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The Philippines: New Directions in Domestic Policy and Foreign Relations
David G. Timberman (ed.)
Asia Society
1998
Philippine Economic Growth: Can It Last?
*
by Emmanuel S. de Dios
**
Introduction
Philippine officials proclaim that in the year 2000 the Philippines will be Asia’s next newly industrialized country. But the real message underlying the hyperboleof the administration’s shibboleth, “Philippines 2000,” is that the Philippines has turned the corner, that economic growth--and hopefully development--can be sustained.Several trends support this. In the brief period since 1993, a significant differenceis apparent in the country’s economic performance. Over the period 1993--95, grossdomestic product (GDP) grew at an average of almost 4 percent annually, with a trendto acceleration: GDP growth was 5.4 percent in 1996 and 5.2 percent in 1997. Thisperformance is certainly a large improvement over output growth of less than onepercent annually in the immediately preceding three years, 1990--92. At that time,the economy was reeling from the effects of a recession caused by a budget crisisand crippling power shortages.
From a long-term perspective, however, recent improvements are far from dramatic.In 1995, Filipinos earned on average only as much as they did in 1984 (Figure 2.1),and it will not be until the late 1990s that Filipinos ultimately regain the averageincomes they received a decade and a half ago. Indeed per capita income in 1995 wasonly 9 percent higher than that of the worst years of the 1980s, an improvement ofless than one percent growth annually over an entire decade.
This is not the first time the country has appeared headed for a permanent recovery.In the period 1987--89 the economy also seemed to be growing out of recession (theworst in postwar history); GDP growth averaged 5.8 percent, more rapid growth infact than in the recovery of the mid-1990s. Yet the earlier recovery sputtered--inpart because of the December 1989 coup attempt--and gave way to a full-blown recessionby 1991.
Indeed, economic growth in the Philippines over the past three decades has been dominatedby a “boom-bust cycle,” according to local economists. Significant interruptionsin economic growth occurred in 1958--60, 1970, 1974, 1983--85, and 1990--92. Thepast decade’s record is shown in Figure 2.1 in which two recessions are evident:in 1984--85 and in 1991--92.
In the typical pattern, a few years of moderate economic growth are followed by shortagesof foreign exchange, making it necessary to cut back on government spending and contractmoney supply, thus halting the growth episode. A period of partial adjustment follows,and the growth cycle resumes once the foreign exchange constraint is eased, withthe government typically feeling freer to resort to deficit spending. As a result,the growth episodes have closely followed a periodization according to major balanceof payments crises. Although different factors may immediately precipitate thesecrises, they are ultimately traceable to the economy’s failure to earn enough foreignexchange to pay for the imports (both productive inputs and final goods) associatedwith rising output and incomes.
The most recent episode of the boom-bust cycle was the recession of 1991--92. Underthe Aquino government in 1987--89, economic growth had begun to recover , led initiallyby deficit financing for rural public works and reviving consumption, then graduallyby investment. GDP growth in this period was as high as 5.8 percent. The attemptedcoup d’etat in late 1989 again shook investor confidence, so that growth fell to3 percent in 1990. Apart from political uncertainty, however, fundamental economicproblems continued to hound recovery.
This boom-bust pattern is often cited by those who contend that the present recoveryis soon bound to end, the same way others did. This has led to a vigorous debateover the soundness and sustainability of the Philippines’ economic growth. Are thingsfundamentally different, or are they fundamentally the same? Put another way, what--ifany--are the reasons to believe that the current growth trajectory will differ fromthose past? This question has been sharpened by the most recent turmoil which causedsharp depreciations and large drops in almost all Southeast Asian currencies andstock markets beginning in July 1997. Perhaps prematurely, the sustainability ofgrowth in the entire region is being placed in doubt, and this only complicates themore limited task of assessing the extent, depth, and prospects of recent Philippineeconomic performance. The difficulty stems only partly from the gap between governmentaspiration and economic reality. Certain analytical problems present obstacles aswell: How much credence should one lend to different sets of information, both ofwhich are true? Is the recent past a more accurate guide to the future than the moredistant past? Nor are econometric models of any use; they are after all based onlyon past data whose very validity for future trends is at issue.
Table 2.1: Philippine GDP Growth Rates, 1984-97 (percent)
| Period | Average Annual GDP Growth Rates |
|---|---|
| 1984-86 | -3.73 |
| 1987-89 | 5.75 |
| 1990-92 | 0.93 |
| 1993-97 | 4.4 |
Source of basic data: Philippine Statistical Yearbook
This chapter will argue that, in many ways, the current recovery is better placedto succeed than previous ones. First, stable macroeconomic conditions have been restored.Second, some major economic reforms, which in the past have met with social resistance,are now firmly established. The final ingredient is the restoration of investor confidence.The succeeding sections discuss each of these aspects in turn.
Solving the Fiscal Crisis
The main problem confronting the Aquino government was a fiscal crisis, wherein thegovernment faced the following macroeconomic dilemma: Maintenance of a decent levelof social and economic services in the face of low tax collections and a large debt-servicebill meant enlarging the public deficit to be financed; but it was feared that monetizingthe deficits would lead to inflation (and more important, it was disallowed underthe International Monetary Fund’s stabilization program).
As a result, the Aquino government initially resorted to domestic borrowing usingshort-term instruments. This, however, began to bloat the internal debt andin turn threatened recovery, since it tended to raise interest rates. More immediately,it also raised the government’s debt service on past debt and worsened the deficitin nominal terms. The government was then caught up in a vicious circle of borrowingmore in order to repay past loans. Debt service was taking up some 30--40 percentof the budget.
In 1990, the Aquino government addressed the fiscal crisis by drastically cuttingback on public spending and quickly raising resources through indirect taxes. TheGulf war in 1991 raised oil prices and bloated the trade deficit, while its threatcreated an aura of national crisis that made calls for austerity more palatable.The government used this opportunity to push harsh crisis measures, including anengineered depreciation, contractionary monetary policy, and renewed fiscal austerity.A 10 percent levy across the board on virtually all imports was imposed, as wellas a peso-per-liter tax on all petroleum imports. Mandatory cuts in spending werealso ordered for all government agencies.
By 1992, the budget surplus before debt service had reached 5.2 percent of GNP. Becauseof the tight-money policy, however, interest rates rose and output fell, finallyending the growth episode. In time, the recession would ultimately moderate bothinterest rates and inflation, as well as exert pressure on the balance of payments.As interest rates fell, the recession also relieved the government’s nominal deficitproblem as debt service on accumulated borrowings fell. In a way, therefore, the1991--92 recession did solve the immediate fiscal problem, but only at the cost offalling output and employment.
The recession was further prolonged by a shortage of power-generating capacity, lastinguntil early 1993, which was due to the government’s failure to anticipate an increasedneed for power and put new plants on stream. The recession of 1991--92 and the cripplingpower crisis would do much to obscure most of the Aquino government’s earlier achievementsin the public mind and leave bitter impressions of its years in power. One lessonthe recession taught policy makers, however, was the importance of holding the publicsector deficit in check if the domestic debt treadmill was not to be cranked up again.
Often overlooked are the significant tax reforms put in place by the Aquino government.In 1986 the value-added tax (VAT) was introduced and the reform of the individualand corporate income tax systems began. These succeeded moderately in raising revenuewithout calling forth any public protest. Taxes rose as a percentage of GDP fromless than 10 percent to 14 percent between 1984 and 1989, before the 1991--92 recessionand the imposition of large indirect taxes. Nonetheless, these efforts were insufficientto overcome the fiscal crisis, chiefly owing to the large portions of the budgetpreempted by debt service, the significant loopholes (chiefly in the form of generousdeductions allowed under the corporate income tax and the partial coverage of theVAT), and finally the poor collection efforts of the government bureaucracy.
After the 1991--92 recession, in one of its most significant accomplishments, thenew Ramos administration managed to maintain a consistent budget surplus. This wasdone through a combination of means: first, by keeping the growth of government expendituresin line with the overall growth of the economy, a measure not without its costs,as will be seen below; second, by a reliance on build-operate-transfer schemes toimplement significant infrastructure; and third, by an active resort to raising nontaxrevenues, primarily in the form of proceeds from privatization. The result was aslowing down of the growth of the internal debt and a reduction of internal debtservice.
