Economic performance,

In concrete terms, the TRAIN is actually an extension of the Aquino administration’s reform agenda. The first critical tax reform was the dramatic sin tax reform in 2012. The next in line is reforming the other excise taxes like fuel, the value-added tax, the fiscal incentives, the income and corporate taxes, etc. Secretary Dominguez, his Undersecretary Karl Chua and the professional Department of Finance have stepped up to the plate.

Another example of policy continuity is AmBisyon 2040. It has become the reference for the Duterte administration’s medium-term development plan. AmBisyon 2040 was conceptualized and formally launched by the Aquino administration.

On the budget, the reforms being pursued by Budget Secretary Benjamin E. Diokno, including the cash-basis budgeting that Congress disdains, are no different from those espoused then by former Budget Secretary Butch Abad. Mr. Diokno’s proposed Budget Reform Act, with a little tweaking here and there, contains the same essential features of the Abad-endorsed Public Finance Management Bill that the 16th Congress ignored.

Today, we see a surge in manufacturing. The Department of Trade and Industry during the Aquino term set up an unpublicized program for manufacturing revival. Current Trade Secretary Ramon M. Lopez has boosted this program. Nowadays, this program is no longer timid in asserting industrial policy, still a dirty word for neoliberal economists. Yet, it is this industrial policy of the new type that is helping drive manufacturing growth.

And we should not forget the essential role of the Bangko Sentral ng Pilipinas (BSP) in creating a healthy macroeconomic environment. The move away from a sole focus on a strong (but overvalued) peso to secure low inflation towards a policy of maintaining price stability but in tandem with supporting growth and employment happened during the term of former Governor Amando M. Tetangco, Jr.

Mr. Tetangco was appointed by then President Gloria M. Arroyo in 2005 and served two terms. Succeeding Mr. Tetangco is former Deputy Governor Nestor A. Espenilla, Jr., appointed by Mr. Duterte in 2017.

Mr. Espenilla cannot be considered a political appointee even though by law, the Philippine President appointed him to the office. He rose from the ranks of the BSP. He has no political link with Mr. Duterte and his personal association is with former Mr. Aquino, for they were high school classmates.

Be that as it may, Mr. Espenilla has affirmed in action the policy stance of his predecessor. He has risen to the occasion despite the overwhelming challenges in the face of the inflationary and political risks.

What is likewise common between the Aquino administration and the Duterte administration is how binding constraints are being resolved. Not being able to make sound diagnostics of the economy and not being able to address the binding constraints lead to poor outcomes.

During the Aquino administration, the binding constraints of political instability and narrow fiscal space were resolved. Mr. Aquino’s victory through credible, fair elections put to a close the issue of legitimacy, which hounded Ms. Arroyo since the “Hello Garci” exposé. Political credibility and legitimacy restored upon Mr. Aquino’s election lifted investors’ spirits.

Furthermore, the restricted fiscal space that the Aquino administration inherited from the previous administration was solved by way of the dramatic increase in sin taxes, especially the tobacco tax, in 2012. Revenue increased significantly for health spending. Even as the allocation for health increased, government was able to free funds for other programs. The reform also signaled that other hard reforms are capable of being passed.

In the case of the Duterte administration, its economic managers have correctly identified the country’s weak and insufficient infrastructure as the binding constraint. Without infrastructure upgrading, the burst of growth will dissipate and the economy will choke. Hence, “build, build, build.”

In this light, other measures like tax reforms and investment liberalization — while having merit by themselves — also serve the strategy of addressing the binding constraint that is infrastructure. TRAIN, for example, provides the credible commitment that funding for infrastructure — even if this means generating debt and deficit — will be met in a sustainable way. Ease of investment entry gives government an additional asset, in the form of private sector financing and technology, for infrastructure-related programs.

Policy continuity and the proper specification of binding constraints, together the implementation of measures to resolve them, are the key elements that explain the high growth that has been sustained in the past six years.

Yet, gleaning from the lengthy discussion above, we categorically say that the economy has yet to reach its potential growth.

Said simply, the economy could have done better.

Agriculture performance remains poor. The inflation rate that has exceeded target is self-inflicted, not because of TRAIN but because of the anti-poor protectionist policy on rice. Even as investments have increased, a significant amount remains untapped because of policy uncertainty (e.g., fiscal incentives) and other risks.

The “other risks” deserve closer attention. One binding constraint that remains but which the Duterte administration is ignoring is the rule of law. Rule of law is associated with strong institutions. The consensus in economics and in the social sciences in general is that strong institutions are the predictor of having long-term sustained growth and achieving the level of a progressive, industrialized, upper-income economy.

Not only has the Duterte administration neglected the importance of rule of law; worse, it has violated it. The arbitrary and highly politicized application of rule of law and the violation of justice manifest in many ways: the incredulous acquittal of plunderers, political accommodation of the highly corrupt who are likewise human-rights violators, use of legality to commit a brazen political act to remove Maria Lourdes P.A. Sereno as Supreme Court Chief Justice, the physical harassment if not incarceration of political opponents, fabrication of non-bailable charges against communists, unresolved extrajudicial killings, etc.

The effect of the erosion of the rule of law on the economy is not immediately palpable. But the effect is immeasurably damaging. Any inconsistency or violation in the application of rule of law can easily spill over to enforcement of contracts and property rights.

The violation of rule of law is like a termite that will eat away at society’s foundations. Undermining justice and rule of law will deeply ensnare the country in the “middle income trap” and prevent it from eventually moving to what new institutional economists call “open access order.”

Thus, rule of law and justice must become our central concern. It must become the primary issue in the 2019 midterm elections and the 2022 presidential election.