Reaction on the economy of the Philippines today?

Philippines - The EconomyPhilippines

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.

The economy had grown 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 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.

Economic growth revived in 1986 under the new president, Corazon C. 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.

The structure of the economy evolved slowly over time. The agricultural sector in 1990 accounted for 23 percent of GNP and slightly more than 45 percent of the work force. About 33 percent of output came from industry, which employed about 15 percent of the work force. The manufacturing subsector had developed rapidly during the 1950s, but then it leveled off and did not increase its share of either output or employment. In 1990, 24 percent of GNP and 12 percent of employment were derived from manufacturing. The services sector, a residual employer, increased its share of the work force from about 25 percent in 1960 to 40 percent in 1990. In 1990 services accounted for 44 percent of GNP.

The Philippines is rich in Natural Resources. Land planted in rice and corn accounted for about 50 percent of the 4.5 million hectares of field crops in 1990. Another 25 percent of the cultivated area was taken up by coconuts, a major export crop. Sugarcane, pineApples, and Cavendish bananas also were important earners of foreign exchange. Forest reserves have been extensively exploited to the point of serious depletion. Archipelagic Philippines is surrounded by a vast aquatic resource base. In 1990 fish and other seafood from the surrounding seas provided more than half the protein consumed by the average Filipino household. The Philippines also had vast mineral deposits. In 1988 the country was the world's tenth largest producer of copper, the sixth largest producer of chromium, and the ninth largest producer of gold. The country's only nickel mining company was expected to resume operation in 1991 and again produce large quantities of that metal. Petroleum exploration continued but discoveries were minimal, and the country was required to import most of its oil.

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.

<> POLITICAL ECONOMY OF DEVELOPMENT

<> ECONOMIC PLANNING AND POLICY

<>AGRICULTURE

<> INDUSTRY

<> EMPLOYMENT AND LABOR RELATIONS

<>POVERTY AND WELFARE

<> INTERNATIONAL ECONOMIC RELATIONS

<> Tourism

Philippines

Philippines - POLITICAL ECONOMY OF DEVELOPMENTPhilippines Economic Development Until 1970In 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. 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.

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.

<> Martial Law and its Aftermath, (1972-86)

<> The Aquino Government

Philippines

Philippines - ECONOMY - Martial Law and its AftermathPhilippines

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 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."

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-one-year 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.

Philippines

Philippines - ECONOMY - The Aquino GovernmentPhilippines

In 1986 Corazon Aquino focused her presidential campaign on the misdeeds of Marcos and his cronies. The economic correctives that she proposed emphasized a central role for private enterprise and the moral imperative of reaching out to the poor and meeting their needs. Reducing unemployment, encouraging small-scale enterprise, and developing the neglected rural areas were the themes.

Aquino entered the presidency with a mandate to undertake a new direction in economic policy. Her initial cabinet contained individuals from across the political spectrum. Over time, however, the cabinet became increasingly homogeneous, particularly with respect to economic perspective, reflecting the strong influence of the powerful business community and international creditors. The businesspeople and technocrats who directed the Central Bank and headed the departments of finance and trade and industry became the decisive voices in economic decision making. Foreign policy also reflected this power relationship, focusing on attracting more foreign loans, aid, trade, investment, and tourists.

It soon became clear that the plight of the people had been subordinated largely to the requirements of private enterprise and the world economy. As the president noted in her state-of- the-nation address in June 1989, the poor had not benefited from the economic recovery that had taken place since 1986. The gap between the rich and poor had widened, and the proportion of malnourished preschool children had grown.

The most pressing problem in the Philippine international political economy at the time Aquino took office was the country's US$28 billion external debt. It was also one of the most vexatious issues in her administration. Economists within the economic planning agency, the National Economic and Development Authority (NEDA), argued that economic recovery would be difficult, if not impossible, to achieve in a relatively short period if the country did not reduce the size of the resource outflows associated with its external debt. Large debt-service payments and moderate growth (on the order of 6.5 percent per year) were thought to be incompatible. A two-year moratorium on debt servicing and selective repudiation of loans where fraud or corruption could be shown were recommended. Business-oriented groups and their representatives in the president's cabinet vehemently objected to taking unilateral action on the debt, arguing that it was essential that the Philippines not break with its major creditors in the international community. Ultimately, the president rejected repudiation; the Philippines would honor all its debts.

Domestically, land reform was a highly contentious issue, involving economics as well as equity. NEDA economists argued that broad-based spending increases were necessary to get the economy going again; more purchasing power had to be put in the hands of the masses. Achieving this objective required a redistribution of wealth downward, primarily through land reform. Given Aquino's campaign promises, there were high expectations that a meaningful program would be implemented. Prior to the opening session of the first Congress under the country's 1987 constitution, the president had the power and the opportunity to proclaim a substantive land reform program. Waiting until the last moment before making an announcement, she chose to provide only a broad framework. Specifics were left to the new Congress, which she knew was heavily represented by landowning interests. The result--a foregone conclusion--was the enactment of a weak, loophole-ridden piece of legislation.

