanMiguelCorp.hadbeensequestered.PresidentAquinoconfirmedthestatementbut
deniedthatshehadmeanttodiscouragePCGGfrompursuingthecase.25
RigobertoTiglao,quotingtheWorldBank(IntoaCorner,FEER,February1993a).26
PLDTsecured(i)aSupremeCourtdecision in1992reversingitsinitialrulingallowingEastern
Telecomstooperatean internationaltelephonegateway,and(ii)aDepartmentofJusticeopinion
blockinganothercompetitor,DigitalTelecommunications,fromoperatingatelephonenetworkin
Luzonthatithadwoninaprivatizationbid(Esfahani1994).27
Tiglao1993d.
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The Political Economy of Reform during the Ramos Administration (199298) 19
Nevertheless, the Ramos administration proceeded to pry the sector open
withvarioustactics.Theserangedfromencouragingtheformationofconsumer
groups that took to the streets and clamored for change, toboardroombattles
wherethepresidentreplacedthegovernmentsrepresentativesandsucceededin
puttingsixnewrepresentativesonPLDTs11manboard.28Aswell, therewere
some
behindthe
scenes
maneuvers
to
increase
the
concerned
parties
receptivenesstoreform.OnecasereportedlyledtotheresignationofaSupreme
CourtjusticewhosedecisionfavoringPLDTwasallegedtohavebeenwrittenby
aPLDTlawyer.29
Asaresult,thetwinexecutiveorders(EO)30thatthepresidentissuedwithin
six months of each other in 1993 opened the floodgates to investments in the
sector.BythetimeCongresspassedlegislationlargelyechoingprovisionsofthe
two executive orders, the countrys teledensity had doubled and PLDT had
alreadyembarkedonazerobacklogprogram.
Fifteen years on, thebenefits of the reform maybe seen in (i) increased
access
to
telecommunication
services,
with
teledensity
in
the
cellular
mobiletelephoneservice(CMTS)segmentofthemarketreaching50per100population
in 2007; (ii) increased market competition with the entry of more players
representing domestic and foreign interests; (iii) the rise of new growth
industriessuchasbusinessprocessoutsourcing;and (iv)awholenewrangeof
businesssolutionsusingcellularmobile telephone technology thatcaters to the
retail client, such as money transfers for overseas workers. An interesting,
perhaps ironic turn of events is that PLDT, which had strongly resisted the
reform, managed to shape up and emerged abig winner of the reform, albeit
nowunderanewcontrollingshareholder.
Oil Deregulation
Thederegulationofthedownstreamoilindustryinvolvedthehighlypoliticized
issue of liberalizing oil pricing. Three important considerations were (i) a long
history, dating back to the 1970s, of civil disturbance related to oil price
adjustments;(ii) thecostwasgoingtobespreadoutacrossawidersegmentof
thepopulation, includingwellorganized, lowincomegroupssuchas transport
groupsthatinthepastpartlyparalyzedMetroManilathroughtransportstrikes;
and(iii)legislationwasrequiredtoenactliberalization.Thus,fromthestart,the
28 In 1993 government ownership included (i) 10.6 percent of PLDT through the Social Security
System, and (ii) 46.1 percent of Philippine Telecommunications Investment Company (PTIC),
whichowned24.2percentofPLDT(Tiglao1993c).29
ThompsonandMacaranas(2006,p.147)reportedhowfollowingpressreportsoftheopinionof
Dr.DavidM.Yerkes,anexperton theauthorshipofEnglishlanguage texts, that therulingwas
pennedbyaPLDTlawyer,SupremeCourtJusticeHugoGutierreztenderedhisresignation.30
One order, EO 59, mandated interconnection among telecoms network; the other, EO 109,
required cellular operators and international carriers to install a minimum number of lines in
specificserviceareasassignedtoeach.
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20 Romeo L. Bernardo and Marie-Christine G. Tang
Ramos government focused on managing potentiallybroad opposition to the
reform.
Efforts to deregulate the industry started as early as 1993. The Ramos
administration launched a nationwide public information campaign to educate
people about the workings of the oil market and allay fears ofspiraling prices
after
deregulation.
Public
acceptance
of
(or
at
least
reduced
resistance
to)
the
proposal was deemed important to get the congressional nod for proposed
legislation to deregulate the industry. The Ramos government also committed
the reform measure under the countrys program with the IMF to help set a
timeframeforpassinglegislation.
Although government officials related that they encountered very little
resistanceduringthenationwideroadshow,whatisinterestingaboutthisreform
experienceweretheactionsofthevetoplayersthelegislatureandthejudiciary.
As the initial spadework on the proposed bill led up to the May 1995
congressionalandlocalelections,workhadtobeputonholdasthelikelihoodof
getting
congressional
approval
became
slim.
While
certain
nationalistmembers of the legislature continued to strongly oppose the proposal when
Congress resumed inJuly 1995, the LEDAC mechanism proved invaluable in
speeding up congressional approval of thebill. An oil deregulation law was
enactedandwas in force for roughly18 monthsstarting inApril1996.During
thatperiod,afullyderegulatedregime,withtheoilcompaniesfreetoadjustoil
prices, had been gradually phased in. In November 1997, in response to a
petitionbyagroupofcongressmenwhohadvotedagainstthebill,theSupreme
Courtdeclaredthelawunconstitutional.31
At the time, thePhilippineswasalready fourmonths into theAsiancrisis.
