Environment and Planning C: Government and Policy 2005, volume 23, pages 399 ^ 417

DOI:10.1068/c051

Devolution and regional disparities in the Philippines: is there

a connection?

Joseph A Silvaô
Department of Geography and Environment, London School of Economics, Houghton Street,
London WC2A 2AE, England
Received 14 December 2004; in revised form 2 March 2005

Abstract. The 1991 Local Government Code of the Philippines brought about a far-reaching transfer
of authority and resources to its local governments. Despite bringing benefits to the nation as a whole,
and to the individual local governments, devolution has also had some negative consequences.
Although regional disparities were present in the country prior to devolution, their recent rise has
coincided with the implementation of devolution. Regional disparities are analyzed in relation to general
macroeconomic policies and trends, such as industrial policy and increased trade, and particular
socioeconomic features of the Philippines, such as the significance of investments and migration. These
policies and trends, coupled with faulty transfer systems and differing levels of efficiency and capacity,
suggest that devolution is hampering the pursuit of regional equity. Hence it is concluded that, although
many factors are resonsible for the spatial inequities, devolution in its present form plays a direct and
interactive part in preserving and/or promoting regional disparities in the country.

1 Introduction
The implementation of devolution in the Philippines, through the 1991 Local Government
Code (LGC), has brought about a level of local government autonomy unprecedented in
the history of the country. Local governments now lay claim to as much as 40% of national
government revenues, up from a low of 11% (Brillantes, 1997), and have experienced
significant political and social change. The reform devolved certain key public service
and regulatory responsibilities to 80 provinces, 114 cities, and 1496 municipalities, and
41 945 barangays (the smallest unit of government). In fact, the World Bank and the
Asian Development Bank refer to the Philippines' 1991 LGC as ``one of the most
far-reaching decentralization reforms in the developing world'' (2003, page 116).
The goal of the LGC was to enable the local governments ``to attain their fullest
development as self-reliant communities and make them more effective partners in the
attainment of national goals'' (Congress of the Philippines, 1991, book 1, chapter 1,
section 2). At the same time, one of the underlying objectives of the LGC was to
promote growth with equity. However, the world has changed markedly since the
days when devolution was being debated in the halls of the Philippine Congress.
The onset and rapid amplification of globalization and its positive and negative
effects, the 1997 Asian crisis, and the various local and regional socioeconomic ^
political forces have each had their own significant impact on the country. There
have also been major breakthroughs in research, such as the new economic geography
theory (Krugman, 1991) and Porter's (1990) clusters concept, which have thrown new
light on how local economies develop and illustrate their strengths and weaknesses.
Simultaneously, numerous scholars have pointed out the pitfalls of devolution (Litvack
et al, 1998; Prud'homme, 1995; Rodr|¨ guez-Pose and Bwire, 2004), and others have
specifically questioned the effects of devolution on spatial inequities (Rodr|¨ guez-Pose
and Gill, 2004a).
ô Current address: iMPOWER Consulting, 40a Dover Street, London W1S 4NW, England; e-mail:
jsilva@impower.co.uk. (The opinions on this paper do not necessarily reflect those of iMPOWER
Consulting.)
400 J A Silva

In this paper I am concerned with whether the system of devolution in the Philippines
has contributed to more equitable growth in the country or not. I compare disparities
among the sixteen political regions and draw upon existing literature and recent findings
to analyze the type and impact of devolution in the Philippine context. Regional disparities
are assessed largely by income and I have not included, as advised by Sen (1999), other
social indicators such as infant mortality and adult literacy rates (though these are equally
important variables via which to assess disparities).
In the next section, the theoretical background of devolution is presented along
with some of its established critiques. In section 3 I briefly examine regional disparities
in the Philippines before framing devolution within the history of Philippine democracy
and attempting to understand the type of devolution that has evolved. In the fourth
section I link regional disparities with devolution, and present other possible factors
that may contribute to inequity. Findings suggest that, although regional inequalities
are caused by many factors, devolution seems to interact dynamically with some
factors in a negative manner. In the fifth section I conclude that the system of
devolution by itself, and in interaction with other factors, has contributed to increasing
regional disparities in the Philippines; and, also present some implications for current
Philippine governance initiatives.

2 Background on devolution
Recent decades have seen more countries of the world moving towards greater devolu-
tion (Rodr|¨ guez-Pose and Gill, 2003). In developing countries in Asia and South
America and the developed countries of Europe and North America, differing levels
and forms of devolution have been pursued. These may be fiscal, administrative, or
political devolution (Litvack et al, 1998), or a combination of all three.
Devolution is the transfer of authority, resources, and responsibility for public
functions from the national government to subnational governments (Prud'homme,
1995). These subnational governments elect their own local officials (mayors, governors,
councillors, etc), raise their own revenues (though at varying levels), have independent
authority to make investment decisions, and have clearly bound geographic boundaries
which make up their jurisdiction (Litvack et al, 1998).
From the political point of view, devolution represents a symbolic and real shift
from autocratic to democratic rule in many countries that were previously controlled
by dictatorships (Aziz and Arnold, 1996). In the following section I discuss some of the
major positive and negative impacts of devolution.
2.1 Expected positive impacts of devolution
There have been various reasonsöfrom efficiency and transparency, to fiscal ratio-
nalesöfor devolving powers and responsibilities to lower tiers. The most commonly
cited basis for devolution is that policymakers would be closer to the people, which
should result in a better match between policies and programs and the needs and
wants of the constituents; those governing will be more flexible and responsive to the
desires of the people (Oates, 1972; Rodr|¨ guez-Pose and Bwire, 2004; Tiebout, 1956).
Devolution also encourages competition among local governments, as citizens can
choose which region they would prefer to live in. This forces local governments to be
creative and efficient, which benefits the citizenry (Tiebout, 1956).
Furthermore, devolution is increasingly being seen as a strategy for economic
development. By encouraging each region to produce its own programs, it is hoped
that local development issues will be addressed and innate advantages exploited
(Rodr|¨ guez-Pose and Gill, 2003). Devolution will also bring greater transparency to
Devolution and regional disparities in the Philippines 401

