ECONOMIC HISTORY OF THE PHILIPPINES PDF

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ECONOMIC HISTORY OF THE PHILIPPINES The Philippines was once a model of development and second only to Japan among east Asian economies. In the 1960s, when South Korea was a land of peasant, the Philippines was one of Asia's industrial powerhouses. It produced consumer goods, processed raw mater...

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ECONOMIC HISTORY OF THE PHILIPPINES The Philippines was once a model of development and second only to Japan among east Asian economies. In the 1960s, when South Korea was a land of peasant, the Philippines was one of Asia's industrial powerhouses. It produced consumer goods, processed raw materials and had assembly plants for automobiles, televisions and home appliances. Chemical plants produced drugs. Scrap metal was imported and made into steel for ships and factories produced cement, textiles and fertilizer. Prior to 1970, Philippine exports consisted mainly of agricultural or mineral products in raw or minimally processed form. In the 1970s, the country began to export manufactured commodities, especially garments and electronic components, and the prices of some traditional exports declined. By 1988 nontraditional exports comprised 75 percent of the total value of goods shipped abroad. * In the 1970s and 80s, the Philippines declined while its neighbors grew and became one of the poorest non-Communist governments in Southeast Asia. The gains made in the 1950s and 60s were lost to corruption, cronyism, and mismanagement during the Marcos years and ineptitude of the Aquino years Now the Philippines is sometimes referred to as "sick man of Asia" and a "Latin-style banana republic in the South China Sea." Its per capita income is about one tenth of that of Taiwan. Many of its most talented people work overseas. According to The Economist: “What distinguishes Manila from other South-East Asian capitals is the ubiquitous Jeepney, the loud rickety bus used by the city's poorer inhabitants. Once modified American Jeeps, nowadays most Jeepneys are cobbled together from second-hand Japanese lorries. They have become a metaphor for the Philippine economy: inefficient and easily overtaken. In the 1970s the Philippines was richer than its neighbours. Yet while it chugged along at growth rates of around 2 percent, other countries stepped on the gas: it was passed by Singapore, Malaysia, Thailand and, more recently, by China. A former American colony, it could have made more of its cultural affinities with the United States, including the widespread use of English. The incompetent and crooked rule of Ferdinand Marcos from 1965 to 1986 bears some of the blame for its failure to do so. A sluggish economy combined with a fast-growing population has forced some 8m Filipinos— equivalent to almost a tenth of the resident population—to seek jobs abroad.[Source: The Economist, August 16, 2007] See Agriculture, See History, The Philippines under Spain and the United States. Economic Development in the Philippines in the Early 20th Century In the mid-nineteenth century, a Filipino landowning elite developed on the basis of the export of abaca (Manila hemp), sugar, and other agricultural products. At the onset of the United States power in the Philippines in 1898-99, this planter group was cultivated as part of the United States military and political pacification program. The democratic process imposed on the Philippines during the American colonial period remained under the control of this elite. [Source: Library of Congress *] Access to political power required an economic basis, and in turn provided the means for enhancing economic power. The landowning class was able to use its privileged position directly to further its economic interests as well as to secure a flow of resources to garner political support and ensure its position as the political elite. Otherwise, the state played a minimal role in the economy, so that no powerful bureaucratic group arose that could pursue a development program independent of the wishes of the landowning class. This situation remained basically unchanged in the early 1990s. *