The most immediate task for Aquino's 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, hitting 5.2 percent of GNP in 1990.

The 1988 GNP grew 6.7 percent, slightly more than the government plan target. Growth fell off to 5.7 percent in 1989, then plummeted in 1990 to just over 3 percent. Many factors contributed to the 1990 decline. The country was subjected to a prolonged drought, which resulted in the increased need to import rice. In July a major earthquake hit Northern Luzon, causing extensive destruction, and in November a typhoon did considerable damage in the Visayas. There were other, more human, troubles also. The country was attempting to regain a semblance of order in the aftermath of the December 1989 coup attempt. Brownouts became a daily occurrence, as the government struggled to overcome the deficient power-generating capacity in the Luzon grid, a deficiency that in the worst period was below peak demand by more than 300 megawatts and resulted in outages of four hours and more. Residents of Manila suffered both from a lack of public transportation and clogged and overcrowded roadways; garbage removal was woefully inadequate; and, in general, the city's infrastructure was in decline. Industrial growth fell from 6.9 percent in 1989 to 1.9 percent in 1990; growth investment in 1990 in both fixed capital and durable equipment declined by half when compared with the previous year. Government construction, which grew at 10 percent in 1989, declined by 1 percent in 1990.

The Aquino administration appeared to be unable to work with the Congress to enact an economic package to overcome the country's economic difficulties. In July, as the government deficit soared Secretary of Finance Jesus Estanislao introduced a package of new tax measures. Then in October, stalemated with Congress, Aquino agreed to seek a reduction in the budget gap without new taxes. The agreement met with resistance from the Congress for being an onorous imposition on an economy in crisis, growth would be stifled and the poor would be impacted negatively. The willingness of the Congress to pass the tax package called for in the IMF agreement was in doubt. In 1990 Congress placed a 9 percent levy on all imports to provide revenues until an agreement could be reached with the administration on a tax package. In February 1991, however, it was learned that in its agreement with the IMF for new standby credits, the government had promised that it would indeed implement new taxes.

Accusations were widespread in Manila's press about the 1990-91 impasse. On the one hand, it was claimed that Aquino and her advisers had no economic plan; on the other hand, the Congress was said to be unwilling to work with the president. Traditional political patterns appeared to be reasserting themselves, and the technocrats had little ultimate influence. One study of the first Congress elected under the 1987 constitution showed that only 31 out of 200 members of the House of Representatives, were not previously elected officials or directly related to the leader of a traditional political clan. Business interests directly influenced the president to overrule already established policies, as in the 1990 program to simplify the tariff structure. Business and politics have always been deeply interwoven in the Philippines; crony capitalism was not a deviant model, but rather the logical extreme of a traditional pattern. As the Philippines entered the 1990s, the crucial question for the economy was whether the elite would limit its political activities to jockeying for economic advantage or would forge its economic and political interests in a fashion that would create a dynamic economy.

Philippines

Philippines - ECONOMIC PLANNING AND POLICYPhilippines

The Philippines has traditionally had a private enterprise economy both in policy and in practice. The government intervened primarily through fiscal and monetary policy and in the exercise of its regulatory authority. Although expansion of public sector enterprises occurred during the Marcos presidency, direct state participation in economic activity has generally been limited. The Aquino government set a major policy initiative of consolidating and privatizing government-owned and government-controlled firms. Economic planning was limited largely to establishing targets for economic growth and other macroeconomic goals, engaging in project planning and implementation, and advising the government in the use of capital funds for development projects.

Development PlanningThe responsibility for economic planning was vested in the National Economic and Development Authority. Created in January 1973, the authority assumed the mandate both for macroeconomic planning that had been undertaken by its predecessor organization, the National Economic Council, and project planning and implementation, previously undertaken by the Presidential Economic Staff. National Economic and Development Authority plans calling for the expansion of employment, maximization of growth, attainment of fiscal responsibility and monetary stability, provision of social services, and equitable distribution of income were produced by the Marcos administration for 1974-77, 1978-82, and 1983-88, and by the Aquino administration for 1987-92. Growth was encouraged largely through the provision of infrastructure and incentives for investment by private capital. Equity, a derivative goal, was to be achieved as the result of a dynamic economic expansion within an appropriate policy environment that emphasized labor-intensive production.

The National Economic and Development Authority Medium-Term Development Plan, 1987-92 reflected Aquino's campaign themes: elimination of structures of privilege and monopolization of the economy; decentralization of power and decision making; and reduction of unemployment and mass poverty, particularly in rural areas. The private sector was described as both the "initiator" and "prime mover" of the country's development; hence, the government was "to encourage and support private initiative," and state participation in the economy was to be minimized and decentralized. Goals included alleviation of poverty, generation of more productive employment, promotion of equity and social justice, and attainment of sustainable economic growth. Goals were to be achieved through agrarian reforms; strengthening the collective bargaining process; undertaking rural, labor-intensive infrastructure projects; providing social services; and expanding education and skill training. Nevertheless, as with previous plans, the goals and objectives were to be realized, trickle-down fashion, as the consequence of achieving a sustainable economic growth, albeit a growth more focused on the agricultural sector.