local government as local chief executives will be more accountable to the people they
govern (Rodr|¨ guez-Pose and Bwire, 2004).
The devolution of authority and resources has also been used as a potential way to
combat corruption, as those governing will be under closer scrutiny on a daily basis.
Nonetheless, it seems that Azfar et al's (1999) findings that corruption could be either
reduced or increased under devolution, depending on the specific circumstances, seems
to be a more realistic assessment.
There have also been financial reasons for devolving powers. Some believe that
increased fiscal autonomy can help mobilize more revenue from local sources, in
developing countries in general (Shah, 1994) and in the Philippines in particular
(Bulosan, 2000). In addition, devolution is claimed to be a weapon in the fight against
rampant national debt (Kim and Smoke, 2002). However, at the subnational level,
Rodden (2002) finds only two circumstances of devolution where long-term balanced
budgets will be achieved: (1) where the national government limits state borrowing; and
(2) where states have full autonomy on taxing and borrowingöthe logic being that
voters and creditors will restrain local chief executives.
It is mostly for these reasons that countries worldwide have opted to shift towards
a more devolved system of governance. Having presented some of the major arguments
in favor of devolution, I now turn to the opposing arguments.
2.2 Criticisms of devolution
In the past decade or so, quite a number of scholars have cited the pitfalls of devolu-
tion. It is striking to see that many of these arguments have directly opposed the major
rationales for devolution, although a few of the others have cited other negative
consequencesöthe most important of which is inequalities resulting from devolution.
Prud'homme (1995) attacks the basic devolution argument of `efficiency based on
the preference of constituents'. He states that, particularly in developing countries, ``it
focuses entirely on demand efficiency and ignores supply efficiency'' (page 207). There
are smaller economies of scale in poorer and smaller regions, which translate to less
efficiency in, say, the procurement of goods and services. Given this, one can concur
with Robinson (2003) that devolution leads to an inequitable provision of public
services. Prud'homme (1995) further argues that there are fewer economies of scope,
as highly skilled personnel are attracted to central government where career opportu-
nities are better. He also points out that the problem is not usually preference for a
particular program, but, rather, plain povertyöat least in developing countries. More-
over, voters in developing countries hardly choose their mayors based on their political
platform, but on other, shallow, factors.
Just as Cheshire and Gordon (1998) point out the pitfalls of territorial competition,
which often leads to a zero-sum game, financial efficiency under devolution may also
not be as bright as it was painted in the previous section. Ebel and Yilmaz (2002),
scrutinizing and refining the data and methodology that deMello (2000) utilized, argue
that ``intergovernmental transfers `worsen fiscal positions' of subnational governments''
(Ebel and Yilmaz, 2002, page 14). It could also be that subnational governments will
deliberately reduce their efforts to raise local taxes in order to receive a greater share in
the transfer scheme, although Ma (1997) suggests otherwiseödepending on the type of
fiscal-transfer system in place.
Developing countries that provide strong financial powers to local governments
might run into serious fiscal problems, as exemplified by the Brazilian debt crises in
the late 1980s and 1990s (Rodden, 2003; Rodr|¨ guez-Pose and Gill, 2004b). At the same
time, devolution can also contribute to increased corruption (Azfar et al, 1999).
402 J A Silva

Devolution also encourages an increase in the number and a decrease in the size of
political units (Guevara, 2000; Rodr|¨ guez-Pose and Gill, 2003). Because of the ten-
dency of politicians to have their own fiefdoms, and also because of the design of
fiscal-transfer schemes, regions may tend to be subdivided to increase per capita
national government transfers to their area.
Findings on the relationship between growth and devolution have been somewhat
inconclusive, with some scholars finding mixed results (Rodr|¨ guez-Pose and Bwire, 2004;
Zhang and Zhou, 2001), whereas others have found no relationship (Mart|¨ nez-Väzquez
and McNab, 2003), and yet others find a positive relationshipöspecifically in develop-
ing countriesöand no effect in developed ones (Davoodi and Zou, 1998). Therefore,
one cannot be confident that devolution will bring about economic growth; in fact, it
might even be detrimental to growth. There could be an effect of devolution hampering
the redistributive role of central government (Prud'homme, 1995; Rodr|¨ guez-Pose and
Gill, 2003). By handing over more control and resources to lower tiers, national
governments are left with much less power and fewer resources with which to balance
out inequalities. In a similar way, national government fiscal policies are harder to
implement as each region/province/state will have predetermined level of control over
taxes and local fiscal policy (Prud'homme, 1995). This was clearly seen in the USA in
2003, when President George W Bush tried to implement tax cuts at the national level
to jump start the economy. To his dismay, his efforts were ineffective as many states
refused to lower their own tax rates.
This leads to my final and main point: devolution can result in less equitable
growth within a country (Markusen, 1994; Rodr|¨ guez-Pose and Gill, 2004a). Rodr|¨ guez-
Pose and Gill (2004a) suggest several reasons why this might happen. They cite
efficiency and fiscal explanations, and suggest that regions which attempt to increase
their local tax rates might engender out-migration. Also powerful local governments
will have greater negotiating power with the national government for certain incentives
and investments as they play a greater role in the national economy (Prud'homme,
1995; Rodr|¨ guez-Pose and Gill, 2004a).
The developing world, where spending per capita in relation to income per capita
is found to be regressive, remains regionally more inequitable than the developed
countries (Rodr|¨ guez-Pose and Gill, 2004a). These findings are supported by Schroeder
and Smoke's (2002) view that, at least in Asia, regions are mostly inequitable given
the present transfer systems. Subnational governments whose residents have high per
capita incomes finance a given level of public services with less tax effort than do
governments of poorer regions (World Bank, 2004).
At this stage, mention must be made of Gil Canaleta et al's (2004) study, in
which a strong negative correlation was found between decentralization and regional
inequalities, as well as a positive influence of decentralization on regional convergence.
However, it must be borne in mind that their study encompassed only highly developed
OECD countries, which may not experience the same impact of devolution as developing
countries in which disparities are greater to begin with.
The contradicting literature raises questions as to whether devolution will really
have more benefits than costs. Having provided a background on the expected out-
comes and possible consequences of devolution, I now examine regional inequalities in
the Philippines and attempt to assess the type of devolution that has evolved there.

