Fostering fair market competition in key sectors including electricity, telecommunications, and transport, can improve services and generate higher-paying jobs in the Philippines, accelerating poverty reduction, according to a new World Bank study released here today.
Entitled Fostering Competition in the Philippines: The Challenge of Restrictive Regulation, the study finds that market competition is limited in sectors critical for quality job creation. Removing overly restrictive regulations and unequal and discretionary application of policies could improve productivity and add at least 0.2 percentage points to Philippine’s growth every year.
“Sustaining our growth through the reform of many highly distortive government policies will be the country’s key policy challenge in the coming years,” Philippine Competition Commission Chairman Arsenio M. Balisacan said. “The study provides useful insight to the Commission’s work of advocating pro-competitive government policies and interventions—one of the main thrusts of the proposed National Competition Policy,” he added.
Data show that the Philippine economy is more concentrated than other economies in the region, with a higher proportion of monopoly, duopoly, and oligopoly markets. While concentration might naturally result from the market conditions, these structures can be more prone to collusion and abuse of market power – abetted by a plethora of restrictive regulations and other restrictions.
These restrictions include state ownership and involvement in business operations; complex regulatory procedures and administrative burdens on start-ups; as well as barriers to trade and investments, including foreign equity investments.
“Ensuring that government policies and regulations do not create barriers to entry or distort the playing field is necessary to enhance private participation and unlock more investment opportunities for all businesses big and small,” said Mara K. Warwick, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand. “The Philippines needs an even more competitive and vibrant private sector to generate the types of jobs and economic opportunities that can lift more people out of poverty, at a similar pace to its neighbors in East Asia.”
The study notes how these restrictions constrain the economy and negatively affect millions of Filipino consumers:
- Electricity costs are high, and capacity is limited. This is largely due to the slow implementation of reforms, such as the open access provisions and retail competition, under the Electric Power Industry Reform Act (EPIRA) of 2001.
- Limitations on foreign direct investments prevent the development of electricity infrastructure.
- The prices of mobile phone services in the Philippines is the highest of all East Asia region, and four times higher than the average price in rich countries.
- Restrictions in transport sectors, particularly cabotage rules and limits to foreign participation, impairs logistics in the Philippines, creating bottlenecks.
- Lack of competition is one of the main reasons why domestic shipping in the Philippines is more expensive than in Malaysia or Indonesia.
“The Government of the Philippines has adopted key reforms to foster competition and limit state participation in sectors where private participation is typically possible and economically viable,” said Graciela Miralles Murciego, Senior Economist and lead author of the report. “But slow implementation continues to hinder the potential benefits of these reforms to consumers, keeping prices high and choices limited.”
The study aims to identify existing regulatory constraints to competition in key sectors, and in the economy as a whole, to help the National Economic and Development Authority and Philippine Competition Commission forge an effective competition policy. The report provides detailed recommendations for reducing regulatory restrictiveness along the following policy actions:
- Tackling restrictive regulations in infrastructure and professional services to create more competitive conditions, which will have positive effects on other sectors of the economy.
- Eliminating restrictions on foreign investors as well as among domestic investors in sectors where such regulatory restrictions create an uneven playing field.
- Minimizing the scope of controlled prices to create the right incentives for firms to compete.
- Ensuring competitive neutrality among public and private operators, which will promote a more effective use of public funds.
- Streamlining burdensome administrative procedures for businesses to facilitate market entry and rivalry.
The study benefited from funds provided by the Australian Government through the Australia-World Bank Philippines Trust Fund and the Canadian government.
Income Growth Sluggish for Malaysian Youth, Lower- Income Households
Slowing income growth among lower-income households and younger workers has contributed to perceptions of being “left behind”, according to the 21st edition of the World Bank’s Malaysia Economic Monitor, launched here today.
Although median incomes continue to outpace inflation, income growth rates for low-income Malaysians slowed between 2014 and 2016. Moreover, wage growth for younger and less-educated workers has been sluggish, persistently trailing the earnings of older and better-educated workers, according to the report.