The realignments of the tax system under the Aquino government probably renderedtax revenues more buoyant, so that as economic growth resumed, tax collections improvedmore than proportionately. The tax effort (ratio of tax revenues to GDP) now standsat some 16 percent. This would be an accomplishment, except that the needs for governmentspending--especially on infrastructure--are much greater. Further attempts at a comprehensivereform of the tax system, especially under the Ramos administration, have been meetingstronger resistance from certain parts of the corporate sector. To provide essentialinfrastructure without bloating the budget deficit, the government since 1992 hasrelied on private sector initiative and financing in the implementation of some largeinfrastructure projects.
Another element in resolving the fiscal crisis was the aggressive resort to nontaxrevenues through the sale of public assets. On the one hand, this was an obviousrecourse: The government had accumulated a large number of unprofitable (often overvalued)assets owing to guarantees it had extended in the past. Their maintenance was a drainon public resources, hence it was an easy decision to be rid of them. The Aquinogovernment had begun in this manner; between 1986 and 1989, nontax revenues representedmore than 20 percent of total revenues.
Since 1992, however, the idea that not only losing enterprises, but even profitableones could be sold off became accepted within government. This realization was partlydue to the exigencies of raising revenues through nontax means. Obviously, the proceedsfrom one-time privatization will moderate substantially as the supply of vendiblegovernment assets gradually runs out. Nontax revenues accounted for more than 23percent of total revenues in 1994; this fell to less than 10 percent in 1995.
The last element in the return to macroeconomic stability was the rehabilitationof the central bank in 1993. Before then, the central bank could not function effectively,owing to a negative net worth caused by bad loans extended during the Marcos regime.As a result, the national government had to perform quasi-monetary functions, issuingT-bills in excess of its own needs for budget financing, bloating the budget in theprocess with higher payments on internal debt. Under a 1993 law, the government reestablisheda new central bank and took over the bad-loans portfolio of the old one. This constituteda large step in allowing independent monetary policy to be conducted and in disentanglingmonetary from fiscal policy.
The effects of having gained control over the deficit were palpable, namely, lowernominal interest rates and a moderation of inflation. As the government’s need fornew borrowings was reduced, the pressure on interest rates was also lessened, whichin turn also reduced the debt service on old debt. Falling deficits also temperedpeople’s expectations of future inflation, and as a result actual inflation has declinedsignificantly. The close relationship between this development and the fall in thegovernment’s budget deficits as a share of GDP is striking (Figure 2.2).
Inflation has also been moderated by the peso’s continuing stability, although thishas been a mixed blessing, as the subsequent sudden depreciation in July 1997 showed.The peso had actually appreciated nominally since 1991, and the exchange rate hadhovered since then at an almost constant P26 to $1. After the successful restructuringof the country’s foreign debt, inflows were sustained by an incipient export boom,overseas workers’ earnings and other factor income, as well as large inflows of foreigncapital, which have resulted in positive payments balances notwithstanding an increasingcurrent account deficit. The central bank’s net international reserves as a resultincreased dramatically from the negative balances of the 1980s to more than $11 billionby late 1996 (Table 2.2). By the middle of the 1990s, the country had restored bothfiscal and monetary control, while the perennial problem of external balance thathad been immediately due to the foreign-debt hangover had been addressed--at leastin the short term.
Table 2.2: Exchange Rates and International Reserves, 1990-96
| Year | Exchange Rate (pesos/$) | Net International Reserves* ($million) |
|---|---|---|
| 1990 | 24.31 | 66 |
| 1991 | 27.48 | 2170 |
| 1992 | 25.51 | 3661 |
| 1993 | 27.11 | 3495 |
| 1994 | 26.42 | 7121 |
| 1995 | 25.71 | 7762 |
| 1996 | 26.2 | 11467 |
Source: Bangko Sentral ng Pilipinas, Selected Philippine Economic Indicators.
* End-of-period balances; figure for 1996 isas of end-September.
The recent speculative attacks on the peso and other currencies of the region haveunsettled the previous situation that was increasingly overly founded on continuingforeign portfolio inflows. In July 1997, the central bank attempted briefly to defendthe peso against speculation by selling more than $4.5 billion worth of foreign exchangein one week. This explicit defense of the currency was soon abandoned, however, asreserves thinned out. The peso then depreciated sharply from P26 to P30 to a dollarover a period of days. The central bank next resorted to raising interest rates andcontrolling liquidity. This worked only briefly, and by the end of 1997 the pesohad depreciated more than 50 percent against the dollar. In what could be a hopefulsign, however, inflation continued to be at single-digit levels, with business beingworried more about the recessionary consequences of the central bank’s high-interest“cure,” which was worse than the depreciation itself. Indeed, notwithstanding itssuddenness, the depreciation represented a badly needed correction of the one macroeconomicvariable that had slowly strayed out of line. Its consequences properly handled,the depreciation could represent a shot in the arm for the flagging manufacturing(and especially export) sector over the next few years.
Structural Reforms
Determining the character and sustainability of economic growth requires an examinationof regimes of trade and investment, since they affect the relative profitabilityof various industries and, in this manner, guide the flow of new investments. Therepeated occurrence of the boom-bust syndrome in the past was due in large part toan industrial portfolio that consisted largely of uncompetitive or inefficient industries.“Adjustment” in those circumstances simply meant depressing the import demand ofsuch industries through a contraction of output all around, i.e., a recession, enoughto temporarily restore the external-payments balance. The so-called recovery phase,however, would subsequently revive the same set of uncompetitive industries, puttingthe economy on course for another crash.
There are indications, however, that this pattern is in the process of being broken.Aside from the restoration of macroeconomic stability, the most recent growth episodeis distinguished from previous boom-bust cycles by its occurrence in a context ofsignificant structural reform. Changes have been most far-reaching in the trade regime;the momentum for lowering the level and narrowing the spread of tariff protectionhas been maintained therein. The overall climate for investment, meanwhile, has alsoundergone dramatic changes, with formerly regulated, restricted, or monopolized industriesbeing opened to competition from new entrants. These industries have included powergeneration, telecommunications, inter- island shipping, passenger and commercialair transport, banking, urban water and sewerage services, and oil trading and refining.The chances for a repetition of the boom-bust cycle are lessened by new investmentsentering industries and firms that are competitive and earn enough exports.
Trade Reforms
The system of protection has long been a bone of contention and has often been depictedas the epitome of the struggle between political and economic forces in the Philippineeconomy. It is in this area, however, that both the Aquino and Ramos governmentsmay be said to have accomplished the largest changes, in a long but steady processof removing the protectionist bias of the trading regime.
After the fall of the dictatorship, the Aquino government’s import-liberalizationprogram of 1986 removed a large number of quotas and other nontariff measures, convertingthese into tariffs. One of the last acts of the Aquino administration was to putin place a large-scale tariff reform to narrow the spread and lower the average levelsof tariffs over the years 1992--96.
The Ramos administration followed through on this commitment by remaining firm inthe implementation of the reforms initiated under Aquino. The momentum was maintainedby the promulgation of another phase of unilateral tariff reductions beginning in1996 and ending in 2001, further narrowing the levels and spread of tariffs. Theneed to adjust tariffs in the context of the country’s participation in the ASEANFree Trade Area (AFTA) partly justified this. Upon its accession to the World TradeOrganization (WTO), the Philippines bound its industrial tariffs to those set underthe Aquino administration and committed to converting remaining agricultural quotas--exceptfor rice--into tariffs. (Japan and South Korea were the only other countries besidesthe Philippines that sought and were given exemptions from the require- ment of theGeneral Agreement on Tariffs and Trade [GATT] to convert agricultural quotas intotariffs.) Finally, as a member of the Asia-Pacific Economic Cooperation (APEC) forum,the Philippines supported the Bogor Declaration’s objective of attaining free tradein the region by 2020 and submitted a unilateral (albeit nonbinding) action planthat would attain a low uniform tariff by 2005.
This succession of initiatives has resulted in a more or less consistent increasein the country’s openness to trade. The average level of protection for importableshas fallen from 47 percent in 1983 to 32 percent by 1995. For agricultural imports,tariffs decreased from 63 percent to 28 percent between 1983 and 1995, while formanufactured imports, average protection fell from 45 percent to 33 percent. Thereduction in tariff rates for agricultural imports has been especially large in relativeterms.