3 Philippine disparities and the onset of devolution

3.1 Regional disparities in the Philippines
According to Gerson (1998), the Philippines' Gini ratio (or coefficient) has hardly
changed, varying from 0.45 to 0.51, in the past four decades. In this period, the
 Devolution and regional disparities in the Philippines 403

Philippines has seen huge disparities in income levels, poverty incidences, and
unemployment rates.
Income distribution in the Philippines is highly inequitable. In the last thirty years,
the richest 20% of the population has received more than one half of the country's
total income, while the poorest 20% has received only about 5% (Loungani, 2000).
These statistics still fail to show the appalling regional disparities. Taking a closer look
at regional income disparities in the Philippines, figure 1 relates gross regional domes-
tic product (GRDP) per capita to poverty levels. The graph clearly shows Metropolitan
Manila (referred to as the National Capital Region, or NCR) towering above all other
regions in terms of GRDP per capital. Its income per capita is more than three times
the national average, about twice that of its nearest competitor (Cordillera Autono-
mous Region, or CAR), and is about eight times that of CARAGAöthe region with
the lowest income per capita.
60 350

50 300
Poverty incidence (%)

GRDP per capita

40 250

200
30
150
20
100
10
50

0 0
Region IV

Region VII

Region IX
Region I

Region II

Region III

Region V

Region VI

Region X

Region XI
NCR

CAR

Region VIII

CARAGA
Region XII

ARMM

Poverty incidence (%) 1997 Poverty incidence (%) 2000 GRDP per capita (standardized) 2000
Figure 1. Poverty incidence, 1997 and 2000, and gross regional domestic product (GRDP) per
capita, 2000 (standardized: average ˆ 100) (source: data from National Statistics Coordination
Board).

Poverty incidence between 1997 and 2000 shows mixed results at the regional level
as high-income and low-income regions all experienced increases and decreases in
poverty levels. It is unsurprising to observe that, in general, lower poverty incidence
accompanies higher income per capita and vice versa, with only CAR seeming to be an
exception with both high poverty and high income levels. What is striking, though, is
that the NCR is the only region with a single-digit poverty-incidence level, while four of
the sixteen regions have poverty levels greater than 40%. The Autonomous Region
of Muslim Mindanao (ARMM) experienced the greatest incidence of povertyö57%
(exactly ten times that of the NCR) 2000.
There are also huge differences in minimum wages and in unemployment rates.(1)
The minimum daily wage ranges from about 70% of the national average in the ARMM
to almost 140% in the NCR. As high-growth areas adjacent to the NCR, Regions III
and IV have the second-highest and third-highest minimum wages, respectively.
Once again, the NCR and the ARMM show the extremes in unemployment
rates with, surprisingly, the ARMM exhibiting the lowest rate (7.7%) and the NCR
the highest rate (17%). This feature of a high minimum wage coupled with a high
(1) In the Philippines, each region has a Regional Wage Board that determines the minimum daily

wage for that region.

404 J A Silva

unemployment rate, clearly observed for the NCR and Regions III and IV, could be
explained by the effects of migration from lower income regions to higher income ones.
Migrants compete with the existing regional labour pool for the same number of jobs,
which results in increased unemployment in those high-wage regions.
What makes things worse is that inequalities seem to be widening. Table 1 shows
the variance of the natural logarithm of GRDP per capita of several developing
countries. Among them, the Philippines seems to exhibit the least amount of log
variance on a consistent basis; whereas China and Brazil show the greatest variance,
most possibly thanks to high-growth zones in their coastal and southern regions,
respectively. From 1980 to 1990, all countries except for India exhibit a convergence,
with Brazil and China making the greatest strides. The Philippines showed a modest
convergence of 12% for the same period.
Of greatest concern is the period 1990 ^ 2000, when all countries exhibit a divergence
with the Philippines diverging the most (by 21%). Coincidentally, it was in that same
decade that the Philippines undertook massive devolutionary initiatives. Although there
are surely other factors that contribute to the observed regional divergence, the undeni-
able coincidence between devolutionary acts and the rise in disparities must be seriously
questioned. Both of these ideas are analyzed for the Philippines in section 4.
Table 1. Log variance of gross regional domestic product per capita, for selected developing
countries (source: data from National Statistics Coordination Board; Rodr|¨ guez-Pose and Gill,
2004a).

Year Percentage changea

1980 1990 2000 1980 ± 1990 1990 ± 2000 1980 ± 2000

China 0.578 0.483 0.581 ÿ16.44 20.29 0.52

India 0.352 0.377 0.441 7.10 16.98 25.28
Philippines 0.229 0.201 0.244 ÿ12.15 21.14 6.42
Mexico 0.388 0.383 0.435 ÿ1.29 13.58 12.11
Brazil 0.588 0.488 0.494 ÿ17.01 1.23 ÿ15.99
a Figures may not match exactly because of rounding.

For now, we have seen that the NCR, together with its two adjacent regions,
Region III (Central Luzon) and Region IV (Southern Luzon, more commonly known
as CALABARZON), have dominated the economic landscape of the Philippines.(2)
Clearly, agglomeration forces (Krugman, 1991) have been at work in this part of the
country. However, several other regionsöthe ARMM, CARAGA, and Regions II, V,
VIII, IX, and XIIöare being left hugely behind, albeit at differing levels of GRDP per
capita, unemployment, poverty incidence, and minimum wage.
Having established the disparities in the Philippines and having shown that these have
been increasing in the past decade, I now review the type of devolution that has emerged.
3.2 The evolution of devolution in the Philippines
Since the Spanish times and into the American occupation, the Philippines has always
been ruled from Manila. During Ferdinand Marcos's dictatorial regime (1972 ^ 86), this
trend of `governance from the centre' did not change, and in fact worsened. Hence the
LGC of 1991 was really the first massive devolutionary initiative, attempting to counter
the centuries-old rule of `Imperial Manila'.

