Archive for the ‘FVR’ Category

Through a rigorous analysis of the tax reform efforts of President Fidel Ramos (1992-1998), the tax policy process is revealed as a bargaining game between various veto players.  An accommodation of some sort is pre-ordained since even as the players have veto powers, everyone has an interest in making sure that a new tax policy emerges from the policy mill.  This is true for President Ramos who initiated the reform.  The desire to get the reform process going is also shared by legislators who, even if satisfied with the status quo, welcomed another opportunity to rewrite tax laws in order to secure divisible policy favors for constituents and supporters.  As a product of bargaining, the resultant tax laws were adulterated versions of their original versions and a mix of public-regarding (e.g., the expanded value added tax law) and private-regarding (e.g., the excise tax on ‘sin’ products law) policies.  The study of the tax policy process affirmed the propensity of lower-level legislators House members) to cater to special and private interests while the Senate was the natural ally of reforming President Ramos.  It also revealed the inordinate influence of several powerful individual legislators in tax policymaking.  The institutional players also included the Supreme Court, which at one point declared a tax law as unconstitutional.  This raised the transactions costs of tax legislation as a new and acceptable law had to be crafted.








President Fidel Ramos


The robustness of the conclusions and findings we had arrived at so far can be further tested if we change the decision-makers with the institutional parameters in place.  For this purpose, we examine in this section the tax reform initiatives undertaken during the presidency of Gloria Macapagal-Arroyo.  As revealed in subsequent paragraphs, this exercise would reveal continuities in tax policy and bolster our previous conclusions regarding tax policymaking in a candidate-centered democratic polity like the Philippines.


Arroyo’s tax reform initiatives evolved from her first term to the early months of her second term.  While the state of the country’s public finances was not in a pretty shape upon her take-over in January 2001, a greater sense of urgency was espoused during the start of her second term.  This was largely due to the alarm bells raised by a group from the University of the Philippines School of Economics (UPSE) [that included several former cabinet members from previous administration] who warned of an impending fiscal meltdown.  In her 2004 State of the Nation Address (SONA), Arroyo asked Congress to pass eight tax measures designed to raise some P80 billion in revenues.  However, Arroyo did not communicate a sense of necessity in this front.  She in fact did not replace her economic management team; in contrast, she appointed new men for the national defense and security portfolios.  The UPSE economists did a signal service for warning the nation of the fiscal dangers awaiting a polity that would continue to not fix its public finances.









President Gloria Macapagal-Arrooyo


During her first term, Arroyo initiated moves to reform the Bureau of Internal Revenue (BIR), the country’s premiere revenue collection agency.  The thrust of the reform was to convert the BIR into a corporate-like public organization that would operate (as well as rewarded and punished) under performance-based parameters.  Officers and staff of the new revenue authority were supposed to be paid at salary scales competitive to the private sector and shielded from political influence.   In her first SONA, Arroyo cited unprecedentedly the sitting BIR commissioner, a mere bureau chief, who spearheaded the reform effort.


An interview with Romulo Miral, Jr., then deputy director of the Congressional Planning and Budget Office (CPBO) at the House of Representatives, indicated the radical extent of the proposed BIR reform.  Miral, who was consultant to Bañez at the time, revealed that the plan was to abolish the BIR and establish a new and independent revenue body called the Internal Revenue Management Authority (IRMA) in its place.  None of the former officials and employees of the BIR were to be automatically or preferentially absorbed into IRMA.  There were plans to sub-contract private head-hunters to hire the officials and staff of IRMA and former BIR personnel had to apply with a screening board if they wanted to be employed by IRMA.   Anybody with a derogatory record was deemed ineligible for employment until her name was cleared.  IRMA officials and staff were to enjoy competitive salaries so quality personnel from the corporate sector could be attracted.  In addition, the pay and tenure of senior IRMA officers were to be linked with revenue collections (Miral 2004).   


Of course, the BIR officials and employees were against the planned reform.  At first, opposition to Bañez’ initiatives (including the transfer of revenue officials who had overstayed at a particular revenue district office to another locale) was confined to the filing of court suits. However, they obtained support from Courage, the left-leaning union of government employees.  The alliance between Courage and anti-reform BIR elements initiated a massive walkout and picketing at the BIR headquarters against Bañez. Almost immediately after this demonstration of popular resentment, he resigned in August 2002.  Bañez, who wanted to be able to fire corrupt and incompetent tax collectors, accused opponents of reform of stirring up trouble among the agency’s employees and undermining tax collection to thwart changes at the agency (MB 2002). President Arroyo admitted in her State of the Nation Address two weeks earlier in July 2002 that tax collections were running far behind target, while government spending is increasing as planned, so that chances are diminishing of reaching the 3% deficit target she had imposed for this year (Mendoza 2002). 


Arroyo could have clearly demonstrated her support for the embattled BIR chief and the IRMA reform by refusing to accept his resignation and supporting the IRMA reform.  However, the planned reform of the tax agency apparently found little support even among her chief allies.  The corrupt mafias within the BIR apparently sabotaged the reform effort by slowing down tax collections.  The drop in revenues was cited by reform opponents to call for Bañez’ resignation and no less than Speaker Jose de Venecia made the first call. 

Houser speaker Jose de Venecia

The speaker was seconded by other House members including Aniceto Saludo, Jr. (Southern Leyte) and Prospero Nograles (Davao).  Saludo even threatened to file charges of economic sabotage against Bañez for the poor revenue collections (Diaz 2002).  Notwithstanding President Arroyo’s optimism during her 2001 SONA, Bañez’ reform efforts apparently did not earn him friends within Congress, especially in the House of Representatives.  While House Bill 5054 calling for the establishment of a National Authority for Revenue Administration (NARA, a new name used in lieu of the much-maligned IRMA) was introduced, the measure languished in the House Committee on Appropriations (HOR 2003).  During the third and last regular session of the 12th congress, a similar measure (HB 6435) was also introduced.  While it fared better than HB 5054, it only managed to be reported by committee and did not pass the second reading stage.  In the Senate, a counterpart measure (Senate Bill 2463) was introduced by Senator Ramon Magsaysay, Jr.  However, the 12th Congress closed with SB 2463 pending in the Senate Committees on Ways and Means (headed by Senator Ralph Recto), Civil Service and Government Reorganization (headed by Senator Aquilino Pimentel), and Finance (headed by Senator Manuel Villar) (HOR 2004).


Miral (2004) explained the proposed BIR reform did not gain ground during the 12th Congress for several reasons.  First, the proposed reform was “mistakenly packaged” as either a ‘privatization’ or ‘corporatization’ of revenue collections.  Miral believed these were unfortunate labels that unduly raised alarums and red herrings among the affected parties.  Second, he noted that the authors of the IRMA measure (which included Speaker de Venecia, Rolando Andaya, Jr., Neptali Gonzales II, and Julio Ledesma IV) were actually not well versed in the technical aspects of the proposed agency reform.  Miral intimated that the less-senior champions of the reform, Reps. Florencio Abad and Joel Villanueva (a party-list representative) were the ones who seriously studied the IRMA proposal and even traveled to countries like Mexico and New Zealand that had reformed their revenue agencies

Rep. Joel Villanueva

(Miral 2004).  Rep. Florencio 'Butch' AbadBut they apparently could not offer much contest to the reform’s opponents.  After Bañez’ resignation, the reform was softened through a proposal to form a National Authority for Revenue Administration (NARA).  A key compromise was the inclusion of a ‘preferential absorption of BIR employees’ provision in the proposed NARA measure.  



During the same 12th Congress, other tax reform measures similarly rotted within the legislative mill.  At the end the second regular session, the status of measures to index and update so-called ‘sin taxes’ (HB 4765 and HB 5057) was reported as for ‘further Committee deliberation’ (HOR 2003).  During the third regular session, similar measures (HB 1728 and HB 4765) remained pending at the House Committee of Ways and Means chaired by Rep. Julio Ledesma IV (HOR 2004).  In contrast, measures that provided tax relief for several sectors and groups were either enacted into law or were approved by the House in third reading.  These included RA 9238 (which exempted certain services from the VAT), RA 9243 (which eliminated the imposition of the documentary stamp tax on secondary trading of financial instruments), RA 9294 (which clarified the tax exemption of offshore banking and foreign currency deposit units, authored by Rep. Exequiel Javier), HB 5713 (which granted tax incentives on capital equipment imports of new and expanding firms registered with the Board of Investments), HB 6344 (which restored the fiscal incentives to enterprises engaged in agriculture and fisheries (HOR 2004). 

Through this blog entry and subsequent ones, I will continue sharing parts of a book on Philippine institutions and policy making which I started writing the middle of last year.


In candidate-centered democratic polities, individual legislators exert an inordinately heavy influence on policy making.  This is so since politicians need to develop personal reputations to get themselves elected into office and to stimulate their political careers.  Their party affiliations will not matter much in candidate-centered political settings and they try to develop their reputations as reliable representatives vis-à-vis constituents, supporters and financiers.  For the benefit of their constituents, they ‘bring home the bacon’ by way of pork allocations to finance local public works and other note-worthy projects that can generate local employment or bring desired goods and services like medicines, sports equipment, and the like to the home district.  To non-resident supporters and financiers, legislators must be able offer divisible policy favors such as subsidized credit, fiscal incentives, and tax breaks.

However, legislators do not participate in policy making only through their individual selves.  They do so through legislative committees.  Committees are institutions established to enjoy the scale economies and efficiency offered by division of labor.  Committee systems allow lawmakers to divide the various policy issues facing the legislature into distinct and separate jurisdictions, each delegated to a different committee.  Members of a legislative committee specialize in the aspects of their particular issues and the legislature capture some gains in efficiency due to the specialized division of labor (McCubbins and Sullivan 1987b).  These insights were drawn from the new institutionalist theory pioneered by Coase (1937) who sought to explain why economic agents coordinated their decisions via central authority rather than through market forces.  The basic approach is to study how institutions (qua rule-bound organizations) enable members within them to pursue their goals more effectively.

Alchian and Demsetz (1972) also noted a particular type of transactions cost and argued that firms reduce these costs better than markets.  Economic actors produce more by cooperating than by producing separately.  They therefore prefer to coordinate their actions.  However, coordinated action introduces the problem of measuring accurately the contribution of an individual to the joint output.  However, individual rewards are only weakly related to their efforts; and although they individually bear the full costs of their own efforts they individually receive only a part of the output they jointly produce.  Meanwhile, when individuals shirk by reducing their effort, the savings in effort accrue only to them and the resulting losses in team production are largely borne by other team members.  The rational behavior of each individual is to shirk or free ride on team effort but this will lead to sub-optimal results.  If everybody tends to shirk, then total team output will be reduced and individual benefits will likewise decrease (McCubbins and Sullivan 1987a).