The long history of failure in trade reforms--and their apparent success in recenttimes--is interesting on its own terms as well as instructive for assessing the likelihoodof success of subsequent similar initiatives. Previous attempts at trade reformsin the Philippines have suffered historically from a weak internal constituency--anunderstandable state of affairs, since the gains to be reaped by industries, firms,and workers appear amorphous and far in the future as compared with the reality ofcurrently established interests. Most proponents of liberalization in the past camefrom multilateral agencies, the technocracy, and to a limited extent academe. Thiscircumstance did not greatly help advocacy in a country that viewed external influencewith suspicion and concrete interests as weightier than theoretical arguments. Anarticulate business advocacy (as opposed to academic and bureaucratic advocacy) forexports emerged only in the 1990s with the emergence of the Confederation of PhilippineExporters (Philexport). Even in this case, however, the interests represented weresmaller and less influential than established ones. Organized labor has also viewedliberalization with suspicion, not merely due to ideology, but for the pragmaticreason that the bulk of unionized labor is concentrated at the moment in industriesthat are inward-looking or declining, i.e., the very ones threatened by liberalization.
It is helpful to distinguish at least two phases in the reform of the trade regime.In the early stages of trade reform in the mid-1980s, success was due primarily tothe extraordinary credibility of the post-Marcos government and its ability to findan internal justification for these reforms. The Aquino administration removed agreat number of quantitative restrictions, using for the most part the rationaleof simply reversing patently unsuccessful intervention measures by the discreditedMarcos regime. The depth and duration of the 1984--85 recession assisted the reformprocess by severely weakening import-substituting interests. Political resistanceto such changes from the business sector was fortunately weakened by the fact thatmany interests affected were of political personae non gratae.
The tariff reforms of 1990--94 represent a second phase in the social justificationfor the trade reform program. The need to keep up with international commitmentsdetermined the pace of liberalization in the second phase. The country’s participationin AFTA, its accession to the WTO, and participation in the APEC forum may be seenas key events which cemented the social and governmental commitment to a liberaltrade and investment regime.
In the case of AFTA, the Philippine government was caught up in a program of liberalizationwithin the region where--for both economic and political reasons--it could not affordto be an outsider. The formation of AFTA in 1990 was initially thrust on ASEAN leadersby the lack of progress in the GATT Uruguay Round, the formation of the North AmericanFree Trade Agreement, and the impending completion of the European single market.ASEAN leaders agreed in 1990 to reduce trade barriers among member countries by theyear 2005, later accelerated to 2003. The Philippines did not push this process inASEAN, since it considered itself to be in a weaker economic position than its neighbors.Furthermore, in order to keep pace with its neighbors it would need to reconfigureits trade regime. A significant element in facilitating social acceptance of AFTA-relatedchanges was that the country was not under visible pressure from developed countries(particularly the United States since the withdrawal of U.S. military bases in 1991)or multilateral institutions to undertake tariff reforms--ASEAN was primarily anaffair among developing countries.
Once the premise of joining AFTA had been accepted, further trade liberalizationwas inevitable. The Philippines could not risk having substantially higher tariffson imports from the rest of the world than those it imposed on imports from ASEAN;otherwise trade and investment flows might be deflected to other ASEAN members withlower tariffs. To illustrate, suppose trade was free between Malaysia and the Philippinesbecause of AFTA, but that the Philippines maintained higher tariffs on non-ASEANimports. Then there would be a large incentive for foreign suppliers to penetratethe Philippine market through Malaysia, or for Philippine trade to be biased undulytoward sourcing from Malaysia over the rest of the world. Practical exigency dictated,therefore, that tariffs on imports from “third countries” should also come down bythe time the free trade area was completed in 2003. This logic provided a strongexternal justification for the proposal floated by the Ramos government’s economicplanners to reduce tariffs to a low uniform level (5 percent) by 2005, a standingproposal that has met with surprisingly little criticism, except for some argumentover the exact level of the low uniform tariff.
The muted social reaction to the country’s participation in AFTA contrasts with thelouder controversy generated by the country’s joining the WTO and APEC, both perceivedas entailing liberalization under terms imposed by developed countries. The controversyover the WTO and APEC was surprising, since for the most part the Philippines’ offersunder the Uruguay Round merely reiterated tariff reforms that the government hadalready determined to undertake unilaterally. In the same manner, the country’s offersto APEC (wherein submissions are voluntary and nonbinding to begin with) merely elaboratedexisting plans to implement a low uniform tariff by 2005. Opposition was muted bythe realization that the country’s submissions were similar to the offers of otherdeveloping countries.
This description of the process of liberalizing trade illustrates the combinationof internal and external factors that succeeded in nudging reforms along in the Philippines.An important factor was the rationale provided by an internal critique of previousfailed policies, up to and including the dirigisme and control of the dictatorship.Another factor was the benchmark provided by the actions of the country’s economicallysuccessful neighbors. Even today, the Philippines defines its goals in terms of abroad emulation of the “tiger economies” of East and Southeast Asia. A final factor,however, in cementing reforms was the momentum of liberalization contained in multilateralorganizations of which the country was a member.
Privatization and Deregulation
The same factors may be traced in the second set of structural reforms the governmenthas undertaken, namely the deregulation of important sectors of the economy and theprivatization of a number of important government corporations. This process alsobegan as a turning away from the politically discredited policies of the Marcos regime,which had supported both private and parastatal monopolies in the economy and hadextended large guarantees on foreign loans taken out on behalf of entities favoredby the Marcos government. The financial distress of these corporations after thedebt crisis and their bailout resulted in their ultimate takeover by the government.
Thus the first phase of privatization was easy in that it tread on no major constituenciestied to the retention of these corporations in the public sector. Indeed, the processwas hastened for significant pre-Marcos interests (e.g., the Lopezes, Ayalas, andSorianos) restored by the 1986 revolution that stood to benefit from a restorationof their assets. Even former Marcos associates eventually reacquired their assets,in a unique version of political reconciliation. Second, the assets involved in privatizationwere egregious acquisitions, which even by former rules were not considered legitimateareas of government activity. The subsequent disposal of these assets involved nomajor ideological change and required only the overcoming of political resistanceamong bureaucrats who had become attached to continuing government stewardship oversuch assets.
In the meantime, the stage had been set for the second, still on-going, phase ofprivatization, involving the disposal of other assets that had traditionally beenowned or controlled by government for some plausible public purposes. The initialmoves in this direction included the privatization through public listing of thePhilippine National Bank, heretofore the country’s largest commercial bank, and Petron,the government-owned oil company. From a bureaucratic and financial angle, as previouslymentioned, the rationale for privatization was found in the need to raise revenuesand bridge the fiscal gap. It was to the government’s credit nonetheless that itsaw the opportunity to expand the agenda to restructure the economy.
Two significant measures affecting foreign investments enhanced the success of thegovernment’s privatization efforts. In 1991, the last year of the Aquino administration,Congress passed an unprecedentedly liberal foreign investments law removing minimumnationality requirements in virtually all sectors of the economy. In particular,the foreign investments law adopted a “negative-list” approach, specifying only thosesectors where full foreign ownership was not allowed, implicitly allowing 100 percentforeign ownership everywhere else. Second, the newly elected Ramos government inApril 1992 lifted a large number of foreign exchange restrictions in the entry andrepatriation of foreign funds. These two moves played a large role in stimulatinginflows of both direct and portfolio foreign investments in the country. The effectwas to increase the number of actors in the privatization efforts and to encouragealliances between foreign investors and large domestic interests.
The first testing ground for “true” or structural privatization was the power sector.To solve the crippling power shortages that had become the principal obstacle togrowth, the Ramos administration in 1992 and 1993 aggressively opened up the power-generationsector--hitherto monopolized by the state-owned National Power Corporation--to bothforeign and domestic investors wishing to build and operate new power plants. Thiscreated a large response, especially among foreign investors and subsequently amongthe large domestic conglomerates as well. The build-operate-transfer contracts werein all likelihood too generous to the contractors and expensive for the government,since they guaranteed not only against sovereign but also commercial risks throughguaranteed sales to the government. On the other hand, this measure did solve theimmediate problem of eliminating power outages and gave both the government and thepublic a positive experience with private sector entry into utilities. Moreover,the entry of serious foreign investors in the energy sector broke the ice and helpedrefocus the attention of foreign direct investors on the country’s gradually improvingconditions.
