(STAR) By Pia Lee-Brago - Corruption is one of the major constraints to Philippine economic growth, which may even set back recent gains if not promptly addressed, an Asian Development Bank report said.

The report titled “Philippines: Critical Development Constraints” also said political instability “hinders investment and growth and reduces the tax base.”

Inadequate infrastructure, tight fiscal situation, inability to solve market failures and weak investor confidence have also hampered private investment and growth in the Philippines, the report said.

“Targeting and removal of the most critical constraints will lead to the highest returns for the country. It will spur investment, which in turn will lead to sustained and high growth and create more productive employment opportunities,” said Ifzal Ali, chief economist of ADB. “This would ensure that the fruits of development are shared by all.”

The report said the Philippine economy has fallen way behind its neighbors in East and Southeast Asia over the five decades.

It said that the pace of poverty reduction is slow and income inequality remains stubbornly high.

The report cited data released by the Philippine government which showed that 26.9 percent of families in 2006 were below the official poverty threshold from 24.4 percent in 2003.

“While growth has picked up in recent years, with the economy in 2007 posting its highest growth of 7.3 percent in the last three decades, both public and private investments remain sluggish and their share in gross domestic product has continued to decline, raising the question of whether the current economic momentum can be sustained,” the report said.

It said the Philippines “consistently underperformed in providing productive employment opportunities to its growing labor force.”

The report said that the fiscal situation remains tight despite the progress achieved by the government in reducing deficits and eventually balancing its budget this year.

The share of government revenues as a proportion of GDP has been the lowest among major economies in East and Southeast Asia, according to the report.

Much of the reduction in fiscal deficit has been driven by deep cuts in spending on social and economic services and sale of government assets.

“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.

The report said available data show that per capita electricity consumption in the Philippines is roughly one third of that of Thailand’s and one fifth of Malaysia’s. Similarly, per capita paved road length for the Philippines is roughly one sixth that of Thailand and one fourth of Malaysia.

The report cited studies suggesting that the Philippines’ ranking in the control of corruption and maintaining political stability has worsened.

Poor infrastructure and weak investor confidence have stymied the flow of foreign direct investment, according to the report.

FDI inflows between 2002 and 2006 amounted to about $1.1 billion, compared with $6.1 billion for Thailand and $3.9 billion for Malaysia. The lower FDI partly explains the Philippines’ smaller and narrower industrial base compared to its neighbors. In 2005, the share of manufacturing in GDP was 23.5 percent, compared with 34.8 percent in Thailand and 30.6 percent in Malaysia.

The report said that the inability of the government to address market failures effectively may have also hampered expansion and diversification of the country’s industrial base.

The report also cited the low domestic savings as one of the constraints to growth.

“In the long run, the need for higher domestic savings and improved skill and knowledge base can emerge as critical constraints to growth,” Ali said.

The report recommended that the government explore ways to improve revenue generation, expenditure management, and governance. The government should accelerate infrastructure development and diversify the industrial base.

Chief News Editor: Sol Jose Vanzi

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