Gloria Steele, John Avila, Daniel Miller and Gerald Britan
In the Philippines — and quite possibly in many other rapidly developing countries — urban-led development focused on second-tier cities as engines of growth promises to be an effective approach for addressing poverty and the inequitable distribution of income.
A development paradigm focusing on cities as engines of growth
USAID’s mission in the Philippines believes that the development of more competitive secondtier cities can drive inclusive growth that improves the welfare of both urban populations and people living in surrounding peri-urban and rural areas.1 As a recent white paper on urbanization noted, “cities can be engines of economic growth” and “urban growth, in turn, drives rural development.”2
This approach is grounded in data that report higher growth in economic output in several increasingly urbanizing Asian countries. In these countries, the development of secondary cities effectively stimulated surrounding rural development. 3 For example, from 1970 to 2006, China and India each produced an average 6 percent increase in per capita GDP for every 1 percent increase in urban population. Vietnam and Thailand exhibited 8 percent and 10 percent increases, respectively.4
Cities in the Philippines, however, have not generated the same high rates of economic growth or reductions in poverty that were realized in China, India, Vietnam and Thailand. This has been attributed to the nation’s archipelagic geography, highly fragmented structures for spatial and infrastructure planning and poor metropolitan governance.5
Conventional approaches to development planning have failed to meet the challenges of rapid urbanization—particularly the poverty, exclusion, informality and vulnerability produced in its wake.6 USAID’s urban-focused Cities Development Initiative in the Philippines is designed to address these challenges and make a significant difference in alleviating poverty.
Poverty and the imbalance of development
Despite an impressive average annual GDP growth rate of 7 percent from 2011 to 2013, unemployment and under-employment remain high in the Philippines, hovering around 7 and 20 percent, respectively. National poverty levels have scarcely budged. Economists call this the paradox of hollow, or jobless, growth.
Income inequality likewise persists: According to national statistics, the top 20 percent of Filipinos capture nearly half of the nation’s total income, while the bottom 20 percent possess only 6 percent. Viewed from another perspective, total income for the wealthiest 20 percent of Filipinos is more than eight times greater than the total income of the poorest 20 percent.
Simply stated, economic gains in the Philippines have not yet generated tangible improvements in the lives of most Filipinos. Estimates by the Philippine Government and multilateral development agencies predict that the Philippines will miss both the poverty and hunger targets set under the Millennium Development Goals. The proportion of the nation’s population living in extreme poverty (less than $1.25 a day) has been declining–but at the very slow pace of 21.6 percent in 2003 to 19.2 percent in 2012.7
For the last 50 years, most development assistance in the Philippines has focused on rural growth as the principal means for poverty alleviation. The strategy seemed to make sense, historically at least, since the vast majority of the poor lived in rural areas.
Despite a continuous long-term focus on rural-led growth, however, rural poverty, at 39.4 percent, remains significantly higher than the national average of 26.5 percent and more than three times higher than the percentage in urban areas.8 Moreover, agricultural productivity remained depressed, and the agricultural growth that did happen was not accompanied by increases in labor productivity.9
In addition, about 62 percent of Philippine growth has been concentrated in the major urban center of Metro Manila and the areas surrounding it: CALABARZON (four provinces to the southeast of Manila)10 and Central Luzon (seven provinces in the plains north of Manila). This rural-urban imbalance is also noticeable in the incidence of poverty across the nation. Only the National Capital Region and two of its immediate neighbors had household poverty rates less than the national average. The entire rest of the country had poverty rates above the national average.
An urban-led development strategy that undergirds the Partnership for Growth
Through the Partnership for Growth (PFG), launched in November 2011, the United States and the Philippines are working together to accelerate and sustain broad-based and inclusive economic growth. The PFG identified binding constraints to growth—weak governance, inadequate fiscal resources, insufficient infrastructure, weak human capacity and pervasive corruption—and concentrates on the policy, regulatory and institutional changes critical to achieving more inclusive and sustainable growth. To have transformative impact on economic growth, the PFG requires strong and sustained levels of engagement from both governments.
The goal: Increase local capacity to manage urbanization and growth, improve the enabling environment for local enterprise development and strengthen the connectivity between urban and surrounding rural areas.
Starting in 2011, the Government of the Philippines has been implementing major policy and institutional reforms and has been strengthening its anti-corruption efforts. Since then, the Philippines has significantly advanced its position in international rankings of business climates worldwide, jumping 30 places in the World Bank’s Doing Business survey, 28 places in the World Economic Forum’s measure of global competitiveness and 35 places in Transparency International’s Corruption Perceptions Index. Real GDP growth has averaged 7 percent per year in the last three years, well above the 4.7 percent average recorded from 2008 to 2012.