At the time of independence in 1946, and in the aftermath of a destructive wartime occupation by Japan, Philippine reliance on the United States was even more apparent. To gain access to reconstruction assistance from the United States, the Philippines agreed to maintain its prewar exchange rate with the United States dollar and not to restrict imports from the United States. For a while the aid inflow from the United States offset the negative balance of trade, but by 1949, the economy had entered a crisis. The Philippine government responded by instituting import and foreign-exchange controls that lasted until the early 1960s. * Economic Development in the Philippines in the 1950s and 60s Import restrictions stimulated the manufacturing sector. Manufacturing net domestic product (NDP) at first grew rapidly, averaging 12 percent growth per annum in real terms during the first half of the 1950s, contributing to an average 7.7 percent growth in the GNP, a higher rate than in any subsequent five-year period. The Philippines had entered an import-substitution stage of industrialization, largely as the unintended consequence of a policy response to balance-of-payments pressures. In the second half of the 1950s, the growth rate of manufacturing fell by about a third to an average of 7.7 percent, and real GNP growth was down to 4.9 percent. Import demand outpaced exports, and the allocation of foreign exchange was subject to corruption. Pressure mounted for a change of policy. * In 1962 the government devalued the peso and abolished import controls and exchange licensing. The peso fell by half to P3.90 to the dollar. Traditional exports of agricultural and mineral products increased; however, the growth rate of manufacturing declined even further. Substantial tariffs had been put in place in the late 1950s, but they apparently provided insufficient protection. Pressure from industrialists, combined with renewed balance of payments problems, resulted in the reimposition of exchange controls in 1968. Manufacturing recovered slightly, growing an average of 6.1 percent per year in the second half of the decade. However, the sector was no longer the engine of development that it had been in the early 1950s. Overall real GNP growth was mediocre, averaging somewhat under 5 percent in the second half of decade; growth of agriculture was more than a percentage point lower. The limited impact of manufacturing also affected employment. The sector's share of the employed labor force, which had risen rapidly during the 1950s to over 12 percent, plateaued. Import substitution had run its course. * To stimulate industrialization, technocrats within the government worked to rationalize and improve incentive structures, to move the country away from import substitution, and to reduce tariffs. Movements to reduce tariffs, however, met stiff resistance from industrialists, and government efforts to liberalize the economy and emphasize export-led industrialization were largely unsuccessful. * Philippines Economy Under Marcos The Philippines economy grew at a relatively high average annual rate of 6.4 percent during the 1970s, financed in large part by foreign-currency borrowing. External indebtedness grew from $2.3 billion in 1970 to $24.4 billion in 1983, much of which was owed to transnational commercial banks. In the 1980s the Philippine economy was hurt by political instability, authoritarianism, increasing foreign debt, falling commodity prices, corporate mismanagement and vast unemployment. The Philippines found itself in an economic crisis in early 1970, in large part the consequence of the profligate spending of government funds by President Marcos in his reelection bid. The government, unable to meet payments on its US$2.3 billion international debt, worked out a US$27.5 million standby credit arrangement with the International Monetary Fund (IMF) that involved renegotiating the country's external debt and devaluing the Philippine currency to P6.40 to the United States dollar.

The government, unwilling and unable to take the necessary steps to deal with economic difficulties on its own, submitted to the external dictates of the IMF. It was a pattern that would be repeated with increasing frequency in the next twenty years. * In the early 1980s, the economy began to run into difficulty because of the declining world market for Philippine exports, trouble in borrowing on the international capital market, and a domestic financial scandal. The problem was compounded by the excesses of President Ferdinand E. Marcos's regime and the bailing out by government-owned financial institutions of firms owned by those close to the president that encountered financial difficulties. In 1983 the country descended into a political and economic crisis in the aftermath of the assassination of Marcos's chief rival, former Senator Benigno Aquino, and circumstances had not improved when Marcos fled the country in February 1986. * Impact of Martial Law on the Philippine Economy in the 1970s and 80s In September 1972, Marcos declared martial law, claiming that the country was faced with revolutions from both the left and the right. He gathered around him a group of businessmen, used presidential decrees and letters of instruction to provide them with monopoly positions within the economy, and began channeling resources to himself and his associates, instituting what came to be called "crony capitalism." By the time Marcos fled the Philippines in February 1986, monopolization and corruption had severely crippled the economy. * In the beginning, this tendency was not so obvious. Marcos's efforts to create a "New Society" were supported widely by the business community, both Filipino and foreign, by Washington, and, de facto, by the multilateral institutions. Foreign investment was encouraged: an export-processing zone was opened; a range of additional investment incentives was created, and the Philippines projected itself onto the world economy as a country of low wages and industrial peace. The inflow of international capital increased dramatically. * A general rise in world raw material prices in the early 1970s helped boost the performance of the economy; real GNP grew at an average of almost 7 percent per year in the five years after the declaration of martial law, as compared with approximately 5 percent annually in the five preceding years. Agriculture performed better that it did in the 1960s. New rice technologies introduced in the late 1960s were widely adopted. Manufacturing was able to maintain the 6 percent growth rate it achieved in the late 1960s, a rate, however, that was below that of the economy as a whole. Manufactured exports, on the other hand, did quite well, growing at a rate twice that of the country's traditional agricultural exports. The public sector played a much larger role in the 1970s, with the extent of government expenditures in GNP rising by 40 percent in the decade after 1972. To finance the boom, the government extensively resorted to international debt, hence the characterization of the economy of the Marcos era as "debt driven." After martial law was declared Marcos's cronies amassed huge fortunes while the Philippines ran up a huge national that brought the economy to edge of collapse. Real incomes declined by half between 1956 and 1985 as the wealth of richest 10 percent rose from 27 percent to 37 percent. In the latter half of the 1970s, heavy borrowing from transnational commercial banks, multilateral organizations, and the United States and other countries masked problems that had begun to appear on the economic horizon with the slowdown of the world economy. By 1976 the Philippines was among the top 100 recipients of loans from the World Bank and was considered a "country of concentration." Its balance of payments problem was solved and growth facilitated, at least temporarily, but at the cost of having

