2009 State of the Nation Address

Gloria’s 9th SONA: Apologetic,
boastful — or both?

TODAY President Gloria Macapagal Arroyo will deliver her valedictory State of the Nation Address (SONA). The act is the highest level of public accountability for the president that is mandated in the Philippine Constitution – for the country’s chief executive to report to Congress, the bureaucracy, and the Filipino people on the state of the nation.

The question is which Arroyo will show up to deliver the SONA: A boastful, triumphant Arroyo, who will take credit for the Philippine economy’s uninterrupted expansion during her watch or an apologetic Arroyo, who has caused so much pain and misery for a lot of Filipinos and has managed to damage, in varying degrees, existing democratic institutions?

Surely, she will try to take full credit for the performance of the economy during her decade-long reign. That strategy is both risky and inappropriate. Risky, since the economy after growing at its peak in 2007 is now heading south – 3.8 percent GDP growth in 2008, and is projected to slow to zero growth in 2009 and to 2.0 percent in 2010.

The economy therefore grew at an average of 4.09 percent during the 10-year period. That, however, is much less than Estrada’s performance of 4.7 percent (3.4 percent GDP growth in 1999 and 6.0 percent in 2000), and slightly better than Ramos’s average of 3.6 percent from 2003 to 2008 or Aquino’s average of 3.34 percent from 1986 to 1992.

Table 1. GDP Growth Under 4 Presidents

Year GDP growth rate,%
1986 3.4
1987 4.3
1988 6.8
1989 6.2
1990 3.0
1991 -0.6
1992 0.3
1993 2.1
1994 4.4
1995 4.7
1996 5.8
1997 5.2
1998 -0.6
1999 3.4
2000 6.0
2001 1.8
2002 4.4
2003 4.9
2004 6.4
2005 5.0
2006 5.4
2007 7.2
2008 3.8
2009proj 0.0
2010proj 2.0

Source: Government sources; author’s own projections for 2009 and 2010

But a comparison of economic performance on the basis of GDP numbers as the only criterion is inappropriate for a number of reasons. First, the terms of office of post-Marcos presidents are uneven. Arroyo would end up serving for 9.5 years or almost a decade, followed by Aquino (seven years), Ramos (six years), and Estrada (2.5 years). Second, the national income accounts system was revised twice during Arroyo’s watch, which means the GDP numbers in recent years may not be comparable with those in earlier years. Third, Professor Felipe Medalla of the U.P. School of Economics has raised several methodological and measurement questions on recent GDP numbers. To date, his questions have yet to be answered by government statisticians.

More importantly, though, the government cannot claim full credit for the country’s economic performance because there are factors that affect economic growth that are beyond its control. The government doesn’t control the weather, which affects agriculture immensely in monsoon Asia. A devastating El Nino or a La Nina could spell a big difference on whether agriculture output would be robust or weak.

The more open the economy, the more it is subject to the vicissitudes of the outside world.

While the rest of the world was on a rapid, sustained growth, the Philippine economy benefited through galloping overseas remittances, stronger exports, and higher foreign direct investments. This happened during Arroyo’s watch and she’s been trying to claim credit for it. But she has nothing to do with the sustained global expansion. And with the sudden reversal of fortune, when the financial bubbles burst, and with the world economy now in a full-blown economic crisis, the Philippine economy has significantly slowed. Unfortunately for Arroyo, this also happened during her watch.

The world economic crisis exposed the long-term reforms that any Philippine president should have addressed seriously and which Arroyo failed to do: the diversification of Philippine exports, the overdependence on overseas migrant workers, the rapid population growth rate, agricultural modernization, and fiscal sustainability.

At the very least, a meaningful way of evaluating economic performance is whether a particular administration has met its own targets. The assumption is that at the time the targets were set, government authorities have enough information to know the available resources, technology, and government capability to meet the targets.

Using this performance criterion, the economy grew much less than planned levels, except for 2004 and 2007, both election years. But the ongoing economic crisis, the gap between the planned level and projected level will be much more serious during Arroyo’s final years: 2008, 2009, and 2010.