The only way to mitigate shirking is to monitor the efforts of team members.  Alchian and Demsetz (1972) also argued that teams could be made better off if they hire a monitor and give her the authority to set payments on the basis of information with respect to productivity and individual contributions.  Since the monitor herself has an incentive to shirk, the team will give her marketable title to the team’s output and install her as the central contracting agent.  The approach of comparing institutions with respect to how well they enable members to pursue their goals is useful in studying firms and congressional committees.  Problems of monitoring and shirking are evident in legislatures as well as firms.  Transactions costs are incurred in building legislative coalitions no matter how tactical these may be. 

Labor in legislatures could also be divided through the party system.  While the committee system allowed legislators to specialize in issue areas of choice, parties also provide management and coordination.  In theory, parties reduce the transactions costs associated with building policy coalitions within legislatures.  Political parties should be looked at as ‘enduring coalitions’ and if parties were robust, the costs of negotiating bargains and securing legislative votes would be brought down since the process of cobbling coalitions on any issue does not have to take place anew each time a proposed measure was considered (McCubbins and Sullivan 1987b).

Notice the big ‘if’; parties rival legislative committees as mechanisms for coordination and management of collective effort only if parties themselves were robust.  In candidate-centered democratic polities where political parties are by definition weak and party discipline is practically non-existent, committees would emerge as the institutional agency of choice in legislatures.   Scholars and reformers for more than a century have acknowledged the central strategic position of committees in legislatures (Wilson 1885; Bryce 1893; McConachie 1898; Norris 1945; Bolling 1965; Eulau and McCluggage 1984; and Smith and Deering 1984).  While some difference of opinion persisted, there was a substantial consensus on a number of empirical regularities and stylized facts: (a) committees were ‘gatekeepers’ in their respective jurisdictions; (b) committees were repositories of policy expertise; (c) committees were policy incubators; (d) committees possessed disproportionate control over the agenda in their issue-area domains; and (e) committees were deferred to, and that deference was reciprocated (Shepsle and Weingast 1987a).

From the traditional literature on legislative committees, the foundation of committee power consists of gate keeping, information advantage and proposal power.  Committees, as an empirical matter, are veto groups that may choose to keep the gates closed on a particular bill.  Enjoying the advantage of smaller memberships (compared to the entire legislative chamber), a committee could study a question, obtain full information, and put the proposed legislation into shape for final decision.  The practice of referring bills to a standing legislative committee (and not debating them in full plenary until reported by that committee) gives legislative committees formidable proposal power.  However, Shepsle and Weingast (1987a, 86) argued that the ultimate source of committee power “resides in the rules governing the sequence of proposing, amending, and especially of vetoing in the legislative process.”  Both believed that the last stage of the legislative process—the bicameral conference where differences between the legislative chambers—was crucial since it confers relevant committees (or subsets of such committees) ex post adjustment power.  The deference given committees on the plenary floor was supposedly a natural consequence of this ex post power wielded by committees in bicameral conference.

Legislative committees have three specific mechanisms to employ in order to influence their institutional influence on the rest of the legislature.  These include punishment, ex ante defensive behavior, and ex post defensive behavior.  A committee may discourage opposition to its decisions (on nonactions) by developing a reputation for punishing those who oppose it.  This explanation is particularly potent in the realm of distributive politics in which the committee’s bills are of significance to a substantial number of legislators; disaggregatable by individual legislators; and introduced on a regular basis. Examples of these bills include those involving the national budget, public works and revenues.  A committee may also induce cooperative, deferential behavior by ex ante accommodation.  It tries, when preparing its committee report, to anticipate what will pass in full plenary.  However, Shepsle and Weingast (1987a) argued that the third mechanism, ex post defensive behavior, is the committee’s most potent enforcement mechanism since it allows the committee to exercise a veto after the full chamber had ‘worked its will’ on the measure.

Recalling the process of lawmaking in the Philippines, we note that after a legislative chamber has passed a bill in third reading, a Bicameral Conference Committee composed of panels from both chambers is formed to reconcile bicameral differences.  It could be demonstrated that relevant committees would dominate their respective chamber’s panels in the bicameral process enabling them to exercise ex post veto power.  In the bicameral conference process, only a small subset of a legislative chamber’s members participates in the process of drafting a bill that can only be voted up or down (or the so-called closed rule as a take-it-or-leave-it proposal) by both chambers in plenary to determine if the measure could be sent to the President for her appropriate action.  Legislative plenaries cannot amend bicameral output and this restrictive rule gives relevant committees (or smaller groups) inordinate power and influence over the entire process.  The bicameral conference process allows the relevant committee (or a subset of that committee) a ‘second crack’ at a bill.  A committee with only the power to move first—by opening the gates or keeping them closed—possessed only blocking power.  Once it opened the gates almost anything can happen and the committee is virtually powerless to alter the subsequent trajectory of a bill.  In contrast, a committee (or a smaller subset) with powers at subsequent stages, especially the penultimate stage, not only affects the subsequent outcome but also influences the antecedent actions of others by conditioning their beliefs and expectations.  A committee (or a subset) with an ex post veto has the power to protect itself against unwanted changes wrought by the entire plenary.  In that sense, deference to the relevant legislative committee is endogenous to the legislative institutional structure and procedures and should be construed as a property of sequential equilibrium.  The conference process institutionalizes the relevant committee’s ex post veto and the closed ‘take-it-or-leave-it’ rule after the bicameral conference stage enhances the veto (Kreps and Wilson 1982; Shepsle and Weingast 1987a).

In response, Krehbiel (1987) argued that congressional committees had never possessed an insurmountable ex post veto and were very much constrained by their parent chambers.  For one, Krehbiel noted that parent chambers possessed ‘discharge’ powers; legislative committees may be ‘discharged’ or compelled to report bills against their wishes.  He added that parent chambers could exercise these ‘discharge’ powers vis-à-vis the bicameral conference committee itself.  Shepsle and Weingast (1987b) conceded that chamber majorities could attenuate ex post committee powers through various institutional devices, including bypassing the bicameral conference process altogether.  They nonetheless asserted that the exercise of such powers by chamber majorities involved greater transactions costs given the greater number of legislators involved.  This point is best illustrated if we consider what majorities face when they deliberate the bicameral conference report under the closed ‘up-or-down’ rule.  If they vote against the report, the status quo is preserved.  But majorities have already expressed a preference to change the status quo when they approved the measure in third reading and agreed to send a panel to the bicameral conference.  Rejecting the committee report meant returning to ‘square one;’ and returning to ‘square one’ did not guarantee that subsequent results would not remain unsatisfactory. Therefore, the greater difficulties involved in attenuating ex post committee powers indicate that these powers bias final outcomes towards the preferences of relevant legislative committees.   

For our purposes, the debate between Krehbiel, on one hand, and Shepsle and Weingast, on the other, remains an academic one.  Under existing rules of the Congress of the Philippines, chamber majorities do not have ‘discharge’ powers vis-à-vis standing legislative committees.  This means that legislative plenaries cannot compel committees to report out a disfavored legislative measure.  Furthermore, there is no way that the bicameral process can be bypassed.  Miral (2004) reported that even inconsequential bills have to go through the bicameral conference process.  The bicameral process for such bills would be ministerial; the bicameral process for substantial bills would be quite involved.  In all, the bicameral stage is an indispensable stage in Philippine legislation.  The ex post veto of legislative committees is more potent in the Philippines compared to their counterparts in the United States.

It is also true that while committees are crucial to the legislative process, participation in committee decision-making is not universal.  On any given bill, the membership of a committee abdicates its considerable legislative powers to some subset of self-selected members (Hall 1987).  In effect, while legislative committees matter, some committee members matter more than others.  Individual legislators wield such power by virtue of their seniority, acknowledged expertise, and legislative rank.  Officials of committees are obviously more powerful than ordinary members; issue experts rather than policy amateurs and neophytes, and grizzled veterans rather than greenhorns would enjoy a comparative advantage even within legislative committees.

President Fidel V. Ramos

In the previous blog entry, we noted how President Ramos was rebuffed by legislators from his own political party in his attempts to expand the coverage of the value-added tax (VAT) during the first half of his term.

Despite this setback, the imperatives of the tight fiscal situation forced Ramos to propose a more comprehensive tax reform program (CTRP) during the second half of his presidential term.  The Comprehensive Tax Reform Program (CTRP) of the Ramos presidency consisted of three laws—Republic Act No. 8184, which restructured the excise tax on petroleum products in support of the Republic Act No. 8180, otherwise known as the Oil Deregulation Law; Republic Act No. 8240, which shifted the taxation of so-called “sin products” from ad valorem to specific; and Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, which initiated changes in individual and corporate income and in tax administration.[1]

As provided for by the 1987 Philippine Constitution, revenue measures must ema­nate from the House of Representatives (HOR), the bigger chamber of the country’s legis­lature.  This practice is supposedly consonant with the principle “no taxation without repre­sentation”; the HOR members being seen as direct representatives of the citizenry since their mandates are supposedly closer to the grassroots than that of the senators who are elected with the entire nation constituted as an electoral district.  In both legislative chambers, the pro­posed tax measure was handled first by their respective Ways and Means (or Finance) Committees, which may then invite affected parties to offer their views on the proposed measure.

Only after a revenue measure was passed by the House will it be considered by the Senate.  There is some controversy over the powers of the Senate in this regard.  Some believe that the Senate can only amend the House measure.  Others believe that the Senate can overhaul or even throw out the House bill and substitute its own version.  These controversies would figure in the passage of the CTRP.  After both legislative chambers have passed their versions of a revenue measure, panels from both chambers will constitute a bicameral conference com­mittee (“bicam” for short) to reconcile their differences (if any).  The “bicam” will then pro­duce a conference committee report that must be presented and approved by both cham­bers.  Once a proposed revenue measure gets passed by both chambers, it is now considered by the President of the Philippines for approval.

The petroleum tax measure was approved by the House as House Bill 5550, a sub­stitute bill for House Bill 72, which was sponsored by Rep. Marcial C. Punzalan, Jr. (Quezon).  HB 5550 was approved by the House in early June 1996.  The Senate approved the same measure after a few days and the President signed it into law as RA 8184 on 11 June 1996.  The said tax law was a necessary complement to Republic Act No. 8180, otherwise known as the Oil Deregulation Law.  RA 8180 also provided for the lowering of tariff duties on crude oil and refined petroleum products from 10% and 20% to 3% and 7%, respec­tively.  In turn, RA 8184 decreed the conversion of the 7% tariff reduction on crude oil to­gether with special oil levies provided for by administrative fiat into a specific tax on refined petroleum products.