The plan also involved implementing more appropriate, market-oriented fiscal and monetary polices, achieving a more liberal trade policy based on comparative advantage, and improving the efficiency and effectiveness of the civil service, as well as better enforcement of government laws and regulations. Proper management of the country's external debt to allow an acceptable rate of growth and the establishment of a "pragmatic," development-oriented foreign policy were extremely important.

Economic performance fell far short of plan targets. For example, the real GNP growth rate from 1987 to 1990 averaged 25 percent less than the targeted rate, the growth rate of real exports was one-third less, and the growth rate of real imports was well over double. The targets, however, did provide a basis for discussion of consistency of official statements and whether the plan growth rates were compatible with the maintenance of external debt-repayment obligations. The plan also set priorities. Both Aquino's campaign pronouncements and the policies embodied in the planning document emphasized policies that would favorably affect the poor and the rural sector. But, because of dissension within the cabinet, conflicts with Congress, and presidential indecisiveness, policies such as land and tax reform either were not implemented or were implemented in an impaired fashion. In addition, the Philippines curtailed resources available for development projects and the provision of government services in order to maintain good relations with international creditors.

The Philippine government has undertaken to provide incentives to firms, both domestic and foreign, to invest in priority areas of the economy since the early 1950s. In 1967 an Investment Incentives Act, administered by a Board of Investments (BOI), was passed to encourage and direct investment more systematically. Three years later, an Export Incentives Act was passed, furthering the effort to move the economy beyond importsubstitution manufacturing. The incentive structure in the late 1960s and 1970s was criticized for favoring capital-intensive investment as against investments in agriculture and export industries, as well as not being sufficiently large. Export incentives were insufficient to overcome other biases against exports embodied in the structure of tariff protection and the overvaluation of the peso.

The investment incentive system was revised in 1983, and again in 1987, with the goal of rewarding performance, particularly exporting and labor-intensive production. As a results of objections made by the United States and other industrial nations to export-subsidy provisions contained in the 1983 Investment Code, much of the specific assistance to exporters was removed in the 1987 version. The 1987 Investment Code delegates considerable discretionary power over foreign investment to the government Board of Investments when foreign participation in an enterprise exceeds 40 percent. Legislation under consideration by the Philippine Congress in early 1991 would limit this authority. Under the new proposal, foreign participation exceeding 40 percent would be allowed in any area not covered by a specified "negative list."

Fiscal PolicyHistorically, the government has taken a rather conservative stance on fiscal activities. Until the 1970s, national government expenditures and taxation generally were each less than 10 percent of GNP. (Total expenditures of provincial, city, and municipal governments were small, between 5 and 10 percent of national government expenditures in the 1980s.) Under the Marcos regime, national government activity increased to between 15 and 17 percent of GNP, largely because of increased capital expenditures and, later, growing debt-service payments. In 1987 and 1988, the ratio of government expenditure to GNP rose above 20 percent. Tax revenue, however, remained relatively stable, seldom rising above 12 percent of GNP. Chronic government budget deficits were covered by international borrowing during the Marcos era and mainly by domestic borrowing during the Aquino administration. Both approaches contributed to the vicious circle of deficits generating the need for borrowing, and the debt service on those loans creating greater deficits and the need to borrow even more. At 5.2 percent of GNP, the 1990 government deficit was a major consideration in the 1991 standby agreement between Manila and the IMF.

Over time, the apportionment of government spending has changed considerably. In 1989 the largest portion of the national government budget (43.9 percent) went for debt servicing. Most of the rest covered economic services and social services, including education. Only 9.1 percent of the budget was allocated for defense. The Philippines devoted a smaller proportion of GNP to defense than did any other country in Southeast Asia.

The Aquino government formulated a tax reform program in 1986 that contained some thirty new measures. Most export taxes were eliminated; income taxes were simplified and made more progressive; the investment incentives system was revised; luxury taxes were imposed; and, beginning in 1988, a variety of sales taxes were replaced by a 10 percent value-added tax--the central feature of the administration's tax reform effort. Some administrative improvements also were made. The changes, however, did not effect an appreciable rise in the tax revenue as a proportion of GNP.

Problems with the Philippine tax system appear to have more to do with collections than with the rates. Estimates of individual income tax compliance in the late 1980s ranged between 13 and 27 percent. Assessments of the magnitude of tax evasion by corporate income tax payers in 1984 and 1985 varied from as low as P1.7 billion to as high as P13 billion. The latter figure was based on the fact that only 38 percent of registered firms in the country actually filed a tax return in 1985. Although collections in 1989 were P10.1 billion, a 70 percent increase over 1988, they remained P1.4 billion below expectations. Tax evasion was compounded by mismanagement and corruption. A 1987 government study determined that 25 percent of the national budget was lost to graft and corruption.