Strong economic fundamentals, combined with enhanced confidence in the government, also led the big three credit rating agencies to raise their ratings for the Philippines, further improving the environment for investment. Thanks to the country’s fiscal policy reforms and improved tax administration, total tax revenues grew by 13.2 percent and tax effort increased from 12.3 percent to 12.9 percent of GDP—the highest increase in decades.
Thus far, economic growth has been heavily concentrated in and around the national capital region. Rather than fight these trends, USAID’s urban-led strategy applies and takes advantage of PFG-generated policy and institutional improvements in second-tier cities, where the potential for urban-rural growth is the greatest.
Why focus on second-tier cities?
Our rationale begins with understanding the close link between the growth trajectories of nations and dense human settlements. Cities, benefiting from physical proximity and increased density, become magnets for entrepreneurial talent and innovation. They typically produce a disproportionate share of a nation’s economic output, as measured in GDP. In the Philippines, cities already offer higher average standards of living compared with surrounding rural areas. The poverty incidence in urban areas (12.8 percent) is roughly half of that in the country as a whole (26.5 percent).
Cities also stimulate growth in surrounding peri-urban and rural areas. A recent study on the transformation of the Philippines’ rural economy found that growth in the rural nonfarm sector occurred in tandem with the development of infrastructure integrating rural areas with urban centers. This growth opened up employment opportunities to male and female workers across age groups, which is vital to reducing poverty and achieving more egalitarian distributions of income.11
Most second-tier cities in the Philippines, with relatively small populations and far less economic activity than Metro Manila, are at relatively early stages of urban development. Development of these cities can help ease congestion and pressure on Metro Manila’s resources and infrastructure—further contributing to broad-based, inclusive, sustainable national growth. Furthermore, second-tier cities in the Philippines are more closely located to the rural and peri-urban areas, where most of the country’s poor people live.
Thus, USAID’s mission in the Philippines aims to assist in the development of second-tier cities using the ideas and plans that underlie our new urban-led growth strategy.
Developing an urban-led strategy: the Cities Development Initiative and USAID’s mission in the Philippines
Our strategy is to strengthen cities’ economic competitiveness and resilience through a carefully coordinated and integrated set of interventions. The goal: Increase local capacity to manage urbanization and growth, improve the enabling environment for local enterprise development and strengthen the connectivity between urban and surrounding rural areas. These interventions will draw upon USAID projects that foster economic growth and improved governance, health, education and environmental resilience.
As part of the PFG, we initiated the Cities Development Initiative (CDI) in three cities: Batangas south of Manila, Iloilo in the Visayas region and Cagayan de Oro in the Northern Mindanao region. Through our urban-led growth strategy, we hope to help create cities in the Philippines that are effective engines of growth, foster broad-based and inclusive growth, and are environmentally sustainable and resilient.
More effective engines of growth
Emerging-growth cities must foster environments that enable new, job-generating businesses to thrive. This means lowering the costs of doing business, facilitating new investments, particularly for small- and medium-sized enterprises, and protecting property rights.
To build upon conditions in Batangas, Iloilo and Cagayan de Oro, USAID assisted in efforts to improve overall business climates, particularly for starting a business, and establish Investment Promotion Offices to attract more investment.
The three CDI cities made significant progress streamlining the business registration and license renewal processes. This included introducing a single application form, reducing the number of steps from as high as 27 to just three or four, reducing the number of required signatories from 13 to one and decreasing overall processing time from several days to just an hour. Businesses now can submit renewal forms online, receive tax orders of payment through email and pay their business taxes and fees at city hall. In Cagayan de Oro, the streamlining of business processes led to an increase of 38.7 percent in business registration fees in the first quarter of 2014 compared to the same period in 2013.
Improved business processes attract investors, leading to the more plentiful and higher-paying jobs that increase buying capacity for goods and services provided by the poor in rural and peri-urban areas. More investment should also result in more taxes to fund education and health services for the poor.
More economically broad-based and inclusive
Cities can serve as economic growth hubs that create jobs for their poorest residents, deliver and improve services and link rural agricultural producers with urban markets. Economically thriving cities can provide farmers with growing markets for their products, reducing the need to migrate to cities in search of employment.
Based on our experience with the pilot cities, we expanded CDI’s focus beyond its initial emphasis on the economic climate and business environment to a “whole of mission” approach that encompasses urban planning, health, education, environmental resilience and other services essential to engaging the urban and rural poor, developing their human capital and ensuring equitable, sustainable growth.