Of the three measures comprising the CTRP, this measure was relatively the least controversial.  It appears that the policy battles in this issue area were fought during the passage of RA 8180 itself.

The “sin tax” measure was approved by the House as House Bill 7198, in substitu­tion of several House measures including HB 6060 (introduced by House speaker Jose de Venecia himself), the latter being a version drafted by the Department of Finance, which included provisions for income taxation and reforms in tax administration.

Its passage was attended by controversy and considerable attention as the corporate giants affected by the proposed measure—San Miguel Corporation, Asia Brewery Inc. (ABI), Fortune Tobacco Corporation and La Suerte Cigarettes—undertook a massive lobbying and media blitz for and against the measure. San Miguel and La Suerte were in favor of the shift to specific taxa­tion while the companies associated with Lucio Tan (ABI and Fortune) were in favor of re­taining the ad valorem ( a percentage of the selling price) tax. However, all of the affected corporations were against indexing the excise tax on cigarettes and beer against inflation.

At one point, the House Committee on Ways and Means tried to satisfy all parties by approving a “whichever-is-higher” formula for beer taxes.  This meant that the government could use either the specific tax or the ad valorem tax depending on which tax rate will yield higher revenues.  This incurred the Palace’s displeasure since it preferred a specific tax on sin products.  HB 7198 was approved by the House (in a 116-11 vote) on 12 September 1996 after it was reconsidered “to allow for perfecting amendments”.  The measure was supposed to have been adopted the day earlier.  This version appeared to hew close to the Palace’s preferences.

However, many observers including Rep. John Osmeña (Cebu) believed that a rehashed version of the controversial “whichever-is-higher” formula was passed by the House (Jabal, Carlos and Batino 1996).  President Ramos then apparently put himself in a ‘Catch-22’ situation when he certified HB 7198 as an urgent measure on 11 September 1996 despite objections from the Department of Finance and some of his cabinet members (Samonte 1996).[2] It took almost two months before the Senate (through a 15-0 vote) could adopt the measure on 7 November 1996, opting for an outright shift to specific taxation (Carlos, Jabal, Santos and Serapio 1996).  A bicameral conference committee was formed and met twice (on 13 and 20 November 1996).  The sin tax measure was approved and en­acted as law by President Ramos on 22 November 1996, just in time for him to claim an im­portant victory before the Association for Asia Pacific Cooperation (APEC) summit meeting in Subic on 24 November of the same year.

In the final version, the specific taxation system was adopted as a rear-guard action by the House to impose a 20% surcharge on foreign ciga­rette brands was withdrawn during the last ‘bicam’ meeting on the measure (Nuqui, Santos, Carlos & Garcia 1996).  In this particular episode, it was quite apparent that the major actors involved com­promised to have a rather ‘bad’ sin tax law rather ending up with none at all.  It also appears that the country’s creditors and oversight multi-lateral financial institutions (such as the In­ternational Monetary Fund) also went along with this compromise.

The passage of the third CTRP component, Republic Act No. 8424, took a longer and more difficult time since a greater number of affected parties were involved.  Corporate actors and self-employed individuals lobbied for a lighter tax burden by way of reduced tax rates or exemption privileges while fixed income earners wanted higher levels of allowable deductions and exemptions.  While organized industrial and economic interests had minimal collective action concerns in the pursuit of their goals, the otherwise more-difficult-to-organize-and-mobilize fixed income earners found champions in such organizations as the Freedom from Debt Coalition (FDC) and in many members of the House who were quite mindful of their chances for re-election in the 1998 general polls.[3]

In addition, proposed reforms on tax administration such as granting the Bureau of Internal Revenue (BIR) Com­missioner the authority to examine the bank deposits of suspected tax cheats were opposed by several powerful sectors such as the commercial banks and many of the legislators them­selves such that they never got off the ground.  These opposition forces also rode on the support of a citizenry wary of the powers of government to pry into the private affairs of individuals—admittedly an attitude developed due to the abuses of the Marcos dictatorship.

The executive department initially opted for a strategy of having the comprehensive tax reform program (CTRP) adopted by the legislature as a single package.  It resisted the idea of breaking the package into smaller and more “digestible” bits, fearing that this will result in a watered-down package; that the legislators will adopt the more politically-palatable aspects of the package while passing up on the more controversial, albeit necessary compo­nents (Guevara 2003).  For this reason, the Department of Finance (DOF) drafted HB 6060 and got House Speaker Jose de Venecia to champion it.

In the end, however, the said pack­age was broken down into smaller measures.  HB 7198 dealt with the excise tax on ‘sin’ products while HB 9077 dealt with individual and corporate income taxation and tax admini­stration issues.  Nonetheless, HB 6060, sponsored by de Venecia in February 1996, should be regarded as the proper starting point for tracing the legislative history of RA 8424.  The emergence of HB 7198 and HB 9077 should be seen as the means through which the House, or more particularly its Committee on Ways and Means headed by Rep. Exequiel B. Javier (Antique) and Rep. Renato Diaz (Nueva Ecija), sought to leave its own mark on tax legisla­tion.

Through HB 9077, the House differed with the Department of Finance (and with the Senate, eventually) on several key issues including the nature of the income taxation sys­tem, the minimum corporate income tax (MCIT), the fringe benefit tax, the tax on the inter­est income of foreign currency deposit unit (FCDU) deposits as well several proposed re­forms in tax administration.

Under the global system of income taxation proposed by the House Ways and Means Committee through HB 9077, all types of income derived from whatever source, active or passive, will be taxed under one schedule of progressive tax rates.  In a schedular system of income taxation, different types of incomes are taxed at different final rates and are covered by separate tax returns or forms.  According to House Ways and Means Committee chairman Javier, the DOF-authored HB 6060 was not adopted by the committee “because it seeks to perpetuate” the schedular system (House TSP, 17 March 1997).  However, the House as a whole voted against the committee’s recommendation for a global system of income taxation and opted for a modified schedular system instead.

In HB 6060, the DOF proposed a minimum corporate income tax (MCIT) based on corporate assets.  In so doing, the DOF wanted to prevent corporate tax cheats hiding be­hind a continuous failure to post bottom-line profits to avoid paying income taxes.  It be­lieved that a corporation that loses year in and year out “has no business being in business”.  House legislators meanwhile had conceptual problems on an “income tax” which was based on corporate assets, a non-income item.  Technically speaking, the MCIT was not an income tax and could be a disincentive to domestic and foreign investors for several reasons. For one, the US Internal Revenue Service has ruled the MCIT to be ineligible as tax credit for American firms operating in the Philippines.[4] Furthermore, the MCIT was also seen by the House as a tax that penalizes capital-intensive firms and will discourage corporate expansion.  It was also seen as a needless burden for firms who do not make a profit due to normal business reasons or legitimate corporate difficulties.

In its place, the House proposed a five-year net-operating-loss-carry-over (NOLCO) provision for firms.[5] Under this proposal, a firm’s net operating loss from each of the 5 taxable years preceding the current taxable year can be carried over to reduce its income tax payable for the current taxable year.  This meant that a firm could declare losses for 5 straight years and avoid paying income taxes.  Senator Juan Ponce Enrile countered that tax cheats can still defeat this provision by breaking the 5-year stretch; if a firm declared a profit for a least a year within a 5-year span, it could avoid paying income taxes for four years.

In response to suggestions that the MCIT be based on some income measure such as gross income, DOF officials countered that it was foolhardy to base a minimum income tax on the income decla­rations of acknowledged tax cheats.  The MCIT was precisely based on corporate assets be­cause these items are among the more transparent items in a corporate financial statement (Guevara 2003).

The Senate and the DOF also wanted to tax the fringe benefits of corporate execu­tives and higher-level corporate employees in order to plug loopholes.  Under the prevailing setup, corporate executives may opt for lower basic salaries (and correspondingly lower tax liabilities) to receive tax-free or tax-exempt perks such as company-provided or –supported housing, international travel, house help, and educational, medical and dental benefits.  All of these perks constituted income-in-kind and should be taxed accordingly.  The House opposed the fringe benefits tax based on, among others, the vacuous reasoning that it will make the corporate tax burden heavier.  It considered the fringe benefit tax as a tax on corporate expense rather than on individual incomes (see the sponsorship speech of Rep. Javier, HOR-TSP, 17 March 1997).[6]

The House also wanted to maintain the prevailing policy of not taxing income from dividends and FCDU deposits.  In contrast, the Senate proposed a 10% final withholding tax on FCDU deposits’ interest income and a graduated tax schedule on dividends (4% in 1998, 8% in 1999, and 10% in 2000).  The House reasoned that maintaining the tax-free policy will help prevent the outflow of precious foreign exchange.  This argument will gain greater sa­lience in the context of the Asian financial crisis that will hit the country by July 1997.  On the other hand, the Senate pushed for these taxes on passive income for reasons of equity.  The senators could not see why holders of peso-denominated deposits should pay a 20% final income on interest income while FCDU depositors do not pay any tax.

In all of these issues, the House was supported by the big business sector, as repre­sented by their peak associations.  In addition, the House and big business, especially the commercial banks, defeated a provision to relax bank deposit secrecy laws to allow tax au­thorities to examine bank accounts of suspected tax cheats. House leaders believed that this power is “fraught with potential abuse and is therefore unacceptable” (Javier, HOR-TSP, 17 March 1997).  The commercial banks meanwhile alleged that relaxing the bank deposit se­crecy law would scare depositors away.  On this issue, the Bangko Sentral ng Pilipinas joined the House and the commercial bankers (Garcia, Jabal, Batino and Nuqui 1996) in insisting on bank deposit secrecy.

The House also differed from the Senate and DOF on other income tax issues.  It clung to the older practice of taxing foreign-sourced income of citizens and residents while the Senate was in favor of taxing only the income of citizens and residents earned within the national territory.  On this issue, House leaders curiously defended their position on grounds of equity: why should income from foreign-based deposits of citizens and residents be exempt from Philippine income taxation when their local peso deposits were not tax-free?

In response, the Senate believed that the new practice would help avoid double taxation of the same income by both countries.  The House was also prepared to exempt the foreign-sourced income of overseas Filipino contract workers and seafarers up to a given ceiling.