Low collection rates also reinforced the regressive structure of the tax system. The World Bank calculated that effective tax rates (taxes paid as a proportion of income) of low-income families were about 50 percent greater than those of high-income families in the mid-1980s. Middle-income families paid the largest percentage. This situation was caused in part by the government's heavy reliance on indirect taxes. Individual income taxes accounted for only 8.9 percent of tax collections in 1989, and corporate income taxes were only 18.5 percent. Taxes on goods and services and duties on international transactions made up 70 percent of tax revenue in 1989, about the same as in 1960.

The consolidated public sector deficit--the combined deficit of national government, local government, and public-sector enterprise budgets--which had been greatly reduced in the first two years of the Aquino administration, rose to 5.2 of GNP by the end of 1990. In June 1990, the government proposed a comprehensive new tax reform package in an attempt to control the public sector deficit. About that time, the IMF, World Bank, and Japanese government froze loan disbursements because the Philippines was not complying with targets in the standby agreement with the IMF. As a result of the 1990-91 Persian Gulf crisis, petroleum prices increased and the Oil Price Stabilization Fund put an additional strain on the budget. The sudden cessation of dollar remittances from contract workers in Kuwait and Iraq and increased interest rates on domestic debt of the government also contributed to the deficit.

Negotiations between the Aquino administration and Congress on the administration's tax proposals fell through in October 1990, with the two sides agreeing to focus on improved tax collections, faster privatization of government-owned and government-controlled corporations, and the imposition of a temporary import levy. A new standby agreement between the government and the IMF in early 1991 committed the government to raise taxes and energy prices. Although the provisions of the agreement were necessary in order to secure fresh loans, the action increased the administration's already fractious relations with Congress.

Monetary PolicyThe Central Bank of the Philippines was established in June 1948 and began operation the following January. It was charged with maintaining monetary stability; preserving the value and covertibility of the peso; and fostering monetary, credit, and exchange conditions conducive to the economic growth of the country. In 1991 the policy-making body of the Central Bank was the Monetary Board, composed of the governor of the Central Bank as chairman, the secretary of finance, the director general of the National Economic and Development Authority, the chairman of the Board of Investment, and three members from the private sector. In carrying out its functions, the Central Bank supervised the commercial banking system and managed the country's foreign currency system.

From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25 percent of GNP, about 5 percentage points less than annual gross domestic capital formation. This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving as a proportion of GNP declined on the average by a third, initially because of the impact of the economic crisis on personal savings and later more because of negative government saving. Investment also declined, so that for three of these years, domestic savings actually exceeded gross investment.

From the time it began operations until the early 1980s, the Central Bank intervened extensively in the country's financial life. It set interest rates on both bank deposits and loans, often at rates that were, when adjusted for inflation, negative. Central Bank credit was extended to commercial banks through an extensive system of rediscounting. In the 1970s, the banking system resorted, with the Central Bank's assistance, to foreign credit on terms that generally ignored foreign-exchange risk. The combination of these factors mitigated against the development of financial intermediation in the economy, particularly the growth of long-term saving. The dependence of the banking system on funds from the Central Bank at low interest rates, in conjunction with the discretionary authority of the bank, has been cited as a contributing factor to the financial chaos that occurred in the 1980s. For example, the proportion of Central Bank loans and advances to government-owned financial institutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82. Borrowings of the government-owned Development Bank of the Philippines from the Central Bank increased almost 100-fold during this period. Access to resources of this sort, in conjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and the later bailouts that contributed to the financial chaos.

At the start of the 1980s, the government introduced a number of monetary measures built on 1972 reforms to enhance the banking industry's ability to provide adequate amounts of long-term finance. Efforts were made to broaden the capital base of banks through encouraging mergers and consolidations. A new class of banks, referred to as "expanded commercial banks" or "unibanks," was created to enhance competition and the efficiency of the banking industry and to increase the flow of long-term saving. Qualifying banks--those with a capital base in excess of P500 million--were allowed to expand their operations into a range of new activities, combining commercial banking with activities of investment houses. The functional division among other categories of banks was reduced, and that between rural banks and thrift banks eliminated.

Interest rates were deregulated during the same period, so that by January 1983 all interest rate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rates were set in relation to the cost of competing funds. Although the short-term response seemed favorable, there was little long-term change. The ratio of the country's money supply, broadly defined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in 1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowest in Southeast Asia.

Monetary and fiscal policies that were set by the government in the early 1980s, contributed to large intermediation margins, the difference between lending and borrowing rates. In 1988, for example, loan rates averaged 16.8 percent, whereas rates on savings deposits were only slightly more than 4 percent. The Central Bank traditionally maintained relatively high reserve requirements (the proportion of deposits that must remain in reserve), in excess of 20 percent. In 1990 the reserve requirement was revised upward twice, going from 21 percent to 25 percent. In addition, the government levied both a 5 percent gross tax on bank receipts and a 20 percent tax on deposit earnings, and borrowed extensively to cover budget deficits and to absorb excess growth in the money supply.