Withthepesohaving lostaquarterof itsvalue,whichpushedupdomesticoil
prices,theRamosadministrationwasunderrenewedpressuretoreregulatethe
industry. Nevertheless, the president persisted in pursuing the reformbothby
tryingtogettheSupremeCourttoreverseitsrulingandbyaskingCongressto
passanewlawwithouttheconstitutionalinfirmitycitedbythecourt.President
Ramos succeeded in the latter, signing into law the Downstream Oil Industry
DeregulationLawinFebruary1998.
Thebenefitsofoilderegulationbecameevidentduringthemostrecentrun
up in world oil prices. The full passthrough of world oil price increases to
31Thisrulingwasbasedonthreeprovisionsofthelaw:(a)the4percenttariffdifferentialbetween
crude and finished oil products; (b) the 40day inventory requirement; and (c) the prohibition
against predatory pricing. Crafters of the provisions argued that (a) prederegulation, there was
already a tariff differentialbetween crude and finished products and a larger one at that (10
percent)andthedifferentialwasneededtokeeprefineriesin,(b)theinventoryrequirementwasa
policy decision favoring supply stability over any negative impact on competition, and (c) the
prohibitionagainstpredatorypricingwastopreventtheexistingbigplayersfromchargingprices
belowcosttodiscouragenewentrants.Inanycase,supportersofoilderegulationcontendedthat
the Supreme Court overreactedby striking down the entire law rather thanjust the offending
provisions.
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The Political Economy of Reform during the Ramos Administration (199298) 21
domesticoilpriceshelpedtoshieldthefiscalsectorfromtheburdenofproviding
oil subsidies at a time when government finances were most fragile. Other
benefitshaveincluded(i)increasedcompetitionintheindustrywiththeentryof
newplayers;(ii)lesspoliticizationofoilpricing;(iii)propermarketresponseto
high oil prices, including conservation and the search for substitutes like
biofuels;
and
(iv)
clean
and
good
restrooms
at
service
stations
all
over
the
country as a byproduct of introducing competition in the industry, helping
supporttourism.
Water Privatization
Inthepublicseye,theMetropolitanWaterworksandSewerageSystem(MWSS)
wastothewatersectorwhatPLDTwastothetelecommunicationssector.Before
privatization,servicedeliverywasextremelypoor,withonlytwothirdsofMetro
ManilasresidentsconnectedtoMWSSspipes.Thesecustomerswere,moreover,
oftenaskedtoconservewater(orweresubjectedtowaterrationing)becauseof
shortages,
with
24
hour
supply
available
only
in
certain
parts
of
the
city.
Worse,
water contamination resulting in occasional outbreaks of cholera cases had
becomeagrowingconcern.
President Ramos had talked about a water crisis in 1993 and ordered the
conveningofaWaterSummitinlate1994.Inspiredbyinitialsuccessesofsimilar
efforts in other countries at the time and several proposals from foreign and
domesticinvestorswantingtoparticipateinthelocalwatersector,thepresident
hadalso directedofficials to look intoprivatizingMWSS. Thiswasseen as the
most logical way out for the financially weak MWSS, which was caught in a
chickenandegg situation. On the one hand, given the highly politicized rate
settingprocess,itcouldnotraisetariffsenoughtoundertakeinvestmentscritical
to
maintaining
and
expanding
its
network.
On
the
other
hand,
without
investmentsinimprovedservicedelivery,MWSScouldnotjustifyraisingwater
rates.Inthemeantime,significantleakagesfromoldpipesandwaterpilferages
notonlyincreasedthefirmslosses(nonrevenuewaterwasover60percent)but
alsoaggravatedthewatershortage.
To make reform possible, the president sought legislators approval of a
Water Crisis Act that would give him emergency powers to solve the water
crisis. This was passed inJune 1995, after which the Ramos administration
sought to reduce potential opposition to the reform in two ways. First,
government implemented a program to compensate the expected losers of the
reform
through
a
liberal
early
retirement
package,
of
which
about
a
third
of
MWSS employees voluntarily accepted. The shedding of excess labor also
enhanced the concessions attractiveness to potential bidders. Second,
government sent leaders of labor unions on study tours of countries that had
undertakenwaterprivatization.Upontheirreturn,theyweregivenafreehand
todraftthelaborprovisionsoftheconcessionagreement.
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22 Romeo L. Bernardo and Marie-Christine G. Tang
Atthesametime,toensuretransparencyandfaircompetition,government
broughtintheInternationalFinanceCorporation(IFC)asanadvisertodesignof
the privatization program. IFC was also used as the clearing house for
accessinggrantfinancingfrombilateraldonors(specifically,theUnitedKingdom
andFrance)withpotentialconflictsofcommercialinterest.Moreover,toenhance
potentiallyfavorable
privatization
outcomes,
President
Ramos
raised
water
rates
some monthsbefore privatization. The latter helped clinch the success of the
reformbecausethebidsreceivedwereatsteepdiscounts(asmuchas74percent)
toprevailingwaterrates.32
TheprivatizationofMWSShasledto:(a)expandedservicedeliveryinterms
of population coverage and water availability; (b) increased operational
efficiencies,mostnotablyintheeastzonewherenonrevenuewaterhasdropped
dramatically; (c) less politicized rate setting; and (d) reduced reliance on
governmenttofundMWSSbudgetshortfallsandneededcapitalexpenditures.
PerspectivesontheThreeReformExperiences
In the Philippines, a crisis situation is often needed for reform to happen. The
three sectoral reforms chosen provide counter examples of how a leader can
influence the timing of reform. The case studies also present glimpses of what
reforminademocracyentails.
