A shift to federalism may not resolve poverty issues prevailing in developing countries like the Philippines, according to a discussion paper released by the University of the Philippines School of Economics (UPSE).
In the paper, titled “Federalism and Inclusion in Developing Economies,” UPSE professor emeritus Raul V. Fabella and assistant professor Sarah Lynne Daway-Ducanes said federalism could lead to greater income inequality in developing countries.
“On the debate whether we should shift to federalism, if inclusion is the criterion, our research results find no support in favor of such despite the claims of proponents. Indeed, the results show that poverty incidence and income inequality could become worse. The contemplated shift appears to be a jump from the frying pan to the fire,” the authors said.
The research went beyond issues of fiscal decentralization, which was among the contentious issues on a possible shift to federalism in the country. It included impacts on the Gini coefficient—which is a measure of inequality—and poverty incidence, among others.
The authors lifted variables from the World Bank’s World Development Indicators consisting of 105 countries spanning a 30-year period of five-year averages from 1987 to 2016.
The data showed 13 percent of the countries have federal systems of government and 78 percent of these countries were developing countries.
The paper stated that the average poverty gap and headcount ratios were at $3.2 per day poverty line are about twice as much as the ratios at the $1.9 per day poverty line. In terms of the Gini coefficient, the authors said its average of 40.16 is quite close to its median of 39.85.
“The interaction term between the federal government dummy and the developing economy dummy has a positive and significant [at the less than a percent level of significance] coefficient, indicating that federalism has an inequality-increasing effect in developing economies. Thus, the total marginal effect of federalism on Gini inequality [i.e., the sum of the two coefficients] is 5.16, which is significant at the less than a percent level of significance,” the authors said.
In terms of its impact on poverty, the authors said, the results showed that federal states, on average, exhibit high poverty incidence and high poverty intensity.
Based on the authors’ calculations, federalism associates with a 4.06-point increase in the poverty head ratio at the $1.9 per day poverty line.
This means, the authors said, federalism may have no effect or has a poverty-reduction effect on developing economies. The authors said “federalism thus appears to be on the wrong side of inclusion—in terms of both poverty reduction and greater income equality.”
“While it is true that cross-country ensemble results may not apply to a particular individual country in the sample since the results pertain to the average, one has to establish that the country in question is exceptional—in this case, in a good sense,” the authors said.
“Case in point: The successful miracle economies in East Asia come under the rubric of ‘East Asian Exceptionalism.’ But, as is widely recognized, the Philippines is ‘the exception’ to the ‘East Asian Exceptionalism’. It is East Asian only in geography but not in performance, especially in the last 30 years,” they added.
In July Socioeconomic Planning Secretary Ernesto M. Pernia said the economic team had a lot of misgivings regarding federalism and said transitioning to a federal form of government in the medium term could disrupt the country’s economic momentum.
Pernia said the National Economic and Development Authority recommended that the transition to federalism be done in no less than 15 years to ensure that the Philippine economy can maximize its growth momentum.
The Constitutional Commission is proposing a three-year transition, which will start soon after the new constitution is approved in the 2019 plebiscite.
The shift to federal form of government, meanwhile, got much-needed boost from the 1,489-strong League of Municipalities of the Philippines (LMP), who believes that federalism will help local chief executives develop their own areas.
The LMP has announced the decision to offer its support for the government’s campaign for the shift to federalism.
In a news statement released through the web site of the Department of the Interior and Local Government (DILG) dated November 12, Socorro, Oriental Mindoro Mayor Ma. Fe. Brondial, president of LMP, said local chief executives support federalism because the plan is good and well-meaning. She believes that through federalism, equal sharing between national and local, and among local governments is possible.
The DILG conducted its 15th regional road show for federalism in Socorro late last week, during which the rally garnered around 2,000 attendees.
During the rally, the elderly, youth, farmers and fisherfolk in Oriental Mindoro rose to support the government’s thrust for a new system of government.