In addition to large intermediation margins, Philippine banks offered significantly different rates for deposits of different amounts. For instance, in 1988 interest rates on six-month time deposits of large depositors averaged almost 13 percent, whereas small savers earned only 4 percent on their savings. Rates offered on six-month and twelve-month time deposits differed by only 1 percentage point, and the rate differential for foreign currency deposits of all available maturities was within a single percentage point range. Because savings deposits accounted for approximately 60 percent of total bank deposits and alternatives for small savers were few, the probability of interest rate discrimination by the commercial banking industry between small, less-informed depositors and more affluent savers, was quite high. Interest rates of time deposits also were bid up to reduce capital flight. This discrimination coupled with the large intermediation margins, gave rise to charges by Philippine economists and the World Bank that the Philippine commercial banking industry was highly oligopolistic.

Money supply growth has been highly variable, expanding during economic and political turmoil and then contracting when the Philippines tried to meet IMF requirements. Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economy with money prior to the 1986 elections was one reason why the newly installed Aquino administration chose to scrap the existing standby arrangement with the IMF in early 1986 and negotiate a new agreement. The Central Bank released funds to stabilize the financial situation following a financial scandal in early 1981, after the onset of an economic crisis in late 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and the Central Bank--the so-called Jobo bills, named after then Central Bank Governor Jose Fernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater borrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, the growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, and the current account was in surplus. Success, however, was obtained at the expense of a steep fall in output and high unemployment.

PrivatizationWhen Aquino assumed the presidency in 1986, P31 billion, slightly more than 25 percent of the government's budget, was allocated to public sector enterprises--government-owned or government-controlled corporations--in the form of equity infusions, subsidies, and loans. Aquino also found it necessary to write off P130 billion in bad loans granted by the government's two major financial institutions, the Philippine National Bank and the Development Bank of the Philippines, "to those who held positions of power and conflicting interest under Marcos." The proliferation of inefficient and unprofitable public sector enterprises and bad loans held by the Philippine National Bank, the Development Bank of the Philippines, and other government entities, was a heavy legacy of the Marcos years.

Burdened with 296 public sector enterprises, plus 399 other nonperforming assets transferred to the government by the Philippine National Bank and the Development Bank of the Philippines, the Aquino administration established the Asset Privatization Trust in 1986 to dispose of government-owned and government-controlled properties. By early 1991, the Asset Privatization Trust had sold 230 assets with net proceeds of P14.3 billion. Another seventy-four public sector enterprises that were created with direct government investment were put up for sale; fifty-seven enterprises were sold wholly or in part for a total of about P6 billion. The government designated that about 30 percent of the original public sector enterprises be retained and expected to abolish another 20 percent. There was widespread controversy over the fairness of the divestment procedure and its potential to contribute to an even greater concentration of economic power in the hands of a few wealthy families.

Philippines

Philippines - AGRICULTUREPhilippines Agricultural GeographyIn the late 1980s, nearly 8 million hectares--over 25 percent of total land--were under cultivation, 4.5 million hectares in field crops, and 3.2 million hectares in tree crops. Population growth reduced the amount of arable land per person employed in agriculture from about one hectare during the 1950s to around 0.5 hectare in the early 1980s. Growth in agricultural output had to come largely from multicropping and increasing yields. In 1988 double-cropping and intercropping resulted in 13.4 million hectares of harvested area, a total that was considerably greater than the area under cultivation. Palay (unhusked rice) and corn, the two cereals widely grown in the Philippines, accounted for about half of total crop area. Another 25 percent of the production area was taken up by coconuts, a major export earner. Sugarcane, pineApples, and Cavendish bananas (a dwarf variety) were also important earners of foreign exchange, although they accounted for a relatively small portion of cultivated area.

Climatic conditions are a major determinant of crop production patterns. For example, coconut trees need a constant supply of water and do not do well in areas with a prolonged dry season. Sugarcane, on the other hand, needs moderate rainfall spread out over a long growing period and a dry season for ripening and harvesting. Soil type, topography, government policy, and regional conflict between Christians and Muslims were also determinants in the patterns of agricultural activity.

<> Agricultural Production and Government Policy

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<> Livestock

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<> Fishing

Philippines

Philippines - Agricultural Production and Government PolicyPhilippines

The percentage of the population living in rural areas declined from 68 percent in 1970 to 57 percent in 1990, and the share of the labor force engaged in agriculture, forestry, and fishing also decreased to less than 50 percent by the late 1980s. Roughly two-thirds of agricultural households farmed their own land or were tenants; the others were landless agricultural workers. Some 75 percent of agricultural value added came from crops and livestock. The remaining 25 percent came from forestry and fishing. Value added in agricultural crops grew rapidly in the early 1970s, averaging growth rates of 7.7 percent. In the 1980s, however, with the exception of corn, which was in growing demand as an animal feed, the growth rate of agricultural production declined and was sometimes negative for bananas and sugarcane. Low world prices combined with the high cost of inputs such as fertilizers were two of the most important reasons.