The House also consistently favored higher levels of allowable deductions from the gross income of individual income taxpayers.  While the Senate was amenable to only a   P20, 000.00 basic deductions per taxpayer regardless of marital status, the House approved a higher basic exemption of P60, 000.00 per individual.  In fact, this issue was one of the most contentious matters that delayed agreement by both chambers.  Both chambers however agreed on several key provisions.  For one, they agreed to simplify the income tax rate structure by reducing the number of tiers from 10 to six.  Both chambers found the DOF-proposed 3-tiered structure (10%-20%-30%) to be too coarse and radical.

HB 9077 was passed by the House with amendments on 8 May 1997 on an overwhelming 156-1 vote.  While the House Ways and Means Committee was amenable to fringe benefit taxation, the whole chamber was not.  The Senate’s approval came only after almost 5 months of de­liberations on 1 September 1997.  The Bicameral Conference Committee was convened al­most immediately and met for seven times during October 1997.  A meeting scheduled for 17 November 1997 was immediately adjourned as Senate panel chairman Juan Ponce Enrile was unable to attend due to his health problems.  Enrile’s absence gave opportunities for some House conferees to move for changes in the agreements reached between Enrile and his House counterpart, Rep. Exequiel B. Javier (Arpon, Santos and Duplito 1997).  Earlier, both panel chairmen were empowered by their colleagues to meet separately in order to fa­cilitate the resolution of points of disagreement between both legislative chambers. The ac­tion of some of the House conferees to change the bicameral committee draft report was opposed by the other members of the Senate panel who insisted that the changes must be approved by Enrile.

Among the changes proposed by the House conferees include raising the allowable tax exemptions for a family of six (consisting of two income earners and 4 dependent chil­dren) to P120, 000.00 from P92, 400.00; the retention of the 35% corporate income tax in­stead of a gradual reduction to 32% from 35% by year 2000; the restoration of tax exemp­tion of gross receipts of thrift banks (which were not subsidiaries of commercial banks) and the 10%-20% tax on capital gains from the sale of unlisted shares of stocks in any domestic corporation (Arpon, Santos and Duplito 1997).

The Bicameral Conference Committee managed to meet a number of times after the aborted November 17 meeting.  However, no minutes of these subsequent meetings could be found in the legislative archives.  In subsequent meetings, an increase in the level of tax exemptions from P92, 400.00 to P98, 400.00 for a family of six obtained the approval of all of the Senate conferees (Santos and Arpon 1997a).  However, some House conferees con­tinued to insist on a P120, 000.00 figure with six of them (Reps. Joker Arroyo, Edcel Lagman, Mar Roxas, Felicito Payumo, Raul del Mar and Ramon Bagatsing, Jr.) dissenting with the bicameral committee report on this account.  Three of them (Reps. Gary Teves, Eric Singson and Tajon) did not categorically reject the said report; they signed the report but signified a preference for a higher exemption ranging from P100, 000.00 to P120, 000.00 (Arpon and Santos 1997).  With the “yeas” of the Senate conferees, the approval of at least 10 of the 18 House conferees was necessary before the bicameral conference report could be taken up by both chambers.  If both panels failed to compromise on the tax exemption level, taxpayers will be back to the prevailing P56, 000.00 figure for a family of six.

It was probably the fear of voter backlash on a much lower tax exemption level that led some of initial dissenters to change their positions as November 1997 waned.  Furthermore, more and more of the House conferees that were initially absent when the signatures were being collected also approved the bicameral conference report so that the magic number of 10 signatures was reached.  By early December 1997, Reps. Mar Roxas, Tong Payumo and Raul del Mar changed their positions; they explained their change of heart by noting that  P98,400.00 was preferable to P56,000.00.

Rep. Mar Roxas even delivered a privilege speech to have his dissenting vote counted as favoring the bicameral report (Arpon 1997).  These vote changes were questioned by opposition legislators at the House floor but the bandwagon for the tax mea­sure in the chamber started rolling.  On December 8, the Senate approved the bicameral conference report with a 21-0 vote with no abstentions.  On the same day, the House ap­proved the same report amidst complaints from some opposition legislators based on some technicalities (Santos and Arpon 1997b).

The tax measure was signed into law by President Ramos on 11 December 1997 and was expected to raise P6 billion in new revenues.  Among the revenue earners included in the law were the 7.5% tax on the interest income of FCDU deposits, the gradual hike of dividend taxes to 10% from 6% by year 2000, a 2% minimum corporate income tax based on gross income, an increase in capital gains tax on real property to 6% from 5% for indi­viduals, and a withdrawal of the tax exemption of thrift banks.  It could be noted that the MCIT that was approved was now based on gross income and not on gross assets as originally pro­posed by the Finance department.

[1] Former finance undersecretary Dr. Milwida Guevara argues that in addition to these 3 measures, the Ramos administration’s CTRP also includes Republic Act No. 7716, otherwise known as the expanded value-added tax (EVAT) law (Guevara 2003).  Pursuing Guevara’s logic, the tax reform effort of President Ramos should also include the 1993 cigarette tax reform law.  However, this same law was the subject of her own doctoral dissertation (Guevara 1995).

[2] Executive Secretary Ruben Torres warned that when he certified a bill as an urgent measure, President Ramos can no longer veto the bill if its final version was not to his liking.  Based on Ramos’ marginal notes to HOR speaker Jose de Venecia, his certification was issued on condition the bill was still to be amended by the HOR in accordance with an earlier meeting of the Legislative-Executive Development Advisory Council (LEDAC) where House leaders committed to adopt the Palace’s version.  The Palace’s hopes for a more congenial tax measure therefore depended on the Senate (Samonte 1996; Villegas, Garcia, Jabal & Carlos 1996).

[3] Olson (1965) noted that if the benefits of a proposed policy change are dispersed amongst so many beneficiaries such that the per capita gain is quite minimal, it is relatively more difficult to mobilize political support from these numerous beneficiaries who are unorganized in the first place.  In contrast, if the adverse effects of a proposed reform are confined to a fewer number of economic actors, their political opposition to the policy reform is more forthcoming.  Furthermore, these economic actors may be organized already and will find it less difficult to mobilize opposition to the reform.  For example, while a lowering of the tariff duty on refined sugar will benefit millions of consumers by way of lower prices, it will be easier for the fewer domestic sugar producers to oppose the new tariff measure.

[4] Among the usual terms of a tax treaty between two countries is a provision that income taxes paid by corporations (incorporated in country A but operating in country B) to the tax authorities of country B could be claimed as tax credits by said corporations when they reckon their final income tax obligations to country A’s tax authorities.  This provision prevents taxation of the same income by both countries.

[5] The House Ways and Means Committee originally proposed a three-year NOLCO but the House approved a more liberal five-year NOLCO provision.

[6] It could be considered a tax on expense if the fringe benefit tax is levied on corporate employers.  As envisioned however by the Senate and the DOF, the fringe benefit tax will be levied on individuals.

In this blog entry, we continue sharing parts of the draft book on political institutions and policy making in the country.  To sharpen the discussion, we focus our attention on tax policy-making with emphasis on tax measures adopted during the presidency of Fidel Ramos.

I believe this discussion is timely given recent warnings that the incoming president will be saddled with fiscal deficits and need to raise revenues by way of raising value-added-tax (VAT) rates and rationalization of current fiscal incentives.

The examination of tax policies is a good way of seeing the policy making process of a country in action.  Taxation touches almost every aspect of the economy and society and taxation is the area of public policy where the most interests are at stake.  For one, a number of public policy decisions (such as public spending and borrowing) and private economic behavior (such as spending and investments) are related to taxation.

Raising adequate tax revenues to finance government programs and support public policy thrusts is one of the key failures of the Philippine state since the colonial period.  During the American colonial period, the efforts of the American-dominated Philippine Commission (which operated as a quasi-executive branch) to raise greater revenues were consistently opposed by the legislative assembly (composed largely of a Filipino elite that acquired land via Spanish land grants and the sale of church lands during the American occupation) (Golay 1984).

In fact, the political dominance of landowners in the legislature helps explain why the real property tax system was not even codified until 1973 (Montes 1991).  In addition, legislators had continually sought tax concessions for constituents and supporters.  Golay (1961) concluded that reliance on tax incentives was the reason why tax revenues did not increase (as a percentage share of the GDP) between 1950 and 1959 despite increasing rates of import duties on American goods.  In his study of the pre-martial law legislature, Stauffer (1970) noted that Congress consistently held back efforts to tax the export industries.  While the martial law government of Ferdinand Marcos adopted tax reforms that increased the tax burden of the wealthier classes, it also granted vast tax exemption privileges to cronies and front-men (Eaton 2002).

Notwithstanding the chronic fiscal crises and crushing debt burden inherited from the Marcos period, legislators were still reluctant to enact tax reform measures after the return to democracy in 1986. However, they were  yet were not immune to tax particularism.  In fact, the most common type of tax bills passed between 1987 and 1994 was designed to grant tax exemptions (Eaton 2002).  President Corazon Aquino (1986-1992) was thus forced to respond to the fiscal bind by relying on domestic borrowing, which allowed her to avoid the politically difficult decisions involved in either repudiating the Marcosian foreign debt or in pursuing tax reform.

Prior to the re-establishment of Congress in 1987, she enacted a limited tax measure which imposed a 10% value-added tax (VAT) on manufactured goods but excluded a wide range of services, including those provided by professionals and financial institutions.

The Ramos presidency (1992-1998) faced a harsher fiscal situation compared to the preceding Aquino government.  On top of the foreign debt service burden, Ramos had to contend with the loss of millions of dollars in official aid from the United States following the abrogation of the Military Bases Agreement and the subsequent withdrawal of American military forces from the country in 1991.  With the passage of the Local Government Code in 1991, his government also had to deal with the increased and automatic claim of local government units (LGUs) on national revenues.  He also had to honor international treaty commitments to lower tariffs.

The need to raise revenues is also demanded by his “Philippines 2000” program, a plan to transform the sick Philippine economy into the latest Asian newly industrializing economy by his term’s end.  It was regarded by many observers as the first strategic top-down project for social and economic restructuring since the Marcosian “New Society” program associated with martial law.

On his election to the presidency in May 1992 on a narrow mandate, Ramos faced an economic crisis characterized by nearly zero economic growth, falling average incomes, and daily power outages of up to 8 hours (De Dios 1993).  At 15% of gross national product (GNP), tax revenues in the Philippines were the lowest in Southeast Asia.  In contrast, In­donesia, Thailand and Malaysia had better tax efforts at 19.8%, 19% and 17.5% of GNP, respectively.  Similarly, the level of tax evasion (more than 50% of potential tax revenues are uncollected) in the country clearly reflected the weakness of Philippine tax administration (Manasan 1994).