It is important tobear in mind that these reforms were linked tobroader
agendas of the Ramos Administrationthe dismantling of monopolies in the
caseoftelecommunications,theEnergyActionPlan(drewupinresponsetothe
power crisis) in the case of oil deregulation, the administrations privatization
program
in
the
case
of
water,
reducing
macroeconomic/fiscal
instability
in
the
lattertwocasesthatultimatelysoughttoattractprivateinvestmentsandbring
aboutfastergrowth.Thecasesdemonstratehowelementsofpoliticalwill,vision,
communication, constituencybuilding and astute timing to take advantage of
opportunitiescanbringaboutchangeinarelativelycompressedtimeperiodand
potentiallysetthebasisforlongtermsustainedgrowth.
Role of Leadership and Political Will
It has been argued that for reform to happen, there must be broadbased
popularsentiment that thingshave to changeanda leadership that is able to
translatethis
broad
dissatisfaction
into
aconcrete
program
that
crystallizes
the
issuesandpointstotheirsolution.33PresidentRamoswasinthissensetheright
manattherighttimewithhisnononsenseleadership,energizingthereform
32Comparedwiththeexistingrateof8.78/m3,thewinningbidswere2.32/m3intheeastzoneand
4.97/m3inthewestzone(Dumol2000).33
Koromzay2004.
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The Political Economy of Reform during the Ramos Administration (199298) 23
process.34 Ingredients of his success formula included a wellarticulated vision
forthecountryandtheconvictiontodowhatisneededtoattainthisvision.The
latter involvedpinningdownthecountrysproblems,callingattentiontothem,
offeringwaysout,and,mostimportantly,takingallnecessarystepstosolvethe
problemsinthefaceofanticipatedandunanticipatedobstacles.
Indeed,in
all
the
cases
studied,
seeing
the
work
through
required
alot
of
politicalwillon thepartof thepresident himself.Thismeantchampioning the
specific reforms to garner political support,being accountable for unpopular
decisions,anddoingeverythingnecessary toremoveobstaclesblocking reform
efforts. This demonstration of political will was evident in all the casesfrom
sacrificingofpersonalfriendshipsintakingontheCojuangcoclaninPLDT,35to
making the politically difficult decisions of raising water rates and reducing
MWSS workforce preprivatization, to staying on the oil deregulation course
despitetheSupremeCourtsnullificationofthefirstoilderegulationlaw.Inthe
lattercase,thepresidentpushedCongresstoquicklypassarevisedlawatatime
whenthe
impact
of
the
Asian
crisis
on
the
exchange
rate
had
led
to
increasing
domesticoilprices,whichinturnhadsparkedpublicoutcries.
Indeed, in light of the relative weakness of Philippine institutionswhere
thesystemofchecksandbalancesputinplacetostemabusesisoftenexploited
bythoseopposingreformtoblockoratleastdelayreformitwouldhavebeen
verydifficult,ifnotimpossible,tocarryoutthereforms,withoutthepresidents
visionandthestrengthofhisconviction.
Moreover, unlike successor presidents, there was greater continuity in
leadership and policies at the departmental level under the Ramos
administration.Forinstance,RobertodeOcamposervedasFinanceSecretaryfor
almost five years of President Ramos sixyear term.36 This is true also in
EconomicPlanning(onesecretary),TradeandIndustry(twosecretaries),Energy
(twosecretaries),andPublicWorks(twosecretaries).Atthesametime,President
Ramos, himself a career officer, understood the value to governments
effectivenessofnurturingthepoolofcivilservicepersonnelwhorose from the
ranks,andthus,unlikehissuccessors,minimizedreplacingcareerofficialswith
outsiders.
Another aspect of leadership is effective communication and constituency
building.Asnotedabove,thepresidentputgreatstoreinaparticipatoryprocess,
going the distance to involve stakeholders in the reform process. Public
consultations,informationcampaigns,multisectoralworkinggroups,summits,
andsimilar
activities
were
important
not
just
to
start
the
reform
process
but
to
ensurereformcontinuityandsupportinthefaceofoppositionfromthosewith
34Spaeth1995.
35Tiglao(1993d)observedthatmorethananythingRamoshasdoneinhisfirstyearinoffice,itis
hisattackagainsttheAntonioCojuangcofamilyscontroloverPLDTthatseemstorevealbestthe
directionofhispresidency.36
Incontrast,sevensecretariesoffinanceservedfrom1997to2007.
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24 Romeo L. Bernardo and Marie-Christine G. Tang
narrowinterests.Hence,notonlyweretheseactivitiesstartedearlyinthereform
process (to explain rationale, manage expectations, and allay fears of the
unknown),theycontinuedtobeundertakenduring(forexample,toexplainbirth
painsifany)andafterthereformshadbeencompleted(forexample,toreporton
reformoutcomes).
Indeed,
one
of
the
most
importantbenefits
of
the
deregulation
of
the
oil
industry is greater public awareness about the workings of the oil market and
governments limited capacity to influence prices setby global demand and
supply conditions. This has helped desensitize the public to periodic oil price
adjustments and confine calls for reregulation to militant sectors. Credit here
maybe given to the nationwide roadshows that government conducted at the
time.Communicationwas likewise important inwaterprivatization (especially
when government decided to raise water rates preprivatization when service
deliveryremainedpoor)andtelecommunications(especiallysincePLDTshares
werelistedinthePhilippineStockExchangeandgovernmenthadtobesensitive
to
market
reactions
to
any
news
that
maybe
perceived
as
negative,
such
as
governmenttakeoverofaprivatecompany).