Chart 1. Underperforming Except During Election Years

GDP, Planned versus actual

GDP, Planned versus actual

An even more important way of evaluating economic performance is whether the people’s well-being has improved. For the common man, the impact of the economy on employment, poverty alleviation, and hunger mitigation is more important than the GDP number.

Better or worse?

An appropriate question is: are Filipinos better off now than when Arroyo took power in 2001? Do they have decent, stable jobs or are they either unemployed or underemployed? Are they poorer or richer? Do they eat regularly or do they go hungry occasionally?

In her first SONA, Arroyo spoke about her “vision of winning the war against poverty within the decade.” But after almost nine years, she is fast losing that war. Poverty worsened from 2003 to 2006 using official government statistics. And with high inflation and food prices in 2008 and rising joblessness, it is reasonable to expect poverty to worsen in 2009. At current expectations of slow recovery, it is highly unlikely that the Millennium Development Goal (MDG) of halving poverty by 2015 will be met, even as neighboring countries (Vietnam, Thailand, and Indonesia) succeed in rapidly reducing poverty.

Chart 2. Deepening Poverty Incidence

Deepening poverty incidence

Arroyo promised to create 10 million jobs or about 1.5 million jobs annually from 2004 to 2010. She’s way short of her target. Worse, the decent jobs in manufacturing continued to disappear while more part-time, less secure jobs were created.

Chart 3. New Jobs Created Versus Targets

Actual new jobs compared to low (1m) and high (1.5m) targets:

Actual new jobs compared to low (1m) and high (1.5m) targets

On her first SONA she promised food on every table, but that also did not happen. Instead, the Philippines became the world’s number one importer of rice. And almost nine years after that first SONA, hunger incidence has reached its peak at 23.7 percent, according to a recent Social Weather Stations survey.

Unemployment, poverty, and hunger are interrelated. Survey results show that unemployment and hunger go together. This reveals the weakness of the Philippine social-protection program, which provides very little protection for those who are needy, including those who lose their jobs. The incidence of hunger is a problem that has been exacerbated by the ongoing economic crisis, and it has progressively worsened under the Arroyo administration.

Chart 4. Unemployment-Hunger Link

unemployment hunger link

Budget mismanagement

But should all these surprise us? Despite the large increases in the national budgets during the last nine years, education, health, and public infrastructure did not get the priority they deserved. From 2000 to 2009, funding for public infrastructure has been modest at less than 1.5 percent of GDP.

unemploymen-hunger link

President Arroyo undermined existing budget institutions. The budget process should be transparent and predictable. Yet Arroyo revealed her disrespect for the constitutional process by habitually operating on reenacted budget. None of her nine regular budgets were approved on time; usually, there is a full quarter delay. In three of her nine years, she ran the government for the full year without an approved budget. She has pushed executive action to its limits by exercising the power of the purse under the shroud of secrecy.

Grading Gloria

In her earlier SONA, Arroyo tried to sum up her vision of governance using a catchy phrase, Beat the Odds (B for balanced budget; E for education for all; A for automated elections; T for transport and digital infrastructure; T for terminating NPA/MILF hostilities; H for healing the wounds of EDSA 1,2 and 3; E for electricity and water for all; O for opportunity to create 10 million jobs; D for decongest Metro Manila; and DS for develop Subic-Clark hub).

Let’s rate President Arroyo on whether she has met or likely to meet her Beat the Odds goals and objectives using the U.P. grading system: 1(Excellent), 1.25, 1.5(Very Good), 1.75, 2.0(Good), 2.25, 2.5(Satisfactory), 2.75, 3.0(Pass), 4.0(Conditional Failure), and 5.0(Fail).

