Challenges triggered by absorptive capacity limitations

A major challenge of economic development is implementing projects with high economic returns toward their proper completion. If that were an easily doable activity, few countries would be in poverty.

In last week’s discussion, I enumerated three major challenges toward realizing ambitious development projects. Today, I devote time to the third challenge, which refers to the country’s absorptive capacity.

Absorptive capacity is the ability to implement projects and investments so that they achieve their intended objectives. If issues arise at any stage in the process, having absorptive capacity implies finding the appropriate ways or adjustments to solve or wiggle out of the problem.

In our country, the capacity to implement projects already well-conceived on the drawing board often gets waylaid by problems that occur prior to or during the construction stage.

Politics and limitations in absorptive capacity have both played roles in reducing the effectiveness of following through good plans.

Impact of politics on absorptive capacity. Politics sets the tone and directions of major decisions on key projects in the economy. Even when the country is capable of carrying through the completion of important projects, changes in political administrations could lead to the discontinuation or dismantling of good plans and projects for political reasons.

When that happens, the country’s absorptive capacity could be hampered. The ability of growth enlarging that capacity to perform is damaged. It could even lead to disastrous consequences, aside from wasting the use of scarce investment funds.

An example in Philippine experience is the politics of vindictiveness and vengeance where projects that were started by previous leaders are cancelled without regard to accountability. Decisions that terminate ongoing projects could stop or hold back projects from getting completed.

Naturally, such decisions damage the nation’s capacity to produce the intended output or service. They waste the public expenditures already made on the projects.

There are distinctly costly political decisions that have stopped projects from completion. Often, corruption is a reason for such actions to terminate.  But corrupt officials could be appropriately punished without destroying public projects.

Former president Benigno Aquino III made a decision to terminate the Chinese loan-financed railway project from Manila to Clark that would promote faster transport links to Central Luzon. In addition to the railway project, the plan included the resettlement of informal settlers in new sites. Large amounts of public funds went to waste.

Another project that ended in cancellation even when loans had already been partly disbursed was the national broadband project which was to be the public backbone of the country’s information technology system.

That these projects are now part of the infrastructure program of President Duterte speaks much about the time lost in failing to pursue the projects.

There is a more serious cancellation that has set the country back at least by a decade in economic growth. When Corazon Aquino took over the presidency, her decision not to commission the finished Bataan nuclear power plant project caused the nation to suffer a serious reduction in the country’s energy capacity.

That decision literally plunged the country into darkness and into a serious energy shortage for many years. The high cost of electricity that the country as a whole has had to bear up to today is the result of that energy crisis .

The politics of discontinuity and revenge against predecessors in office often has caused serious setbacks for the nation. It is fortunate that the Duterte government is more inclined toward a policy of continuity with respect to economic development projects of the previous administration.

Politics sets the restrictive policy framework. The general tone of Philippine economic policy today is friendly toward free trade. In their details, however, there are restrictive economic policies that trace back to the politics of the independence struggle that limit our participation in freer trade.

That was in 1934 when the independence constitution was crafted. The restrictions on business ownerships concerning land, public utility and natural resources industries were written in that constitution.

Decades of development have resulted in the empowerment and protection of businesses, among those with a monopolistic hold on industries that depended on the restrictive provisions against foreign investments.

The current Duterte government has spoken on the need to revise such provisions, but there has been little movement in the legislative front that would actively hurry those amendments. Are the proposed revisions being held hostage to broader political constitutional amendments?

There might be a false sense of security that there are indications of rising foreign direct investments (FDIs) to the Philippines under the present government. The quantity, volume and quality of FDIs could further be helped by improving the business climate by actions on these revisions.

In many countries where FDIs came in large volumes (e.g., ASEAN neighbors Singapore, Thailand, Malaysia, Indonesia and Vietnam), not only have domestic incomes risen impressively, workers have improved their economic well-being and their domestic productivity have risen. This has been the outcome of rising capability within the economy – an improved shift in the economy’s absorptive capacity arising from the improvements brought about by the influx of technology, management, and technical manpower.

Right-of-way problems in infrastructure and the use of power of eminent domain. Right-of way issues are known to be a major source of delays especially in the case of transportation infrastructure projects.

The legal processes associated with such issues are often intricate. They are known also as the source of corruption and other delaying tactics that hold up projects.

The government must give speedy resolution to right-of-way cases. It could shorten procedures and assure that appropriate settlements are reached before they become stumbling blocks toward finalizing the issues.

The state must be able to utilize remedies that assure that important projects are not held up unduly. If necessary, special task forces devoted to the issue of facilitating quick transfer of property to the public domain is worth a try.

The state must be able to use its power of eminent domain more often rather than almost nil.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/