Median employment income for younger workers aged between 20 and 29 grew at an annual rate of 2.4 percent, compared to 3.9 percent for those 40 to 49 years old over the same period. The increase in the monthly absolute earnings gap between these two age groups has been more pronounced, more than doubling from RM529 in 2004 to RM1,197 in 2016 (all amounts adjusted for inflation). This signifies a growing wage divide and wage stagnation for the youths.
The report highlighted varying purchasing power in different parts of the country, poor financial planning, household indebtedness, and unaffordable housing as other key factors affecting living costs.
“The cost of living is a concern which extends beyond prices. Those on lower wages spend their income to pay for essentials – rent, transportation, food – and in the end, they find not much is left for the month. The challenge for policymakers is that different solutions are needed to cater to different groups with different needs,” said YB Datuk Seri Saifuddin Nasution Ismail, Malaysia’s Minister of Domestic Trade and Consumer Affairs. “The National Action Council on Cost of Living was established so that efforts by different ministries and government agencies can be formulated, consolidated and discussed under one roof. This timely report by the World Bank also serves to inform efforts to better serve the people.”
Amidst global uncertainty, the report notes that Malaysia’s growth continues to be sustained with GDP projected to expand by 4.5 percent in 2020, largely driven by the expected expansion of private consumption of 6.5 percent and despite weaker-than-anticipated investment and export growth in recent months.
Given the outlook, preserving fiscal space will be vital to mitigate the impact of any shocks. More can be done to raise government revenue, forecasted to be at 15.2 percent of GDP in 2020, without affecting low-income households, in key areas such as making personal income taxes more progressive and broadening consumption taxes. This will help create fiscal space for development and social spending to boost shared prosperity.
“More than ever, we need to scale up investments in people to encourage sustainable, inclusive economic growth. Malaysia can make policy decisions to combat inequality and improve the lives and opportunities of the poorest,” said Mara Warwick, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand. “The report draws on strong evidence to identify high-impact policies with a proven record of building shared prosperity and improving people’s access to services and long-term development opportunities.”
Alleviating cost of living pressures demands a mix of short-term measures and long-term policies, according to the report. Short-term measures should strengthen social safety nets, while over the long run, greater coordination across agencies and implementation of structural reforms to foster greater market competition and accelerate productivity would help lift real incomes for all.
Inequality threatening human development
Despite global progress in tackling poverty, hunger and disease, a “new generation of inequalities” indicates that many societies are not working as they should, the UN Development Programme (UNDP) argues in its latest report released on Monday.
The 2019 Human Development Report (HDR) states that just as the gap in basic living standards is narrowing for millions of people, inequalities surrounding education, and around technology and climate change, have sparked demonstrations across the globe.
Left unchecked, they could trigger a ‘new great divergence’ in society of the kind not seen since the Industrial Revolution, according to the report.
“This Human Development Report sets out how systemic inequalities are deeply damaging our society and why,” said Achim Steiner, the UNDP Administrator.
“Inequality is not just about how much someone earns compared to their neighbour. It is about the unequal distribution of wealth and power: the entrenched social and political norms that are bringing people onto the streets today, and the triggers that will do so in the future unless something changes. Recognizing the real face of inequality is a first step; what happens next is a choice that each leader must make.”
‘Inequality not beyond solutions’
Mr. Steiner added crucially that “inequality is not beyond solutions”.
The human development approach views “richness” as going beyond the idea that economic growth will automatically lead to development and wellbeing.
It focuses on people, and their opportunities and choices.
UNDP research shows that in 2018, 20 per cent of human development progress was lost due to the unequal distribution of education, health and living standards.
“What used to be ‘nice-to-haves’, like going to university or access to broadband, are increasingly important for success, but left only with the basics, people find the rungs knocked out of their ladder to the future,” said Pedro Conceição, Director of the HDR Office at UNDP.
Invest in education, productivity, public spending
The report recommends revamped policies in the areas of education, productivity and public spending.
