1 INSTITUTIONS AND MARKETS IN THE PHILIPPINES – EVIDENCE FROM GLOBAL INDICATORS Lino Briguglio and Carmen Saliba University of Malta ABSTRACT The objective of this paper is to assess the administrative, economic and social institutions in the Philippines. For this purpose, the paper utilises seven indicators relating to administrative, economic and social governance to assess the scores and the rankings assigned to the Philippines and compares them to scores and rankings pertaining to (i) other ASEAN member countries and (ii) other countries globally. The indices utilised in the study are also tested for correlation, using a one-to-one comparison, to (a) GDP per capita (b) economic growth and (c) macroeconomic stability, so as to assess how these macroeconomic aggregates relate to the scores of the indices. The results indicate that the Philippines registered relatively low scores with regard to its institutional set-ups when compared to other countries in the region and globally. JEL: Classification: O43 - Institutions and Growth; D02 - Institutions: Design, Formation, and Operations N2 - Financial Markets and Institutions CONTENTS 1. INTRODUCTION........................................................................................................... 3 2. LITERATURE ON INSTITUTIONS AND MARKETS ............................................ 3 2.1 Institutions and Economic Growth.......................................................................... 3 2.2 Institutions and Competitiveness ............................................................................. 4 2.3 Institutions and Corruption ..................................................................................... 4 2.4 Institutions and Social Cohesion .............................................................................. 5 2.5 Market Efficiency, Institutions and Growth........................................................... 5 3. GLOBAL INDICATORS AND THE PHILIPPINES’ SCORES ............................... 5 3.1 The Worldwide Governance Indicators (WGI) ..................................................... 5 3.1.1 The WGI: Regional Comparisons................................................................. 6 3.1.2 The WGI: Global Comparisons .................................................................... 7 3.1.3 The WGI: Correlation with other economic variables ................................. 7 3.2 The Rule of Law Index ............................................................................................. 9 3.2.1 The RLI: Regional Comparisons .................................................................. 9 3.2.2 The RLI: Global Comparisons ................................................................... 10 3.2.3 The RLI: Correlation with economic changes in the region ...................... 10 3.3 The Corruption Perception Index ......................................................................... 11 3.3.1 The CPI: Regional Comparisons ................................................................ 11 3.3.2 CPI: Global Comparisons .......................................................................... 12
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1
INSTITUTIONS AND MARKETS IN THE PHILIPPINES –
EVIDENCE FROM GLOBAL INDICATORS
Lino Briguglio and Carmen Saliba
University of Malta
ABSTRACT
The objective of this paper is to assess the administrative, economic and social institutions in
the Philippines. For this purpose, the paper utilises seven indicators relating to administrative,
economic and social governance to assess the scores and the rankings assigned to the
Philippines and compares them to scores and rankings pertaining to (i) other ASEAN
member countries and (ii) other countries globally. The indices utilised in the study are also
tested for correlation, using a one-to-one comparison, to (a) GDP per capita (b) economic
growth and (c) macroeconomic stability, so as to assess how these macroeconomic
aggregates relate to the scores of the indices. The results indicate that the Philippines
registered relatively low scores with regard to its institutional set-ups when compared to other
countries in the region and globally.
JEL: Classification: O43 - Institutions and Growth; D02 - Institutions: Design, Formation, and
Operations N2 - Financial Markets and Institutions
APPENDIX 1: DEFINITIONS OF THE COMPONENTS OF THE 7 INDICES ........... 27
APPENDIX 2: THE SCORES OF THE PHILIPPINES SINCE 2005 ............................. 32
3
INSTITUTIONS AND MARKETS IN THE PHILIPPINES –
EVIDENCE FROM GLOBAL INDICATORS
Lino Briguglio and Carmen Saliba
University of Malta
1. INTRODUCTION
The objective of this paper is to assess the administrative, economic and social institutions in
the Philippines. For this purpose, the paper utilises seven indicators to assess the scores and
the rankings assigned to the Philippines and compares them to (i) scores in other ASEAN
member countries and (ii) scores in other countries globally. The indices utilised in the study
are the following:
