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Corruption and Economic Growth in the Philippines

Grand Corruption has been sighted as one of the major stumbling blocks of economic growth of Philippines and because of which Philippines was called "Sick man of Asia". Corruption, which exists in the form of graft, bribery, embezzlement, backdoor deals, nepotism, and patronage , has deterred growth in the Philippines.

However, in recent years, anti-corruption policies have been successful to a large extent and have resulted in Philippines' economy to be the 76th freest country in the 2015 Index. Corruption in the Philippines has steadily declined since 1980s when the corruption was at its peak as depicted by Transparency International Corruption perception Index (CPI) which is the indicator used to measure corruption where the scale ranges from 1-10; 1 being high perception of corruption and 10 being low perception of corruption. Graph 1 depicts the CPI scores from the year 1995 to 2012 in Philippines (Appendix 1). The mean CPI score in the years 1980-85 was 1.04 and from 1988-92 CPI was 1.96, which is very high. The high corruption figures from 1980-85 correspond to the presidency of Ferdinand Marcos, the corrupt dictator of Philippines who is accused of stealing huge amount of money from the treasury. According to David Timberman in his book, a Changeless Land, "it [corruption] became much more pronounced under Marcos, because of his predilection to control virtually every aspect of the society. The budget of many ministeries were regularly tapped and tampered to cater to the extravagant life style of the Marcos's family. All in all, Marcos stole $10 billion from the Philippines treasury. Democratic transition led to marginal decrease in CPI hence, the CPI score decreased from 3.6 to 2.6 between 1995 and 1998. The decrease in the CPI was insignificant due to various political scandals most infamous one being nepotism practiced by President Estrada, 10th most corrupt leader in the world. In 1996, President Estrada appointed his friends and family members at important positions on various organizations including Philippine Amusement and Gaming Corporation. However, there was a huge dip in the CPI score in 2000. One of the main reasons as to why the CPI score decreased to 2.6 in 2000 was because President Estrada stole $8,255,933 from the Philippines Treasury and used it for gambling to make illegal gambling profits. Several corrective measures taken during 2000-9 such as improvement in government service and cutting of red tape contributed to the stabilization of CPI score around 2.5-2.6. The implementation of Presidential Anti-Graft Commission (PAGC) in 2001 turned out to be effective as it was described as "very strong" in the 2008 Global Integrity Report. President Gloria Arroyo used $22.1 (USD) to fund this project. This project dealt with increase in tax collection, channel more resources in health care and education. Additionally, the primary anti-corruption agency called the office of the Ombudsman (OBM) was created and was given the financial independence and fiscal autonomy so that they are able to investigate public officials in Sandiganbayan (a special court with jurisdiction) to handle graft and corruption cases. Donor agencies such as ADB, USAID also did their own due diligence to curb corruption. However in 2008, the corruption in Philippines was considered one of the worst among South East Asian countries due to several corruption scandals such as the Philippine National Broadband Network controversy where US$329 million construction contract was awarded to Chinese telecommunications firm. Several Philippine National Police officials went to Russian in2008 to attend an Interpol conference and got caught for carrying 6.9 million Php in cash. Further, Oscar Lopez, owner of a news channel called ABS-CBN used negative publicity against Arroyo's decision to take over Meralco, largest electricity distributer in Philippines . From 2009 onwards, the CPI score decreased by 0.1 unit each year till 2012. Although Philippines has a long way to go, progress that has been made in the last decade is significant and was done largely by reducing opportunities for corruption through policy and regulatory reforms such as the establishment of Transparency and Accountability Network (TAN) which is the network of multi-sectoral anti-corruption organizations. Transparency International Philippines conduct workshops to raise awareness of anti-corruption programs in private sector, civil society and the media. Most recent legal source of corruption is the PORK barrel where every year each congressman is entitled to P70 M and a senator is allotted P200M for various government projects. This fund has now been renamed as PDAF (Priority Development Assistance Fund). It is alleged and also found that half of this money is used to increase the personal wealth of the beneficiaries in 2013. Before a relationship can be drawn between corruption and economic growth, the patterns of money politics in post-independence era with those that arose after the democratic transition in 1987 will be outlined. Jong-sung, a Ph.D candidate at Harvard University iterates that Philippines' initial configuration of state and business (before 1965) was "rent-seeking" where the business sector was concentrated and the state was fractured. During Marco's presidency, the business-state configuration changed to "predatory state". In 1986, the configuration changed to "laissez faire".

During 1950s through 1960s, the Philippines had impressive economic growth along with political stability. Rent Seeking from the Coconut and the Sugar Industries was typical in 1960s because both industries grew rapidly in 10 years before martial law. Furthermore, Quirino, the second president of Philippines was also charged with allegations regarding nepotism to misappropriation of funds. However, low corruption corresponded to the high growth rate (5.4%). The Philippine state promoted import substitution, economic nationalism, democracy and development in countryside. Technological changes in the agriculture sector yielded more number of rice and mechanized agriculture, which contributed to rural development. However, the land reform didn't get any attention.