Also deserving mention are the presidents personal qualities and
relationshipwithmembersof his Cabinet. In theauthors interviews of former
governmentofficialswhohaveworkedcloselywithPresidentRamos,acommon
refrain ishowhisqualitiesasa leader toarticulateaclearandcoherentvision,
leadbyexample,andguideandinspirehelpedthemtofocusontheirjobs.Also,
that indoingtheirjobs, theyweresecure in theknowledge that if thesituation
warranted,thePresidentwillbetheretobackthemup.Thissenseofhavinghis
personal support appeared to havebeen an important element inbringing out
thebest in his men, which would help explain their ability to deliver results.
(RobertodeOcampo,votedFinanceMinisterof theYear in1995byEuromoney
magazine,quippedthatthefinanceministerhasmanykeydecisionstomake
themostimportantonebeingwhichpresidenttoserve.)
The Reform ProcessOpportunistic Timing,Pragmatism, Judicious Haste, Persistence
Comparedwiththeresolutionofthepowercrisisthathasbecomeahallmarkof
the Ramos administrations effectiveness, the three reforms discussed in this
papermaybeconsideredelectivesurgery(noncrisissituations).Therefore,they
demonstratebetter the reformprocess inademocraticsettingwhere the leader
himselfhas
to
generate
the
impetus
for
reform
through
his
vision
and
persuasion
and tocraft approaches thatarepolitically feasible.Thecasestudiesshow that
theRamosadministrationhadtoaddresstheproblemsineachareainwaysthat
were possible given the timing, the window of opportunity, conditions
prevailing,andotherprospectsavailable.
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The Political Economy of Reform during the Ramos Administration (199298) 25
Intelecommunicationsforexample,theadministrationwasabletoopenup
the sectorby executive action alone37after it creatively weakened entrenched
interestsopposingreformthroughtheuseofvarioustoolsatitsdisposal.Thus,
whereas the previous administration, despite having sequestered a significant
portion of PLDTs shares linked to deposed President Marcos, failed to exert
pressureon
the
powerful
controlling
shareholder
to
desist
from
anticompetitive
behavior, the Ramos administration succeeded in activating the governments
boardrepresentation.Thisenabledittoposeacredibletakeoverchallengeofthe
companysboardifPLDTcontinuedtoblockgovernmenteffortstoopenupthe
sector.Similarly,itundertookaflankingactiononthejudiciary.
The fact that itwasnotnecessary for the executive to secure legislation to
open up the sector made it possible to complete the reform within a short
timeframe. The sectors dynamism brought positive results very quickly for
everyone to see, thus winning legislators to the reformers side. The law itself
wasneedednot to introducereformbut toprotect thereform from reversalby
succeedingadministrations.
In water, the administration opted to pursue the worlds largest water
privatization,followingagreatdealof investor interestfrombothforeignand
local groups in the watersector in general and the MWSS inparticular. It was
able to do this in light of existing international water privatization models
(particularly Buenos Aires and Paris) from which the Philippines could learn.
Theseexperienceshelpedgovernmentanticipateandmanagepotentialareasof
conflict(forexample,withlabor)andkey issues(forexample,theneedtohave
lowerwaterratespostprivatization).
Thewaterprivatizationexperiencealsoproducedone important finding in
supportofthetheoryofsecondbestsolutionsortheperfectistheenemyofthe
good. Had the Ramos administration followed the firstbest approach of first
putting in place a strong, independent regulatorybody to keep watch post
privatization, it would in all likelihood never have accomplished the MWSS
privatization. The creation of such abody would have had to go through the
legislative mill, which would have involved a long process, as the oil
deregulation case showed, and with no guarantees of passage. Instead,
government set up a Regulatory Office within the MWSS itself to oversee
contractimplementationpostprivatization.Itthenstrengthenedtheregulation
bycontractregimebyprovidingforaninternationalarbitrationmechanismfor
disputesettlementinthecontract.Althoughissuesrelatedtoregulatorycapture
(in
a
succeeding
administration)
have
been
raised
when
one
of
the
concessionaires failed, the regulatory regime has held up well to date
consideringthemanychallengespostprivatization.38
37 Legislation followed two years later to strengthen the legalbasis and reduce risk ofjudicial
challengeandreversal.38
Forinstance,thegovernmenthassuccessfullycompletedaraterebasingexerciseandauctioned
offtheshareholdingsofthemajorityownerinthefailedconcession.
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26 Romeo L. Bernardo and Marie-Christine G. Tang
In oil, managing public opinion was a basic consideration. Thus,
governmenthadtopursuederegulationinphasesandtimefullderegulationto
coincidewithbenignoilandforeignexchangemarketconditions.Togetherwith
anintensivepublicinformationcampaign,thesewereintendedtoreducetherisk
ofpublicproteststhatcouldjeopardizethereformeffort.
Other Design Considerations
AnotherimportantpointemergingfromtheRamosadministrationsexperience
withthesereformsistheimportanceofcraftingrulesthatwouldensurefairplay
once the reforms are implemented. This meant putting systems in place that
enabledgovernmenttoaddressanymarketfailuresandstrikeabalancebetween
themarketsprofitmaximizationobjectiveandconsumerwelfare.Largely,these
rules were intended to deter market abuse rather than keep government in
control.
Intheoilsectorforinstance,wherethe issueofallegedcartelizationbythe
Big
3
oil
companies
had
always
loomed
large,
government,
in
deciding
to
privatize Petron Corporation, one of the Big 3 oil companies, has opted to
retainasignificantminorityshare(40percent)39sothatitcancontinuetomonitor
industry developments from within. Moreover, the oil deregulation law
mandates the Department of Energy to monitor oil prices and oil companies
compliance with various laws, as well as prescribe minimum inventories of
petroleumstock.Whilegovernment,intimesofnationalemergency,mayimpose
fuel rationing or take over operations of oil companies, this has not happened
sincederegulation.