As a first step, Ramos proposed the broadening of the narrow VAT base and asked Congress to include telecommunications, cargo transport, hotels and restaurants, books, newspapers, broadcasting, and the lease/sale of real estate.  By buying off congressional opposition to the measure through accelerated releases of pork barrel allocations, an expanded VAT law (Republic Act 7716) was enacted in 1994.  However, the new law’s implementation in July 1994 was suspended when the Supreme Court ruled it violated the Constitution.

After the 1995 mid-term elections, legislators from the House of Representatives resumed their offensive against expanded VAT coverage.  The outcome of this new tax policy process was the improved VAT or IVAT law (Republic Act 8241), which took effect on 1 January 1997.  The new law was a setback for Ramos as legislators reneged on an executive-legislative deal to limit exemptions.

Instead of expanding VAT coverage, RA 8241 expanded the list of industries and economic activities exempted from VAT, leading to foregone revenues estimated at US$20 million (Eaton 2002).  In effect, Ramos used up government funds and substantial political capital to end up with a tax law not entirely up to his liking in terms of revenue productivity, economic neutrality, and equity.

GMA presiding over Lakas-Kampi-CMD national convention

We have entered what a recent American visitor (who briefed us on the vagaries of campaign finance and the implementation of electoral laws in the US) termed as the ‘silly season’ in the electoral campaign period.  The time when campaign messages take on a darker tone and when ‘rats’ start deserting ‘sinking ships’.

A clear casualty here is the ruling Lakas-Kampi-CMD party what with all the defections, internal wranglings about the lack of campaign funds, and a lot of talk about the First Couple’s “secret candidate(s)”.

The ruling party’s travails is to be expected and is reminiscent of its fortunes in 1998.  Then, Lakas’ presidential bet was Jose de Venecia (JDV) but the obvious man to beat was Erap.  Then, the Lakas electoral campaign paled in comparison (in terms of reach and therefore of expenditure) to that waged by Erap’s Partido ng Masang Pilipino (PMP).

Common sense knowledge stipulates that money flows to the survey leaders and as the election day nears and leads are defined, then survey laggards get starved of resources.  So, if Dick Gordon wants to sue survey firms for conditioning minds, he has to do so on the premise that financiers based their ‘investment’ decisions on survey standings.

Lakas’ strength in 1998 was reduced by the defection of Renato de Villa and the formation of the Reforma party in support of his own presidential bid.  This after RDV failed to win the outgoing FVR’s endorsement.

But did the ruling party really go all out for JDV’s candidacy?

There are grounds to believe that not all of the ruling party members did so.  After all, they may reason, why throw good money for an unwieldy cause? Why support a losing candidacy? Better to keep the money and run!

The ruling party’s current travails stems from an earlier attempt at an ill-advised merger between Lakas-CMD and Kampi.  Lakas-CMD was perceived to be an FVR-JDV bastion while Kampi was supposed to be a GMA strong-hold.  The merger was not smooth and some big-time feathers were seriously ruffled, especially that of FVR, JDV (who was unseated as House speaker in the aftermath of the NBN-ZTE corruption scandal), and Kampi president Luis R. Villafuerte.

Afterwards, its weaknesses surface with the limitations of of its national line-up for the 2010 elections.  As in the 2007 elections, its senatorial slate (save for Ramon ‘Bong’ Revilla and Lito Lapid) is populated by sure-losers.  It cannot even field a complete 12-person senatorial slate.

Then party presidential bet, Gibo, continues to register single-digit numbers survey after survey and VP bet, Edu Manzano, is a practical non-entity in these polls.

Again, if we go by recent history, who ever gets to be president by July 1 this year will determine the fate of all political parties.  Given current trends, Lakas will get relegated to the wings.  What strongly suggests such a fate are the signals emanating from GMA–signals which do not undoubtedly indicate support for Lakas’ presidential bet or that she has abandoned plans to stay on top of the political heap even after June 30, 2010.

If the Comelec denies Lakas’ bid  for dominant majority party status due to the numerous defections ahead of the May 10 polls, then that may be the proverbial last nail on its coffin.

I may have to qualify that last statement though since political parties in the Philippines have exhibited great resilience.  Lakas may weaken but it may not yet be on its way to the grave-yard.

Some twenty-four odd years after the ‘people power’ revolution of EDSA in the Philippines, the country’s democracy is still in trouble and illustrates the continuing problems of cosmetic change with unrevised socio-economic structure. The Philippines’ predicament mimics many of the post-authoritarian regimes created by the third and fourth waves of democratization. In Thailand where the ‘red’ crowds are currently occupying central Bangkok, for instance, the 2006 ouster of a similarly populist political leader (Thaksin Sinawatra) who did not seat well with the Bangkok urban set and the Thai king, mimicked the ouster of Erap Estrada in the Philippines in 2001, and has installed a military-dominated (but sanctioned by the king) regime.  The musical-chairs game in Ukraine seems to raise questions why the Orange Revolution was waged in the first place. It is thus warranted to re-examine the efficacy of the ‘people power’ route to democracy.

The post-Marcos record

The post-authoritarian government of Mrs. Aquino was an uneasy coalition between anti-Marcos civilians and military rebels and ‘reformists’. Critical of Aquino’s initial moves (e.g. freeing prominent CPP-NPA leaders and conducting peace talks with the communists), military rebels and Marcos loyalists repeatedly tried to topple her government up to December 1989 (Thompson 1996). Through these coup tries, Enrile and his military allies wanted to capture state power (which they failed to do in February 1986) for themselves. The US government opposed parlaying with the communists and worried that Aquino would close its military bases. Meanwhile, the communists scored significant propaganda gains through daily tri-media exposure during the peace talks, raising fears of an eventual leftist takeover or participation in a coalition government. The killing of several demonstrating peasants by the police in January 1987 ended peace negotiations and renewed the anti-insurgency drive.

Besieged by insurgents and military rebels, Aquino adopted the policy preferences of more powerful opponents and patrons. The resumption of anti-insurgency operations pleased the U.S. government and eroded the basis for military coups. Keeping options open earlier, she eventually favored retaining the American military bases. Business groups and big landowners were placated by the dismissal of a sympathetic-to-workers labor minister (and other left-leaning cabinet members) and a watered-down agrarian reform law. The regularization of government in 1987-1988, with the ratification of a new constitution and the consequent establishment of a legislature and reconstitution of local governments, returned previously disenfranchised politicians to power at various levels.

The peaceful assumption of the presidency by Fidel Ramos in 1992 and Joseph Estrada in 1998 marked a high point in the consolidation of Philippine democracy. However, chinks begun to show afterwards. A less-than-universally-acclaimed reprise of ‘people power’ ousted Estrada and installed Gloria Macapagal-Arroyo as president in January 2001 (Lande 2001; Putzel 2001). Arroyo survived a ‘poor people power’ uprising in May 2001 and a military mutiny in July 2003 . She contested for the presidency in 2004, the first time for a post-Marcos incumbent to do so since the 1987 constitution has imposed a single-term limit. Apart from using government’s resources, there was a strong perception that she cheated to win the elections (Muego 2005). In mid-2005, wire-tapped conversations between her and a ranking Commission on Elections (Comelec) officer surfaced and insinuated padding of the count in her favor (Hedman 2006). While her government survived various challenges since then (including resignation of many cabinet members, two impeachment charges, and a coup attempt in February 2006), questions regarding her legitimacy continue to linger and contribute to political instability. In 2007, her government was scandalized by credible allegations of bribery and other corrupt acts. These developments raise serious doubts about the progress of Philippine democratization since February 1986.

To date, a final closure regarding the dictatorship has yet to be achieved. There is no Filipino equivalent of the truth and justice commissions organized elsewhere to pinpoint responsibility and prescribe ways to heal a divided and brutalized society. The AFP, torturers and all, was absolved of its human rights violations during the dictatorship for abandoning its commander-in-chief by merely donning an NAFP (N for new) insignia. The same is true for the US government. Their joint culpability was not even whispered about during the heady days after Marcos’ ouster. The Aquino government eventually allowed the re-entry and political rehabilitation of most of regime stalwarts after Marcos’ death in 1989. The accommodations and compromises reached after February 1986 suggest that the democratic transition was more of a pacto along the lines of the Brazilian case (Hagopian 1990) rather than a real ruptura as argued by Thompson (1996), or the ‘insurgent path’ in South Africa and El Salvador (Wood 2001). This means that the democratic transition in the Philippines continued rather than ended with Marcos’ exile.

However, the analysis of Philippine democratic transition should be distinguished from democracy’s problems. Obviously, the democratic institutions established after 1986 were clear improvements over the dictatorship (Thompson 1996). The effectiveness of civil resistance in ending authoritarianism is clear. However, it could not be reasonably burdened with the task of consolidating democracy in the Philippines and elsewhere. The rather distasteful compromises with the military and regime stalwarts may have been necessary to ensure the survival of a fledging democracy besieged by military rebels and communist insurgents during Aquino’s term.

Better an imperfect democracy rather than a return to authoritarianism. A principled commitment to nonviolence may not be needed to oust a dictator. It may however affect prospects for democratic consolidation. If elite political actors once resorted to nonviolence as a political expedient, then violence may be resorted to if deemed necessary in the future. One can only note how easily the Aquino government unsheathed the ‘sword of war’ against the communists in 1987. In the process, democratic principles and civil political dialogue may be seriously compromised. A key problem is how a democracy (restored by a broad political coalition that includes an anti-revolutionary albeit reformed military) will deal with an on-going communist insurgency.

It is quite clear that the democratic credentials of any government will be put to a severe test. Continuing human rights violations by the Philippine military from 1987 up to the GMA presidency are among the worst aspects of post-Marcos governments. Thompson (1996: 197) reminds us however that ‘such crimes committed by an otherwise democratic government in the context of a civil conflict are not exceptional’. These difficulties recall the single most important prerequisite identified by Rustow (1970) in his seminal work on democratic transition and consolidation—that the ‘boundary’ question is resolved. That is not the case in the Philippines. Armed Muslims want to secede and armed communists and military rebels don’t share the consensus around elections and representation.

In other democratization cases, this question was settled. The Soviet empire had to broken up into several smaller states and Czechoslavakia was split in two.