1. Worldwide Governance Indicators,
2. Rule of Law Index
3. Corruption Perception Index and
4. Economic Freedom of the World Index,
5. Global Competitiveness Indicators,
6. Doing Business Index, and
7. Human Development Index.
The first three indicators (the Worldwide Governance Indicators, the Rule of Law Index, and
the Corruption Perception Index) mostly relate to legal and administrative institutions. The
next three indicators (the Economic Freedom of the World Index, the Global Competitiveness
Indicators and the Doing Business Index) mostly relate to economic governance, and are
therefore associated with economic and business institutions and with the workings of
markets. The seventh indicator (the Human Development Index) mostly relates to social
governance, and is therefore associated with social institutions. It should be stated, however,
that there is some overlap between the first six indicators, with some of them drawing on
similar sources, although they all have a degree of distinctiveness.
The scores of the mentioned indices are also tested for correlation, using a one-to-one
comparison, to (a) GDP per capita (b) economic growth and (c) macroeconomic stability, so
as to assess how these macroeconomic aggregates relate to the scores of the indices.
The paper is organised in five sections. Following this introductory section, a brief literature
review is presented focussing on the connection between institutions and a number of
economic variables. The section that follows will examine each of the seven indicators
mentioned above, focussing on the relative scores of the Philippines within the region and
globally. Section 4 summarises the main tendencies derived from the previous seven sections.
Section 5 concludes the study and proposes a number of implications that emerge from the
analysis.
2. LITERATURE ON INSTITUTIONS AND MARKETS
2.1 Institutions and Economic Growth
Several publications associate institutional capacity with growth and development. (North
1990; Rodrik,1999; Aron, 2000; Commission on Growth and Development, 2008).
4
Institutions form one of the pillars of the Global Competitiveness Index of the World
Economic Forum (2012).
Jutting (2003), in an extensive literature review on the subject, concluded that ―most of the
studies suggest a strong and robust relationship between institutional quality and growth and
development outcomes‖.
A similar conclusion was reached by Rodrik et al. (2002) due to the direct and indirect
effects of institutions on growth and development, with the indirect effects including
increases in investment attractiveness, better policies, better management of conflict and an
increase in the social capital stock of a community – factors which are known to influence
economic growth and development.
The direction of causation of economic growth and institutions are discussed in some studies.
Some authors prefer the theory of growth first and institutions later, (e.g. Glaeser et al., 2004)
while others take the opposite view (e.g. Acemoglu et al.,2005).
2.2 Institutions and Competitiveness
There are several indicators that link institutions with competitiveness‘ - perhaps the most
famous being the WEF‘s Global Competitiveness Indicators (Schwab, 2012). It is argued that
the quality of institutions influences investment decisions and the organization of production
and plays a key role in the ways in which societies distribute the benefits and bear the costs of
development strategies and policies
2.3 Institutions and Corruption
Institutions are formed by legal and administrative arrangements. Sometimes institutions are
associated with excessive bureaucracy and red tape, overregulation, corruption, and lack of
transparency and political patronage.
The relationship between corruption and institutions is considered in de Vaal and Ebben
(2011) who present a model that shows that for corruption to have a positive effect on
growth, institutional quality has to be sufficiently low.
Some studies indicate that corruption is extensive in developing countries (Svensson, 2005).
Corruption may be beneficial to the persons who bribe and those bribed, but it creates various
economic downsides, including additional costs to firms and negative effects on the provision
of goods and services by the government (Olken and Pande, 2011). Corruption also generates
an atmosphere of uncertainty and dishonesty.
There are studies (e.g. Huntington, 1968), that suggest that corruption can be beneficial, when
governments are autocratic and remain in power by hook or by crook. In this case, graft may
provide an opportunity for entrepreneurs to influence the decision-making process and enable
them to generate business and innovative activities). However, as Easterly (2006) argued,
claims that corruption ―greases the wheels‖ of growth simply do not stand up to empirical
scrutiny.