Balanced budget: Arroyo incurred large national government deficits during her early years: P211 billion in 2002, P200 billion in 2003, and P147 billion in 2004. And after cutting the budget deficit to P12 billion in 2007 (aided by severe spending compression and hefty one-time privatization proceeds of P91 billion), she is expected to exit with a large deficit of P250 billion this year and another P200 plus billion deficit next year. As a result, national government public debt would more than double: from P2.2 trillion as of end 2000, it will balloon to a new high of P4.5 trillion to P4.75 trillion by end June 2010. Preliminary final grade: 5.0

Education for all: Arroyo neglected basic elementary and secondary education during her first six years. As a result, despite her catch-up plan, progress in education has been slow and uneven. Key MDG targets will surely be missed. Net enrollment ratio has worsened – from 96.8 percent in 2000 to 83.3 percent in 2006. Translation: 17 out of 100 children of school age are out school. What would these children do in the future? The Arroyo administration is in denial and confuses inputs (school buildings, textbooks, etc.) with outputs and outcomes (better test scores, higher literacy). Grade: 4.0

Automated elections: The Commission on Elections failed to do it in 2004 and 2007. There is a fair chance that the 2010 national and local elections will be automated. But the poll automation is the responsibility of a separate, independent constitutional commission. Still, it could be Arroyo’s positive contribution to the democratic process if the 2010 elections, against all odds based on her past electoral behavior, turn out to be honest, orderly, and peaceful. Grade: Incomplete. (This is work in progress.)

Transport and digital infrastructure: The government has underinvested in public infrastructure. The promised additional light rail transit systems in Metro Manila have yet to be started. The existing three systems are not even linked, though work has been started. The digital infrastructure is happening through private telecommunication firms, which suggests that there was really no need for the corruption-laden NBN-ZTE project. Grade: 3.0

Terminating NPA/MILF hostilities: Both NPA and MILF remain capable of harassing government troops. Mindanao remains to be a battleground for Muslim rebels and government armed forces, and there appears to be no end to the conflict. The probability of having peace in Mindanao is much lower now than when Arroyo assumed office in 2001. Grade: 5.0

Healing the wounds of EDSA 1, 2 and 3 forces: But the country is more divided now than in 2001. There is even a serious rift within EDSA 2 forces. Grade: 5.0

Electricity and water for all: No additional power capacity was built during Arroyo’s term. Intermittent power failures are already being experienced in parts of the Visayas and Mindanao. And a return of the power crisis is likely in 2011. It could be sooner where it not for the severe economic slowdown, which muted demand for power. Water supply in Metro Manila has improved, but that was the outcome of decisions made during the term of Ramos (no credit for Arroyo). The appointment of a politician as head of the Local Water Utilities Administration is a negative. Grade: 3.0

Opportunity to create 10 million jobs: The government’s goal is to create 1.5 million new jobs every year. But from 2005 to date, only about 600,000 jobs were created yearly, and only 430,000 jobs if unpaid family workers were excluded. Decent jobs, mostly in manufacturing, were lost. These jobs were replaced by part-time, less paying jobs in agriculture and the informal service sectors. The rising number of overseas workers is proof that all’s not well in the domestic economy, and that the government has failed to provide enough jobs for Filipinos at home. And by being the top importer of rice, we’re giving up jobs at home and creating jobs for Vietnamese and Thais. Grade: 4.0

Decongest Metro Manila: The idea is not well thought out in the light of the ongoing world economic crisis. The trend for the future is to have denser cities, where people live where they work. The growing urban centers, however, have to be connected to the lagging rural areas. Yet since the idea to relocate the Department of Agrarian Reform to Iloilo, the Department of Tourism to Cebu, and the Department of Agriculture to Davao, is senseless, the failure to implement it may not be bad after all. Grade: 3.0

Develop Subic-Clark hub: The hub was thought out by Ramos, funded under Estrada (through the Obuchi Plan), and implemented by Arroyo. It is a worthwhile project. But project implementation was delayed and financed at large cost overrun, a characteristic of many GMA projects. Grade: 2.75

Preliminary Final Grade: 3.86 or 4.0 (Conditional Failure). Arroyo’s dismal performance supports the view that the EDSA 2 political adventure was a monumental mistake. It has set back the country’s democratic process and poverty reduction programs by almost a decade. As a society and a people, we’re worse off now than when Arroyo took power in 2001 – while our Asian neighbors continue to march forward, despite the world economic crisis.