The deregulation of telecommunications came soon after in 1993 (following a famousspeech by Lee Kuan Yew, who carped at the state of Philippine telecommunications)with new entrants allowed in international gateway, cellular, and finally domestictelephone services. This momentum was sustained with the deregulation of interislandshipping (1993), domestic passenger and cargo airlines (1993), and banking (1994)following in quick succession.
The privatization deals that have caught the most attention (and attracted controversy)have been large sales of idle government real property (the sale of the Fort Bonifacioproperty in Makati, stockyards in Alabang, and reclaimed property on Manila Bay areexamples). These deals have turned out to be the most lucrative for the government.Their impact on economic structure is less complex, although they have managed tostimulate domestic and foreign investor interest and allowed the government to bridgeits fiscal deficits.
In 1997, the government undertook another major structural privatization by biddingout the concessions to operate the heavily indebted water supply and sewerage systemsin the Metro Manila area. The full deregulation of the oil industry was also slatedwithin the year, as was the privatization of some power-generation assets of thepower company.
The hope underlying privatization and deregulation has been that these should providenew stimuli for both domestic and foreign investors, especially as compared withinvestment by government-owned or controlled corporations, which are typically indebtedand strapped for cash. The principle involved is clear: encouraging new entrantsand competition should induce new investments, either by the new entrants, the incumbents,or both. This has worked most clearly in telephone services, where the previouslydominant firm, Philippine Long Distance Telephone (PLDT) was compelled to undertakea massive expansion and upgrading program with the entry of new competition.
What Could Go Wrong?
Philippine industrial structure has changed inexorably as a result of the reforms.But the effects of such changes on aggregate indicators of economic performance,though encouraging, are still modest at best. The reasons for this are discussedbelow.
Low Savings and Investment
Reflecting the importance of foreign investment, foreign savings (i.e., foreign investmentsplus foreign loans) have constituted an increasing part of total investment, risingfrom 18 percent in 1991 to 34 percent by 1995. But this improvement in foreign investmenthas been offset by a fall in domestic savings, which have dropped to only 15 percentof GDP in 1995, versus 21 percent in 1988. This performance is far below “dragon”savings rates of 30 percent of GDP or more in other rapidly growing countries ofthe region.
Looking only at foreign investments, a distinct increase in both direct and portfolioinvestments may be dated from 1993 following the 1992 liberalization of the capitalaccount and a spate of initial public offerings on the stock market from privatizedgovernment firms and hitherto closely held family corporations. Table 2.3 shows analmost simultaneous rise in both portfolio and direct foreign investments in 1993,more than double that of 1992 net inflows. By 1995, net foreign investment inflowshad risen to $3.7 billion, buoyed up further by portfolio investments. The increasein the more significant direct foreign investments has been slower but steady.
Table 2.3: Direct and Portfolio Investments by Foreigners 1990-95 ($ million)
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | |
|---|---|---|---|---|---|---|
| Direct investments | ||||||
| Inflows | 550 | 556 | 776 | 1238 | 1591 | 1524 |
| Outflows | -22 | -27 | -101 | -374 | -302 | -399 |
| Net inflows | 528 | 529 | 675 | 864 | 1289 | 1125 |
| Portfolio investments | ||||||
| Inflows | 152 | 227 | 566 | 2257 | 2979 | 4740 |
| Outflows | -204 | -102 | -411 | -1360 | -2078 | -2110 |
| Net inflows | -52 | 125 | 155 | 897 | 901 | 2630 |
| Total net inflows | 476 | 654 | 830 | 1761 | 2190 | 3755 |
Source: Bangko Sentral ng Pilipinas, Selected Philippine Economic indicators.
For all that, total investment as a proportion of GDP has increased only from 20percent to 23 percent between 1991 and 1995 (Figure 2.3). This figure is inferiorto the pre-recession level of 24 percent, and some distance away from tiger-economystandards of 30 percent or more of GDP being invested. Ultimately this deficiencyhas been reflected in the relatively modest growth rates the economy has managedto achieve. If investment constituted as much as 30 percent of GDP in the Philippines(as it does in many other Southeast Asian countries), then the GDP growth rate ofthe country would have been around 7 percent or more per annum, rather than the mid-1990srate of only 5 percent.
The conundrum--and the fundamental problem for growth--continues to be the low rateof domestic savings. It is unlikely for foreign loans and direct investments to exceed10 percent of GDP, so if domestic savings continue to remain below 20 percent, theinvestment needed to sustain GDP growth of 7 percent will not be forthcoming. Asthe economy first started to climb out of recession, the problem of low savings wasthought to be due simply to low average incomes. As Figure 2.3 shows, home savingrose only moderately since 1993 and is still below levels of 1988--89, which aresimilar years of recovery. (Financial liberalization has failed similarly in bringingabout improvements.) What is more likely, new measures will have to be found to solvethe domestic savings problem. Institutions such as pension funds and housing schemesthat tap small household savings have played a large role in the high savings ratesin some countries of the region. By contrast, similar institutions in the Philippinessuch as the government and private pension funds have remained small and peripheralto the accumulation process.
International Competitiveness and the Current Account
A principal source of income growth is not even directly related to homegrown employmentbut to earnings overseas. Earnings from contract workers abroad and from propertyabroad made up 28 percent of all foreign exchange earnings in 1995, up from only13 percent five years earlier. The true size of “property income from abroad,” reflectedas “foreign exchange account withdrawals” in the statistics, has been questionedfor some time now; at least some of these are properly treated as investments, whilesome exports may actually have been booked twice. In either case, GNP would be overstated.
Partly reflecting the large gap between domestic savings and investment has beena worsening of the trade balance (the difference between exports and imports of goods;see Table 2.4), which now stands at almost 12 percent of GNP. Nonetheless, the currentaccount deficit has declined owing to the large inflows of factor earningsfrom overseas, as earlier mentioned.
Table 2.4: Tradeand Current Account Deficits, 1990-96 ($ billion)
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | |
|---|---|---|---|---|---|---|---|
| Trade deficit | 4.02 | 3.21 | 4.7 | 6.22 | 7.85 | 8.94 | 11.35 |
| Exports of goods | 8.19 | 8.84 | 9.82 | 11.38 | 13.48 | 17.45 | 20.54 |
| Imports of goods | 12.21 | 12.05 | 14.52 | 17.6 | 21.33 | 26.39 | 31.89 |
| Current account deficit | 2.57 | 0.87 | 0.86 | 3.02 | 2.95 | 3.3 | 3.91 |
| As a percent of GNP | |||||||
| Trade deficit | 9.1 | 7 | 8.7 | 11.2 | 11.9 | 11.7 | 13.2 |
| Current account deficit | 5.8 | 1.9 | 1.6 | 5.5 | 4.5 | 4.4 | 4.5 |
Source: Bangko Sentral ng Pilipinas, Selected Philippine Economic indicators.
Notwithstanding the respectable growth of exports in current dollars, it is surprisingthat the country’s orientation to exports (of goods alone) in recent years has actuallydeclined, while the share of imports has increased. Goods exports made up 23 percentof GDP in 1990, and this figure had fallen to 18 percent by 1995. Importsas a proportion of GDP, on the other hand, rose from 28 percent to 35 percent overthe same period.
In one view, the worsening trade performance is merely due to the necessarily heavyimports the country must undertake in the course of industrialization and its catch-upon infrastructure, admittedly an import- and capital-intensive proposition. Thiscannot be the whole picture, however, since not only is it true that imports aregrowing rapidly; there are also signs that some of the country’s exports are losingcompetitiveness. Indeed, except for electronics--where direct foreign investmentshave fortunately facilitated some deepening and diversification within the sector--agood number of the country’s other export products are stagnant or in decline, withtheir export share or actual earnings actually shrinking. This is true for agriculture-basedcommodities (coconut oil, sugar, fruits, and vegetables), processed foods, furniture,and others. In 1996, garments, long a staple export good, experienced a fall in exportearnings, as the government admitted that the country was being edged out by othersuppliers with lower labor costs such as Vietnam, China, and Bangladesh, and thatsome U.S. demand had been lost as a result of NAFTA. Indeed, electronics now accountfor 70 percent of all goods exports.
