Introduction choice when markets fail or are unable to


research has three interrelated themes, namely, political governance, economic policy
reforms, and aid effectiveness. The setting is the Philippines, with lessons
drawn specifically from the Ramos administration. The researcher will look at
these three themes in terms of how each one contributes to two goals of
economic development, namely, creating opportunities and expanding the breadth
and scope of human choices. Viewing the themes this way yields a framework for
organizing thinking about the various reforms carried out by the Ramos administration.

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1992, when the administration of Pres. Fidel V. Ramos began, the Medium-Term Philippine
Development Plan (MTPDP) 1992-98 made improving the quality of life of every Filipino
its development vision. To realize this vision, the administration geared its
policies and programs to creating opportunities and expanding the range of
human choices in a sustainable manner. In line with this, the Ramos administration
initiated reforms in many fronts: political, economic, and social

the outset, it is useful to note that over the past two decades, one of the fundamental
changes in thinking about growth and development is the increasing recognition of
the possible contribution of political governance and institutions to economic
growth. Political institutions and good governance have now joined economic
factors like savings, investments in human and physical capital, and
technological progress as key determinants of growth. At the most rudimentary
level, public choice is able to expand private choice when markets fail or are
unable to produce some commodities in the amounts commensurate to what society
demands. When government is able to get society to agree about what public goods
must be collectively supplied, then society benefits from the additional public
goods that government provides. Some of the public goods assist private
production. For example, roads, bridges, ports and airports that the private
sector will not build may be provided by the government through a
tax-and-spending system, or through a public-private partnership scheme.

economic policy reforms are undertaken in pursuit of efficient production and
distribution, which in the process leads to growth. Such reforms, in so far as
they increase reliance on the coordinative ability of markets guided by a price
system, enable scarce resource to move to their most valued uses. Savings go to
investments in human, physical capital, and technological capital to produce
growth. At the same time, market reliance fosters competition, thereby yielding
invention and innovation. As a result, there is growth, and human choices

note that official development assistance (ODA) continues to be the main
instrument of the developed countries in assisting developing countries realize
their development goals. The conduct of ODA is largely the product of a
political process in the donor country. It is in the budget of the central
government and so cannot miss being at the center of political debates. It
generally comes in two forms: grants for technical assistance and capacity
building, and concessional loans for project financing. ODA is a source of concessional
financing largely for the social overhead capital requirements of the
developing countries, where normally, long-term financing for infrastructure facilities
is not available. In addition, technical assistance helps developing countries
provide international public goods to their residents, such as, clean air and
water, and disease-free surrounding for the poor. All this expands human
choices in the developing countries.

Political Governance

is widely agreed that markets require good governance and credible institutions
to be able to help facilitate growth and development. If the government
intrudes excessively in the price system, the latter loses its ability to
signal which commodities are getting scarce or in surplus. Resources are thus
misallocated. At the very least, the political structure in place must be
stable. Rules are expected to be procedurally and operationally efficient
across political administrations.

addition, the police and the military must ensure that internal security is
guaranteed and that the country is adequately protected against external
aggressors. Furthermore, there must be a legal, judicial, and administrative
system in place that is conducive to contractual performance. In case contractual
disputes emerge, the same system must be able to adjudicate fairly and without
undue delay.

Challenges and Responses    

1986 Constitution of the Philippines provides for a presidential system,
elected to a term of six years without reelection by direct voting. The
candidate who garners the highest number of votes is proclaimed president.

first important political challenge that Pres. Ramos faced was building and solidifying
his administration’s political base in Congress. He won with only a small
majority in the presidential election of 1992. To succeed in his economic and
social agenda, it was

to get the support of Congress.

Constitution also provides for an elected Congress with two chambers, namely, the
House of Representatives and the Senate. Representatives, no more than 250,
serve a term of three years with reelection; they are subject to a maximum of
three consecutive terms. Senators, 24 of them, are elected to a term of six
years with reelection, but under a maximum of two consecutive terms.