Another problem in the Philippines: how will a restored democracy make its military accountable for its authoritarian past without being endangered by a military backlash? The blanket absolution of the AFP, especially of the RAM leaders (many of whom were accused of being heavy torturers), was essentially wrong yet was politically necessary at the time. The failure to pursue military accountability during martial law was further compounded by a kids-glove treatment of military putschists against the Aquino government by her defense officials, including soon-to-be President Ramos. Ramos himself bought tactical peace with a political settlement with military rebels during his first years in office. The shortcomings of this policy of appeasement will be revealed subsequently by the unhealthy role played by the military in the ouster of President Estrada in January 2001, and the coup attempts against President Arroyo in July 2003 and February 2006.

The Philippine experience underscores the extreme difficulties faced by a restored democracy as it tried to consolidate itself while weighed down by the legacies of authoritarianism (a weak economy, a highly-politicized civilian and military bureaucracy, weak or non-existent political institutions, and continued existence of maximalist forces), the shallowness of its elite democracy, and an unresolved first-order ‘boundary’ question. After Marcos’s ouster, the record of democratic commitment is mixed. The political elites and ‘yellow’ forces in the Philippines would subsequently fail to sustain their democratic credentials in several occasions. A reprise of ‘people power’ in January 2001 failed to impress true democrats since a democratically elected albeit corrupt president, Estrada, was deposed. As an exercise of extra-ordinary or irregular politics, ‘people power’ stunted the growth of the country’s political institutions. These same elites apparently turned a blind eye to a prima facie case of systematic cheating by President Arroyo during the May 2004 elections to prevent a populist Estrada-like presidency. While expedient in 2001 and 2004, the failure to uphold democratic principles is at the root of current political instability. Questions regarding the legitimacy of Arroyo’s mandate have inspired parodies of ‘people power’ since then. After weathering a rather inchoate ‘poor people power’ uprising in May 2001 and a military mutiny in July 2003, her government almost fell apart in July 2005. She survived another coup attempt in February 2006 through emergency rule. While styled as a referendum on her continued rule, the May 2007 mid-term elections failed to settle the legitimacy question.

This high-mindedness could flounder at the realist shoals and rough tumbles of everyday politics. Notwithstanding the less-than-pristine basis of civil resistance in the Philippines, it did depose the Marcos dictatorship. What is of greater value—the ouster of the dictatorship or a principled commitment to non-violent means of resolving inevitable conflicts? Upholding the democratic mandate of a venal chief executive or a preference for good governance? Should irregular politics be frowned upon since they undermine existing institutions or should non-institutional deviations be tolerated or even encouraged given institutional inadequacies and dysfunctionalities? Or are these false dilemmas?

Theoretical propositions

I borrow from work I have done earlier on the Soviet reform project from 1956 to 1991 (Mendoza 1992) and forward these theoretical propositions regarding democratization and democratic transitions.

1. Ultimately, transitions from authoritarianism are both prone to voluntarist action (qua actor-directed processes) and vulnerable to material and subjective (i.e., cultural) constraints. In this sense, therefore, there is no uniform road from authoritarianism and each country necessarily charts an idiosyncratic path.

2. Democratization is a politically contentious process. First, since it proposes to change or to disrupt existing institutions (understood in a broad sense ala Douglass North as ‘rules of the game’), it will always invite opposition from interests and groups comfortable with the status quo or from those who believe that the changes that had been achieved so far are quite enough. In addition, there is a time lag before the benefits of democratization could be realized or made apparent. This delay and the difficulties experience during the period could be used as arguments for scuttling the democratization process. For one, the post-authoritarian democratic regime must (by definition and by necessity) recognize and guarantee the political enfranchisement even of unrepentant or latent sympathizers of the deposed regime. Secondly, even in the rare case of apparent unanimity for the necessity of change, differences on the nature, pace and sequencing of democratization reforms will most likely arise and precipitate political struggles. Thirdly, the dysfunctionalities and turmoil generated by democratic transitions also provide leeway for other political projects to be implemented. The possibilities for non- and pseudo-democratic projects are almost always present. This is quite apparent in post-1986 Philippines as exemplified by the current presidency of Gloria Macapagal-Arroyo since 2001.

3. The above proposition leads to a third major insight—the open-endedness of political processes—one gained through a hindsight evaluation of transitions from authoritarian rule initiated from the top, or what I call abo-reformism (reform from above). Notwithstanding the ‘people power’ circumstances of the authoritarian regime’s demise, all transitions from authoritarianism are elite-directed processes. This is the necessary and logical outcome both of the difficulties of maintaining long-term popular mobilization and the inherent appetite of elites to limit democratic changes. In fact, many transitions could be characterized as popular projects hijacked by elites.

Appropriate institutions and technologies of ‘people power’

It can be argued that the democratization project is the evolution of appropriate technologies and institutions. A careful reading of the Bolshevik (which was a ‘people power’) project indicates that it entails the institutionalization of new and appropriate technologies of production and distribution and, above all, of governance. While the post-authoritarian project of democratization may not seem, at first glance, as comprehensive as the Bolshevik project—the realities in underdeveloped jurisdictions like the Philippines where socio-inequalities can undermine legal equality require a similar broadness.

Social-hierarchical (as opposed to technical-hierarchical and therefore socially-neutral), rather than horizontal or associational, relations between persons imbricate the existing technology of production the world over. Taylorism organized the capitalist labor process so that it was conceived and directed from a hierarchical center and could be executed with parts of the entire process done by distinct groups of workers supervised by foremen and surveilled by timekeepers. The institutional expression of Taylorism is the factory assembly line and the consequent shopfloor division of labor. The objective was to remove any element of worker control over the pace, intensity and quality of work. Taylorism was adopted by Lenin himself instead of ‘workers’ control’ since Taylorist methods were seen as particularly useful in building the Soviet industrial base with a work force which was relatively young and inexperienced and which was not weaned from its peasant origins, traditions and values.

The available technologies of distribution and economic organization are limited to the market and centralized state allocation, or metaphorically, the ‘invisible hand’ and the ‘central plan’. The German ‘social market’ is an attempt to essay a third way just like other social democratic welfare states in West Europe. Karl Polanyi (1957) noted that the organizing principles of reciprocity and redistribution characterized pre-capitalist societies. Plan and market are weak in several respects. For one, the problem of monopoly arises in both cases. The most likely reaction to institutional failure is to adopt its antipode; that is, the response to state failure is to marketize and vice-versa. “Third way’ experiments appear to be doomed by Kornai’s detection of the strong affinity between specific modes of property ownership and economic coordination mechanisms, i.e., between state ownership and central planning and between private property and market coordination. On the other hand, the rule of the few over the many is the essence of the technology of governance and political organization used through much of recorded human history.

In contrast, democratic (and socialist) governance is a promise of self-activation and management of society for the benefit of all its members. At its purest, democracy is majority self-rule. Vincent Ostrom submits that a self-governing free society is governed by an elaborate structure of institutional arrangements that conform to two basic rules. The first is the basic golden rule: ‘Do unto others as you would have others do unto you’. Under this rule, humans takes the perspective of others, discount partialities associated with self-love, and strive for impartiality. The second rule is W.R. Ashby’s ‘law of requisite variety’: To realized specified effects, there must exist as much variety in the strategies available as there is variety in the conditions that obtain.

The historical experience so far reveals that the problem of democratic governance is accentuated by the phenomenon of ‘substitutionism’, disguised as representation—a malady denounced by Rousseau in his Social Contract. This seems to be unavoidable given the size of modern societies. In a democracy, the people are supposed to be sovereign and they appoint their representatives as ‘public servants’. The age-old question of who will guard the guardians recurs repeatedly. How can the ‘servant’ be made accountable for its actions and decisions to the sovereign principal? What can prevent or alleviate the effects of an agent’s action which is detrimental to the principal’s interests? So far the institutional (meaning nonviolent) means available to principals for checking their agents are freely-contested elections and mechanisms for recall or impeachment of treasonous, incompetent, or corrupt public officials. However, problems of the authenticity of electoral exercises as well as the politicization of the recall/impeachment processes reduces control over agents.

While formally a democratic republic wherein all governmental authority emanates from the sovereign people, the Philippines is characterized as an elite or ‘shallow’ democracy that has been unable to adequately respond to the needs of under-classes.  In addition, the Philippine state is seen as relatively weak and is susceptible to capture and plunder by strong private social groups and interests including political factions and families, big business groups, among others.  The failures of the Philippine state and politics are highlighted by the inability to sustain and realize a promising economic growth potential (as of the 1950s) when the country was supposed to be second in Asia only to Japan in terms of economic development.  At the core of this failure is inconsistency and incompatibility of economic policy making with the requirements of sustainable growth since 1946.

The source of policy inconsistency is identified in the literature as reflective of incomplete elite 

Peso-dollar exchange rate

differentiation in the country.  For example, as the country’s elite groups are involved in almost all lines of business such as external trade (imports and exports), real estate, commercial agriculture, manufacturing, and finance—there has been for a long time no elite consensus on trade and foreign exchange policy.  For example, if one was an importer, she may prefer a protectionist trade regime to protect his import monopoly.  She may also prefer an over-valued peso so her imports will be cheaper in terms of the local currency.  However if she is also an exporter, she may want an under-valued peso so her products will be more competitive in the world markets.  If she actually manufactures the exportables, her stance may be more nuanced.  For instance, to the extent that the import-content of his export products is quite high, then she may be in favor of an over-valued peso. She may also prefer a more liberal foreign trade regime to make her imported inputs cheaper.  However, since she wants her products to be competitive externally, she will prefer an under-valued local currency.  In sum, she will not have a straightforward position on foreign exchange and trade policies.

Philippine exports, 2001

In truth, much manufacturing activity up to the recent past had been directed towards an internal market buoyed by protectionist trade policies and population growth.  In theory, therefore, industrialists should favor land reform in order to broaden and deepen domestic demand for manufactures.  However, their strong links with landed interests stop them from championing land reform in the rural areas.  They try remedy the limitations of the internal market by selling to a more-demanding world market.  In more recent years, domestic demand had been bolstered by the hefty foreign exchange remittances of overseas contract workers.  Thus the recourse to external markets, including international labor markets, relieved domestic pressures for reforms and helped induce growth of consumer goods, real estate and the services sectors.