Two factors bear on the question of current competitiveness, neither of which canbe easily addressed: the exchange rate and productivity. By early 1997, the pesohad strengthened to the point that the profitability of most domestic exports (bothmanufactured and traditional) was threatened. The authorities also appeared to havebeen lulled by the continuing growth of foreign investment--led exports, neglectingthe fact that the productivity margins for the latter are much higher than for domesticexports.
The politically correct opinion about solving the trade deficit has now become thatof “raising productivity” in the export sector. This is already happening as directforeign investments bring in superior technology. But more intensive support in termsof technology, infrastructure, and credit is required to raise productivity amongsmall and medium enterprises enough to compensate for the penalty of a strong currency.Between the time foreign capital inflows ultimately weaken and the time a vigorousset of new export industries arises, the economy will be treading a narrow line.It would be in the economy’s best interests indeed if such a period never occurred.
Agriculture and Wages
The concentration of investor interest (and especially foreign investor interest)in utilities, finance, real estate development, construction, and manufacturing hasmeant the relegation of agriculture--particularly small-holding agriculture--to secondaryimportance. A complicating factor has been the uncertainty of ownership caused bythe agrarian reform program, which does not yet have a clear policy regarding landsof 50 hectares or less. In the face of more profitable competing uses for land, thenatural slant of incentives is toward real estate and a reduction of land devotedto agricultural production. The government’s inadequate capacity to support agriculturalproduction through irrigation and other infrastructure facilities, R&D, and extensiondoes not help. The peso’s continuing strength in real terms further erodes the competitivenessof domestic agricultural production.
For mainly these reasons, the domestic farming sector has remained skeptical andcautious about the effects of globalization and has adopted a highly defensive andprotectionist posture. In the debate over the country’s joining the WTO, the governmentconceded that it would improve its support of agriculture as a condition for farmers’support for WTO accession. Among others, the country managed to exclude rice fromthe general WTO obligation to replace import quotas with tariffs.
The more worrisome consequence of this instinctively phobic agricultural postureis the possibility that the sector may unwittingly inflict damage on itself, andon the rest of the economy indirectly. The quotas on agricultural imports, removedas called for by the country’s WTO commitments, were replaced by import tariffs higherthan the equivalent protection provided by the quotas on these goods. Although 50percent tariffs on staples such as corn, rice, sugar, and others are still belowthe maximum WTO rates the country promised not to exceed, the levels are high enoughto risk domestic producers outpricing themselves. For example, high tariffs and hencehigher prices on corn feed will lead not to a shift from imported to domestic corn,but to a shift away from imported corn toward imported soybeans.
The fate of agriculture in and beyond Philippines 2000 remains unclear. One of thecountry’s clear disadvantages in its export drive is its loss of competitivenessin labor-intensive products, because wages have become high in dollar terms, relativeto what other countries offer, even before full employment has been reached. Giventhe official reluctance to use the exchange rate as a tool to regain competitiveness,the remaining lever is to provide cheaper food to reduce pressure to raise nominalindustrial wages by, for example, importing cheap food from abroad. The current inefficiencyof agriculture and the high cost of food relative to prices from abroad representsa severe drag on industrialization. But importing food would definitely cause severedislocations among those employed in traditional agriculture. Alternatively, thegovernment could improve productivity in agriculture sufficiently to raise food cheaplyat home. This approach, however, requires a large amount of public funds and an appreciablylong period to realize, if at all. Neither case represents an attractive option forthe government.
Fiscal Management
The fiscal picture in the Philippines has without doubt improved considerably, amain element of the restoration of macroeconomic stability. Nonetheless, permanentmeasures are needed to ensure regular sources of income to sustain--not to mentionimprove--government programs. The inability to mobilize public resources means thegovernment cannot reliably provide social and economic services without worryingabout their effects on macroeconomic stability.
The question, however, is whether enough revenues can be generated to support thehuge catch-up in public spending required for the Philippines to become regionallycompetitive. Suppose, quite arbitrarily, that central government spending must beraised from the current level of 18 percent to a modest 20--23 percent for this catch-upto take place over the next five years. At the same time, one may anticipate thatthe proceeds from privatization would fall. The extreme case, with only tax revenuesavailable (about 15 percent of GDP), would leave a central government deficit ofsome 5--8 percent of GDP. Running such a deficit, which is large relative to recentperformance, would weaken the government’s credibility and would probably be takenas a sign of a loss of macroeconomic control. To opt for maintaining the deficitin those circumstances would require severe cuts in spending and giving up the catch-upin infrastructure and social spending altogether.
Clearly, a greater tax effort is needed, a point that has not been lost on the Ramosgovernment. Over the past two years, the government expended a good deal of politicalcapital in pushing two tax initiatives, the expansion of the coverage of the value-addedtax to remove exemptions and a comprehensive tax reform aimed at closing the loopholesin the indirect tax system and simplifying the income tax system. In both cases,however, the results have been mixed at best. After a great deal of debate (reachingthe Supreme Court), the VAT coverage was indeed expanded, but intensive lobbyingensured that the odd exemptions remained (e.g., publishing, mass media, and cooperatives),defeating the original purpose of simplifying administration. The expanded coveragealso allowed large businesses to claim deductions on purchases from small supplierspreviously not covered by VAT. The net effect on revenues, therefore, has been ambiguousat best.
The government’s other great stab at improving tax efforts fared somewhat better.The comprehensive tax reform program is intended to plug certain tax loopholes thathad caused large revenue losses. For example, some producers had been able to evadespecific taxes on tobacco and alcoholic products by setting up their own distributionnetworks and deliberately underpricing sales from the factory to these retail networks.In corporate income taxation, on the other hand, unlimited deductions for business-relatedexpenses considerably reduced taxable incomes. At the same time, the government’stax planners hoped to rally some middle-class support for the entire package by includingmore generous deductions for individual income-tax payers to offset the income-bracketcreep caused by inflation.
The entire process threatened to unravel when Congress seemed interested only inthe more popular tax-losing parts of the package, while the proposed changes in tobaccoand alcohol excise taxes became hostage to a narrow debate over whether the applicabletax should be specific or remain ad valorem. Ultimately, after lengthy negotiations,public relations blitzes, and executive intervention, a so-called compromise wasforged with Congress, which the government felt would likely yield higher revenuein the short run but had sufficient ambiguity to give business interests leeway tomaneuver in the future. This “compromise” is a nightmare for anyone seeking uniformityof treatment and flexibility. Beer and cigarettes are classified according to severalprice-quality categories for purposes of determining the level of specific taxes.To overcome the inflexibility of specific tax collections in the face of inflation,the price categories and the level of taxes are to be reviewed and revised by Congressperiodically. The system virtually invites future lobbying.
Nonetheless, for all its twists and turns, the tax-reform episode did end in a compromisethat accomplished (if imperfectly) part of the reform agenda. This is at least ahopeful indication that with sufficient statesmanship and practical power politics,democratic institutions could lead to (perhaps small) steps even in difficult reformareas.
The main constraint to achieving a more significant reform in taxes will be the growingresistance to taxes in general, both among the middle classes and the poor who feelthey pay a disproportionate share of revenues, as well as the business sector whodemand more liberal tax treatment citing globalization. For example, the desire toattract and keep investments is putting pressure on the government to reduce corporatetaxes and preventing the withdrawal of tax breaks for investors. Moreover, tradetaxes, which currently make up some 30 percent of all taxes, are scheduled to bereduced drastically. Reflecting the Philippines’ commitment to a liberal trade policyand its international commitments, tariffs for most nonagricultural goods are dueto be reduced to a low uniform level by the year 2003. (The current scenario callsfor a uniform 5 percent tariff.) The commitment to implement a low-tariff regimewill put additional pressure on the government to find alternative sources of revenue.
The Challenge of “Second-Generation” Reform
The variable fortunes of the tax package illustrate the difficulties likely to befaced in succeeding reform initiatives. Several factors can explain the uphill climb,which can be seen most vividly by comparing the proposed tax reforms with the successfultrade reforms. A first difference is found in the fact that the locus of the initiativehad shifted from the executive to the legislature. Compared to tariff reforms, whichcould be implemented by executive orders, tax reforms involved Congress and alloweda larger number of agents and interests (especially business interests) free playin influencing the decision. This lengthened the process and risked distortion ifnot defeat of the reform goals.