Similarly in the water sector,asemiautonomous RegulatoryOffice within
the MWSS was set up to review and recommend approval of the two
concessionaires
periodic
applications
forprice
adjustments
as
well
as
conduct
regularraterebasingexercisesandoverseeasystemofpenaltiesandrewardsto
create incentives forgoodperformance.Asnotedabovehowever,onedoesnot
need to strive for perfection in designing the regulatory regime. While the
RegulatoryOfficeisnotwhollyindependentandnorisitabletomaintainapool
ofhighqualityregulatoryexperts,thesetuphasbuiltinflexibility(forexample,
hiring external consultants and having a contractually enforceable third party
internationalarbitrationprocess)thatallowsittoovercometheseshortcomings,
ensuringthatthesystemfunctionswell.
In telecommunications, governments regulatory role was initially geared
towardspreventing
PLDT
from
using
its
monopoly
position
to
weaken
competitors,
for exampleby delaying interconnection. The focus of governments regulatory
functionhassinceevolvedgiventhesectorsrapidgrowthanddynamism.
39The Ramos Administration sold 60 percent of Petron Corp. in 1994 (40 percent heldby Saudi
Aramcoand20percentbythepublic).
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The Political Economy of Reform during the Ramos Administration (199298) 27
ReformOutcomes
In looking at reform outcomes to demonstrate the quality of the economic
policies and equity impact, the case studies took a micro/sectoral (rather than
macroeconomic)approach,zooming inonthespecific impactofthereformson
particularsectoral
parameters
that
one
can
assume
as
having
apositive
impact
onoverallgrowthperformance.Thisapproachavoidsthedifficultiesofisolating
the aggregate growth effects of the particular reforms, which is especially
problematic in an overdetermined system like in the Philippines. In this case
there are a multiplicity of binding constraints dragging down economic
performance.Inaddition,interveningfactors,suchaspoliticalinstabilityinlater
administrations and external factors like the Asian crisis, tend to mute the
longertermeffectsofthereforms.
Improved Service Delivery
Telecommunications.Since
the
reform,
the
sectors
direct
contribution
to
economic
growthhasbeenontheuptrend(figure8).Thesectorstransformationhasbeen
most dramatic, especially in the wireless segment, with mobile phones having
taken over the traditional role of fixed lines. While the installed fixedline
teledensity increased significantly given companies rollout targets, subscribed
teledensityisonlyabouthalfofinstalledlines(figure9).Incontrast,thecellular
mobiletelephonesubscriberbasehasincreasedbyacompoundedannualgrowth
rateof40percentover200005,resultinginahigh41percentteledensity(figure
10). Thus, despite the catching up that the Philippines had to do during the
1990s in terms of effective teledensity,40 2003 data show that the Philippines is
ahead
of
China,
Indonesia,
Vietnam,
and
India,
although
it
lags
Malaysia
and
Thailand (figure 11). Philippine telephone call rates have likewise been
competitive versus other Asian countries (table 1). This has had the additional
benefitofencouragingwiderInternetuse(figure12).
40Philippines:MeetingInfrastructureChallenges(WorldBank2005)defineseffectiveteledensityasthe
higherofeithertelephonemainlinesper100populationorcellularsubscribersper100population.
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28 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 8: Contribution of Communications Sector to GDP Growth
0
5
10
15
20
25
1992 1993 1994 1995 1996 1997 1999 2000 2002 2003 2004 2005
Percent
Year
Source: National Statistical Coordination Board Statistical Yearbook. Data for 1998 (negative change in GDP)and 2001 (statistical glitch) are not shown.
Figure 9: Fixed-Line Telephone Density (per 100 population)
0
1
2
3
4
5
6
7
8
9
10
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
Installed
Subscribed
Year
Telephonesper100population
Source: National Telecommunications Commission.
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The Political Economy of Reform during the Ramos Administration (199298) 29
Figure 10: Cellular Mobile Telephone Subscriber Density
0
5
10
15
20
2530
35
40
45
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Cellularphonesper100
population
Source: National Telecommunications Commission.
Figure 11: Effective Teledensity, 2003
0 10 20 30 40 50
India
Vietnam
Indonesia
China
Philippines
Thailand
Malaysia 8,940
Per capita income
(US$, PPP)
7,450
4,640
4,990
3,210
2,490
2,880
Teledensity per 100 population
Source: World Bank (2005a, p. 175); World Bank World Development Report 2005 for per capita income.
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30 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 12: Internet Service
0
20
40
60
80
100
120
140
160
180
200
1997 1998 1999 2000 2001 2002 2003 2004 2005
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Registered ISPs*
Subscribers (millions)
Million
RegisteredIS
Ps
Year
Source: National Telecommunications Commission.
*Internet service providers.
Table 1: Voice Call (US$/min), Postpaid
Country Local IDD
Philippines 0.070.16 0.300.40
Australia 0.150.93 0.462.37
Malaysia 0.110.35 0.441.15
Indonesia 0.06 0.22
India 0.010.06 0.151.18
Taiwan, China 0.030.54 0.06
Hong Kong, China 0.060.13 0.027.80
Singapore 0.060.12 0.521.25
China 0.05 1.04
Source: Data consolidated by Globe International Services from individual company websites as of April 23,2007.
Note: Ranges cover prices of different providers in each country.