5
2.4 Institutions and Social Cohesion
Institutions may be conducive to enhancing social cohesion in a country, which is necessary
to support the effective functioning of the economic apparatus, without the hindrance of civil
unrest. Social cohesion is also associated with effective social dialogue which, in turn, would
enable collaborative approaches towards the undertaking of corrective measures in the face of
adverse economic shocks (Briguglio et al., 2009). Easterly (2006) argues that good
institutions can unify fractionalized peoples, and defeat the average tendency to divide and
rule. This line of arguments supports the contention in Easterly (2001) that formal institutions
contribute to the ―social glue‖ that tends to be in short supply when there are ethno-linguistic
divisions.
2.5 Market Efficiency, Institutions and Growth
The science of economics views markets and their efficient operation through the price
mechanism as the best way to allocate resources in the economy. If a market adjusts rapidly
to achieve equilibrium following an external shock, the risk of being negatively affected by
such a shock will be lower than if the market remains in disequilibrium. Indeed, with very
slow or non-existent market adjustment, resources will not be efficiently allocated in the
economy, resulting in welfare costs, manifested, for instance, in unemployed resources and
waste or shortages in the goods markets.
It is often contended that when markets can operate it is better to let them operate without
government intervention in order to foster economic growth. Government intervention
however is generally justified in the case of merit goods (such as education, health and
pensions)1 which have relative high positive externalities.
2 However, a functioning market
does not mean absence of institutions or the law of the jungle. As a matter of fact, most
countries, particularly those upholding the benefits of free markets, adopt competition law
and policy, with related competition authorities. It is contended that the recent global
financial turmoil might not have happened if the regulatory institutions appropriately oversaw
the excessive risks in the financial markets of the USA and the UK, among others (Ocampo,
2008).
3. GLOBAL INDICATORS AND THE PHILIPPINES’ SCORES
3.1 The Worldwide Governance Indicators (WGI)
The 2012 Worldwide Governance Indicators (WGI) 3
, with data updated to 2011, covers 215
countries and has six dimensions of governance, namely (1) voice and accountability (2)
political stability and absence of violence (3) government effectiveness (4) regulatory quality
(5) rule of law and (6) control of corruption (see Appendix 1 for the definition of these
indicators). The indicators are based on the views of persons involved in business, ordinary
citizens and expert surveys, with sources derived from various institutes, think tanks, non-
governmental organizations, international organizations, and private sector firms.
1 The extent to which government intervenes in subsiding merit goods depends on the philosophy upheld by the
nation, with left leaning governments generally being more prone to support merit goods. 2 It is also generally accepted that markets do not operate in the case of public goods, such as many
environmental assets, and externalities, such as pollution. 3 The Indicators‘ website URL is: http://info.worldbank.org/governance/wgi/index.asp
* Scores range from -2.5 to +2.5, with -2.5 representing the worst possible WGI score and +2.5 the highest possible score.
Key: V&A = voice and accountability; PS&AV = political stability and absence of violence; GE = government
effectiveness; RQ = regulatory quality; RL = rule of law; and CC = control of corruption; AVG = average scores of the six
indices.
The Philippines ranks 6th
overall in the region when all indices are considered together,
however its scores are particularly low in terms of Political Stability & Absence of Violence
and Control of Corruption.