Constitution allows a multiparty system. In this political setting, an elected president
has to build a coalition in Congress to heighten the likelihood of getting
support for his or her legislative agenda. The dominant political party that
emerged from the political maneuvers was Pres. Ramos’s political party, namely,

other challenge that the Ramos administration faced concerned internal
security. Pres. Aquino had been the target of several military coup d’etats,
all of which failed to unseat. However, her presidency was perceived to be unstable,
yielding adverse economic consequences, especially on inflows of foreign

address internal insecurity, Pres. Ramos in his first State of the Nation
Address delivered on July 27, 1992 issued Proclamation no. 10, granting amnesty
to 4500 rebels consisting of former soldiers, communist party members, and Moro
National Liberation Front (MNLF) members. Peace talks with the MNLF were
aggressively pursued, culminating in the signing of a peace pact in November
2003. Ramos also created the Office of the Presidential Adviser on the Peace
Process to oversee implementation of the peace program. This was in recognition
of the importance of peace and order as a precondition for economic development.
Mindanao, in particular, could not realize its growth potential in view of a
pestering Muslim insurgency in the South. Once the peace accord with the MNLF
was signed, an Autonomous Region for Muslim Mindanao was established.

other challenge that the Ramos administration confronted came from the
Judiciary. The latter was perceived as an activist court when it came to
economic matters. The Constitution provides for this third branch of government
whose justices are appointed by the President of the Philippines based on
recommendations of the Judicial and Bar Council. Decisions of the Supreme Court
become part of policy in so far as they constitute precedents.

illustrate the activist stance of the High Court, during the time of Ms.
Aquino, a foreign petrochemical company wanted to locate in Batangas; some
government officials wanted the firm to put up its plant in Bataan. The case
was brought to the Supreme Court and the foreign firm lost. In response, the
foreign firm just abandoned its plan to invest in the Philippines. To deal with
this issue, the Ramos administration appointed justices that were pro-market
and liberal minded. In addition, some ODA-funded technical assistance was worked
out for the Judiciary in support of a judicial reform program.

get support for his economic policy reform program, such as, accession to the World
Trade Organization (WTO) and oil industry deregulation, the Ramos
administration worked for the enactment of a law creating the Legislative-Executive
Development Advisory Council or LEDAC. The LEDAC is chaired by the President
and co-chaired by the Senate President and the House Speaker. The LEDAC serves
as a forum for consensus building on the part of the Executive and the
Legislative on important bills, particularly, economic policy reform measures.

addition, in 1993, Pres. Ramos convened a Multisectoral People’s Summit consisting
of representatives from the Executive, Congress, and the private sector to
forge a common legislative agenda supportive of development goals. The covenant
that came out of the summit was called the Social Pact for People Empowered
Development. Two of the agreements pertained to closing the fiscal gap and the
electric-power shortage.

Economic Policy Reforms

Mr. Ramos assumed the presidency in 1992, he inherited an economy with a large
budget deficit. The economy had receded in 1991 largely as a result of
austerity measures imposed by a standby credit arrangement with the
International Monetary Fund (IMF)
and the destruction from natural disasters like the eruption of Mt. Pinatubo.
Pump priming the economy through
increased government spending was ruled out in view of the large budget deficit of the national government. Instead, the
Ramos economic program put great
reliance on private initiatives. That shift in strategy called for several
structural policy reforms,
including, privatization and deregulation, all of which entailed institutional
changes. The latter, meanwhile,
needs strong political support. Pres. Ramos could already count on a majority coalition in Congress.
Moreover, LEDAC was already being convened. But before the Administration could fully embark on its market-based
strategy, it had to address a serious challenge—an
electric power shortage.

Power shortage

1992, the economy was subjected to a severe shortage of electric power, which could
be traced to the 1983 foreign debt crisis. After the government declared a
moratorium on foreign-debt servicing, the National Power Corporation (NPC), a
government monopoly in power generation and transmission, was unable to build new
generating capacity, even to replace, for instance, the foregone power from the
mothballed Bataan Nuclear Power Plant. At the height of the power shortage, the
country experienced daily brownouts lasting 8 to 12 hours. All sectors of the
economy, especially, non-agriculture, saw their respective output slow down.