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The Political Economy of Reform during the Ramos Administration (199298) 31
Water. The two concessionaires have succeeded in servicing a larger
proportionofMetroManilaspopulation,at thesame timemakingmorewater
available (figure 13) over a longer period of time (table 2). Given the financial
difficultiesofthewestzoneoperator,41performancecriteriawereevidentlybetter
in the east zone. Operational efficiencies in the east zone have improved
considerably
as
seen
in
the
steep
decline
in
nonrevenue
water
versus
the
pre
privatization record of MWSS. Operating expenditures are similarly noticeably
lower in the east compared with the west zone where performance under the
previous concessionaire hasbeen poor. On the other hand, water rates have
increasedsignificantlyfromoriginalbidratesinbothconcessions(figure14).The
increases largely reflect a combination of the outcome of the first rate rebasing
exercise,significantexchangerateadjustmentsfollowingtheAsiancrisis,general
priceinflation,andgreaterexpendituresinsewagedisposal(apublicgood)post
privatization.
Table 2: Selected Water Sector Indicators
Before(1996)
After(2005)*
Water coverage (% of population)
MWCI
MWSI
67%
94%
85%
Water availability (hours per day)
MWCI
MWSI
(HHs with 24-hour water)
17
(25%)
21
21
(98%)
Nonrevenue water
MWCI
MWSI
61%
35%
68%
Staff per 1000 connection
MWCI
MWSI
9.8
2.6
3.5
Operating expenditures (/m3
produced)
MWCI
MWSI
4.3
6.5
Source: MWSS Regulatory Office for 2005 data; Fabella (2006) for 1996 data.
*Except water coverage which is data as of September 2006.
41 The Asian Development Bank nevertheless noted that the failure of the original west zone
proponenthasproducedvaluablelessonsthatfosterprivatesectordevelopment,asevidencedby
thesuccessfulrebiddingprocessthatledtotheawardofthewestzonetoanewconcessionaireby
2007(Chiplunkaretal.2007).
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32 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 13: Billed Water Volumes (BWV) in m3
0
50
100
150
200
250
300
350
400
450
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
MWSS
Maynilad
Manila Water
Year
Cubicmeters
Source: MWSS Regulatory Office.
Figure 14: Evolution of Water Tariff Post-Privatization (/m3)
0
5
10
15
20
25
30
35
199798
1999
2000
2001
2Q2001
4Q2001
2002
2003
2004
2005
East zone
West zone
/m
Year
Source: MWSS Regulatory Office.
Oil.Improvementinservicedeliveryismostevidentintheimprovedquality
of services at refilling stations (for example, convenience stores, cleaner
washrooms).Withtheentryofthenewplayers,servicestationshaveincreasedin
numberfrom3,000in1996toalmost4,000stations,approximately20percentof
whichisownedbythenewplayers.42Pricechangeshavemeanwhilemovedinline
with internationalcrudepricesandexchangeratechanges(figure15),withprice
levelswithintherangeofpricesprevailinginotherAsiancountries(seetable4).
42DepartmentofEnergy2005.
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The Political Economy of Reform during the Ramos Administration (199298) 33
Figure 15: Oil prices: International vs. Domestic (1996=100)
0
50
100
150
200250
300
350
400
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
International
Domestic
Year
perbarre
l
Source: http://www.eia.doe.gov for international prices (Arabian Light), Department of Energy for domesticprices (unleaded gasoline, weighted average based on market shares of players).
Table 3: Major Foreign Players by Sector Post-Reform
Telecommunications Oila
Water
First Pacific Group, Indonesia (PLDT) Saudi Aramco United Utilities, UK (Eastzone)
NTT Communications (PLDT) Shell Mitsubishi, Japan (Eastzone)
NTT DoCoMo (PLDT) Chevron Corporation Bechtel (East zone)
Singapore Telecom (Globe) PTT (Thailand) Ondeo Services, France(West zone)
TeliasoneraAB, Sweden (Digitel) Petronas (Malaysia)
Deutsche Telecom Liquigaz (Netherlands)
Total (France)
a. Source for new players: Department of Energy 2005.
Attracting New Players and Increasing Competition
Telecommunications.Theentryofforeignplayerspostreform,inpartnershipwith
domestic firms, has heightened competition in telecommunications, where
technology is a key growth driver. Competition is particularly fierce in the
wireless
segment
of
the
market,
where
the
industry
initially
saw
an
increase
in
thenumberofplayers(fromonlytwoin1992tofiveby1994andfurthertoseven
in2001),43someofwhichlatermerged(GlobeandIslacom,PLDTandSmart).
43Thetwooperatorsin1992werePilipinoTelephoneCorporationandExpressTelecommunications
Co.Thethreenewplayers in1994wereGMCR,Inc.(Globe),IslaCommunicationsCompany, Inc.,
andSmartCommunicationsCorp.DigitelandBayantelwereauthorized in2001,Digitelbecame
operationalonlyin2003,andBayantelwasnotyetoperationalatend2005.
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34 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 16: Oil Industry Market Shares
Petron
Caltex
Shell
Others
19962004
Source: Department of Energy 2005.
Twooperators(SmartandGlobe)dominatethepresentmarketwithacombined
80percentshareofthesubscriberbase.Thisnonethelesshasfallenfromahigh87
percentsharein2002beforetheentryofDigitel.
Oil. A Department of Energy committee44 reviewed the deregulated oil
industry in 2005 and noted the following: (i) there were 35 new players in the
industry importing finished products, in addition to numerous other entities
engagedinotherdownstreamactivities,suchasretailtrade;(ii)overall,thenew
playerswereabletoincreasetheircombinedshareofthemarketfromlessthan3
percentin1997to15percentin200545(figure16);(iii)intheLPGsegmentofthe
market,the
new
players
gained
amarket
share
of
more
than
40
percent;
and
(iv)
reported return on equity for two of the biggest players, Petron and Shell,
averaged 3.7 percent and 3 percent respectively under the deregulated regime,
lowerthantheaveragePhilippineTreasurybillrateduringtheperiod.
