DEVELOPMENT CONTEXT, CHALLENGES AND OPPORTUNITIES: 

Building a Partnership for Growth 

As Asia’s oldest democracy, located in the world’s most economically dynamic region, and blessed with incredible human and natural resources, the Philippines should be far more stable, prosperous and well‐ governed than it is.  Indeed, at the 20th century’s midpoint the Philippines was still “the Pearl of the Orient,” with the highest per capita GDP in Asia.  But in the decades since, the country’s economic performance has lagged and per capita GDP is now among the lowest in Southeast Asia – last among the five original ASEAN (Association of Southeast Asian Nations) members (Habito 2010).1    

In 2011, the United States Government (USG) and the Government of the Philippines (GPH) joined in a new Partnership for Growth (PFG), a combined effort by all elements of the USG to work with the GPH to transform the country by addressing its most serious constraints to development and growth.   In planning the PFG, the two countries conducted a joint analysis which concluded that the key constraints to growth in the Philippines are a lack of fiscal space (insufficient public revenues for investment and services) and weak governance, and that underlying both is pervasive corruption.  The analysis also found that efforts to increase fiscal space and strengthen governance may also hinge upon broadening representation in the polity and diminishing state capture by the traditional economic elite.   Poor infrastructure and inadequate human capital (people who are poorly educated and unhealthy) were also identified as serious constraints, but these are exacerbated by poor governance and related underlying issues.  Other analyses indicate that a population growing faster than the economy presents additional challenges.

This Country Development Cooperation Strategy (CDCS) describes USAID’s program to support the PFG, the underlying development hypotheses that this strategy reflects, and the empirical data upon which these strategic choices were based.  It articulates USAID’s goal of creating a more stable, prosperous and well governed Philippines by accelerating and sustaining broad‐based, equitable and inclusive economic growth, enhancing peace and stability in conflict‐affected areas of Mindanao, and improving environmental resilience (by reducing the risks from natural disasters and improving the management of natural resources).  Most importantly, through this strategy USAID energetically partners with the government and people of the Philippines to transform their country for the benefit of all Filipinos.

Development Challenges

Over the past several decades, economic growth in the Philippines has been insufficient to significantly raise real incomes or reduce poverty, and an estimated 41.5 percent of Filipinos – about 39 million people – still live on less than the international poverty level of $2 a day (World Development Indicators 2011).  Growth remains constrained by ineffective governance (including a poor regulatory environment, rampant corruption, and weak rule of law), elite state capture, inadequate health and social services, decaying infrastructure, degrading environments, frequent natural disasters, and a population growth that outpaces the rate of economic development.   Trade and investment lag, the economy stagnates and job growth remains woefully insufficient.   

Corruption is consistently cited as the most serious problem underlying the lack of development in the Philippines.  Reducing corruption, both within and outside government, and addressing its related underlying causes, would substantially increase economic competitiveness and produce much higher levels of domestic and foreign investment.   A focus on governance –reducing corruption, growing fiscal space, increasing regulatory and institutional effectiveness, enhancing the rule of law, and improving judicial effectiveness – therefore cross‐cuts nearly every element of USAID’s strategy.  

  For economic growth to be broad‐based, inclusive and sustained, the quality of education must be strengthened to create a modern, competitive workforce.   Colleges and universities must place greater emphasis on science, technology and research in order to produce innovations to spur economic growth and leapfrog into the 21st century.  

Inclusive and equitable economic growth also requires a healthy and productive population and, to be sustainable, a balance between economic and population growth.  Health indicators in the Philippines are at best mixed.  Maternal mortality is more than triple the UN Millennium Development Goal (MDG) target.  While mortality rates for infants and children have improved, they have not kept up with neighboring countries.  The Philippines also remains a high‐burden tuberculosis (TB) country, with more than 25,000 deaths each year.   

   Prosperity and stability in the Philippines are further undermined by armed conflict and the threat of international terrorism.  Conflict occurs throughout the country, but the most conflict and terrorism‐ threatened area is Mindanao – the Philippine’s largest, and potentially most productive region.   While violence remains scattered and relatively low‐level, its persistence discourages investment, drains government resources and poses a continuing risk of connections to international terrorism.

A more stable, prosperous and well‐governed Philippines also requires a more resilient environment that responds to disturbances and disasters by resisting or minimizing damage and recovering quickly. The Philippines is one of the world’s great repositories of biodiversity, a key component in the country’s economic growth.  But coastal, marine, and forest resources are poorly managed and under enormous pressure from overutilization, degradation, natural disasters, and the growing threat of global climate change.  Due to its unique geography, the Philippines is also one of the world’s most disaster‐prone countries, particularly vulnerable to earthquakes, volcanic eruptions, tropical cyclones and flooding.  

  The concentration of population in urban and coastal areas greatly exacerbates the level of injury and death from natural disasters, causing estimated direct economic losses of at least several hundred million dollars annually (USAID 2011).  Indeed, the total economic cost from just two typhoons that hit metro Manila in 2009 has been estimated at 2.7% of GDP.  Recent research (based on data from the Philippines) suggests that such natural disasters may also be major sources of instability and conflict (Hsiang et al. 2012).

To summarize:

• The USG and the GPH are partners pursuing the shared goal of a more stable, prosperous and well‐governed Philippines.
• USAID’s program will contribute to the achievement of this goal by accelerating broad‐based, and inclusive economic growth, increasing peace and stability in Mindanao, and improving environment resilience.
• The key constraints impeding broad‐based and inclusive economic growth in the Philippines are weak governance and a lack of fiscal space, both of which reflect pervasive underlying corruption and elite state capture.   A focus on improving governance by reducing corruption, strengthening the rule of law, and improving the regulatory and institutional environment therefore cuts across USAID’s entire program.
• Broad‐based, equitable and inclusive growth will be accelerated by increasing domestic and foreign investment, enhancing economic competitiveness and improving human capital (strengthening education and improving health).
• The persistence of armed conflict in Mindanao undercuts the creation of a more stable, prosperous and well governed Philippines and directly affects the spread of international terrorism. 
• A more stable, prosperous and well governed Philippines also requires a more resilient environment  that is better able to resist perturbations and recover from damage because of improved natural resource management and reduced risk from natural (particularly climate‐ related) disasters.