The government pursued sometimes contradictory goals of maintaining cheap food and raw material prices, high farm income, food security, and stable prices, at times through direct intervention in agricultural markets. In 1981 the National Food Authority was created. It was empowered to regulate the marketing of all food and given monopoly privileges to import grains, soybeans, and other feedstuffs. The ability of the National Food Authority and its predecessor organizations to stabilize prices and keep them within the established price bands, at either the farm gate or the retail market, has been quite limited because of insufficient funds to affect the market, strict purchasing requirements, and corrupt practices among authority personnel. In 1985 the role of the National Food Authority was reduced, and price ceilings on rice were lifted. Beginning in the 1950s, government efforts to stimulate industrial development, such as tariffs on manufactured goods, overvaluation of the currency, export taxes on agricultural commodities, and price controls had a deleterious effect on the agricultural sector, making it relatively unprofitable. On the other hand, irrigation water was distributed at below-cost prices, and fertilizer manufacturing was subsidized.

Beginning in the latter half of the 1970s, the Marcos regime gave increased attention to agriculture and the rural sector in general, including agribusiness development. The Aquino government continued that emphasis, although its policy evolved from a commodity-specific orientation to a general, cropdiversification approach that relied more on market signals to guide crop selection. The rice-price stabilization program remained in effect, and a program was implemented to increase small-farmer access to postharvest facilities such as warehouses, rice mills, driers, and threshers.

Providing credit to the agricultural sector, particularly to small-sized and medium-sized farmers had been a government policy since the early 1950s, one that met with mixed success at best. By the early 1980s, there were approximately 900 privately owned, rural banks, which were the principal implementors of government-sponsored, supervised credit schemes. The Masagana 99 program was initiated in the early 1970s to encourage adoption of new, high-yielding rice varieties. No-collateral, low-interest loans were made available to small farmers, mainly by privately owned, rural banks, with the government guaranteeing 85 percent of any losses suffered by the banks. In general, however, regulated interest rates made rural banks unattractive to depositors.

In 1975 more than 500,000 farmers participated in the Masagana 99 program. By 1985, however, the program had expired because of high arrearage and the tight monetary policy instituted as part of an agreement with the IMF. The program was revived in the Aquino administration's Medium-Term Development Plan, 1987-92. According to a government report, however, as of 1988 the program had not yet reached most of the intended beneficiaries. Government efforts were also underway to rehabilitate rural banks, the majority of which had experienced severe difficulties during the economic crisis of the early 1980s and the subsequent monetary squeeze.

Philippines

Philippines - Rice and the Green RevolutionPhilippines

Rice is the most important food crop, a staple food in most of the country. It is produced extensively in Luzon, the Western Visayas, Southern Mindanao, and Central Mindanao. In 1989 nearly 9.5 billion tons of palay were produced. In 1990 palay accounted for 27 percent of value added in agriculture and 3.5 percent of GNP. Per hectare yields have generally been low in comparison with other Asian countries. Since the mid-1960s, however, yields have increased substantially as a result of the cultivation of high-yielding varieties developed in the mid-1960s at the International Rice Research Institute located in the Philippines. The proportion of "miracle" rice in total output rose from zero in 1965-66 to 81 percent in 1981-82. Average productivity increased to 2.3 tons per hectare (2.8 tons on irrigated farms) by 1983. By the late 1970s, the country had changed from a net importer to a net exporter of rice, albeit on a small scale.

This "green revolution" was accompanied by an expanded use of chemical inputs. Total fertilizer consumption rose from 668 tons in 1976 to 1,222 tons in 1988, an increase of more than 80 percent. To stimulate productivity, the government also undertook a major expansion of the nation's irrigation system. The area under irrigation grew from under 500,000 hectares in the mid-1960s to 1.5 million hectares in 1988, almost half of the potentially irrigable land.

In the 1980s, however, rice production encountered problems. Average annual growth for 1980-85 declined to a mere 0.9 percent, as contrasted with 4.6 percent for the preceding fifteen years. Growth of value added in the rice industry also fell in the 1980s. Tropical storms and droughts, the general economic downturn of the 1980s, and the 1983-85 economic crisis all contributed to this decline. Crop loans dried up, prices of agricultural inputs increased, and palay prices declined. Fertilizer and plant nutrient consumption dropped 15 percent. Farmers were squeezed by rising debts and declining income. Hectarage devoted to rice production, level during the latter half of the 1970s, fell an average of 2.4 percent per annum during the first half of the 1980s, with the decline primarily in marginal, nonirrigated farms. As a result, in 1985, the last full year of the Marcos regime, the country imported 538,000 tons of rice. The situation improved somewhat in the late 1980s, and smaller amounts of rice were imported. However, in 1990 the country experienced a severe drought. Output fell by 1.5 percent, forcing the importation of an estimated 400,000 tons of rice.