Impact on Investments
The improvement in service delivery in all three sectors reflects the significant
amountofinvestmentsthattheprivatesectorexpendedintheirrespectiveareas.
For the telecommunicationssector for instance, the two leading cellularmobile
service providers spent a total of US$5 billion from 2000 to 2006, or the
equivalent
on
average
of
almost
1
percent
of
GDP
annually
on
capitalexpenditures (figure 17). These have enabled the firms to provide nationwide
access towirelessservices. Inoil, theDepartmentofEnergyreported that from
1996to2004,newplayersinvestedover23billion.46Inwater,from1997to2005,
44DepartmentofEnergy2005.
45The2005figureisfromhttp://www.doe.gov.ph.
46DepartmentofEnergy2005.
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The Political Economy of Reform during the Ramos Administration (199298) 35
capital expenditures of the two concessionaires totaled 18billion (or US$355
million), excluding concession fee projects. Capital expenditures increased
dramaticallyaftertheraterebasingexercisein2002,particularlyintheeastzone
(figure 18). The financial statements of the east zone concessionaire, Manila
Water, show capital spending reaching 12.3billion (or US$229 million) from
2003to
2006,
excluding
concession
fees
paid.
Figure 17: Capital Expenditures in Telecommunications ( billions)
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006
PLDT-Smart
Globe
Year
billions
Source: Globe and PLDT Annual Reports.
Figure 18: Capital Expenditures in Water ( millions)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1997 1998 1999 2000 2001 2002 2003 2004 2005
West zone
East zone
m
illions
Year
Source: MWSS Regulatory Office.
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36 Romeo L. Bernardo and Marie-Christine G. Tang
Contribution to Fiscal Stability
Oil. The abolition of the Oil Price Stabilization Fund (OPSF) following
deregulationfreedgovernmentoftheburdenofgrapplingwithrecurringdeficits
intheOPSF47(figure19).Forinstance,asaresultofahugedeficitintheOPSFin
1989 that reachedalmost1percentof GDP,governmenthad toput ina reported
5.3billion48
the
following
year
(equivalent
to
0.5
percent
of
1990
GDP)
to
reduce
the
deficit.Thisreformisperhapsbestappreciatedinthelightoftherecentrunup in
world oil prices. A World Bank study showed that, compared with neighboring
economieslikeChina,India,Indonesia,andMalaysia,whichhadbeenfinancing
fuelsubsidies from thebudget, thePhilippinesallowedhigherpassthroughof
increasesincrudeoilpricetodomesticprices49(table4).Thishashelpedshield
the fiscal sector from theburden of providing oil subsidies at a time when
governmentfinancesweremostfragile.
Figure 19: OPSF versus Oil Prices
1.0
0.80.6
0.4
0.2
0.0
0.2
0.4
0.6
0.8
1.0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
0
100
200
300
400
500
600
700
800OPSF, % of GDP, lhs
Oil prices (/bbl), rhs
PercentofGDP
Pesos
Year
Source: For OPSF, Department of Budget and Management, Fiscal Statistics Handbook for 19842003; for oilprices, http://www.eia.doe.gov; for exchange rate, Bangko Sentral ng Pilipinas.
47TheOPSFwasintendedtokeepdomesticoilpricesstable.Fundsweredrawndownwhenworld
oilpriceswerehighandreplenishedwhenworldoilpriceswerelow.Wheneverdeficitsstartedto
buildup,governmenthadtoeitherinfusefreshcapitalorraisepetroleumprices,whichwasoften
met with strikesandprotests. On the other hand, when insurplus, the OPSF couldbe used for
otherends,suchasgeneralbudgetfinancing.48
Thenationalgovernmentcontributed5billiontotheOPSFwithPAGCORcontributinganother
300million(PIDS1995).49
BaconandMasami2006.
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The Political Economy of Reform during the Ramos Administration (199298) 37
Figure 20: National Government Budgetary Support to MWSS ( million)
400
200
0
200
400
600
800
1,000
milllions
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: Department of Budget and Management, Fiscal Statistics Handbook for 19842003.
Table 4: Pass-Through Coefficients in Local Currency (January 2004April 2006)
Gasoline Diesel
China 0.71 0.53
India 1.25 0.66
Indonesia 1.20 1.02
Malaysia 0.75 0.84
Philippines 1.29 1.30
Thailand 1.37 1.15
Vietnam 1.03 0.70
Mean of case studies (31 countries) 1.03 0.88
Mean of net oil importers (25 countries) 1.19 1.01
Mean of net oil exporters (6 countries) 0.35 0.32
Industrial countries
Germany 1.20 0.98
Japan 0.85 0.65
United Kingdom 1.25 1.08
United States 1.02 1.05
Source: Bacon and Masami (2006, pp. 4 and 60).
Note: Coefficients were computed by dividing fuel price increases in local currencies by price increases on theinternational market converted to local currencies.
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38 Romeo L. Bernardo and Marie-Christine G. Tang
Water. Prior to privatization, the national government had to allot funds
annuallyfromthegeneralbudgetintheformofequitycontributions,advances
for loan payments, or outright subsidiesto fund MWSS losses (figure 20).
