A manifestation of income inequality in the Philippines emanates from geography. From the period beginning the fourth quarter of 2013 to the third quarter of 2014, the average share of National Capital Region (NCR) was 36 percent of the country’s gross domestic product (GDP), while Region 4A or Calabarzon (Cavite, Laguna, Batangas, Rizal and Quezon) and Central Luzon have 18 percent and 9 percent shares, respectively.
These regions make up more one-half of the country’s production, as less than half or 37 percent are distributed to the rest of the country. Mindanao, the whole island that is at the center of recent headlines, accounts only for 18 percent of the GDP, with the Autonomous Region of Muslim Mindanao posting the lowest contribution at 0.8 percent. In effect, the improved economic performance currently experienced in the country can be seen as fundamentally based in Luzon, particularly Metro Manila.
In any case, it is not surprising that the top 3 income-generating regions are both found in Luzon and are in fact located adjacent to one another. Urbanization—the concentration of population in cities and towns—is a key feature of economic growth. Given its long history as the country’s trade center, Manila developed at a faster rate than the other cities in the country. Nevertheless, cities need to be sustained if these are to survive.
With agricultural produce coming primarily from Central Luzon and manufacturing output from Calabarzon, Metro Manila continues to be the premier urban area in the country. Yet, clearly, without the development in its surrounding regions, the NCR would certainly not be able to maintain what others consider its “imperialistic” hold over the country. At the same time, without the necessary markets provided by the NCR, these nearby regions will not grow at a rate faster than other regions.
This tale of three regions clearly shows the close relationship between urbanization and economic growth. Metro Manila created greater non-agricultural activities which did not require land intensity and created agglomeration forces resulting in increased scale of production.
In effect, urbanization promoted a structural transformation from agricultural, involving more people in the production process and, in turn, generating increased demand for outputs originating in the two other regions. Each sector experienced greater productivity because of such trends, and in each location, various region-specific interventions, including infrastructure, allowed economic units to respond effectively to these trends.
This close urbanization-growth linkage, however, does not happen automatically. Three interrelated factors are needed to be in place.
First, regions should exploit the benefits from the proximity provided by their geographic location. Even without too much infrastructure, the contiguity across regions must result in lower transaction costs and greater and easier interactions. The urbanization in Metro Manila, for instance, created clusters of growth which had improved production technologies in the adjacent regions. To some extent, geography determines the comparative advantage, or economic potential of combined regions.
Second, regions must develop integration or increased trade connections. Because it exploits the region’s comparative advantage, trade has been considered as engine of growth and has been a persistent theme in the economic development literature. To some extent, this may be exaggerated. However, trade needs to be considered in terms of the capital infusion and technological innovations that are projected in each location. Externalities from technological changes and learning by doing effects then maximize the benefits of this integration process over a long period of time. These are functions that a first-tier urban area is expected to accomplish.
Third, institutions have to be established in order to make trade between these regions more mutually beneficial. This factor has received increasing attention in the growth literature as it has become evident that property rights, appropriate regulatory structures, environmental laws, the quality and independence of the judiciary, and bureaucratic capacity are significant in many settings and that they were of utmost importance to initiating and sustaining economic growth.
Previously seen as being dependent on incomes, institutions are now considered essential preconditions and determinants of growth. In fact, macroeconomic policy and the so-called economic fundamentals depend on the institutional context.
The three regions in Luzon have undergone remarkable transformations during the last two decades in their economic performance, while many others have experienced sharp deteriorations. Manila for instance has a strong service sector with the advent of the business- process outsourcing and call-center industry. More recently, however, an upsurge in the manufacturing sector is noted, particularly in the outskirts of Metro Manila. This suggests that moderate changes in region-specific circumstances (policies and institutional reforms such as “matuwid na daan”), often interacting with the external environment, can produce significant discontinuous changes in economic performances.
The key lesson in this tale of Luzon regions is that the process of urbanization and growth can be replicated in other urban areas in the country in order to enhance current economic growth and minimize regional disparities. Surely, the products and the production process may differ in other regions. Desirable institutional arrangements may also vary and may have a large element of context specificity, arising from differences in historical trajectories, geography, political economy or other initial conditions.
However, difficult though it may be, a comprehensive approach involving all three factors is all that is needed for this process to work. In the end, urbanization and the consequent structural transformation will require institutional changes that are cognizant of the limits imposed by geography and should incorporate integration as a necessary outcome to be sustainable.
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Leonardo Lanzona Jr. is director of the Ateneo Center for Economic Research and Development and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.
1 comment
f&ck the central government for putting too much focus on the NCR and the nearby regions….wel in 10 or 20 more years, your areas would I guess be unlivable already, with the air and water quality too unfit for human beings..