The second difference is a waning sense of crisis. The congressional conviction thatraising additional revenues is an urgent task is weaker than the arguments againstnot joining the WTO or for the need to open power generation to foreigners and theprivate sector in order to resolve the energy crisis. It has certainly been no helpthat the Ramos administration has periodically portrayed its budget surpluses aspermanent and the fiscal crisis as solved.
Third, while trade reforms involved the removal of bureaucratic prerogatives in certainareas, tax reform and others similar to it define and strengthen such privileges.The intellectual and social justification for any reforms relying on bureaucraticdiscretion will obviously be weakened if many parts of the bureaucracy are perceivedas being inept and corruptible. Indeed, the success of second-generation reformswill depend less on sweeping policy changes and more on steadfast and reliable implementationof rules and regulations. Aside from the implementation of tax laws, new areas suchas the regulation (including price- and rate-setting) of privatized utilities willrequire a highly competent and impartial bureaucracy.
Fourth, unlike trade reforms, second-generation reforms typically are not drivenby externally determined targets or conditionalities. Furthermore, the specific policiesadopted in fulfillment of their objectives can have vastly differing outcomes forsocial distribution. The overall objective of raising revenues, for instance, maybe attained equally well through an increase in indirect taxes or through stricterenforcement of existing tax laws. But each has a different consequence on incomedistribution: the former would hit the poor the hardest, whereas the latter woulhit mostly the affluent. In this instance, the only external pressure is for thegovernment to raise revenues; how this is done is left to political leaders and policymakers. The formulation of these policies involves primarily a domestic struggleover redistribution whose features and final outcome may be shaped by either negotiationor the raw exercise of political power. By contrast, there is much less leeway forsocial renegotiation when implementing the country’s international commitments toAFTA and the WTO.
Sustaining Reforms: Is There a Reform Constituency?
By any standard, in terms of economic reforms the Philippines has traveled a remarkabledistance over the past five years. A question that intrigues both Filipino and foreignobservers, however, is how such large changes over a short period were possible inthe first place and, related to this, whether in fact the momentum of such reformscan be sustained. In a political form such apprehensions have carried over to thequestion of whether a successor to President Ramos can be found to carry on the reformagenda. The underlying issue, however, is whether there is a constituency in Philippinesociety that wants further reforms and is influential enough to see to the electionof a government that will implement them. The answer to this question depends onwhether the entire reform episode up to now has been a fluke peculiar to the Ramospresidency, or whether the process reflects lasting changes in the balance of interestsin Philippine society.
Many observers of Philippine policy making see the lack of a reform momentum, especiallyin regard to removing protectionism, dismantling monopolies, and resolving the agrarianquestion. For example, some have used the dominance of landed clans and local elitesto explain past opposition to agrarian reform. The involvement of landed familiesand their diversification into import-substituting industrialization in the past,combined with their dominant position in local and national politics, has explainedthe lasting influence of protectionism (both agricultural and industrial). Underthe resulting conditions of small protected markets and the availability of monopolyprivileges, “rent-seeking” (the exertion of efforts to obtain favored economic positions)has served as an important means of accumulating wealth; but by drawing on otherwiseproductive resources, it has diminished the potential for development. Formal institutionshave provided no checks to such vested interests. In particular, the bureaucracyhas been a weak institution relative to the influence of dominant industrial andcommercial interests bent on preserving monopoly privileges.
The immobility in the social structure and the consequent policy stasis that maybe derived from such analyses have certainly helped to explain some of the country’sbackwardness relative to faster-growing countries in the region. For example, suchfactors may reveal why export interests have been weaker and entrepreneurship lessdefined in the Philippines than, say, Thailand. The derived result appears to bethat no significant (or lasting?) economic reforms are conceivable without a countervailingsocial coalition to overcome the resistance of vested interests. Such interpretations--termed“closed” or “rounded-off” models--have also discomfited a number of people by makingthe necessity of revolutionary change more plausible.
The problem for such closed readings of the Philippine situation, however, is explaininghow the rapid pace of economic (though not yet social) reforms in the 1990s can haveoccurred without the occurrence of large social conflicts or realignments. Thereare two options: one casts doubt on the profundity or permanence of the changes thathave taken place, since the winning coalition to support them is absent or weak.The other--admittedly less theoretically elegant--admits the possibility that vestedinterests are fluid and can be redefined by changing external circumstances, as wellas simply by learning.
Without claiming to be exhaustive, this paper takes the latter view, namely, thatrecent structural changes in the Philippines do stand some chance of being sustained,since they have come to correspond with a changed perception of national interestand purpose, especially among the elite. These changes were occasioned by a deepsense of national crisis, a reconstructed strategy for emulating the success of thenewly industrializing economies, and no less important, some real opportunities toaccommodate incumbent interests in a liberalizing environment.
A Sense of Crisis
A crucial ingredient that started the process of liberalization and has periodicallysustained it has been the element of crisis. The shock of the deep recession of 1984--85was an unmistakable signal for the wholesale abandonment of the dirigismeof the Marcos regime and a cause to experiment with its opposite, namely liberaltrade and investment policies. It also helped that the import-substituting industriespromoted by the previous regime were substantially weakened by the crisis itself.The realization that the country had fallen behind in a rapidly growing region heightenedthis sense of crisis. The oft-repeated hyperbole describing the Philippines as the“sick man of Asia” and the equally exaggerated idea that, with some effort, it couldbecome a newly industrialized country (NIC) by 2000 illustrate the lengths of nationalself-persuasion involved.
The same sense of national crisis has time and again assisted the system in overcomingthe typical malaise of most democracies, namely the costly (often lengthy and occasionallyinconclusive) process of making decisions and its susceptibility to lobbying. Thisis compounded in the case of the Philippines by the dominance of particularisticinterests in government, especially in the legislature, which have adversely affectedthe content of economic decision making in the past.
External threats often lead to the kind of solidarity or consensus needed to takemajor economic decisions (South Korea and Taiwan, both of which faced external threats,easily come to mind). In the same manner, deep crises have time and again resultedin the grant of sweeping powers to the president to address an urgent situation.The resolution of the power crisis is one example. Congress at that time grantedPresident Ramos special powers to augment energy supply expeditiously, powers thatallowed the executive to enter into negotiated contracts and to shortcut some stipulatedprocesses of environmental impact assessment. The Ramos administration utilized thisopportunity to open up the power-supply industry to build-operate-transfer schemes.As seen above, that move not only addressed the immediate problem of the power shortage,but also rehabilitated the country as a major field for foreign investments in general.
Emulating the Newly Industrialized Countries
A second factor facilitating change was the example of the newly industrialized countriesin successfully pursuing a high-growth path based on strong manufacturing exports.In the Philippines, however, the NICs’ experience was interpreted as consisting primarilyof an agenda for liberalization, that is, a reduction of state intervention and participationin the economy in general, and in particular an abandonment of selective industrialpromotion of industries through either tariff protection or fiscal or credit incentives.This has led some writers to worry about the discrepancies between the Philippines’own strategies and the highly interventionist approaches of such NICs as South Korea.The apprehension concerns whether the Philippines has not in fact gone overboardin its liberalization strategy, using the NICs as a benchmark. The concern is fairenough. But in fact, there is no single NIC experience: neoliberal and interventionistapproaches are two ends of a spectrum.
Comparisons seeking to show similarities or discrepancies between the Philippines’and the NICs’ strategies (whether by the government or its critics) are quite besidethe point. Industrialization strategies are unlikely to be directly transplantableacross social and political systems; heavy economic intervention may possibly functiondifferently between the fragmented elite democracy prevailing in the Philippinesand the authoritarian governments in some other Asian countries. More important iswhether the current strategy, however determined, is appropriate to the current socialcontext.
Properly administered, a policy of discriminating among sectors (say, aggressivelypromoting industries determined to have the greatest technological promise) may conceivablybe superior to one of uniform tariff protection. On the other hand, if (as the literaturesuggests is true in the Philippines) lobbying is rampant, the bureaucracy is weakrelative to the business sector, and mistaken democratic decisions are difficultto overturn, the same policy may carry possibilities for large mistakes and waste.Indeed the same argument can be carried over to questions of administered pricing,government-owned monopolies, and heavy regulation, all of which could be justifiedin a perfect world. Thus the neoliberal strategy now pursued by the country mightbe justified not because it yields the best results of all possible strategies whenproperly applied in a perfect world, but because it is less liable to huge abuseor costly failure than any other strategy under existing conditions.
