Tight fiscal situation, inadequate infrastructure, weak investor confidence and inability to solve market failures have constrained private investment and growth in the Philippines, a study by the Asian Development Bank (ADB) said.

According to the study, "Philippines: Critical Development Constraints", these four critical constraints have caused both public and private investment to remain sluggish and their share in the Gross Domestic Product to decline.

Investor confidence, the study said, has also been eroded by poor performance on controlling corruption and maintaining political stability.

According to the study, the perception of worsening corruption is an added factor to the low investment rate in the country.

Ifzal Ali, chief economist of the ADB, said that the costs of lack of political instability and distractions are extremely high. "Since 1986, there have been brief periods of stability followed by instability."

The study added that, to a large extent, the decline in revenue generation is a result of "serious weaknesses in tax administration".

"Governance concerns not only weaken investor confidence, they underlie most other critical constraints," the ADB report said.

"Corruption undermines tax collection; political instability hinders investment and growth and reduces the tax base; and both contribute to the tightness of the fiscal space," it said.

Cuts in social spending

"Due to the inability to generate revenues, the government has had to cut expenditures on social and economic services to arrests deficits," the study said.

Ali said the country has made progress in reducing the fiscal deficit, but this reduction was driven primarily by cutting spending on social and economic expenditures.

Statistics showed that government spending on social and economic expenditures declined from 5.4% in 1997 to 2.9% in 2005.

"There has been a dramatic turn-around in the last five years, but it has been accompanied by cutting back on public expenditures." Ali said.

High business cost

The study also said that the inadequate infrastructure, particularly in the transport and power sector, had increased the cost of doing business in the Philippines.

"Infrastructure has impacts on competitiveness of Philippine exports and determines extent of connectivity," Ali said.

Cost of transportation and power rates in the country, the study said, are higher than the rest of its neighbors.

The study noted that it costs 16-51% more to export a 20-foot container from the Philippines than from China, Singapore or Thailand. Similarly, power tariffs in Manila are 20-80 percent higher than other major Southeast Asian cities.

Aside from these constraints, the study showed that the government has failed to address market failures that lead to small and narrow industrial base as shown by the lack of expansion and diversification of the manufacturing sector, low technical quality, slow upgrading of domestic manufacturing, and low spending on research and development.

The study recommended that the government should explore ways to raise revenue generation, improve expenditure management, accelerate infrastructure development, support expansion and diversification of the industrial base, and improve governance.

"Targeting and removing the most critical constraints will lead to highest returns for the country," Ali said.

Higher investment rates needed

The bank said in its latest country report that much more must be done to boost investor confidence and create jobs, with one-third of the population still living in extreme poverty.

Inflation was 2.8 percent and economic growth came in at 7.3 percent in 2007, a 31 year-high, but Ali said the growth was mainly due to "very high" spending linked to May 2007 mid-term polls.

"For growth to be sustained over long periods of time will require much higher rates of investment than what we are seeing in the Philippines," he told a news conference.

Figures showed per capita power consumption in the Philippines was roughly a third of Thailand's and one-fifth of Malaysia's because electricity costs are high compared with the rest of Asia.

Per capita paved road length was just a sixth of Thailand's and one-fourth of Malaysia's.

Foreign direct investment was 1.1 billion dollars in the five years to 2006 compared to 6.1 billion dollars for Thailand and 3.9 billion dollars for Malaysia, the report said.

The industrial base has shrunk, with manufacturing accounting for just 23.5 percent of economic output in 2005, compared to 34.8 percent for Thailand and 30.6 percent for Malaysia.

The report noted that much of the recent progress on trimming the budget deficit had been driven by sales of government assets and deep cuts in spending on social and economic services, which hit the poor hardest.

Manila has "consistently underperformed in providing productive employment opportunities to its growing labor force," the report said, with the jobless rates hovering at three times the level of Thailand and twice that of Malaysia.

Though prone to typhoons and other disasters, the Philippines had no "effective disaster relief programs" and only half of the eight million victims every year received aid. With a report from Agence France-Presse (abs-cbnNews.com/Newsbreak)

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