(2) On 17 May 2002, Region IV (originally known as Southern Tagalog) was officially split into two

regions: Region IVa (CALABARZON) composed of the provinces of Cavite, Laguna, Batangas,
Rizal, and Quezon; and Region IVb (MIMAROPA) representing the provinces of Mindoro,
Marinduque, Romblon, and Palawan.
Devolution and regional disparities in the Philippines 405

After the 1986 People Power revolution which ousted Marcos, Corazon Aquino was
thrust into power and was faced with the difficulty of dismantling authoritarianism and
reestablishing democracy (Abueva, 1997). She convened a Constitutional Convention
to draft the 1987 Constitution, which declared that ``the state shall ensure the autonomy
of local governments'', and which required Congress to pass a local government code to
implement the said local autonomy. Four years later, Congress passed the landmark
1991 Local Government Code.
With the aid of the model developed by Rodr|¨ guez-Pose and Gill (2003), one can
analyze the type of devolution that has developed in the Philippines. Having historically
had a very centralized government, and initially having had more political support for
the centreöwith President Aquino symbolizing the new national governmentöthe
central government continued to have stronger legitimacy than the local governments.
In fact, immediately after Aquino assumed the presidency, she went on to appoint
officers in charge to replace the mayors and governors known to the loyal to Marcos
throughout the countryöan act that was a signal of her strong popular support and had
the backing of the majority of the citizenry.
Although the new constitution guaranteed local autonomy, it would be some time
before the old `center knows best' mindset (Brillantes, 1998, page 40) that politicians
and the bureaucracy were accustomed to was removed. This stigma may have diluted,
for better or for worse, the formulation of the 1991 LGCöspecifically, the amount of
responsibility and resources to be devolved. By law, basic services (such as health,
social services, agriculture, and education, among others) were devolved to local
governments. Local governments were allowed to raise their own revenues to a certain
extent, generally had freedom to spend their own budgets as they wished, and received
substantially increased financial resources to implement their new-found powers.
Though admitting some shortcomings, some scholars, such as Brillantes (1997), have
described the 1991 LGC as a success and have provided case studies to prove their
point. However, others have been more sceptical.
A former undersecretary of the Department of Finance, Milwilda Guevara,
believes that power structures remain traditional and that the relationship between
local government and the central government is still paternalistic. She states that
``power is still deeply rooted in the central government and local governments have
remained mignons of the central government'' (2000, page 97). This explains the
existence and longevity of the so-called `pork-barrel' funds ödiscretionary funds of
congressmen and senators öthat many local governments court assiduously and use
mainly for capital expenditures. Similarly, Capuno (2002) subscribes to the notion that
``central government remains the dominant player in fiscal affairs ... its share in both
total public revenues and total public expenditures far exceeds that of the local govern-
ments'' (page 274). Figure 2 (over) indeed shows that local governments largely remain
dependent on the main fiscal-transfer mechanism, the Internal Revenue Allotment
(IRA)ölocal governments' share of the internal tax revenues of the national govern-
ment. Whereas mostly only the rich cities and municipalities of the NCR (and a
handful of other local governments) are not dependent on the IRA, thirteen of the
sixteen regions have more than 50% of their total revenues still coming from the IRA.
In fact, six regions find themselves depending on the IRA for three quarters or more
of their total revenue, partly as there ``is little incentive or pressure for local government
units (LGUs) to optimise their revenue raising powers'' (Guevara, 2000, page 108).
At the same time, national government agencies were still `rowing' instead of just
`steering'. ``The LGC mandated a number of services to be devolved to the local
governments. Despite this mandate, however, the national government still continues
to provide services to the local governments such as education services, hospitals and
406 J A Silva

95
85
75
65
IRA (%)

55
45
35
25
15
Region I

Region II

Region V

Region X
NCR

CAR

CARAGA
Region III

Region IV

Region VI

Region VII

Region VIII

Region IX

Region XI

Region XII

ARMM
Figure 2. Internal Revenue Allotment (IRA) as a percentage of total local government revenue,
2000 (source: data from National Statistics Coordination Board).

other medium-scale infrastructure programs'' (Capuno, 2002, page 264). The still
significantly increasing budgets of several national agencies (Department of Health,
Department of Agriculture, Department of Social Welfare and Development, Depart-
ment of Environment and Natural Resources), despite devolution having occurred a
decade ago, attest to this fact (Brillantes, 1998). Some agencies ``continued to formulate
and develop programmes and projects at the national level and then mandate local
governments to implement them, without at least consulting the local governments,
and to make matters worse, mandate local governments to implement these programs
without providing the necessary financial support'' (Brillantes, 1998, page 46).(3) More-
over, ``some national government agencies wilfully withhold their support to local
governments in order to set them up for failure and thus justify retention of powers
and authorities with the national government'' (Brillantes, 1996, pages 208 ^ 209). In
addition, devolution brought about great dismay in the career path of local government
workers (Brillantes, 1996; Rood, 1997).
Nonetheless, devolution progressed and was backed by the highest office in the
land: President Fidel Ramos's 1995 veto of a bill recentralizing health services sent a
strong signal and ensured that devolution was here to stay (Brillantes, 1997). This has
been further solidified by President Gloria Macapagal-Arroyo's 2001 repeal of several
Executive Orders that impeded local government's utilization of funds.(4)
It must also be said that devolution has had its fair share of successes. There have
been immense local government success stories heralded under devolution. Projects
range from the issuing of housing bonds to ecotourism projects, and to health and
microfinance programmes, among others, many of which are chronicled in the Galing
Pook Awards Programme (an initiative led by civil society, academe, and government
which recognizes innovative local government projects and programs). In her speech
celebrating the tenth anniversary of the 1991 LGC, President Macapagal-Arroyo spoke
(3) Rood (1997), however, finds that the claim of `devolution of responsibility without the necessary

resources' is mistaken, at least in the case of cities and municipalities.

