State capture and the new Philippine playbook
The recent slowdown in the Philippine economy has revived a persistent debate: is this merely cyclical turbulence or a sign that deeper structural problems are weighing growth down?
At the heart of the issue is state capture—the concentration of political and economic power in a few hands, shaping policy and public spending for private gain.
The Philippines now faces an opportunity to rewrite its economic playbook, leveraging fiscal reforms like the Mandanas-Garcia ruling to build a more dynamic, polycentric system of governance.
Economists warn that such extractive political arrangements choke off innovation, suppress competition and depress long-run growth.
Nobel Prize-winning Economist Daron Acemoglu and his associates argue that once a small coalition dominates, economic institutions are designed not to encourage dynamism but to lock in privilege.
Public spending tilts toward politically connected projects, investors hesitate because rules are unclear or selectively enforced, and regions outside major urban centers remain trapped in a low-productivity equilibrium.
Reforms
In this environment, even well-intentioned national reforms struggle because the bottleneck is not policy design—it is the structure of power itself.
The Mandanas-Garcia ruling represents a rare opportunity to reorder this dynamic. By substantially increasing the fiscal resources automatically transferred to local governments, the ruling disrupts the long-standing hyper-centralization that has enabled capture.
It shifts fiscal gravity away from the national government toward provinces, cities and municipalities—places where competition, transparency and citizen oversight can potentially operate more effectively.
The ruling can even be likened to the Disbursement Acceleration Program under the Aquino administration, which redirected previously unused funds toward productive projects and temporarily propelled the economy onto a higher growth trajectory, demonstrating how strategic fiscal reallocations can generate real economic momentum.
But increased resources alone do not guarantee better outcomes. They can either empower local innovation or entrench local dynasties.
The difference lies in whether this fiscal shock is accompanied by a shift in the country’s governance architecture—one that embraces what another Nobel laureate, Elinor Ostrom, called polycentric governance.
Ostrom’s idea is simple but powerful: complex economies perform best when authority is distributed across multiple, overlapping centers of decision-making.
These centers—local governments, private firms, cooperatives, business associations, civil society groups and regional alliances—monitor one another, learn from each other’s experiments, and respond to local conditions more quickly than a congressman or a senator, distant central authorities, can.
Polycentric governance creates a system where no single actor can monopolize power because multiple nodes have the capacity to innovate and check abuses.
This logic aligns with insights from Keyu Jin’s “The New China Playbook,” which emphasizes how China’s earlier high-growth era relied not on rigid central planning, but on local experimentation, pragmatic competition among regions and bottom-up initiative.
Growth flourished when cities and provinces had the space to test policies, adapt to changing conditions and respond to market signals. The worst stagnation came when power became too concentrated and incentives distorted.
The Philippines stands at a similar crossroads. Mandanas-Garcia can unleash local dynamism—if the country moves toward a more polycentric system, with the potential of raising the gross domestic product growth rate to double digits.
Competition
For businesses, this shift matters.
A polycentric environment reduces regulatory uncertainty because decision-making is not bottlenecked in Manila.
It encourages competition among local government units (LGUs) to attract investment, streamline permits, digitize services and improve logistics. It creates multiple pathways for economic collaboration—regional transport corridors, inter-LGU supply chain planning, localized tourism clusters—that do not depend on the pace of national agencies.
In short, the ruling has the potential to restructure the playing field so that growth and industrialization are driven by dozens of economic centers rather than a few entrenched interests.
Although the Mandanas-Garcia ruling has been implemented since 2022, the actual net tax allocation (NTA) shares received by LGUs remain five percent below the full 40 percent of national taxes envisioned by law.
In peso terms, this five-percentage-point gap translates to roughly P150–P170 billion in 2025, meaning LGUs are receiving substantially less than what the full mandate would have delivered.
Despite the government’s roadmap for gradual adjustment, there is still uncertainty as to whether the legally mandated share will be fully achieved.
This arises because the computation of the NTA depends on the evolving interpretation of what counts as national taxes, the continuing exclusions applied by the Department of Finance (DOF) and Department of Budget and Management, and the lack of clarity on when—or whether—the government will fully align the allocation with the Supreme Court’s ruling.
Although LGUs cannot legally pledge their NTA as collateral, the expected five-percentage-point increase under the Mandanas-Garcia ruling can enhance their revenue predictability and, in turn, their borrowing capacity.
Banks, especially under the Agri-Agra credit requirement, can use these strengthened revenue projections to justify larger loans for agricultural, rural development and infrastructure projects.
Based on the five-percentage-point Mandanas shortfall, a typical city forfeits about P247 million in annual revenue, enough to support a loan of roughly P900 million over 10 years at 6 percent interest.
A typical municipality loses around P36 million annually, equivalent to a borrowing capacity of about P134 million, while a barangay foregoes roughly P760,000, which could sustain a loan of approximately P2.8 million.
These figures show how the unreleased 5 percent significantly limits the additional financing LGUs could otherwise mobilize. It is imperative then for DOF to release these funds.
Budget reallocation
Yet, even with full implementation, the budget reallocation will not create any impact on growth, unless three institutional shifts are enforced.
First, transparency must be standardized across all LGUs. Investors and citizens need clear, comparable information on budget execution, procurement, business regulations and service delivery.
Without transparency, local power can simply translate into local capture. With transparency, LGUs can be allowed to formulate independent investment strategies to compete with one another on performance. This competition is exactly what Ostrom and Jin identify as a source of adaptive efficiency.
Second, regional collaborations must be empowered. Many economic opportunities—logistics, tourism, ports, agribusiness value chains—operate at a scale larger than a single municipality.
Polycentric governance thrives when cities and provinces cooperate horizontally, forming networks that reflect real economic geographies rather than administrative boundaries. These regional formations can plan infrastructure more efficiently, pool resources and share best practices.
Third, local economic actors must be integrated into decision-making. Chambers of commerce, banks, cooperatives, universities and civil society groups must play active roles in shaping local development agendas.
Ostrom’s research repeatedly shows that governance improves when institutions are coproduced—when multiple stakeholders participate in rulemaking, monitoring and enforcement.
If these conditions take hold, Mandanas-Garcia becomes more than a fiscal reform. It becomes a structural transformation—creating a landscape where authority is dispersed, experimentation is rewarded and economic dynamism emerges from the ground up.
This is the new Philippine playbook: replacing dependency on centralized decision-making with a competitive ecosystem of locally driven growth.
Polycentric governance, in fact, enhances accountability by distributing power, increasing transparency through competition, connecting authorities more closely to citizens and creating multiple overlapping layers of oversight that make corruption harder to hide and superior performance easier to reward.
The country cannot rely on a monocentric policy to revive investment and productivity. The real growth path lies in enabling dozens of local economies to innovate, compete and collaborate.
Mandanas-Garcia provides the fiscal foundation for this shift, but polycentric governance provides the institutional blueprint.
Together, they offer a rare chance to move from a captured, centralized model to a dynamic, locally powered economy—one where growth is not the privilege of a few, but the product of many.
(Leonardo A. Lanzona, Jr. is a professor of Economics at the the Ateneo de Manila University, and Brigido R. Simon, Jr. is a former mayor of Quezon City.)