USAID’s mission in the Philippines is also working to create and improve links between cities and surrounding rural areas. This involves reducing policy and regulatory barriers, lowering connectivity and information costs related to the spatial flow of goods and services, strengthening supply-chain linkages between urban markets and rural producers and developing arrangements that improve coordination and exchange.
More environmentally sustainable and resilient
Given the Philippines’ vulnerability to natural hazards, disasters cost the Philippines as much as 2 percent of GDP annually and put large urban populations at risk. For cities to achieve sustainable development and inclusive growth, they must increase environmental resilience by improving the management of natural resources and reducing the risks associated with natural disasters.
CDI has helped build environmental resilience in its three pilot cities. To increase access to water and sanitation, USAID forged partnerships for network optimization and septage management between local water service providers in Iloilo and Cagayan de Oro and providers in Manila. Through conducting training in cost-benefit analysis, USAID helped local governments strengthen their capacity to prioritize initiatives and increase their cities’ resilience to impacts related to hydrologic climate change.
Low-emission development also plays an important role in resilient urban development and growth, and CDI helped pilot cities implement these strategies. This included using the Rapid Assessment of City Emissions tool in Batangas to promote low-carbon and resilient urban development growth. Also in Batangas, USAID partnered with the private sector and the local government to launch an interactive learning hub about the environment and climate change. CDI also organized business forums to promote clean and renewable energy investments. In Cagayan de Oro, one such forum facilitated a connection that led to a green development loan from the Land Bank of the Philippines to a local property developer.
Conclusion
The three cities supported by USAID’s mission in the Philippines are now some of the fastest growing and progressive cities in the country. Cagayan de Oro and Iloilo ranked first and second, respectively, among 122 cities in the National Competitiveness Council’s 2013 City Competitiveness Survey. Batangas garnered the second-highest satisfaction score among 14 cities included in a customer satisfaction survey for business registration and renewals. Streamlining of the business-permitting process led to increases in business registrations across the three cities and increases in combined local revenues.
Based on our experience working in the first three CDI cities, we will scale up the program to include other urban areas and mobilize a wide range of assistance instruments to increase impact. This includes leveraging private capital, partnering with the private sector to improve the investment climate and more fully engaging local academia and civil society. While we do not yet have extensive data on the CDI’s impact on reducing poverty, increasing growth in the country combined with increasing engagement of the poor bodes well for the future.
Gloria Steele is mission director, John Avila project management specialist, Daniel Miller office director, and Gerald Britan strategy and evaluation adviser for USAID/Philippines. The views expressed in this essay are their own and do not necessarily represent the views of the United States Agency for International Development or the United States Government.
1 Michael Spence in the preface to the 2009 Urbanization and Growth, published by the World Bank, noted, “Deciding whether urbanization causes growth or growth causes urbanization is very difficult, and largely beside the point. We know of no country that either achieved high incomes or rapid growth without substantial urbanization, often quite rapid. There is a robust relationship between urbanization and per-capita
income: Nearly all countries become at least 50 percent urbanized before reaching middle-income status. In all known cases of high and sustained growth, urban manufacturing and services led the process.”
2 International Housing Coalition. 2010. The Challenge of an Urban World: An Opportunity for U.S. Foreign Assistance. Washington, DC.
3 Ramos, C.G., J. Estudillo, Y. Sawada and K. Otsuka. 2012. Transformation of the Rural Economy in the Philippines, 1988-2006. Journal of Development Studies, 48(11): 1629-1648.
4 World Bank. 2014. Country Partnership Strategy for the Republic of the Philippines, FY 2015–18. Washington, D.C.
5 World Bank. 2014. Country Partnership Strategy for the Republic of the Philippines, FY 2015–2018. Washington, D.C.
6 Asian Development Bank. 2011. Inclusive Cities, Manila.
7 World Bank. 2014. Country Partnership Strategy for the Republic of the Philippines, FY 2015–2018. Washington, D.C.
8 World Bank. 2014. Country Partnership Strategy for the Republic of the Philippines, FY 2015–2018. Washington, D.C.
9 World Bank. 2014. Country Partnership Strategy for the Republic of the Philippines, FY 2015–2018. Washington, D.C.
10 CALABARZON includes the provinces of Calamba, Laguna, Batangas and Rizal just south of Metro Manila.
11 Ramos, C.G., J. Estudillo, Y. Sawada and K. Otsuka. 2012. Transformation of the Rural Economy in the Philippines, 1988-2006. Journal of Development Studies, 48(11): 1629-1648.
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