resolve the power crisis, it was important to build new power generating
capacity in the quickest time possible. But existing government regulations on
procurement posed obstacles to a rapid approach. Under the leadership of Pres.
Ramos and with the help of Congress, the Electric Power Crisis Act was enacted
into law, permitting negotiated contracts for power plants. At the same time,
the Build-Operate-Transfer (BOT) Law was amended, which allowed independent
power producers to operate. Five power plants were built under the Electric
Power Crisis Act and 15 through BOT and its variants. These power plants added 770MW
new capacity in Luzon, of which 715 MW were through BOT. As a result, the power
outages were eliminated in December 1993. That strengthened the modest economic
recovery that began in 1992, which gained strength through time until the 1997
Asian financial crisis intervened. Still, the economy was not hard hit by the
financial crisis in view of the economic strengthening brought about by the
other elements of the Ramos economic program, e.g., macroeconomic stabilization
and financial-market liberalization.

Macroeconomic stabilization

economic challenge was to sustain economic growth without triggering inflation and
a balance-of-payments (BOP) crisis. Through the years, the economy experienced
so called boom-and-bust cycles on account of inconsistent fiscal, monetary and
exchange-rate policies. Inflationary fiscal and monetary policies under a fixed
exchange rate system, for instance, led to speculative attacks against the
foreign reserves of the central bank, resulting in the collapse of the fixed
exchange rate and a BOP crisis. To usher in stable growth, the Ramos
administration adopted, first, a responsible deficit-reduction program.

Fiscal policy:
Quite urgent was closing the budget deficit of the national government. When
government borrows to finance the deficit, it absorbs funds that otherwise
would go to private investments. However, the fiscal deficits of the previous
years had starved the social sector of budgetary funds. A responsible
deficit-reduction had to be implemented. As the Administration sought to
balance the budget in the medium-term, it had to protect core values like
health, education, shelter, and infrastructure. To do this, a combination of
prudent spending and tax-enhancement measures had to be undertaken. The tax
measures included an upward adjustment in the excise tax on cigarettes, withholding
VAT or value-added tax on government contractors and suppliers, and
establishment of a large taxpayers’ unit in the Bureau of Internal Revenue
(BIR). All of these measures resulted in an increase in the tax effort from
13.3% in 1992 to 15.2% in 1993.

1996, the consolidated public sector deficit, consisting of the deficits of the

government and of government-owned corporations, had posted a surplus, one year

of schedule.

administration is also tax policy. In line with this, the computerization of
the BIR and the Bureau of Customs (BOC) was undertaken. Tax reforms continued
and in 1997, the Administration succeeded in having enacted the Comprehensive
Tax Reform Act (CTRA) of

It consisted of reforms of the personal income tax and of the corporate income.
Reforms in tax administration were included.

political base of Pres. Ramos in Congress helped ensure the enactment of CTRA. All
tax measures emanate from the House of Representatives, approved by the Ways
and Means Committee of the House, and then sent to the Senate for its

achievement in the fiscal front was helped by revenues raised from
privatization of big-ticket items like PETRON, a government corporation engaged
in oil refining and petroleum-product distribution, and the Philippine National
Bank (PNB), a wholly owned government commercial bank that was the biggest in
terms of assets at the time. Ramos also initiated the sale to the private sector
of military base lands, such as, Fort Bonifacio and Clark Air Base. The
Metropolitan Waterworks and Sewerage System (MWSS) in Metro Manila was also

of national government spending, particularly, for activities devolved to the
local government units (LGUs) also helped a lot. LGUS were already receiving during
the latter part of the Ramos administration an internal revenue allotment (IRA)
equal to 40% of the total internal revenue collection of three years ago.

Monetary policy:
The central bank emerged from the martial-law years nearly bankrupt. It was
saddled with huge liabilities incurred through time under inappropriate monetary
and exchange rate policies. The institutional arrangement in the monetary
board, which was then dominated by the fiscal authority, also created an
incentive for inflationary monetary policy. The liabilities precluded conduct
of sound monetary policy.

A major breakthrough
in the conduct of monetary policy was the passage of the New Central Bank Act
in 1994. The law created an independent monetary authority called the Bangko
Sentral ng Pilipinas (BSP). It is independent in that it consists of tenured
members of the Monetary Board appointed from the private sector, except for
one, who is chosen by the


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