(4) These repealed Executive Orders were (1) requiring local governments to submit their annual

investment plan to the Department of Budget and Management before they could get their 20%
development fund; (2) witholding part of the IRA intended for local governments contributions to
the Government Service Insurance System, Philhealth, and other government financial institu-
tions; and, (3) requiring local governments to set aside 5% of their 20% development fund
for anti-drug-abuse programs (not that the national government was against anti-drug-abuse
programs, but rather that the national government trusted the local governments' judgment).
 Devolution and regional disparities in the Philippines 407

of the ``adolescence though not yet the full maturity of local government autonomy''
(2001, page 2). More precisely, it is a devolution that is still largely driven from the top
down, but with the different units of the center simultaneously trying to let go and to
hang on; and, like the Filipino culture, it is still paternalistic to a certain extent.
Having established the existence of wide regional disparities and the type of
devolution that has evolved in the Philippines, in the next section I assess the relation-
ship between the two and attempt to determine whether devolution does contribute to
regional disparities.

4 Devolution and (in)equity

4.1 The relationship in the Philippines
In this section I explore the possibly coincidental relationship between the two realities
in the Philippines. Regional disparities are measured as the variance between the
natural logarithms of the GRDP per capita of the sixteen regions; devolution is
measured as subnational government expenditures as a percentage of total government
expenditures. Subnational expenditures include both those funds which are generated
locally and those that are transfers from the central government. The key idea is that
the local governments have full authority and responsibility over how those funds are
spent, or how much fiscal power the local governments actually possess. Although
Akai and Sakata (2002) and Ebel and Yilmaz (2002) both raise objections to the use of
subnational government expenditures as a measure of devolution, there is currently no
other objective variable with which to measure devolution.
The relationship between the two variables is charted over a two-decade period,
sandwiching the passage of the 1991 LGC, and indicating some focal social, economic,
political, and legislative periods and events in the Philippines' recent history. As
figure 3 shows, from 1980 to 1986 there was a decreasing trend in regional disparities
during the highly centralized Marcos years öa period when subnational expenditures
were relatively steady at 5% ^ 6% of total government expenditures. However, imme-
diately after the People Power Revolution of 1986, the level of disparities seems to
have become more volatile, possibly as a by-product of increased economic activity
of total government expenditure (broken line)
Subnational government expenditure as a percentage
Log variance of gross regional domestic product

Ramos AdministrationÐ
focused on foreign direct
investment and reinforced 20
People Power
devolution
0.24 Revolution
18
ousts Marcos The transition Aquino
Administration
Marcos DictatorshipÐ 16
0.22 highly centralized
Asian 14
financial
crisis The Estrada
0.20 years
12
New Local
per capita (solid line)

Constitution Government
guaranteeing Code passed, 10
First year of full
0.18 autonomy implementing implementation
to local devolution of 1991 Local 8
governments Government Code
6
0.16
4

0.14 2
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Figure 3. Philippine inequalities and subnational government expenditures (source: data from
National Statistics Coordination Board; International Monetary Fund).
408 J A Silva

following a surge of investor confidence brought about by the accession of the reformist
Aquino Administration.
At the same time, the transition period of 1986 ^ 92 saw significant milestones
towards dismantling the authoritarian Marcos regime. Based on the level of sub-
national expenditures at that time (still hovering around 5% ^ 6%), one can classify
that period of restructuring as being still a continuation of highly centralized govern-
ment. It was only after the 1991 LGC was passed that subnational expenditures
increased to about 10% of total government expenditures, and gradually to 16% and
then 18%. Together with this rise in subnational expenditures, however, there is a
steady rise in regional disparities as well. The biggest one-year jump in the log variance
of GRDP per capita was in 1994 ^ 95, when it increased by 20%, which could be
attributed to the fact that 1993 was the first year of full implementation of the 1991
LGC (Rood, 1997).
With a correlation of 0.52, it can be concluded that there is a positive but moderate
association between devolution and income disparities. There are several reasons
explaining how devolution could have contributed to this rise in regional income
disparities: these include inequitable transfers, differing levels of efficiency, and the
impact of investments on devolved regions. Each of these is discussed in turn below.
4.1.1 The issue of transfers
First, the allocation of nondiscretionary (IRA) and discretionary transfers and grants
are not commensurate with the level of development of a region. ``The magnitude and
distribution of the IRA and the cost of devolved functions may account partly for the
differences in local fiscal performance, and ultimately also for the variations in
regional development'' (Capuno, 2002, page 234). Capuno also points out that ``both
local revenues and expenditures ... generally appear to be positively correlated with
their respective IRA shares'' (2002, page 234). This suggests that, on average, those
local governments that already have higher revenues still receive higher IRA shares
(at least in the case of provinces and cities). This fact is also substantiated by Guevara
(2000), who asserts that, among others, those with higher taxable capacity are allotted
more grants. She claims that ``the equity goal of the allotment system is far from
accomplished ... on a regional level, grants flows more heavily to more developed
regions like Region's IV, III, and NCR in Luzon'' whereas ``grants to depressed regions
... were below the average'' (Guevara, 2000, page 101).
Second, the system of discretionary transfers from central to regional governments
is uneven. It seems that richer states enjoy greater negotiating strength in terms of
being able to capitalize on central government transfers unrelated to the basic IRA
distribution formula. This could possibly be because of their relative importance to the
national economy, their political clout, or a combination of both. Rodr|¨ guez-Pose and
Gill (2004a) refer to this as the `dynamic effect' of devolution. This `national economic
importance factor' is consistent with Capuno's (2002) Philippine assessment that ``the
regional budget allocation of key national government agencies does not seem to help
reduce interregional disparities. Social service expenditures are focused on the low-
income regions, but infrastructure expenditures are focused on high-income regions''
(page 276).
Despite the LGC, the national government still allocates funds for local public
services. These funds, which are significantly greater than the IRA, are distributed
in a way that seems to exacerbate fiscal imbalances in the country (Capuno et al,
2001). As figure 4 shows, there is a regressive allocation system with regard to national
government capital outlays per region, with the NCR and CAR, both of which have
high incomes, receiving the most national government capital outlays per capita;
 Devolution and regional disparities in the Philippines 409

