MANILA, Philippines - In a scathing rebuke of the Philippine government?s appalling governance record, a new study issued by the Asian Development Bank (ADB) has highlighted a direct link between corruption and political instability and decline in investment growth.

The study, titled ?Philippines: Critical Development Constraints? and released last week, did not mince words in pinpointing governance concerns as one of the ?critical constraints to private investment and growth in the Philippines.?

It comes as one of the strongest indictments of governance issues ever to be issued recently by the ADB or any other international financing institution.

Written in blunt terms, the report appeared to contradict the Philippine government?s position calling on the public to ignore mounting criticisms over corruption scandals rocking the administration of President Macapagal-Arroyo and focus instead on the high economic growth rates over the past few years, topped by the 7.3-percent growth of the gross domestic product (GDP) in 2007, the highest in three decades.

Sustainability in doubt

While the report acknowledged the high growth, it noted that domestic investment had remained sluggish and its share in GDP continued to decline. It said the contradiction raised the issue of how the recent pace of growth could be sustained amid the political volatility sparked by the corruption scandals engulfing the Arroyo administration.

The ADB study was released as the Arroyo administration sank deeper into public disrepute amid the continuing Senate inquiry into the canceled $329-million National Broadband Network (NBN) contract with China?s ZTE Corp.

Using the so-called growth diagnostics framework as a tool for analysis, the report identified the following ?critical constraints to private investment and growth? in the Philippines:

Tight fiscal situation due largely to weak revenue generation.

Inadequate infrastructure, particularly in electricity and transport.

Weak investor confidence due to governance concerns, particularly, corruption and political instability.

Inability to address market failures leading to a small and narrow industrial base.

But the report was particularly scathing on the issues of governance. It devoted lengthy reference to governance concerns.

Corruption and investment

The ADB report said: ?Empirical studies have found causal relationships between corruption, political instability, weak rule of law, on the one hand, and investment, on the other hand, in the Philippines.

?For instance, political instability in the late 1980s caused the decline of foreign direct investments, in sharp contrast to surges in Malaysia, Indonesia and Thailand. The problem has not disappeared; instability was manifested in a number of political events (in 2000, 2005-2006, and 2007) and tested constitutional processes.?

(Government economists, official apologists and even a number of private sector organizations have tended to follow the government line of understating or even glossing over the political instability generated by turbulent events starting in the 1980s, including the several rounds of coup attempts, street protests demanding Ms Arroyo?s resignation, and several impeachment complaints against her.

(Some economists, including those in the private sector, have explained that the high GDP growth rates were accounted for by a ?fire wall? erected by the economy to insulate itself from political turbulence. This explanation has, however, failed to satisfactorily explain the growth momentum, as though an unseen hand has been behind this growth.)

The ADB report further said: ?The perception of worsening corruption was found to partly explain the low investment rate in the Philippines. Poor governance was also found to translate into higher lending rates, reflective of premiums for worsening corruption, political instability, and internal conflict, acting as disincentives to private investment.

Patronage

?A key reason for weak revenue generation?leakages in revenue collection?is rooted in persistent corruption and patronage distribution.?

In another section, the ADB report said: ?Governance concerns not only weaken investor confidence [but also] underlie most other critical constraints. For instance, corruption undermines tax collection; political instability hinders investment and growth, and reduces the tax base.?

It pointed out that several studies had indicated that poor governance was a major concern for the Philippines. It ?seriously affects (attractiveness) for private investors, and is a critical constraint to investment and growth.?

Low score

Studies have shown that the Philippines has scored lowest among countries with similar per capita GDP levels on the control of corruption and political stability since 1996, and the rule of law since 2002.

They have also shown that the Philippines ?has lost momentum in controlling corruption, and has allowed Vietnam and fairly soon Indonesia, to pass it. In the case of political stability, the Philippines has slipped, particularly relative to the 1998 level.?

Corruption, political instability and weak rule of law have had ?significant negative effects on investment,? the ADB report said.

Lost decade

Studies have suggested that the 1980s turned into a ?lost decade? of growth for the Philippines ?because of its failure to attract the massive wave of relocating direct foreign investments? that followed international accords (the Plaza Accord).

Instead, the ADB report said: ?For most part of the decade (the Philippines) was mired in deep political turmoil, which placed it at a significant disadvantage relative to some of its neighbors as a foreign investment destination.

?Nor has the problem disappeared: instability was manifested in a number of political events from 2000 to 2007, that sorely tested normal constitutional processes.

?More generally, the perception of worsening corruption figures significantly in an explanation of the investment rate, which may partly explain the downturn in investment in recent years.?