Within the context of grave inequity and widespread poverty, Philippine politics is clientelistic or patronage-driven.  This picture should however be qualified with the importance of political violence and coercion as an additional (to the clientelistic) mode of mediation between political leaders and their constituents.  The country’s political institutions are unevenly developed

Manila’s urban poor

and are not fully functional even after sixty years of modern statehood.  Following the typology of Rothstein (1996), the rule-making and rule-applying institutions may seem to be over-developed compared to the rule-adjudicating, and more importantly, rule-enforcing institutions.[1] While lack of resources (which is in turn a function of the state’s weak capacity to extract resources from society) plagues all four institutional types, consolidation of these democratic institutions is hampered by first order problems, chief of which are the ‘boundary’ (Rustow 1970) and ‘unity and internal order’ imperatives.    Re the boundary question: is the Philippines the state of a single well-defined nation or should putative nations (such as the Bangsa Moro) enjoy the full rights of self-determination (including secession from the Republic)?  The unity and internal order problems are largely the product of poverty and inequity as the have-nots try to redress the situation even with violent modes of action.  In fact, the Bangsa Moro issue is an intersection of ‘boundary’ and ‘equity’ problems because the Bangsa Moro people perceived themselves to be among the poorest and powerless in Philippine society.

Guerillas, Moro National Liberation Front

The most glaring evidence of dysfunctional institutions is recent instances of or attempts at regime change through extra-constitutional means.  These include the reprise of a ‘people power’ uprising against a universally-perceived corrupt President Joseph Estrada in January 2001 that led to his replacement by

Oakwood mutiny, 2003

incumbent President Gloria Macapagal-Arroyo (PGMA) and the various attempts to unseat her since then (the ‘poor people power’ uprising in May 2001, the Oakwood military mutiny in July 2003, and a failed coup attempt in February 2006).

The intensity of political contests in the Philippines is a function of the fact that the government disposes a significant chunk of resources, and exercises discretion over a wide sphere. The premiere political plum is that of the Presidency.  The implicit goal of elite struggles is to control the state’s machinery and resources and skew their deployment to favor specific interests.  Powerful incentives then work to persuade incumbents at various levels to retain power indefinitely in order to protect such interests.  Conversely, turnovers—whether electoral contests or more fundamental challenges to legitimacy, such as attempted coups—may be viewed as chances to attain or to retain political power.   The economic costs occasioned by such regimes can be seen to be large a priori. First are the obvious losses from competitive rent seeking, as factions seek to build their capacities to compete for dominance. The larger the gains are (which could turn on the scope of the government’s influence over resource allocation) and the more evenly-matched the factions are, the greater is the likely dissipation of resources in terms of lobbying, maintaining retinues of followers, and so on. These losses from classical rent seeking result from the diversion of resources towards unproductive uses, where these could have been invested or allocated more efficiently.

Further losses apart from those occasioned by rent seeking may arise as investment is discouraged by political uncertainty. In this respect, two potential effects of democratic, decentralized regimes in raising investment uncertainty may be distinguished.  One effect owes to greater challenges to authority even in periods between regime turnovers—in short, internal uncertainty to investors brought on by the diffusion of power (through the system of checks and balances) even without a regime change. For instance, a government contract approved by the executive can be challenged at the legislature or at the Supreme Court. The Supreme Court’s decision in

Seal of the Supreme Court of the Philippines

the mid-90s to nullify the sale of the historic Manila Hotel to a group of Malaysian investors (in favor of a group of Filipino-Chinese businessmen) on the grounds of “protecting the national patrimony” is a case in point.  While this risk may be inherent in any separation-of-powers system, its effects appear to be stronger in the Philippines where ‘losers’ in a particular institutional arena do not readily concede defeat but will try to win in others.  Of late, there has been a strong tendency to call on the courts to rule on the constitutionality of approved laws or to issue restraining orders on government contracts.  While the intervention of the judiciary may be necessary in principle, excessive judicial activism will surely raise the transaction costs of policy making and could adversely affect the investment climate.  An example would the constitutional challenge to the reformed value added tax (VAT) law of 2005 (Republic Act No. 9337).  Losers in the legislative arena sought to reverse their defeat through a Supreme Court temporary restraining order (TRO) based on the law’s alleged violation of the Constitution. Eventually, the Court ruled in favor of the law’s constitutionality and unimpaired implementation.  Nonetheless, the uncertainties generated by the court suit did their damage.

A second source of uncertainty is regime turnovers. This uncertainty results from possibly large changes in policies, ranging from reversals of broad policy initiatives to alteration of contracts. The threat of victory by hostile factions may be viewed as leading to unsettling changes in policies that further raise the cost and the risk of investing. Potential political challengers may threaten to reverse the results of transactions accomplished under the incumbent administration once they come to power.  These dangers became more important  in the post-authoritarian period which saw disorderly or unconventional presidential successions.

President Corazon Aquino, 1986-92

  The shift in the winning alliances also made a difference.  The Aquino (1986-92) and Ramos (1992-98) presidencies had a similar preference for liberalizing economic reform as they were supported by modernizing elite fractions and their middle class allies. 

President Fidel Ramos, 1992-98

President Joseph Estrada, 1998-2011

The Estrada presidency, which drew support from a different elite constituency as well as a populist mass base, preferred a personalist (as opposed to an impersonal market-oriented) stance in economic policy and actively dispensed policy favors to key supporters and campaign financiers.  For instance, his administration reversed the ‘open skies’ policy of his predecessors to suit the preferences of Lucio Tan’s Philippine Air Lines (PAL) and built the NAIA (Ninoy Aquino International Airport) Terminal 2 exclusively for PAL’s use.   The other less favored airlines had to make do with the cramped NAIA Terminal 1. 

Tan, considered the country’s richest man, is the same Marcos crony targeted by the previous Ramos administration for massive tax evasion.  Estrada rehabilitated Tan by extolling him as one of the country’s top and most consistent taxpayers.  In the process, the court suits filed by Ramos’ tax officials were summarily dismissed supposedly because of the loss of truckloads of evidence against Tan.[2]

Lucio Tan

The possible shift in policy consequent to turnover represents additional uncertainty and a discouragement to investment.  An additional element of uncertainty is offered by the fluidity of the country’s political factions, manifested by the weakness of political parties and the relative lack of party discipline.  Given the heterogeneity of elite groups’ economic interests and the attendant lack of clear-cut policy preferences, changing compositions of political factions may yield differing policy preferences or could simply lead to contract alteration simply because the new ‘ins’ will want to have their ‘cut’ on big uncompleted projects.  This seems to be the case with the NAIA Terminal 3 project.  Contracts for these projects were awarded during the Ramos presidency and the new terminal’s construction was almost completed during Estrada’s aborted term.  However, the Arroyo administration saw substantial legal infirmities in the Terminal 3 contracts.  This finding was subsequently affirmed by the Supreme Court.  The project had to overcome these difficulties so the terminal could be used.  Kudos to GMA and Mike Defensor.

Since the mid-1990s, it is possible to discern a clear-cut division between modernizing and outward-looking elite fractions and the more-traditional rent-seeking elite groups.  After decades of protectionism and oligopolies, the modernizers were bolstered by here-to-fore protectionists who were convinced of the greater returns to economic openness and freer markets.  These interests provided the political base for the reformist efforts of the Fidel Ramos presidency.  However, the Estrada presidency represented a setback for market reforms and a resurgence of personalistic politics as well as the corruption of state and private institutions (including the stock exchanges and the commercial banking system) for presidential aggrandizement.  Critical state bureaucracies served as the protective cover for many criminal syndicates involved in a wide range of activities from smuggling to gambling.  The Estrada presidency championed the cause of more traditional and inward elite groups who are unmindful of ratings from Standard & Poor or the lack of an IMF ‘seal of good housekeeping’ since they can still earn fabulous incomes from informal and criminal economic activity.  The failure to achieve thoroughgoing reform (especially in the political and social fronts) had however forced the modernizing elites to live with and compromise with rent-seekers.  The drag of unreformed politics increases the costs of doing business in the country and lowers its economic potential.  On the other hand, the strength gained by modernizers as a result of the Ramos reforms has allowed the economy to discount political ‘noise’ and even turmoil in recent years to come up with middling economic growth rates relative to the country’s Southeast Asian neighbors.  The question remains whether growth can be sustained for a longer period (to make significant dents on the country’s poverty rate) while political institutions remain unchanged.

We now turn our attention to the military establishment in the country and its role in policy making.  Path dependence is a key factor here.  The important role that the military played in the overthrow of the Marcos dictatorship in February 1986 had allowed it to escape its own responsibilities and culpabilities as one of the dictatorship’s main props.  Despite a return to democracy in 1986, the continued existence of a communist insurgency had guaranteed an inordinately heavy influence of the military establishment on the nation’s security policy.  In fact, dissatisfaction with what was perceived as ‘radical’ policies of President Corazon Aquino (such as freeing of communist and other leftist detainees, conducting peace talks with the communist insurgents, and keeping an open mind on the extension of the military bases agreement with the United States) fueled many coup attempts against her government.  All these putsches were defeated by a military establishment commanded by soon-to-be President Fidel Ramos in his capacity first as armed forces chief of staff and subsequently as national defense secretary.

Honasan, the rebel soldier

As president, Ramos quelled military restiveness with a general amnesty for coup plotters and participants.  The most charismatic and dangerous coup leader, former Colonel Gregorio Honasan was incor­porated into the political system as an elected member of the Philippine Senate in 1995.  While there was persistent gossip that Ramos and his henchmen (particularly Jose T. Almonte, his shadowy National Security Adviser) ‘doctored’ election returns to ensure Honasan’s electoral victory, many Filipinos accepted that as a small price to pay for political peace.  Ramos soon embarked on an ambitious modernization and professionalization program that will focus the military on an external defense mission while the police forces will take care of internal order (including the insurgencies).   The Asian financial crisis deprived the country of the funds to finance the military’s modernization.  The police forces proved to be inadequate for the anti-insurgency campaign and the military forces were once more embroiled in the country’s internal wars.  The financial constraint was a major reason why President Joseph Estrada opted to enter into the Visiting Forces Agreement (VFA) with the US even as he earlier voted against the extension of the US-RP military bases as a senator in 1991.  The agreement allowed the US to train Filipino military personnel and provide military assistance (by way of war materiel and equipage) in the context of annual joint military exercises.