As inequality begins even before birth and can accumulate through adulthood, investing in young children’s learning, health and nutrition is key. These investments must continue throughout life as they have an impact on earnings and productivity in the labour market.
UNDP observed that countries with a more productive workforce generally have a lower concentration of wealth at the top, which is enabled by policies that support stronger unions, the right to a minimum wage, social protection and which bring more women into the workplace.
The report further highlights the role of taxation, which cannot be looked at on its own. Rather, fair taxation should lie behind policies that include greater public spending on health, education and greener energy alternatives.
As the UNDP chief noted, “Different triggers are bringing people onto the streets — the cost of a train ticket, the price of petrol, demands for political freedoms, the pursuit of fairness and justice. This is the new face of inequality”.
Looking to the future, the report asks how inequality might be viewed years down the line, especially in relation to “two seismic shifts” that will shape the next century.
Those are the climate crisis, and the progress of the technological transformation that includes renewables and energy efficiency, digital finance and digital health solutions.
The report calls for opportunities to be “seized quickly and shared broadly”.
Concerted Action Needed to Address Unique Challenges Faced by Pacific Island Countries
Small island developing states (SIDS) must position themselves to take full advantage of often limited, but nonetheless available, opportunities to improve standards of living and accelerate economic growth, according to the latest issue of the Asian Development Bank’s (ADB) Pacific Economic Monitor launched today.
The Monitor focuses on addressing the development needs and challenges of the Pacific SIDS, which in the context of this publication are the Cook Islands, the Federated States of Micronesia, Fiji, Kiribati, the Marshall Islands, Nauru, Palau, Papua New Guinea (PNG), Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
The Monitor notes that the geographic and physical challenges faced by SIDS manifest in elevated cost structures and heightened economic vulnerability that severely constrain development prospects. These are further compounded by fragility from thin institutional capacities for effective governance and increased climate change risks.
“Development challenges stemming from vulnerability and fragility, which are further amplified by climate change impacts, call for a differentiated approach to long-term development among the SIDS,” said ADB Director General for the Pacific Ms. Carmela Locsin. “Sustainable development financing as well as innovative, fit-for-purpose strategies for institutional strengthening are central to such an approach.”
This is the 28th issue of the Monitor, the ADB Pacific Department’s flagship economic publication, which was launched in 2009 to provide more regular economic reporting on the Pacific islands. It reveals that a weak external environment is translating into a softer 2019–2020 outlook for the Pacific through subdued exports. The subregional outlook is for average growth of 4.0% in 2019 before moderating to 2.5% in 2020, largely reflecting weaker prospects in Fiji and a return to low growth in PNG as the ongoing recovery from last year’s major earthquake fades.
The Monitor includes country articles as well as policy briefs. Country articles feature analyses of labor productivity and youth unemployment in Fiji, fishing revenues in Kiribati and Tuvalu, and how various SIDS manage unconventional revenue streams. Other articles focus on recent fiscal adjustments in PNG, sustaining tourism-led growth in the Cook Islands, improving the business environment in Palau, Samoa’s ability to rebound and build resilience after disasters, and urbanization issues in Tonga.
Topical policy briefs in the report further examine the common development challenges faced by SIDS. The first policy brief discusses the structural constraints to long-term development among SIDS and highlights the crucial role of sustainable development financing to overcome these. Another policy brief mapping fragility in the Pacific shows that although some progress has been made over the past decade to strengthen institutional capacities among SIDS, there is still work to be done. Other policy briefs outline key takeaways from some Pacific atoll nations at the frontlines of climate change, and explore poverty reduction challenges in small island developing states, with special reference to PNG.
The Pacific Economic Monitor is ADB’s bi-annual review of economic developments and policy issues in ADB’s 14 developing member countries in the Pacific. In combination with the Asian Development Outlook series, ADB provides quarterly reports on economic trends and policy developments in the Pacific. The Monitor welcomes contributions of policy briefs from external authors and institutions.
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