4 This rescaling method is based on the formula (Xi-Xmin)/(Xmax-Xmin) where Xi is an ith observation in an
array of observations of a given variable. Xmin is the observation with the minimum value and Xmax is the
observation with the maximum value in the same array of observations. Thus the observation with the minimum
value will be rescaled to equal zero and the observation with the maximum value will be rescaled to equal 1. All
other observations will have a value between 0 and 1. This method is commonly used in composite indices. Its
main shortcoming is that outliers can give distorted results. 5 The weights reflect the pattern of correlation among data sources. The method adopted by the authors assigns
greater weight to data sources that tend to be more strongly correlated with each other. The authors argue that
while this weighting improves the statistical precision of the aggregate indicators, it typically does not affect
very much the ranking of countries on the aggregate indicators
7
It can be seen also that in terms of Voice and Accountability, all countries in the region were
assigned a negative score. However the least negative of them all was that assigned to the
Philippines. This indicator captures perceptions of the extent to which a country's citizens are
able to participate in selecting their government, as well as freedom of expression, freedom of
association, and a free media. Interestingly even Singapore, which has the highest scores
overall, received a negative score in terms of Voice and Accountability.
3.1.2 The WGI: Global Comparisons
Table 2 shows that globally, the Philippines again scored very badly in terms of Political
Stability and Absence of Violence, being ranked 194 out of 215 countries. It has also
received relatively bad rankings in terms of Control of Corruption and Rule of Law. Overall
the Philippines‘ WGI ranking is well below the average, being ranked 138 out of 215
countries. It should be noted however that in terms of Government Effectiveness, the
Philippines scores only slightly below the average, with the best ranking among the six
indicators assigned to this country. This indicator is the one which is the most associated with
public sector institutions.
Table 2
The Scores and Rankings of the Philippines compared to a set of 215 Countries and Territories
Average of all scores 0.000 0.000 0.000 0.000 0.000 0.001 -0.002
* See notes under Table 1 for the key to the headers of each column
3.1.3 The WGI: Correlation with other economic variables
The components of the WGI of the ASEAN member countries were correlated with each
other and with three other variables, shown in Table 3, namely GDP per capita (GDPPC)6 in
2012, real GDP growth between 2003 and 20127, and an index of macroeconomic stability.
8
Table 4 shows the degree of correlation between the economic aggregates just described. It
can be seen that GDP per capita is negatively correlated with economic growth and positively
correlated with macroeconomic stability.9 The negative correlation between GDP per capita
and growth can be explained in terms of the possibility that a low-income country registers a
6 The data was sourced from the IMF Global Economic Outlook website, available at:
http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx . 7 The data was sourced from the IMF Global Economic Outlook website, available at:
http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx . 8 The index of stability was constructed on the basis of three variables, namely (1) Inflation, (2) Current
Account Deficit as a ratio of GDP and (3) Gross Debt as a ration of GDP. Each variable was rescaled using the
max-min formula and averaged to obtain a stability index, noting that while the maximum values of Inflation
and Debt/GDP and the lowest value of Current Account/GDP balance indicate the highest rates of instability.
The data pertained to the ten-year period 2003-2013, so as to span over the business cycle. The data was sourced
from the IMF Global Economic Outlook website, available at:
http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx . 9 It should be noted that the same pattern of correlations was found to exist globally (180 countries), namely that
the GDPPC was negatively correlated with growth and positively correlated with macroeconomic stability.
* Scores range from 0 to 1, with 0 representing the worst Rule of Law score and 1 the best possible score.
Key: LGP = limited government powers; AC = absence of corruption; O&S = order and stability; FR = fundamental rights; OG = open governments; RE = regulatory enforcement; ACJ = Access to civil justice; ECJ = effective criminal justice; AVG = average of all
score.
3.2.2 The RLI: Global Comparisons
Globally, the RLI scores indicate that the Philippines scores badly in terms of Access to Civil
Justice, which is a similar result when only the ASEAN group was considered, as can be seen
from Table 7. Its best rankings are in Limited Government Powers and Regulatory Quality,
but the relative scores are still below the global average.
Table 7
The Scores and Rankings of the Philippines compared to a set of 97 Countries
* Scores range from 1 to 10, with 1 representing the worst EFW score and 7 the best possible score
Key: SG = size of government; LS&PR legal system & security of property rights; SM = access to sound money; (4) FTI = freedom to trade internationally; RG = regulation of credit, labour, and business; AVG = average of all areas.