Senator Gringo Honasan

The reprise of the ‘people power’ uprising in 2001 had unfortunately ‘institutionalized’ the military’s role in extra-ordinary and non-institutional regime change in the country.  The July 2003 Oakwood military mutiny and the failed coup in February 2006 meanwhile revealed the re-emergence of factions within the armed forces.  Political incumbents and regime challengers since then have consistently wooed military support and contributed to renewed factionalism and divisiveness within the ranks.  Many analysts are also convinced that the GMA government is dependent upon the military brass for its continued political survival and is captive to the military’s security policy preferences.  What is quite disturbing was the government’s use of the security forces for clearly partisan purposes during the May 2007 elections especially against leftist party list groups.  Thus, what we have is a military establishment that is not modernized and professionalized, still embroiled in internal wars, plagued once more with factions and restiveness, and vulnerable to political pressures and influences.  On the other hand, it had gained substantial leverage vis-à-vis civilian political leaders especially since 2001.  In short, the Philippines does not have a professional or ‘militarized’ military[3].

Our final note concerns local politics and its link to national-level politics.  Notwithstanding charges of too much concentration of governmental power and functions at the national levels, it is quite clear that local political elites are powerful in their own right.  The literature attributes the emergence and flourishing of local elite power to the incorporation of the archipelago into the world economy in the late 19th centuryunder the auspices of a weakening colonial power via many localities (including Cebu, Iloilo, Legaspi,  Zamboanga, etc.) and not only through the capital city of Manila.  It did not only inhibit the creation of a centralized state bureaucracy but also stimulated the growth of many local elite groups with sources of wealth and power independent of the state.  The immediate enfranchisement of these local elites by the American colonial forces through municipal elections and their elevation to national status through the formation of the 1907 Philippine Assembly consolidated these local elites to the extent that the first Philippine president under American

Manuel Luis Quezon

auspices (Manuel L. Quezon) came from their ranks and not from Manila-based politicians.   Elected Filipino local officials enjoyed enormous discretion over the emerging state apparatus, including control over pork barrel funds and appointments of local bureaucrats.  At the national level, legislators likewise exerted influence over the awarding of contracts, concessions and franchises, appointments to national government agencies, and allocation of state loans.

Following independence in 1946, the continued subordination of the national state apparatus to this multi-tiered hierarchy of elected officials and the expanding economic role of the state in import-substitution industrialization led to entrenchment of political bosses in numerous localities and at various levels of state power.  In some localities, a concentration of land or other forms of proprietary wealth facilitated the entrenchment of political dynasties over successive generations.  At the congressional district and provincial levels, long-time congressmen and governors have relied on state office to control ‘nodal’ economic choke points and key natural resources.  The key to local political control has lain in the accumulation and retention of a preponderant share of resources for electoral success: a retinue of loyal personal followers, money for buying votes and bribing election officials; and coercive resources to reinforce personal and pecuniary objectives.   A modus-vivendi between local politicians and those who aspired for the presidency was established.  Local politicians delivered vote banks under their control to the presidential candidate of their choice in exchange for pork barrel allocations and other patronage resources.  The increased availability of foreign funds, including military monies from the United States, allowed Ferdinand Marcos to get himself re-elected in 1969 without relying so much on local politicians.  He declared martial law in 1972, abolished Congress, and ruled henceforth by decree.  He centralized a national police under the armed forces (wresting control over the police from local politicians), established quasi-governmental monopolies for major commodity exports, and parceled out regulatory and proprietary control over strategic sectors of the national economy within a close circle of family members, cronies, and front-men.  Nonetheless, Marcos still counted among a number of local strongmen for political support.

Since the fall of Marcos in 1986 and the restoration of regular competitive elections at the local and national levels, local political power had likewise been restored and strengthened by a new local government code.  Given the rich spoils of these offices, elections have been fiercely contested through machine mobilization, vote buying, fraud, and violence.  Political dynasties have likewise been encouraged to contest for national and local posts.  For one, the flexibility to run for either a national or a local post affords politicians the possibility of remaining in office when term limitations kick in. Thus, a member of the House of Representatives may seek the office of provincial governor or city mayor after serving three terms as legislator.  In the meantime, he may field his wife, brother, child, or any other relative to contest his House post.  The diversification of political post portfolios may help explain the longevity of political dynasties.  Membership in the House affords access to pork barrel funds and other forms of largesse that helps consolidate political control of a political bailiwick.  On the other hand, control of a local government post ensures closer and more extensive relations with voters, which in turn helps ensure prospects for re-election of incumbents.  To the extent that political parties remained weak, politicians seeking national elective offices (such as President, Vice President, and Senator) had to similarly court the support of local notables for so-called machine or command votes in exchange for patronage.

A subtle change in the linkage between business and politics is currently underway in the country.  In many provinces where suburban industrial and commercial growth is most pronounced, local politicians have abandoned local empire-building efforts in favor of brokerage services for Manila-based or foreign capital, winning lucrative construction and real-estate deals but skimming percentages (for permits, zoning ordinances, and union-busting services) on new industrial and commercial estates, residential subdivisions, and gold courses.  Some major illegal rackets (e.g. narcotics) are similarly centralized and internationalized, leaving local bosses to serve merely as franchise dealers or recruiters for urban-based and foreign syndicates (Sidel 1996).

What then are the key characteristics of the policy outputs of this peculiarly Philippine institutional setup?  We have already alluded to the system’s general unresponsiveness to the needs of the country’s under-classes as well as the predominantly private-regarding character of policy.  Some examples can be cited in support of this finding.  The 13th Congress of the Philippines (July 2004-June 2007) succeeded in enacting an extremely liberal tax amnesty law before the electoral campaign recess.  However, it failed to pass the cheap-medicines bill before its adjournment.  This means that the measure, designed to lower costs of medicine through parallel importation of patented drugs, had to return to ‘square one’ in the 14th Congress (July 2007-June 2010).

A review of the property rights regime in the country is instructive in pointing to other key features of Philippine policies (Mendoza 2008).  The study reveals that significant advances in the legal recognition of the property rights of the poor had been achieved since the restoration of democracy in February 1986.  Notwithstanding these advances, the relevant policies have been plagued with problems of poor coherence and coordination, spotty quality of implementation and enforcement, and inefficiency.  At times when policies needed to be flexible and adaptable, they were rather stable as old and archaic laws coexisted uneasily with newer ones despite decades of policy reform.

For example, key policies with respect to land administration persisted since the beginning of the 20th century despite the shocks of global war, internal insurrections, authoritarianism, coup attempts, and irregular regime change.  Land administration refers to the processes of recording and disseminating information about the ownership, value, and use of land.  These processes include mapping and survey, identification of alienable and disposable lands, original land titling, transfer of title, land information and records, taxation, and land valuation (LAMP 2: n.d.).  The land administration system in the Philippines, with its colonial origins, is considered one of the most complex systems in Asia and is consequently plagued with institutional defects, inconsistencies, corruption, and unworkable practices.  These defects include: multiple land administration agencies, multiple land administration laws, multiple land titling processes, multiple standards for surveying and mapping, multiple forms of certificate of title, multiple steps for land transfer, multiple standards for land valuation, multiple agencies undertaking valuation, and multiple taxes on land ownership and transfers.  These pathologies often lead to several problems including long and expensive delays to secure land titles[4] and the proliferation of fake titles.  Consequently, there is a little confidence in the system and a relatively low level of registration of subsequent title transactions (LAMP 2; Roberts and Burns 2003).  Separate estimates (De Soto 2000; Roberts and Burns 2003) indicate that more than half of all landed property in the country (more than 8.4 million parcels with a combined value of US$133 billion) lacked clear title.

The institutional setting for land administration and management is characterized by large, central agencies that are quite resistant to change.  There are about fifteen (15) agencies involved and the two principal agencies are the Department of Environment and Natural Resources (DENR) and the Land Registration Authority (LRA) of the Department of Justice.  There are two legal processes in gaining title to land—administrative and judicial.  Administrative processes leading to titles are handled by three agencies.  Titles obtained through the judicial process are senior to titles obtained administratively since the former decrees absolute ownership while latter confers rights with conditions and limitations.  Under the judicial process, occupants of land are required to apply to the courts to confirm existing rights to title based on evidence of ownership and occupation.  The inevitable result of having so many departments and agencies involved in land management and administration, each supported by enabling laws, is confusion, overlapping functions, and long bureaucratic processes and delays which lead to litigation and corruption.  Thus, one piece of land can be owned by two or more entities since two titles—one administrative and one judicial—were issued.  It could also happen that the same asset can be covered by two administrative titles—for example, an ancestral domain claim (CADC or CADT) and a certificate of land ownership award (CLOA) under the agrarian reform program.  These overlapping claims generate conflict among the poor themselves—i.e., between indigenous peoples and agrarian reform beneficiaries.  Or the same piece of land may be valued differently due to different valuation standards used by different agencies.  Furthermore, the existence of a hierarchy of rights over private land complicates the tenure system because many of the rights are for specific and temporary use, so the need for updating or conversion to a superior right, adds to the bureaucratic chain (Roberts and Burns 2003).  For example, separate rights for ownership, cultivation, building, use and management can apply to land.  When added to an already complicated regulatory system and a high degree of centralization, this creates a concentration of power in numerous points of the process and increases the potential for bribes, discourages participation and engenders distrust of the formal tenure system.  The complexity, delays, and costs of registering titles lead to a relatively low level of registration of subsequent title transactions.  Another consequence is a thriving grey market for land and land titles.


[1] Rule-making institutions are needed to make collectively-binding decisions about how to regulate the common interests.  These roughly correspond to the legislatures at various levels—from the national down to the barangay.  Rule-applying institutions are needed for implementing these same decisions.  These correspond to the chief executives at various levels from the president of the republic down to the barangays chairmen.  Rule-adjudicating institutions are needed to take care of individual disputes about how to interpret the general rules (laid down by legislatures) in particular cases.  They include the courts at various levels from the Supreme Court down to the municipal trial courts, quasi-judicial bodies, and other dispute settlement and arbitration mechanisms.  Rule-enforcing institutions are necessary to take care of and punish rule-breakers, whether insiders or outsiders.  These institutions include the courts, security or uniformed services (police and armed forces), and the prison/penal system.

[2] A fuller story on Lucio Tan’s travails and triumphs during the Ramos and Estrada presidencies is supplied by Mendoza (2004) and Lim and Pascual (2000).

[3] A militarized military is an armed force deployed only for military missions—particularly for the defense of a sovereign state against external threats.  Under this concept, anti-insurgency campaigns are a police function and should be undertaken by internal security or police forces.  In a democracy, a militarized military is non-partisan, under civilian control, and does not get involved in domestic politics, electoral or otherwise.  It will be an important institutional player in the formulation and implementation of the country’s foreign policy.

[4] It can take up to three years to secure or transfer a land title and have it registered (LAMP 2).