4 000
NCR
National government capital
outlays per capita (in pesos)

3 000

2 000

CAR
1 000

ARMM
0
0 50 100 150 200 250 300 350
GRDP per capita, standardized (average ˆ 100)
Figure 4. National government capital outlays per capita per region, and gross regional domestic
products (GRDP) per capita (source: data from the Commision on Audit; National Statistics
Coordination Bureau).

whereas the ARMM, which has the lowest income, receives the least amount of capital
outlays. However, when the NCR and CAR are removed from the dataset, the figures
suggest a slightly progressive distribution of capital outlays.
This unequal allocation also seems to apply to the distribution of Official Devel-
opment Assistance (ODA) funds. More than 40% of all ODA funds go to the NCR,
and Regions III, IV, and VII receive huge shares as well. These regions are, ironically,
the most prosperous regions in the Philippines. On the other hand, the ARMM,
CARAGA, and Region IIösome of the most marginalized regionsöseem to receive
no region-specific ODA funds.
Third, the formula utilized in distributing transfers does not ensure that local
governments receive resources commensurate with their actual needs. If assuming
that needs can be partially defined as the size of the population of an LGU, then the
more populated ones should receive greater grants. However, the more populous LGUs
actually receive a smaller allotment per capita (Guevara et al, 1995).
Fourth, since the 1997 Asian financial crisis, the Philippines has had a rising
budget deficit, which is in fact reaching a critical stage at this point in time (de Dios
et al, 2004). This long-standing national government budget deficit negatively affects
transfers to poorer regions (Schroeder and Smoke, 2002), whereas richer regions
can cope much better as they are less dependent on the transfers because of their
significant internally generated revenues.
4.1.2 On efficiency
In their recent joint major undertaking, the World Bank, the Asian Development
Bank, and the Government of the Philippines (2003), found distributing evidence of
a lack of capabilities of the devolved local governments. They conclude that ``LGU
capacity for expenditure management is uneven, especially in planning, investment
appraisal, financial management, and personnel functions'' (page 118).
They found weak local government capacity in financial management, especially in
rural LGUs where it would be more difficult to hire qualified and experienced account-
ants. With regard to revenue administration, issues include the lack of precise electronic
taxpayer-registration databases, the lack of trained professional staff, and the virtually
nonexistent taxpayer services, among others. Furthermore, the report also suggests that
410 J A Silva

``local governments have limited ability to manage and develop their own personnel''
(World Bank et al, 2003, page 119), and experience difficulty in service delivery and
procurement.
Although the report does not define which types of regions they found more
efficient, it would be safe to assume that those local governments found to be wanting
would more likely be the more marginalized and far-flung ones, as they would have less
resources to train their personnel, less resources to invest in an effective tax-mapping
program, less chances of providing taxpayer services (and other similar programs), and
would be located in areas where there are fewer trained professionals whom they could
hire. The opposite would most likely be true for the more prosperous and better linked
areas. These efficiency indicators would also spread across other public services of the
local governments, thereby affecting the overall level of development and income of
each jurisdiction.
4.1.3 The systems effects of investments on devolved local governments
An interconnected series of linkages of established theories related to specific circum-
stances in the Philippines is presented in figure 5. This shows how investments (both
local, and foreign direct investmentöFDI) have been playing a significant role in the
economic growth of the Philippines (discussed further in the next section). The Board
of Investments and the Philippine Economic Zone Authority report that investments
have been increasing since the late 1980s, though there has been a tapering off as of
late. As a huge portion of these investments have been going into special economic
zones (SEZs), it could be said that investments are not only decided directly by firms
looking to construct factories, but also by the public and private entities that create the
SEZs.
Initially rich regions will have a greater fiscal advantage (over poorer regions) in
that they have a bigger tax base with which to support their public services and
infrastructure programs (Rodr|¨ guez-Pose and Gill, 2004a). As Makabenta (2002) finds
that FDI and SEZs in the Philippines are primarily located in areas where good
infrastructure (paved highways and ports) are located, initially richer regions, therefore,

Better infrastructure Weaker infrastructure

and better skilled people and less-skilled people

Foreign direct investment

and local investors
attracted more to regions Less tax base to
Bigger tax base
Initially with better infrastructure Initially spend on infra-
to spend on
and better skilled workers structure and
infrastructure richer poorer public services
and public services regions Ðmostly already-rich regions
regions; and less attracted (like education
(like education
to poorer regions with and training)
and training)
less infrastructure and
less-skilled workers

Sends signs of Sends signals of

more competitive less competitive
industrial conditions No, or less, industrial
and better quality Agglomeration of firms agglomeration of firms conditions and
of life poorer quality
of life

Migration of
Increasing workers in search Stagnating
wages of `greener pastures' wages

initital causation succeeding causal relationship secondary/minor causation factors