In terms of these indicators, the Philippines performs very badly with regard to the Legal
System & Property Rights and Freedom to Trade Internationally. However, it receives
relatively high scores with regard to Sound Money and Size of Government. Overall, on the
EFWI the Philippines does relatively well, being ranked 3rd
in the region, even higher than
Malaysia.
Given that this index has three areas which focus on market efficiency, namely Sound
Money, Freedom to Trade Internationally, and Regulations, it is useful to see where the
Philippines finds itself with regard to these indicators. The results are a mixed bag of scores,
with a very high score with regard to Sound Money, a fairly good score with regard to
Regulations and a relatively bad score with regard to Freedom to Trade Internationally. If
13
Data was not available for Brunei Darussalam and Lao PDR.
14
these indicators are combined, the Philippines would be ranked 4th
among the eight ASEAN
countries in the region, being surpassed by Singapore and Cambodia. Surprisingly, the
second ranked country on this index is Cambodia, which registers relatively high scores with
regard to market efficiency.
3.4.2 The EWFI: Global Comparisons
From Table 13 it appears that the Philippines, compared to all countries of the World,
performed badly in terms of the Legal System and Property Rights, and in terms of Freedom
to Trade Internationally, but relatively well in terms of and Size of Government and Sound
Money. Overall, in terms of the EFWI the Philippines‘ was ranked 62nd
out of 144 countries
and territories, that is at the lower end of the top half, which is reflected in the overall score
which is nearer to the top ten scores than to the lower ten scores, as shown in Table 13.
Table 13
The Scores and Rankings of the Philippines compared to a set of 144 Countries and Territories
in terms of the Economic Freedom of the World Index
SG LS&PR SM FTI RG AVG
Philippines rank (out of 144) 9 110 39 96 74 62
Philippines score 8.31 4.37 9.29 6.68 6.92 7.11
Best ten scores (Average) 8.57 8.50 9.72 8.76 8.80 8.22
Worst ten scores (Average) 3.89 2.69 5.06 4.40 4.88 4.85
Average score globally 6.42 5.60 8.08 7.02 6.96 6.81
* For the key to column headings see Table 12
3.4.3 The EFWI: Correlation with economic changes in the region
Table 14 again replicates the findings of the previous correlation matrices that governance is
overall positively correlated to GDP per capita and macroeconomic, but not with economic
* The lowest possible GCI score is 1 and the highest possible level of GCI score is 7.
Key: BI = basic requirements indicators, EF = efficiency enhancers; IS = innovation & sophistication; IN = Institutions; GM = goods market efficiency; LM = labour market efficiency; FM = financial market development; AVG = average of all indices.
15
In addition, some formulae for constructing 2011 data required information from other years. 16
The GCI utilise a somewhat arbitrary weighting procedure, depending on the stage of development of the
country being considered, as measured by the GDP per capita. See Schwab (2012: 9).
16
It can be seen from Table 15 that out of the eight countries17
represented in the Global
Competitiveness Index (last column), the Philippines ranked sixth, with Vietnam and
Cambodia scoring lower. As expected, in the region Singapore and Malaysia received the
highest GCI scores.
The Basic Requirements Indicator sub-index includes a pillar entitled Institutions (IN), in
which as can be seen in Table 13, the Philippines‘ score is the lowest in the eight countries
included in the table.
The indicators relating to market efficiency are part of the third sub-index entitle Efficiency
Enhancers (EF) with includes the goods and labour markets. It can be seen from Table 13,
that the Philippines‘‘ scores are relatively low with regard to Goods Market Efficiency (GM)
and the Labour Market Efficiency (LM), placing the country the one before the last in the
region, the last being Vietnam.
3.5.2 The GCI: Global Comparisons
Table 16 shows that the Philippines ranks 66th
out of 144 countries in the overall index
(AVG) which is a satisfactory score, placing the Philippines in the top half of the league,
albeit towards the lower end of this half. It an also be seen, however, that the Philippines
scores are rather low with regard to the Basic indicators sub-index again mostly due to the
Institutions Pillar.