Under the privatized setup, the concessionaires took over operations and
servicing of MWSS debt (through the payment of concession fees), freeing
government
of
theburden
of
supporting
MWSS.50
Moreover,
going
forward,
government no longer had to worry about financing the huge amount of
investment(US$7billion,over5percentof2006GDPoverthe25yearconcession
period51)neededtoupgradesystemsandexpandservicesinMetroManila.
Governments Role and Politicization of Pricing
The reforms have helped to redefine governments role and the publics
expectations of it. Because of the reforms, government has decidedly moved
awayfromtheroleofaprovidertothatofanenabler/regulator.Asnotedabove
though, to make some of the reforms possible, government has had to accept
less
than
perfect,
second
best
solutions
to
the
regulatory
setup.
Thus,
there
is
much room for strengthening governments regulatory function to ensure its
continued responsiveness to changing market needs (especially in highly
dynamic areas such as telecommunications) and to avoid opportunities for
regulatory capture that can undermine the success of the reform effort. In this
regard, there has been a lot of learningabout utility operations, market
dynamics,andpublicresponse,amongothersoverthepast10to15years.This
follows many challenges to existing rules, especially in the water and
telecommunicationssectors,toaidregulatorsgoingforward.
The ratesetting process has likewisebecome much less politicized today,
with the public mostly desensitized to the regular price adjustments in the oil
and
water
sectors.
Although
there
are
still
occasional
demands
from
nationalists forgovernment tocontrolorsubsidizeprices,especially in the
oil sector, these demands largely havebeen ignored, anddomestic prices have
beenallowedtomoveinstepwithinternationalcrudeprices.Theprivateplayers
themselves, in both the oil and water sectors, appear to be sensitive to the
political acceptability of rate adjustments, preferring to increase prices in
increments over a period of time rather than implementing a single, large
increase.Chargingmarketpriceshasnotonlyboosted investor confidenceand
encouragedmoreinvestments,butalsoithaselicitedproperconsumerresponses
tohighprices,suchasconservation(figure21)andsubstitution(thatis,biofuels,
whichalso
are
more
environmentally
friendly).
50Atleastuntil2001whenthewestzoneconcessionaireranintofinancialdifficultiesandwasnot
abletopayitsconcessionfees.Governmentadvancedfundsforthisandensuingeventsledtoexit
ofthewestzonesmajorityshareholderandtheauctionofitssharestoanotherprivategroup.51
WorldBank(2005a,p.114).
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The Political Economy of Reform during the Ramos Administration (199298) 39
Figure 21: Petroleum Crude Import Volumes and Prices
Year
0
20
40
60
80
100
120
140
1999 2000 2001 2002 2003 2004 2005
0
10
20
30
40
50
60Volume ('000 metric tons)
Price (US$/metric ton)
US$permetric
ton
000metrictons
Source: Bangko Sentral ng Pilipinas, selected economic indicators.
New Growth Drivers
One of the most significant developments following the opening up of the
telecommunications sector is its spread to other areas, such as computerbased
services. This in turn has spawned a new growth industry ofbusiness process
outsourcing (BPO) services such as call centers, software development, data
transcription,andbackroomoperations.Availabledatafromthenationalincome
accounts,capturing
only
third
party
BPO,
show
the
sectors
value
added
rising
very rapidly in recent years (figure 22). This is likely tobe an underestimate
howeversincemanycorporationssuchasbanksmaintain inhousecallcenters,
which have greatly increased in number, revenues, and employees since 2000
(figure 23). Moreover, government forecasts show that the BPO industry is
expectedtocontinuegrowinginthecomingyears,raisingdollarrevenuesbyan
annualaverageof35percentandcreatinganaverageofover200,000newjobs
peryearfrom2007to2010(figures24and25).
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40 Romeo L. Bernardo and Marie-Christine G. Tang
Figure 22: Third-Party Business Process Outsourcing, Gross Value Added (1985=100)
0
500
1,000
1,500
2,000
2,500
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
Pesos
Year
Source: National Income Accounts.
Figure 23: Contact Center Performance
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000Number of contact centers, lhs
Number of seats ('000), lhs
Number of employees ('000), lhs
Revenues (US$ million), rhs
US$
million
Number
Year
Source: Magtibay-Ramos et al. 2007.
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The Political Economy of Reform during the Ramos Administration (199298) 41
Figure 24: BPO Forecast Revenues (US$ billion)
0
2
4
6
8
10
12
14
2004 2005 2006 2007 2008 2009 2010
US$billion
Year
Source: Magtibay-Ramos et al. 2007.
Figure 25: Forecast of New Jobs in BPO (thousands)
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010
No.ofjob
s(thousands)
Year
Source: Magtibay-Ramos et al. 2007.
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The Political Economy of Reform during the Ramos Administration (199298) 43
Figure 26: Selected Fiscal Indicators (% of GDP)
6
4
2
0
2
4
6
8
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
NG budget deficit
Social spending
Percent
Year
Source: Department of Budget and Management, Fiscal Statistics Handbook for 19962003; National
Statistical Coordination BoardStatistical Yearbook
for 200406; National Statistical Coordination Board forGDP.
ReformasaContinuingProcess
Reforms that have stood the test of time tend tobe difficult to reverse. This
appears tobe trueat least in the threespecific sector reforms discussed in this
paper,wheregovernmenthasovertheyearshasresistedcallsforoilreregulation
and nationalization or for taking over one of the water concessions that failed.
Nonetheless,
as
has
been
observed,
to
achieve
the
desired
impact
on
investments
andgrowth,reformhastobeacontinuingprocess inwhichnewreformefforts
builduponcompletedonesuntilthecountryisabletoachieveenoughcredibility
in its reform program to inspire investor confidence. However, the Philippine
presidentssixyear term(withnoopport
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