to service an external debt that rose from US$2.3 billion in 1970 to more than US$17.2 billion in 1980. * There were internal problems as well, particularly in respect of the increasingly visible mismanagement of crony enterprises. A financial scandal in January 1981 in which a businessman fled the country with debts of an estimated P700 million required massive amounts of emergency loans from the Central Bank of the Philippines and other government-owned financial institutions to some eighty firms. The growth rate of GNP fell dramatically, and from then the economic ills of the Philippines proliferated. In 1980 there was an abrupt change in economic policy, related to the changing world economy and deteriorating internal conditions, with the Philippine government agreeing to reduce the average level and dispersion of tariff rates and to eliminate most quantitative restrictions on trade, in exchange for a US$200 million structural adjustment loan from the World Bank. Whatever the merits of the policy shift, the timing was miserable. Exports did not increase substantially, while imports increased dramatically. The result was growing debt-service payments; emergency loans were forthcoming, but the hemorrhaging did not cease. * It was in this environment in August 1983 that President Marcos's foremost critic, former Senator Benigno Aquino, returned from exile and was assassinated. The country was thrown into an economic and political crisis that resulted eventually, in February 1986, in the ending of Marcos's twenty-oneyear rule and his flight from the Philippines. In the meantime, debt repayment had ceased. Real GNP fell more than 11 percent before turning back up in 1986, and real GNP per capita fell 17 percent from its high point in 1981. In 1990 per capita real GNP was still 7 percent below the 1981 level. * Impact of U.S. Military Bases on the Philippines Economy The economy of the Philippines in the Marcos years in many ways was propped by the Subik and Clark American military bases, trade with the United States and income from overseas workers. The World Bank played a major role in planning and running the Filipino economy under martial law. In early 1991, the Philippine government was in ongoing negotiations with the United States on the future status of United States naval and air facilities at Subic Bay and Clark Air Base. What would normally be an issue of foreign policy and national security became a major domestic political issue and took on an economic dimension of considerable importance. At the domestic level, the conflict was between those who argued that the continuing presence of the United States bases was an infringement on Philippine sovereignty and a continuation of a neocolonial relationship and those who, for a combination of internal security, foreign relations, and economic reasons, saw the need for maintaining the presence of the bases. President Aquino, through 1990, refused to publicly commit herself to a position; however, it was clear that her government was working to reach accommodation with the United States. As negotiations progressed, the economic issue became prominent. [Source: Library of Congress *] There were three economic considerations from the point of view of the Philippine government. First, the proportion of the Philippine budget allocated for its armed forces was the smallest in the region, a fact linked to the presence of United States air and naval forces in the Philippines, as well as direct military assistance. Second, in the latter half of the 1980s, the bases directly employed between 42,000 and 68,000 Filipinos and contracted for goods and services from Filipino businesses. During this period, yearly base purchases of goods and services in the Philippine economy (when corrected for the estimated import content of the goods purchased) was in the range of P6.0 billion to P8.3 billion. *