Figure 5. Philippine devolved regions and increased investments.
Devolution and regional disparities in the Philippines 411

will have the advantage in attracting investments as they would generally have better
infrastructure. Chalk (2001) identifies quality of labor as the main reason why elec-
tronics companies, which constitute a significant percentage of overall investments,
invest in the Philippines. Unlike in Brazil or the USA, individual Philippine local
governments have, and utilize, relatively fewer incentives to attract investments as it
is mostly the national government agencies that set the investment incentives.
Hence, based on the findings of Makabenta (2002) and Chalk (2001), investments
in the Philippines flow to areas where there is good infrastructure and an abundance of
high-quality laboröalmost always the initially richer regions. As an agglomeration
of firms is established in the richer regions (the NCR, Regions III, IV, and VII),
as predicted by Krugman's (1991) new economic geography theory, the tax base of
the local governments will be increased and this can be ploughed back into further
upgraded infrastructure and public services. Hence, investments will be even more
attracted to locate in the richer regions, and a virtuous cycle is formed.
The implication for the other side of the coin is that poorer regions, with a smaller tax
base and with weaker infrastructure capacities, will attract much less investment, resulting
in less economic activity. This, in turn, will leave them with a continued small tax base, and
hence they will find it difficult to upgrade their infrastructure and public services by
themselves. If they do not receive assistance from the national government to upgrade
their infrastructure and public services, and hence not train their people better, they will
not be in a position to attract investments; and a vicious cycle is reinforced.
Simultaneously, less economic activity in poorer regions will lead to stagnating
wages, which will result in the migration of workers to areas of higher wagesöthe
prosperous regions. This movement of labor is ``the force that generates the unequal
geography within a country'' (Paluzie, 2001, page 82).
In addition, Makabenta's (2002) regression analysis suggests that low wages in
marginalized regions are seen by FDI decisionmakers as a sign of ``less competitive
industrial conditions and a lower quality of life'' (page 71), and vice versa for the higher
wages in the richer regions, which further reinforces both causal loops. Keeping in
mind that wages in the Philippines, as in many similar developing countries, are very
low, firms are willing to pay slightly `more' in order to ensure higher quality.
These arguments show how devolution impacts on inequalities in the Philippines,
and demonstrate that, at least in the 1990s, devolution seems to have contributed to
rising disparities. However, these arguments certainly do not mean that devolution is
the only cause of inequalities.
4.2 Other factors affecting equitable growth
Several other factors have been identified as impacting on equity. The major factors
specifically affecting equity in the Philippines are presented below, broken down as
microlevel and macrolevel factors.
4.2.1 At the macrolevel
There are three macroeconomic characteristics that have significant effects on regional
development and, hence, regional equality. First, a more open trade regime results in
increased disparities (Paluzie, 2001) as regions with more linkages with the interna-
tional economy benefit more than do those that have not, except in times of recession
(Hill, 2002), and high interest rates are likely to affect areas dominated by heavy
industry (World Bank, 2004). When trade, as measured by combined imports and
exports in relation to gross domestic product (GDP), is used as an indicator, the
Philippine economy has steadily opened up in the past two decades. In the past few
years, combined exports and imports are almost equivalent to GDP, and exports alone
have been equivalent to more than 40% of GDP.
412 J A Silva

There is a striking congruence between total exports and total investments per
region. For the most part, where investments go, exports originate from. Although
the growth of FDI in the Philippines has been slowing in recent years (thanks to the
`China factor'), what is most striking is the monstrous 50% share of Region IVö
CALABARZONöboth in investments and in exports. When combined, the adjacent
regions of the NCR, Region III, and Region IVöthe regions most linked to the
international economy öreceive 91% of all investments and are responsible for a
staggering 83% of total exports. These shares in investments and exports are translated
to elevated levels of income in those regions, which hence are leaving the other, poor,
regions behind.
Second, the type of exports also matters. If the exports were primarily agro-based
products, then growth would be more dispersed as agricultural lands are present
nationwide. However, about 90% of exports are manufactured goods (and more than
half of total exports are electronic goods). Once again, because manufacturing firms
tend to agglomerate (in order to capitalize on linkages and cheaper transport costs,
among other things), wages will tend to rise more rapidly in those regions.
The concentration of economic activity in certain regions is no coincidence, which
leads to the third point: national government industrial policy. Being the capital, it is
not surprising to see the NCR receiving a huge share of investments and being
responsible for a significant amount of exports. However, the Aquino and Ramos
Administrations (1986 ^ 92 and 1992 ^ 98, respectively) packaged the two adjoining
regions (Regions III and IV) to become the paramount growth corridors in the country.
Government-owned export-processing zones (EPZs) and privately owned SEZs, which
were authorized to give various fiscal and other incentives to investors, sprung up in
those two regions. These EPZs and SEZs proved attractive to the investors, as is shown
by the increasing occupancy rates. It also helped that the lease expired on the two
American military bases (Subic Naval Base and Clark Air Base) in Region III.
These sprawling former bases, with first-world infrastructure, were converted to highly
attractive economic zones which were also authorized to give certain fiscal and
other incentives to investors (for a discussion on all incentives, see Chalk, 2001). This
combination of adequate infrastructure coupled with incentives made these EPZs,
SEZs, and former US bases successful in attracting investments.
Although increased trade in a developing country which is evolving from an
agriculture-based economy to one that is manufacturing-focused will further engender
inequity as agglomeration forces concentrate activity in a few areas, this may not be
precisely the case in the Philippines. Based on figure 6, it is true that the Philippines is
moving away from agriculture (though this is certainly still a huge part of the economy,
particularly from the labor point of view). However, industry (and manufacturing)
does not seem to be increasing its share of GDP; instead, the services sector has
been gaining ground. At the moment, this implies further disparities as the still-
underdeveloped service sector is mainly focused in the three leading regions (the NCR,
III, and IV). However, in the future, this effect may yet be reversed as the service
sector matures and capitalizes on the use of technology, as exemplified by the surging
call-center operations in the country (Henderson and Silva, 2002).
Before proceeding to the microlevel issues, it must be noted that there have been many
cross-country findings on the relationship between growth and inequality. Summers (1999)
points out that Kuznet's original theory, that growth leads to inequality, has already
been disproved many times over. In one of the latest studies, Dollar and Kraay (2004)
found that increasing growth leads to proportionate increases in incomes of the poor.
Sarel (1997) further suggested that higher growth rates lead to improvements in income
distribution. However, this does not seem to hold true in the Philippines case.
 Devolution and regional disparities in the Philippines 413

47
Services
42
Percentage of GDP

37
Industry

32

27 Manufacturing

22
Agriculture
17
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Figure 6. Trend of gross domestic product (GDP) composition by sector, 1987 ^ 2003 (source:
National Economic and Development Authority, 2004).

