Under the proposal, as many as 13 new regional governments would take responsibility for planning, development, housing, hospitals, education, infrastructure, water supply and irrigation. Budget allocations for regional and local government would be constitutionally guaranteed at 60 percent of the national revenue share.
A prime minister would be elected by the national assembly and become head of government, with the authority to choose a Cabinet and responsibility for domestic and economic policy. The president would remain head of state, with power over defense, foreign policy, and national security.
To win the business community's support, members of Duterte's ruling PDP Laban party lawmakers are also promising to scrap a constitutional provision capping foreign ownership in some Philippine enterprises at 40 percent, a rule seen to have deterred investment in areas like telecommunications and even tourism.
"There is a reason that the Philippines attracts only a 4 percent share of the foreign direct investment into Asean," said Eduardo Araral, a political economist at Singapore's Lee Kuan Yew School of Public Policy who's advising Duterte's party on the proposal. The amendment could add 1 or 2 percentage points to economic growth "each year, every year," he said.
Growth in the Philippines has been among the fastest in the region, staying above 6 percent since 2012. Advocates of lifting foreign ownership restrictions have predicted a surge in investment and infrastructure spending outside central Manila and the surrounding areas, which produce around 62 percent of the country's gross domestic product.
Around Asia, decentralization has seen mixed success. Indonesia, which spread power and money across the archipelago after the fall of Suharto in 1998, saw a surge in graft cases.
"A shift to federalism is a lethal experiment," Former Supreme Court Chief Justice Hilario Davide said at a Senate hearing. "The poor will become poorer. Inevitably, the people will be burdened with more taxes of all kinds to support and maintain the federal bureaucracy."
Duterte's opponents aren't the only ones raising concerns. Finance Secretary Carlos Dominguez last month acknowledged challenges surrounding taxation and revenue sharing under federalism, telling business leaders "there's a potential for it to become a nightmare."
Much will depend on the final constitutional reform, especially the fiscal arrangements, said Alex Wolf, senior emerging markets economist at Aberdeen Standard Investments.
"Constitutional reform is not a magic wand that will reduce income inequality or reduce the power of political dynasties, but if done well and enough resources are paid to building successful local institutions, a shift towards federalism could decentralize power from Manila and increase economic competition," he said.
Yet even lawmakers who support Duterte are concerned that a new tier of regional governments could end up being taken over by already powerful provincial dynasties.
"Shifting to federalism may strengthen families' hold on local government units," Senator JV Ejercito, the son of former President Joseph Estrada and an ally of the Duterte administration, said in an interview. "We cannot rush the process."
(Siegfrid Alegado contributed to this report)
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