A third and politically very important consideration, was the sum given to the Philippines by the United States in connection with the presence of the bases, referred to as aid by United States officials and as rent by the Filipinos. Base-related payments were first agreed to in 1979 when United States president Jimmy Carter made a "best effort" pledge to secure US$500 million for the Philippines from the United States Congress over a five-year period. In 1983 another five-year commitment was made, this time for US$900 million. In October 1988, the Philippines' Secretary of Foreign Affairs Raul Manglapus and United States' Secretary of State George Schultz signed a two-year agreement for US$962 million, an amount double the previous compensation but substantially less than the US$2.4 billion that the Philippines initially demanded. In 1991 talks over the future of the bases and the size and terms of the aid or rent that would be given in consideration for continued United States access to military facilities in the Philippines was the most important unresolved issue. The decision of the Philippine administration to bring Secretary of Finance Jesus Estanislao into the negotiations in March 1991 was a further indication of the economic importance of the bases to the Philippine government. * Philippines Economy Under Cory Aquino The Philippines economy floundered under Corazon Aquino. Power shortages and brownouts were common. The American military bases were closed down. Economic growth revived in 1986 under Aquino, reaching 6.7 percent in 1988. But in 1988 the economy once again began to encounter difficulties. The trade deficit and the government budget deficit were of particular concern. In 1990 the economy continued to experience difficulties, a situation exacerbated by several natural disasters, and growth declined to 3 percent. [Source: Library of Congress *] The Philippine economy experienced considerable difficulty in the 1980s. Real gross national product (GNP) grew at an annual average of only 1.8 percent, less than the 2.5 percent rate of population increase. The US$668 GNP per capita income in 1990 was below the 1978 level, and approximately 50 percent of the population lived below the poverty line. The 1988 unemployment rate of 8.3 percent (12.3 percent in urban areas) peaked at 11.4 percent in early 1989, and the underemployment rate, particularly acute for poor, less-educated, and elderly people, was approximately twice that of unemployment. In 1988, about 470,000 Filipinos left the country to work abroad in contract jobs or as merchant seamen. * In 1990 the Philippines had not yet recovered from the economic and political crisis of the first half of the 1980s. At P18,419, or US$668, per capita GNP in 1990 remained, in real terms, below the level of 1978. A major thrust of Aquino's 1986 People Power Revolution was to address the needs of impoverished Filipinos. One of the four principles of her "Policy Agenda for People-Powered Development," was promotion of social justice and poverty alleviation. Government programs launched in 1986 and 1987 to generate employment met with some success, reversing the decline of the first half of the decade, but these efforts did little to alleviate the more chronic aspects of Philippine poverty. After Aquino took office the most immediate task for here economic advisers was to get the economy moving, and a turn around was achieved in 1986. Economic growth was low (1.9 percent), but it was positive. For the next two years, growth was more respectable--5.9 and 6.7 percent, respectively. In 1986 and 1987, consumption led the growth process, but then investment began to increase. In 1985 industrial capacity utilization had been as low as 40 percent, but by mid-1988 industries were working at near full capacity. Investment in durable goods grew almost 30 percent in both 1988 and 1989, reflecting the buoyant atmosphere. The international community was supportive. Like domestic

investment, foreign investment did not respond immediately after Aquino took office, but in 1987 it began to pick up. The economy also was helped by foreign aid. The 1989 and 1991 meetings of the aid plan called the Multilateral Aid Initiative, also known as the Philippine Assistance Plan, a multinational initiative to provide assistance to the Philippines, pledged a total of US$6.7 billion. * Economic successes, however, generated their own problems. The trade deficit rose rapidly, as both consumers and investors attempted to regain what had been lost in the depressed atmosphere of the 1983-85 period. Although debt-service payments on external debt were declining as a proportion of the country's exports, they remained above 25 percent. And the government budget deficit ballooned...