Opposition and Policy Instability
Recent economic growth distinguishes itself from past episodes by drawing in largersectors of the population both in terms of social strata (e.g., the middle classes)and geographically (e.g., the development of regional centers other than the metropolitanManila area). As a result, the recent growth episode has built a constituency formeasures that will sustain that growth. It is also noteworthy that structural reformshave been put in place with relatively limited adjustments and dislocations. Theunemployment rate has remained fairly stable at less than 10 percent. A number ofsocial indicators, including poverty incidence, have continued to improve; thereis a good chance of achieving the goal of reducing poverty incidence (which stoodat 35 percent in 1994) to 30 percent or less by 1998. These characteristics augurwell for the sustainability of liberalizing policies.
Nonetheless, this is far from saying there has been or will be no opposition to reforms.There is, owing to extremely uneven distribution of the gains from the liberalizationprogram. The first source of opposition is from those sectors of the economy thatare being left behind. Wealth has been concentrated in the services sector, especiallyfinance, real estate, retail and wholesale trade, telecommunications, and construction.By contrast, new private investment and technological change have been much slowerin small-holding agriculture and in small- and medium-scale manufacturing enterprises,with continued low incomes and productivity. The resistance of the farm sector tothe country’s accession to the WTO was already discussed.
In addition, economic reforms threaten implicit social safety nets in specific areas.Recent examples are the reassertion of private or public property rights (motivatedby high real estate prices) on hitherto idle lands where squatter occupation wastolerated and the reduction of redundant employment in privatized government corporations.Because the grievances and interests involved are disparate and sectional, but moreimportantly because the ideological and organizational split in the Left leaves noworkable ideology to unite them, the resulting protests have delayed but not preventedthe government’s liberalization. Both to enhance the credibility of its actions andas part of its social policy, therefore, the government needs to respond by puttingin measures that ease the transition for marginalized sectors and draw them intothe mainstream of development.
Accommodating Established Interests
Internally, the congruence of interests between foreign investors and domestic landedand financial interests has consolidated social receptivity to liberalization. Therecession of 1984--85 led to the collapse of most industry. Fortuitously, it willbe recalled, the subsequent recovery took place after an agenda for tariff reformshad been set. The incentives would gradually be changed so that industries wouldno longer be as heavily oriented to the protected domestic market. The vocal socialadvocacy of the exporter interests also contributed significantly to changing thesocial climate for policy making, shifting it in favor of outwardness.
Nonetheless, it has not been the domestic export sector but foreign investment, bothdirect and indirect, that has constituted the dynamic element that is proving crucialin consolidating social support for a globalization strategy. It is foreign investmentthat has generated the competitive exports (especially in electronics), providedaccess to capital and new technology in various projects, and provided the new buyersfor initial stock offerings and privatizations.
The benefits derived from the entry of direct and portfolio investment have managedto coopt most elite economic interests and reshape them. The more “modern” urbanbusiness classes represented by the financial circles in Makati have a large stakein the continuing openness of the economy, especially to foreign investors. The dependenceof land values on foreign demand is an obvious link. Higher demand for real estate,as a consequence of both industrial relocation and rising incomes, has brought aboutrising land prices, especially in the metropolis and adjoining rural areas, includingthe provinces in the path of Metro Manila’s expansion: Cavite, Laguna, Batangas,Rizal, and Quezon, known as the CALABARZON region. Similar booms in real propertyare also being experienced (or at least expected) in other areas.
Outside Manila, several other urban centers have sought to emulate Manila’s and theCALABARZON’s example of presenting alternative sites for relocating firms. This hasbeen helped along by the decentralization and devolution process, the emergence ofa sharper breed of local executives, and the government’s promotion (uneven at times)of other urban centers such as Cebu in the Visayas, the former U.S. bases Subic andClark in Central Luzon, and Davao, General Santos, and Zamboanga in Mindanao. Animportant point is that land and property prices in these areas are tied up withdemand for land as industrial sites. This development is significant if, as the canonicalanalysis of Philippine political economy suggests, a good amount of the social basisof wealth and political influence is based on landed property. From a political-economyviewpoint, the gain is clear: Traditional local elites are looking for a stake inthe globalization process and giving up their orientation to a purely local economy.
The spate of new strategic alliances between large domestic conglomerates and transnationalfirms also ties up a large part of the domestic economy with foreign investor interest.This has occurred largely in the deregulated utilities, including telecommunications,shipping, infrastructure, and power. It has allowed other established local groupsto diversify into different businesses, often in strategic alliances or joint ventureswith foreign firms. The bidding for concessions to operate the metropolitan waterand sewerage system was won by firms associated with traditional names in Filipinobig business, namely the Lopezes and the Ayalas. It can be argued, therefore, thatthe liberalization strategy, through deregulation, privatization, and the increaseddemand for land, has become smoothed, since it has permitted a retention of someof the value of the already wealthy.
A further element that has made for policy stability has been the greater prominenceaccorded the Filipino Chinese business community, whose upper echelons (locally knownas the taipans) have recently attained a social recognition (though not yet politicalprominence) that has never been accorded the Chinese in Philippine history. The internationalconnections of Filipino Chinese businesses to other large ethnic Chinese businessinterests in the region have allowed them to mobilize funds readily and attract largeinvestments from related interests in Taiwan, Malaysia, Indonesia, Singapore, anhong Kong. In a significant development, Filipino Chinese interests with strong foreignconnections have won over the traditional “oligarchy” in several huge public bidsfor privatized government assets (notably urban real estate deals).
Nonetheless, the distribution of the benefits of the economic boom has been far fromeven. Mainly the larger, more established conglomerates have benefited most readilyfrom the process. By contrast, there appears to be much less correspondence betweenagriculture-based interests and foreign investments. The structures of protectionand exchange-rate policy have shifted incentives away from agricultural productionin favor of services, utilities, real estate, and to a lesser extent, manufacturing.
However, the struggle among private interests seeking to dispute the gains from liberalizationby attempting to change the rules threatens policy stability. The most prominentexample was the Supreme Court decision in 1997 overturning the results of a biddingprocess for the privatization of the historic Manila Hotel. A Malaysian-led consortiumhad earlier won the bid. The losing Filipino consortium argued, however, that thehotel was part of the “national patrimony” and could therefore not be awarded toforeigners, an argument that the high court sustained. Other large public-privatedeals, including the port-services concession for Subic Bay Free Port and the privatizationof reclaimed portions of Manila Bay, have also been the subject of legal or proceduraldisputes, with some reaching the courts or the level of congressional inquiries.In these cases, losing bidders have sought to change the arena of competition byhaving recourse to political solutions, using the courts, congressional influence,or the media.
In hindsight, the use of political means to resolve economic disputes is merely acarryover of previous rent-seeking behavior. It is true, of course, that the liberalizationprocess itself would remove the means for rent-seeking by narrowing the scope forgovernment intervention. Nonetheless some processes in a liberalizing agenda, especiallyderegulation and privatization, yield substantial rents as well, and no great technologicalshift is required on the part of dominant groups--including those well-representedin government--to use customary rent-seeking methods to win such battles.
Presidential Succession
Notwithstanding the more or less conscious desire to avoid the negative experienceof the Marcos dictatorship, the 1987 Constitution still left a good deal of leewayfor presidential prerogative (e.g., line-item vetoes, discretion over budgetary releases,legislation through executive orders, appointing power over the bureaucracy and themilitary, and so on). The role of a strong presidency has been crucial in the currentreform episode. As already seen, these prerogatives have thus far served the reformprocess well by helping to overcome resistance by disparate local interests throughthe combined use of a dominant position and patronage. In other words, the dominantpresidency has served to check possible abuses by local interests. In the pre-electionyear 1997, however, this pattern was in danger of being broken, as circles closeto President Ramos engineered attempts to extend his term beyond the six years setby the constitution, on the ostensible basis that none of the likely winners in apresidential election could carry through the balance of economic reforms with thesame zeal and competence. First, “mass petitions,” then calls for turning a beholdenCongress into a constituent assembly were attempted to set turning the wheels ofconstitutional revision. Rather than reassure investors of policy-continuity, however,these all-too-transparent attempts only managed to increase uncertainty and raisefears that future policy would be severely biased to favor exclusive groups, as happenedunder the Marcos regime. Because of this, the “modern” business sector joined withthe Catholic Church and other social groups to vociferously oppose any charter change.