Table 16
The Scores and Rankings of the Philippines compared to a set of 144 Countries and Territories
The Philippines‘ Efficiency Enhancers sub-index receives a relatively high score (61st out or
144). However, the goods and labour market pillars, which form part of this sub-index
received very low scores and rankings (103rd
and 86th
out of 144 respectively). The average
score of the Efficiency Enhancers sub-index received a boost from the Market Size (Pillar
10), due to the large size of its domestic market, in which the Philippines was ranked 29th
out
of 144 countries.
A deeper look at the Institutions Pillar is given in Table 17, which indicates that the
Philippines scores markedly below average, globally, in many of the components of this
pillar.
17
Data was not available for Lao PDR and Myanmar, but these would probably be at a lower end of the table.
17
Table 17
Variables (Components) which are included in the Institutions Pillar
of the Global Competitiveness Indicators
Variables Score Global
Rank
Position*
Strength of auditing and reporting standards 5.1 41 MAA
Government services for improved business performance 3.9 51 AA
Efficacy of corporate boards 4.7 51 AA
Protection of minority shareholders‘ interests 4.3 57 AA
Property rights 4.1 74 AA
Wastefulness of government spending 3.0 86 BA
Intellectual property protection 3.2 87 BA
Favouritism in decisions of government officials 2.8 87 BA
Ethical behaviour of firms 3.7 87 BA
Public trust in politicians 2.4 95 BA
Transparency of government policymaking 4.0 97 BA
Organized crime 4.7 97 MBA
Judicial independence 3.0 99 MBA
Diversion of public funds 2.8 100 MBA
Reliability of police services 3.6 100 MBA
Efficiency of legal framework in challenging regulations 3.2 102 MBA
Efficiency of legal framework in settling disputes 3.2 107 MBA
Business costs of crime and violence 3.9 107 MBA
Irregular payments and bribes 3.2 108 MBA
Burden of government regulation 3.0 108 MBA
Strength of investor protection 4.0 110 MBA
Business costs of terrorism 4.4 126 VMBA * BA = below average; AA = above average; MBA = Markedly below average ; MAA = Markedly above average‘ VMBA = very markedly below average.
Another component of the Basic Indicators sub-index relates to the infrastructure, in which
the Philippines also receives a relatively low score and is ranked 94 among 144 countries.
The variables included under this pillar are shown in Table 18. It can be seen that the quality
of the air transport and the seaport infrastructure receive the lowest scores and particularly
bad ranking.
Table 18
Variables which are included in the Infrastructure Pillar
of the Global Competitiveness Indicators
Variables Score Global
Rank
Position*
Available airline seat kms/week, millions 0.2 26 VMAA
Quality of roads 3.4 87 BA
Quality of railroad infrastructure 1.9 94 MBA
Mobile telephone subscriptions/100 pop 2.0 95 MBA
Quality of overall infrastructure 3.6 98 MBA
Quality of electricity supply 3.7 98 MBA
Fixed telephone lines/100 pop. 7.2 103 MBA
Quality of air transport infrastructure 3.6 112 MBA
Quality of port infrastructure 3.3 120 VMBA * VMAA= Very markedly above average; BA = below average; AA = above average; MBA = Markedly below average ; MAA = Markedly
above average‘ VMBA = very markedly below average.
3.5.3 The GCI: Correlation with economic aggregates
18
Table 19 presents correlation coefficients of the GCI with the sub-indices and with the three
economic aggregate. It can be seen that the indicators chosen are generally highly correlated
with each other. They are also positively correlated with GDP per capita. Again, there is no
indication that the GCI indicators are correlated with growth, with the overall coefficient
relating to the summary index (AVG) showing a negative sign. The positive coefficients with
regard to growth on some of the indicators are very low. Overall, the indices would seem to
be positively correlated with macroeconomic stability, although the coefficients are very low