Philippines

Philippines - Coconut IndustryPhilippines

The Philippines is the world's second largest producer of coconut products, after Indonesia. In 1989 it produced 11.8 million tons. In 1989, coconut products, coconut oil, copra (dried coconut), and desiccated coconut accounted for approximately 6.7 percent of Philippine exports. About 25 percent of cultivated land was planted in coconut trees, and it is estimated that between 25 percent and 33 percent of the population was at least partly dependent on coconuts for their livelihood. Historically, the Southern Tagalog and Bicol regions of Luzon and the Eastern Visayas were the centers of coconut production. In the 1980s, Western Mindanao and Southern Mindanao also became important coconut-growing regions.

In the early 1990s, the average coconut farm was a medium-sized unit of less than four hectares. Owners, often absentee, customarily employed local peasants to collect coconuts rather than engage in tenancy relationships. The villagers were paid on a piece-rate basis. Those employed in the coconut industry tended to be less educated and older than the average person in the rural labor force and earned lower-than-average incomes.

Land devoted to cultivation of coconuts increased by about 6 percent per year during the 1960s and 1970s, a response to devaluations of the peso in 1962 and 1970 and increasing world demand. Responding to the world market, the Philippine government encouraged processing of copra domestically and provided investment incentives to increase the construction of coconut oil mills. The number of mills rose from twenty-eight in 1968 to sixty-two in 1979, creating substantial excess capacity. The situation was aggravated by declining yields because of the aging of coconut trees in some regions.

In 1973 the martial law regime merged all coconut-related, government operations within a single agency, the Philippine Coconut Authority (PCA). The PCA was empowered to collect a levy of P0.55 per 100 kilograms on the sale of copra to be used to stabilize the domestic price of coconut-based consumer goods, particularly cooking oil. In 1974 the government created the Coconut Industry Development Fund (CIDF) to finance the development of a hybrid coconut tree. To finance the project, the levy was increased to P20.

Also in 1974, coconut planters, led by the Coconut Producers Federation (Cocofed), an organization of large planters, took control of the PCA governing board. In 1975 the PCA acquired a bank, renamed the United Coconut Planters Bank, to service the needs of coconut farmers, and the PCA director, Eduardo Cojuangco, a business associate of Marcos, became its president. Levies collected by the PCA were placed in the bank, initially interest-free. In 1978 the United Coconut Planters Bank was given legal authority to purchase coconut mills, ostensibly as a measure to cope with excess capacity in the industry. At the same time, mills not owned by coconut farmers--that is, Cocofed members or entities it controlled through the PCA--were denied subsidy payments to compensate for the price controls on coconut-based consumer products. By early 1980, it was reported in the Philippine press that the United Coconut Oil Mills, a PCA-owned firm, and its president, Cojuangco, controlled 80 percent of the Philippine oil-milling capacity. Minister of Defense Juan Ponce Enrile also exercised strong influence over the industry as chairman of both the United Coconut Planters Bank and United Coconut Oil Mills and honorary chairman of Cocofed. An industry composed of some 0.5 million farmers and 14,000 traders was, by the early 1980s, highly monopolized.

In principle, the coconut farmers were to be the beneficiaries of the levy, which between March 1977 and September 1981 stabilized at P76 per 100 kilograms. Contingent benefits included life insurance, educational scholarships, and a cooking oil subsidy, but few actually benefited. The aim of the replanting program, controlled by Cojuangco, was to replace aging coconut trees with a hybrid of a Malaysian dwarf and West African tall varieties. The new palms were to produce five times the weight per year of existing trees. The target of replanting 60,000 trees a year was not met. In 1983, 25 to 30 percent of coconut trees were estimated to be at least sixty years old; by 1988, the proportion had increased to between 35 and 40 percent.

When coconut prices began to fall in the early 1980s, pressure mounted to alter the structure of the industry. In 1985 the Philippine government agreed to dismantle the United Coconut Oil Mills as part of an agreement with the IMF to bail out the Philippine economy. Later a 1988 United States law requiring foods using tropical oils to be labeled indicating the saturated fat content had a negative impact on an already ailing industry and gave rise to protests from coconut growers that similar requirements were not levied on oils produced in temperate climates.

Philippines

Philippines - SugarPhilippines

From the mid-nineteenth century to the mid-1970s, sugar was the most important agricultural export of the Philippines, not only because of the foreign exchange earned, but also because sugar was the basis for the accumulation of wealth of a significant segment of the Filipino elite. The principal sugarcane-growing region is the Western Visayas, particularly the island of Negros. In 1980 the region accounted for half the area planted in cane and two-thirds of the production of sugar. Unlike the cultivation of rice, corn, and coconuts, sugarcane is typically grown on large farms or haciendas. In the mid-1980s, more than 60 percent of total production and about 80 percent of Negros's output came from farms twenty-five hectares or larger. Countrywide, tenancy arrangements existed for approximately half the sugarcane farms; however, they were generally the smaller ones, averaging 2.5 hectares in size and accounting for only slightly more than 20 percent of land planted in the crop. Elsewhere, laborers were employed, generally at very low wages. A survey undertaken in 1990 by the governor of Negros Occidental found that only one-third of the island's sugar planters were paying the then-mandated minimum wage of P72.50 per day. The contrast between the sumptuous lifestyles of Negros hacenderos and the poverty of their workers, particularly migrant laborers known as sacadas, epitomized the vast social and economic gulf separating the elite in the Philippines from the great mass of the population.