4.2.2 At the microlevel

With respect to the above comments, the Philippines seems to be an exception. Regional
data suggest that growth contributes to a reduction in poverty incidence, but that the effect
is weak in rural areas (Loungani, 2000)öwhich are predominantly what make up poorer
regions. This is consistent with the empirical analysis of Balisacan and Pernia (2002), on
Philippine provincial-level inequalities: they found that the overall impact of average
income growth on poverty is much less than the cross-country analyses suggests.(5)
More importantly, Balisacan and Pernia (2002) concluded that, aside from growth,
many other provincial-level factors impact on equity. They found that education,
infrastructure, terms of trade,(6) agrarian reform, governance, and irrigation, are all
significantly positively correlated with the income of the poorest quintile (bottom 20%).
On the other hand, political dynasties, high transport costs, and typhoon-prone areas
(see also Otsuka et al, 1992) are negatively correlated with the welfare of the poor. They
also found variables which, when taken together, have a positive impact on those
marginalized. Schooling raises the welfare of the poor if it is accompanied by comple-
mentary public investments; this is also true for agrarian reform, if there is investment
in land improvement coupled with the removal of price-distorting mechanisms.
It can be seen that many microlevel factors found to be significant by Balisacan
and Pernia (2002) are factors that are related to powers that have been devolved in
the Philippines. Though devolved to local governments at differing levels, education, the
provision of infrastructure, agrarian reform, and irrigation are all areas in which local
governments can play a huge part. However, ``In spite of the strong and numerous
provisions under the existing LGC for local governments to take a prominent role, they
have not been significantly involved'' (Mercado, 2002, page 68). Specifically for infra-
structure development and public works, Mercado identified three interrelated reasons:
vague roles across different levels of government; lack of funds; and the lack of
technical and administrative capability. This set of explanations can be said of most
of the other factors identified (that is, education, irrigation, etc), and, hence, the
differing levels of capabilities of the devolved local governments can easily translate
into regional disparities.
(5) They find that for every 10% increase in per capita income growth, the income of the poor rises
by only 5% instead of the one-to-one ratio that others suggest.
(6) They suggest that the terms of trade are ``positive and significant, indicating that changes in the

price of agriculture relative to the price prevailing in other sectors of the local economy have a
profound impact on poverty reduction'' (page 17).
414 J A Silva

5 Conclusions
In this paper I have attempted to analyze the relationship between devolution and
regional disparities in the Philippines. Findings suggest that disparities have existed for
quite some time, and have grown dramatically in the 1990söthe period when devolution
began to be implemented in the Philippines. At the same time, Philippine devolution has
been observed to be `center-led' and it seems that the national government has found itself
still struggling to let go completely of its old powersönotwithstanding the fact that the
topmost leadership has consistently thrown its support behind the devolutionary process.
Although devolution has certainly had its share of success in the Philippines, some
of the theoretical criticisms of devolution also seem to hold true. Efficiency levels
among local governments vary widely, and fiscal equalization transfers are not all
that `equalizing'öboth of which impact on the level of development of each local
government unit. This is not to say that local governments do not have the authority
to bring about amplified development. However, the more marginalized local govern-
ments are hindered by lack of capacity, resources, and qualified personnel öingredients
which the more progressive and more prosperous local governments usually have much
more of.
Aside from the fact that other factors öoverall macroeconomic policy, industrial
policy, and increased tradeöalso impact on spatial disparities, Philippine-specific
factors, such as the scope of FDI and domestic migration, have also been observed
to reinforce regional inequalities dynamically under devolution. Based on these findings,
it can be concluded that the temporal coincidence between devolution and increased
regional disparities in the 1990s did not happen completely by chance; and that Philippine
devolution, in its present form, contributes to (or even exacerbates) regional disparities
both by itself and by having a dynamically reinforcing interaction with the other related
factors.
This by no means suggests that devolution should be discarded, as there have
certainly been many positive outcomes. Nonetheless, these findings have serious impli-
cations on the present trajectory of regional equity in the Philippines. Should all the
aforementioned factors continue to impact as they currently do on income levels across
the regions, then the gap between the progressive regions and the less-developed
regions is set to become wider.
There are some key actions that may contribute to correcting the situation, such as:
reviewing the general system of transferring funds (IRA and otherwise) with a view to
ensuring greater equality among regions; significant investment could be made in
serious regional development programs which would tie together several key compo-
nents, such as rationalized infrastructure, capacity building, and investment incentives,
in the more deprived regions.
For their part, local governments could also play a part by building capacity within
their organizations and among their constituents, and by supporting their existing
small and medium-sized enterprises (SMEs) to become industry winners. In fact,
with the aforementioned slowdown of FDI to the Philippines in the last few years,
because of the `China factor', and weak exports growth because of the global recession
after 9/11, the Philippine government was prompted to look inward to a certain extent
and to stimulate SME development as a means to achieve sustainable growth. This
two-pronged strategy of devolution and local SME developmentöstimulating local
economic activity on a nationwide scale ömight very well be an approach that could
achieve growth with equity in the Philippines.
Last, the overall findings also have implications on the revived proposals for over-
hauling Philippine governance: a shift to a federal system of government (Corvera,
2004). Although this drive is largely being sponsored from belowöa sign from local
Devolution and regional disparities in the Philippines 415

governments that they would prefer even more autonomyöthe center's opinion is
mixed, as it should be. There are those who believe it is still unnecessary at this point,
whereas others see it as the logical next step and a key element for enhanced national
development (Pimentel, 2004). Prudence is, therefore, advised in these next steps.
Whatever may happen to the federalism initiative, lessons from the implementation
of the 1991 LGC have to be incorporated. The institutional aspects should ensure that
local governments will be able to maximize the authority given to them, and that the
redistributive power of the national government is not compromised.
Acknowledgements. The author thanks Professor Andrës Rodr|¨ guez-Pose for his invaluable com-
ments, and is grateful to Alok Misra and two anonymous referees for their helpful remarks. The
author acknowledges the gracious support of the British Council Philippines and the British
Embassy in Manila. Any errors are the sole responsibility of the author.
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