Decentralization deters dollars

Foreign direct investment (FDI) largely bypasses the country, flowing instead to more centralized competitors like Vietnam and Thailand, a situation largely blamed on a law granting local autonomy.

The root cause lies not in a lack of democracy but in the unintended consequences of the Local Government Code of 1991 (RA 7160) which devolved significant powers to more than 1,400 municipalities and cities. This must be corrected.

Decentralization was promoted as a triumph of people power and grassroots democracy after the first Marcos era.

In theory, it promised accountability, localized decision-making, and efficient service delivery. In practice, it created a fragmented regulatory environment that global capital finds intolerable. Multinational firms seeking to establish large-scale operations, such as tech manufacturing plants and infrastructure projects, require speed, consistency and predictability.

Vietnam offers a streamlined national approval process where investors deal primarily with a single, coherent authority capable of fast-tracking permits. Thailand similarly maintains centralized coordination for key economic zones.

In contrast, a foreign investor in the Philippines faces a bureaucratic gauntlet. Securing a factory site requires navigating mayor’s permits, business licenses, zoning ordinances, environmental clearance and local taxes, which vary sharply between municipalities.

What is approved in one town may be blocked or renegotiated in the next. The hyper-localized system turns every mayor and Sangguniang Bayan into an independent gatekeeper with leverage over national economic outcomes.

The result is frequent delays, inconsistent rules, higher compliance costs and opportunities for arbitrary demands or outright extortion concentrated in Metro Manila and a few economic zones, while provinces struggle. Vietnam and Thailand have captured far larger shares of manufacturing and tech FDI by offering one-stop national facilitation.

Critics of recentralization argue that returning the power to Manila would revive patronage politics and weaken local accountability.

However, the current model has not delivered robust provincial development either. Many local governments remain heavily dependent on Internal Revenue Allotment (IRA) transfers, with limited capacity or incentive to compete for investments.

The 2018 Mandanas-Garcia Supreme Court ruling, which became final and executory in 2019, fundamentally strengthened fiscal decentralization.

By reinterpreting the “just share” of local government units (LGUs), the Court ruled that the 40-percent allocation must be based on all national taxes, not just internal revenue taxes collected by the Bureau of Internal Revenue (BIR) but also by the Bureau of Customs and other agencies.

This expanded the revenue base, leading to a sharp increase in transfers, which were renamed the National Tax Allotment.

In 2022, LGU shares jumped significantly, by around 37 percent to 55 percent in early estimates, reaching over P1 trillion.

Implemented alongside Executive Order 138 in 2021, which pushed full devolution of functions in health, agriculture, infrastructure, environment, social welfare and investment promotion, the ruling aimed to empower provinces, cities, municipalities and barangays with both money and responsibility.

Proponents viewed it as a means of correcting “Imperial Manila’s” fiscal dominance and enabling localized development.

Instead of fostering healthy competition, decentralization has sometimes produced regulatory Balkanization, in which local autonomy becomes a tool for parochial interests rather than for broad-based growth.

True autonomy should never overpower national competitiveness. Reforming RA 7160 need not abolish local governance but could introduce standardized national investment corridors, mandatory fast-track procedures for strategic projects, and clearer delineation of authority between national and local levels.

Without addressing this structural flaw, the country will continue to signal to global capital that its investment environment is high-friction and unpredictable.

For an emerging economy striving to industrialize and generate jobs beyond Metro Manila, that trade-off is becoming increasingly costly.

Foreign investors vote with their capital, and so far, they have chosen predictability over chaotic autonomy.