Governance scorecard

Arroyo’s failure to move the economy and the government forward on a lot of government’s goals and objective may be attributed to various aspects of governance. What was the Philippine governance rating before Arroyo took power and what is it now?

On voice and accountability, in 2000, the Philippines’ rating was 54.3-percentile rank (that is, the Philippines was better than 54.3 percent of all countries in the study). By 2008, the rating had regressed to 41.3 percent. Political assassinations, incidents of summary killings, unfavorable reports on human rights violation by UN agencies, and many attempts to muzzle the press have not helped the Arroyo administration.

On political stability, there was a sharp drop in rating: from 26.0 percentile rank in 2000 to 10.5 in 2008. The Philippines is better than only one out of 10 countries among the 212 countries and territories surveyed.

On government effectiveness, there has been an improvement from 49.3 percentile rank in 2000 to 55.0 in 2008.

On regulatory quality, there has been a regression from 56.6 percentile rank in 2000 to 51.7 in 2008.

On the rule of law, there has been a slight improvement: from a 36.7 percentile rank in 2000 to 39.7 in 2008. But, the Philippines hit rough patches during the early years of the Arroyo administration. The rule of law dipped to 36.2 percentile rank in 2002, 33.3 in 2003, and 33.8 in 2004, a reminder of the extra-constitutional way by which Arroyo was installed to power.

On control of corruption, the deterioration was quite severe: from 36.4 percentile rank in 2000 to 26.1 in 2008. The 2008 ranking was a slight improvement compared to the 22.2 ranking in 2007, when congressional investigations of high profile allegations of corruption such as the NBN-ZTE and fertilizer scams were at their peak.

Table 2.Philippine Governance Indicator: 2000 to 2008

Indicator 2000 2002 2003 2004 2005 2006 2007 2008
Voice and accountability 54.3 52.9 50.5 49.5 50.5 46.6 42.8 41.3
Political Stability 21.6 26.0 14.4 12.5 17.8 12.0 11.5 10.5
Government effectiveness 49.3 52.1 54.5 46.9 54.0 54.5 54.5 55.0
Regulatory quality 56.6 50.2 52.2 46.8 51.7 50.7 50.5 51.7
Rule of law 36.7 36.2 33.3 33.8 41.9 44.8 37.6 39.7
Control of corruption 36.4 36,4 36.9 31.6 34.0 21.4 22.2 26.1

During Arroyo’s watch, there has been a serious deterioration in four of six aspects of governance. The governance ratings are not just numbers, unfortunately. Better governance, according to the World Bank study, strengthens development, and not the other way around.

Poor governance has an impact on how poorly the Philippines fared in its fight against poverty and its desire to improve the living standards of Filipinos.

Lost decade

The state of economic affairs is one where people’s welfare has been set back for about a decade. More people and families are poorer now than when Arroyo assumed power in 2001. More workers are jobless and underemployed now than before. And more people are likely to go hungry now than a decade ago.

As a result, people are dissatisfied with Arroyo as shown by her negative net satisfaction rating during the second half of her decade-long term. She has the worst net satisfaction rating among all post-Marcos presidents.

Net satisfaction ratings

Ten years after, government finances are on shakier ground. Taxes-to-GDP ratio is much lower, going back to levels seen in the Marcos years, and national public debt would have more than doubled. In 2000, every Filipino had a debt burden of P25,991. By July 1, 2010, the amount is expected to double to P50,492. Under an unchanged condition, with the huge chunk of the national budget going to debt service, Arroyo’s successor can do very little to improve the people’s welfare.

As President Arroyo exits Malacanang, she will transmit to her successor a nation that is on the brink of financial collapse, hardly able to fund any program that would feed, educate, and take care of the health needs of its people.

Dr. Benjamin E. Diokno was budget secretary during the term of President Joseph Estrada. He is currently a professor at the University of the Philippines School of Economics.