In the 1950s and 1960s, sugar accounted for more than 20 percent of Philippine exports. Its share declined somewhat in the 1970s and plummeted in the first half of the 1980s to around 7 percent. The sugar industry was in a crisis. Part of the problem was a depressed market for sugar. A dramatic increase in the world price of sugar had occurred in 1974, peaking at US$0.67 per pound in December of that year. The following two years, however, saw prices fall to less than US$0.10 a pound and remain there for a few years before moving upward again toward the end of the decade. Sugar prices fell again in the early 1980s, bottoming in May 1985 at less than US$0.03 per pound and averaging US$0.04 per pound for the year as a whole. In early 1990, prices had recovered to US$0.14 cents per pound then declined to approximately US$0.08 to US$0.09 per pound.

Historically, the Philippines was protected to a certain degree from vicissitudes of the world price of sugar by the country's access to a protected and subsidized United States market. In 1913 the United States Congress established free trade with its Philippine colony, providing Filipino sugar producers unlimited access to the American market. Later, in 1934, a quota system on sugar was enacted and remained in force until 1974. Although Philippine sugar exports to the United States were restricted during this period, the country continued to enjoy a relatively privileged position. Philippine quotas for the United States market in the early 1970s accounted for between 25 and 30 percent of the total, double that of other significant suppliers such as the Dominican Republic, Mexico, and Brazil. After the quota law expired in 1974, Philippine sugar was sold on the open market, generally to unrestricted destinations. As a consequence, shipments to the United States declined.

On May 5, 1982, the United States reestablished a quota system for the importation of sugar. Allocations were based on a country's share in sugar trade with the United States during the 1975-81 period, the period during which Philippine sugar exports to the United States had dwindled. The Philippine allotment was 13.5 percent. Efforts by the Philippine government to have it raised to 25 percent, the country's approximate share during the previous quota period, were unsuccessful. The loss of sales imposed by the reduced quota share was compounded by a dramatic 40 percent drop in total United States imports of sugar in the mid-1980s as compared with the early 1970s. Philippine sugar exports to the United States that had averaged just under 1.3 million tons per year in the 1968-71 period averaged only 284,000 tons from 1983 to 1988, falling to approximately 161,000 tons in 1988. In 1988 only 273 thousand hectares were planted in sugar, about half that of the early 1970s.

During the earlier quota period, Philippine producers enjoyed high profits, but operations were inefficient and lacking in mechanization. Sugar yields in the Philippines were among the lowest in the world. Increases in production occurred through expansion of land area devoted to sugarcane. With falling prices and the end of the United States quota, attempts to improve productivity through mechanization increased yields, but caused a dramatic fall in labor requirements, initially by 50 percent and, over a longer period, by an estimated 90 percent. In an island economy such as that of Negros, where sugar has accounted directly for 25 percent of employment, the consequent actual and potential lost livelihood was disastrous.

The decline of the sugar industry was complicated by the monopolization that took place during the martial law period, a process not dissimilar to what occurred in the coconut industry. In 1976, as a reaction to the precipitous decline in sugar prices, Marcos established the Philippine Sugar Commission (Philsucom), placing at the head his close associate Roberto Benedicto. Philsucom was given sole authority to buy and sell sugar, to set prices paid to planters and millers, and to purchase companies connected to the sugar industry. A bank was set up in 1978, and the construction of seven new sugar mills was authorized at a cost of US$40 million per mill.

By the 1980s, considerable resistance to Philsucom and its trading subsidiary, the National Sugar Trading Corporation (Nasutra) had been generated. As with the monopoly in the coconut industry, the government acquiesced in its 1985 agreement with the IMF to dismantle Nasutra. But the damage had been done. In a study undertaken by a group of University of the Philippines economists, losses to sugar producers between 1974 and 1983 were estimated to be between P11 billion and P14 billion. Aquino established the Sugar Regulatory Authority in 1986 to take over the institutions set up by Benedicto.

Philippines

Philippines - Land Tenancy and Land ReformPhilippines

An important legacy of the Spanish colonial period was the high concentration of land ownership, and the consequent widespread poverty and agrarian unrest. United States administrators and several Philippine presidential administrations launched land reform programs to maintain social stability in the countryside. Lack of sustained political will, however, as well as landlord resistance, severely limited the impact of the various initiatives.

Farm size is a significant indicator of concentration of ownership. Although nationwide approximately 50 percent of farms in 1980 were less than two hectares, these small farms made up only 16 percent of total farm area. On the other hand, only about 3 percent of farms were over ten hectares, yet they covered approximately 25 percent of farm area. Farms also varied in size based on crops cultivated. Rice farms tended to be smaller; only 9 percent of rice land was on farms as large as ten hectares. Coconut farms tended to be somewhat larger; approximately 28 percent of the land planted