The dictatorship style of governance of Marcos caused the business-state configuration to change to predatory state. During Marcos's presidency, generation of rents took place at an unimaginable level as Marcos took advantage of dispersed business networks. A classic example is when the Philippines government took control over the sugar trading business in 1974 to stabilize domestic sugar prices and prevent private hoarding. This decision basically enabled the government to capture large rents from the increase in export prices as prices paid to farmers were substantially below the revenue earned prices from sugar sales. Furthermore, the construction of sugar mills in 1979 by politically favored individuals in spite of having mounting sugar inventories was a source of corruption and wealth generation. Further, the government officials received kickbacks from individuals who were favored for allocating contracts and giving access to credits. For instance, Construction and Development Corporation of the Philippines (CDCP), Integral Factors Corporation, and Government Service Insurance System (GSIS) received most of the public works and large construction projects of the martial law government. Moreover, Marcos set aside public lands for the ownership and favored businessmen.

In spite of high levels of corruption, the GDP of the Philippines rose during 1970s-1980s. It rose from USD 7.4 Billion to USD 36 Billion . This was due to massive lending from commercial banks. Aggressive borrowing and spending was done to improve infrastructure and tourism. Green revolution, new rice technology was one of the main development strategies that led to increase in rice output, gains from production shared by poor farmers, increase in employment due to labor-intensive nature of the new technology, and higher wages. During this time period, Coconut, Sugar and Bananas were the top three Philippines' exports, which fostered economy's growth. However after 1980s, Philippines had a very disappointing economic growth where the growth rate was either very low or negative. For instance; annual growth rate was -7.3% in 1983. Hutchcroft suggests that this was because of a) poor decision-making by Marcos who generally implemented too expansionary in its fiscal and monetary policy, b) due to capital flight from the Philippines treasury and lastly due to the assassination of Aquino which striped away investors' confidence in the political and economic stability of Philippines.

After the People Power revolution, and Marcos's regime ended and a democratic transition took place. The money politics became Laissez- faire, where the state was fractured and businesses were dispersed. Corruption continued in the Laissez faire system as observed in the Tobacco industry. In 1992, Fortune Tobacco Company, which was well aware of the economic gains through cronyism, negotiated with Ramos (President of the Philippine in 1992) and promised political donations for favorable economic policies, which would allow the Tobacco Industry to profit greatly. Ramos allowed a two tiered ad valorem tax system which gave Fortune Tobacco Corporation a pricing advantage over its competitors when Ramos specifically promised that he will "breakdown large monopolies including the tobacco sector" in his presidency speech. The GDP increased from $ 58.7 Billion to $81 Billion in 2000 during Ramos's regime. President Ramos changed the negative growth rate to 5% in 2000 through privatization of basic industries such as telecom and shipping, which was an effective anti-corruption policy because there was less government intervention in the economy. Hence businesses no longer needed to pay bribes to earn economic gains. This led to reduction of trade and investment barriers (economic liberalization). Furthermore, it has improved the business climate and is attracting foreign direct investment (FDI) which can be supported by the fact that Philippines was listed as the world's 59th most competitive nation in the World Economic Forum as opposed to 87th rank in 2010. This is primarily because reduction in corruption reduces the cost of doing business, which is favorable for FDI.

Between 2000 and 2002, under Estrada's administration, the annual growth rate was 3.8% and GDP increased from USD 76.3 Billion to USD 81.4 Billion . Although cronyism exercised by Estrada worsened the image of economic stability of Philippines, targeted revenues weren't reached and implementation of policies became very slow, some profound policies were executed. Estrada focused on population control (budget allocated for family planning and contraceptives) and Poverty Alleviation Plan (delivery of social services, basic needs and assistance to poor families, inequitable control over resources).

In 2002 through 2005 was when most economic development took place. Average growth rate was 6% under Arroyo's administration. Policies under Arroyo's administration promoted tourism, foreign investments and regional development. Emergence of Overseas Filipino workers (OFW) and the Business Process Outsourcing (BPO) increased the amount of remittances (10% of GDP in 2010) which encouraged growth via investment and spending. Lastly, from 2009 onwards the Philippines was the fastest growing economy in the world with a GDP growth of 7.3% driven by the growing business process outsourcing and overseas remittances. President Aquino invested in anti-corruption policies that led to more transparent business environment as well as more equitable economic growth. As a result, the credit rating increased, debt decreased and fiscal management improved. This also led to increase in exports as shipments rose about 12 percent in 2014. Currently, the GDP growth rate is 6.0% derived by investment, recovery of exports and expanding of private consumption and higher remittances.

Appendix:

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