What the vocal and negative public reaction to charter changes really illustratesis the social value placed on maintaining the arduously attained modus vivendi amongcompeting interests, an accommodation that has been cemented by the recent and prospectivemoderate economic gains. Conforming with the established ground rules for succession--imperfectthough they may be--is obviously regarded as more important than securing business-friendlypolicies, since the cost of violating the social consensus would be worse--palpableunrest. In initiating moves to extend its stay, the Ramos government seriously overestimatedthe value of its own contribution to the economic climate, as well as miscalculatedthe modern business sector’s fear of a less than ideal electoral outcome. Indeed,to the extent the reforms it presided over prove lasting and the business sectorfeels able to fend for itself and strike an independent deal with the rest of society,the Ramos administration becomes an increasingly superfluous guardian.
Conclusion
Economic reforms in the Philippines found a starting point in the crisis that prevailedsince the economic collapse of a decade ago and successive tests thereafter. Theeconomic collapse weakened hitherto protected interests, while the government’s cash-strappedposition reduced the scope for redistributing largesse. As a result, the perceivedscope of rent-seeking also declined, permitting the two successive post-Marcos governmentsto introduce large-scale changes--mostly in the direction of liberalizationsimplyas part of undoing politically discredited economic approaches, and subsequentlyas part of a national goal of catching up with the industrializing economies of theregion, summarized, if vaguely, in Philippines 2000. The country’s involvement ininternational economic arrangements, as well as the approval its policy measureshave found among foreign investors, have also positively reinforced the government’sresolve to see through the entire liberalization program.
Improving economic indicators due to the moderate economic growth over the past fouryears may have weakened the sense of urgency and crisis that initially provided theatmosphere for consensus. The unequal distribution of benefits has also led to somedissatisfaction over the way the “spoils” from liberalization are being divided.
Legitimate dissatisfaction understandably comes from socially marginalized sectors,whose immediate poverty and association with declining or less dynamic sectors preventsthem from participating meaningfully in any restructuring of the economy. Dissatisfactionis also found among elements of traditional elites whose bases of wealth and localpower have been bypassed by a process that, left to itself, tends inherently to concentratewealth geographically and socially. In addition to these, however, the entire “modern”business community, the Church, the political opposition, and other mainstream sectorswith no particular reason to oppose the direction of economic changes found commoncause in opposing attempts to change the constitutionally ordained process of transition.
A real danger exists that such dissatisfaction could lead to implosive tendencies,in which rent-seeking battles, combined with social protests, reverse the policydirection or sufficiently poison the investment climate. Until recently, however,the continuation of even moderate growth has held such tendencies in check, withthe public mechanisms to redistribute resources functioning reasonably satisfactorily(this includes the pork-barrel mechanisms that have kept Congress pliant). Thereis, obviously, no guarantee that the delicate balance between economic growth andsocial consensus will not be tilted too far in either direction. There is also noguarantee that the quality of the government’s bureaucracy and other institutionsof governance will be sufficient to implement second-generation reforms, includingchanges in the tax system and the effective regulation of private monopolies. Thereis, finally, no guarantee that the favorable global economic forces that have sustainedmoderate growth in the Philippines thus far--especially inflows of foreign investment--willlast long enough to permit the economy to restructure itself. Strictly speaking,the Philippines will by no measure be any tiger economy by 2000 or perhaps even 2005.What it will have achieved is a recovery of incomes from a decade ago, though perhapson a more stable economic and social basis. The experience of the Philippines thusfar shows that further steps along the road of economic and social reform will betedious and difficult--but not impossible.
Table 2.5: GrowthRates of Output, Investment, and Trade (percent)
| Year | GDP | GNP | Investments | Exports | Imports |
|---|---|---|---|---|---|
| 1982 | 3.62 | 2.84 | 8.4 | -10.69 | 2.45 |
| 1983 | 1.87 | 1.51 | 6.4 | 3.45 | -3.06 |
| 1984 | -7.32 | -8.83 | -36.99 | 4.54 | -17.48 |
| 1985 | -7.31 | -7.02 | -31.85 | -16.07 | -14.2 |
| 1986 | 3.42 | 4.15 | 10.06 | 16.91 | 10.24 |
| 1987 | 4.31 | 4.62 | 19.69 | 6.83 | 28.63 |
| 1988 | 6.75 | 7.71 | 14.69 | 14.53 | 19.62 |
| 1989 | 6.21 | 5.61 | 20.45 | 8.87 | 15.18 |
| 1990 | 3.04 | 4.02 | 15.83 | 1.86 | 10.04 |
| 1991 | -0.58 | 0.46 | -17.29 | 6.27 | -1.12 |
| 1992 | 0.34 | 1.55 | 7.83 | 4.28 | 8.69 |
| 1993 | 2.12 | 2.12 | 7.87 | 6.22 | 11.5 |
| 1994 | 4.42 | 5.28 | 8.65 | 19.84 | 14.5 |
| 1995 | 4.85 | 5.73 | 3.52 | 13.77 | 15.61 |
Source of basic data: Asia DevelopmentBank, Key Indicators of Developing Asian and Pacific Countries (Hong Kong:Oxford Univ. Press, 1996).
Table 2.6: Investment,Saving, and Trade as Shares of GDP (percent)
| Year | Investment | Domestic Saving | Exports | Imports | Trade |
|---|---|---|---|---|---|
| 1984 | 19.51 | 22.92 | 26.52 | 23.65 | -2.87 |
| 1985 | 14.35 | 18.81 | 24.02 | 21.89 | -2.12 |
| 1986 | 15.27 | 19.07 | 27.15 | 23.34 | -3.81 |
| 1987 | 17.52 | 20.98 | 27.8 | 28.78 | 0.97 |
| 1988 | 18.82 | 21.22 | 29.83 | 32.24 | 2.41 |
| 1989 | 21.35 | 20.08 | 30.58 | 34.97 | 4.39 |
| 1990 | 24 | 18.57 | 30.23 | 37.35 | 7.12 |
| 1991 | 19.96 | 16.43 | 32.31 | 37.14 | 4.83 |
| 1992 | 21.46 | 15.01 | 33.58 | 40.24 | 6.65 |
| 1993 | 22.67 | 13.01 | 34.93 | 43.93 | 9 |
| 1994 | 23.58 | 14.61 | 40.09 | 48.18 | 8.09 |
| 1995 | 23.29 | 15.29 | 43.5 | 53.12 | 9.62 |
Source of basic data: Asia DevelopmentBank, Key Indicators of Developing Asian and Pacific Countries (Hong Kong:Oxford Univ. Press, 1996).
Table 2.7: National Government Spending and Revenue
| Year | Taxes (% of GDP) | Expenditure (% of GDP) | Deficit (% of GDP) | Nontax Revenue (% of total revenue) |
|---|---|---|---|---|
| 1984 | 9.55 | 13.08 | 2.24 | 13.45 |
| 1985 | 1071 | 15.28 | 3.22 | 12.58 |
| 1986 | 10.75 | 18.8 | 5.82 | 20.67 |
| 1987 | 12.58 | 22.77 | 7.86 | 18.5 |
| 1988 | 11.3 | 20.95 | 7 | 23.36 |
| 1989 | 13.23 | 18.73 | 2.5 | 22.68 |
| 1990 | 14.08 | 23.74 | 7.16 | 17.76 |
| 1991 | 14.6 | 23.49 | 6.04 | 19.48 |
| 1992 | 15.44 | 24.28 | 6.52 | 15.03 |
| 1993 | 15.61 | 21.28 | 3.72 | 12.48 |
| 1994 | 16.07 | 22.07 | 2.26 | 23.64 |
| 1995 | 16.27 | 20.19 | 2.3 | 9.96 |
Source of basic data: Asia DevelopmentBank, Key Indicators of Developing Asian and Pacific Countries (Hong Kong:Oxford Univ. Press, 1996).
Endnotes
*: Editor's Note: This chapter was written before the outset of the regionalcurrency crisis and was updated in late 1997, before the impact of the crisis onthe Philippines could be ascertained. Back.
**: I am grateful to Raul Fabella, Paul Hutchcroft,Joseph Lim, Felipe Medalla, and Amado mendoza for stimulating ideas and conversations. Remaining errors of fact or opinion, however, are my sole responsibility. Back.
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