ECONOMICS IN THE PHILIPPINES

ECONOMICS IN THE PHILIPPINES

The economy of the Philippines is an anomaly in the Asia-Pacific region in that it has lagged behind other economies, such as those of Singapore, South Korea, and Taiwan. From a position as one of the wealthiest countries in Asia after World War II, the Philippines is now one of the poorest. Since the 1970s, which were a relatively prosperous decade, the Philippines has failed to achieve a sustained period of rapid economic growth and has suffered from recurring economic crises. This persistent underperformance has occurred in spite of the Philippines’ rich natural and human resources. [Source: Library of Congress, 2006]

The economy has weathered global economic and financial downturns better than its regional peers due to minimal exposure to troubled international securities, lower dependence on exports, relatively resilient domestic consumption, large remittances from four- to five-million overseas Filipino workers, and a rapidly expanding business process outsourcing industry. The current account balance had recorded consecutive surpluses since 2003; international reserves are at record highs; the banking system is stable; and the stock market was Asia's second best-performer in 2012. Efforts to improve tax administration and expenditure management have helped ease the Philippines' tight fiscal situation and reduce high debt levels. The Philippines has received several credit rating upgrades on its sovereign debt, and has had little difficulty tapping domestic and international markets to finance its deficits. [Source: CIA World Factbook =]

Economic growth in the Philippines averaged 4.5 percent during the Macapagal-Arroyo administration, but poverty worsened during her term. Growth has accelerated under the Gloria Aquino government (2001 to 2010, but with limited progress thus far in bringing down unemployment, which hovers around 7 percent, and improving the quality of jobs. Underemployment is nearly 20 percent and more than 40 percent of the employed are estimated to be working in the informal sector. The administration of Benigno Acquino III (2010- )has been working to boost the budgets for education, health, cash transfers to the poor, and other social spending programs, and is relying on the private sector to help fund major infrastructure projects under its Public-Private Partnership program. Long term challenges include reforming governance and the judicial system, building infrastructure, improving regulatory predictability, and the ease of doing business, attracting higher levels of local and foreign investments. The Philippine Constitution and the other laws continue to restrict foreign ownership in important activities/sectors (such as land ownership and public utilities). =

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. [Source: Library of Congress 1991]

Agriculture, forestry, and fishing are the occupations of 40 percent of the thirty million people who are employed. Light manufacturing, construction, mining and the service industries provide the remainder of employment opportunities. The unemployment rate is over 9 percent. Fifty percent of the population lives below the poverty line. The Asian financial crisis resulted in a lack of jobs, and the drought period of the El Niño weather cycle has reduced the number of agricultural positions. It is not uncommon for people to "volunteer" as workers in the health care field in hopes of being chosen to work when a position becomes available. People work seven days a week and take additional jobs to maintain or improve their lifestyle or pay for a child's education. Eight hundred thousand citizens work overseas, primarily as merchant seamen, health care, household, or factory workers in Saudi Arabia, Hong Kong, and Taiwan. Over Seas Workers (OSWs) have a governmental agency that looks after their interests. Laws govern hours of work, insurance coverage, and vacation time, but workers may be exploited and mistreated. Recruitment centers are found in all large municipalities. OSWs send $7 billion home each year, providing 4 percent of the gross domestic product. [Source: everyculture.com]

Economic Statistics for the Philippines

GDP (purchasing power parity): $454.3 billion (2013 est.), country comparison to the world: 32; $425.3 billion (2012 est.), $398.2 billion (2011 est.). GDP (official exchange rate): $272.2 billion (2013 est.). GDP - real growth rate: 6.8 percent (2013 est.), country comparison to the world: 27; 6.8 percent (2012 est.), 3.6 percent (2011 est.). [Source: CIA World Factbook, 2013 =]

GDP - per capita (PPP): $4,700 (2013 est.), country comparison to the world: 165; $4,400 (2012 est.), $4,200 (2011 est.) Gross national saving: 22.9 percent of GDP (2013 est.), country comparison to the world: 63; 21.3 percent of GDP (2012 est.); 23.6 percent of GDP (2011 est.). =

In 2004 the gross domestic product (GDP) was US$84.6 billion, or US$1,150 on a per capita basis. According to purchasing power parity (PPP), however, GDP in 2005 was estimated to be US$451.3 billion, or US$5,100 per capita. In 2004 the Philippines achieved real economic growth of 6 percent, up from 4.5 percent in 2003. However, with the population expanding by more than 2 percent annually—one of the highest rates in Asia—the actual improvement in living standards is modest. [Source: Library of Congress, 2006]

Growth (average percent growth between 1990 and 1998): 1.9 percent. Growth in 1995: 5.1 percent, twice what it was in 1993 but less than Southeast neighbors. Growth between 1991 and 1995: China (11.8 percent); Singapore (8.6 percent); Malaysia (8.5 percent); Thailand (8.5 percent); South Korea (7.6 percent); Indonesia (6.9 percent); Taiwan (6.7 percent), Hong Kong (5.6 percent), the U.S (2.0 percent), the Philippines (2.4 percent), Japan (1.2 percent).

GDP - composition, by sector of origin: agriculture: 11.2 percent; industry: 31.6 percent services: 57.2 percent (2013 est.). GDP - composition, by end use: household consumption: 72.6 percent; government consumption: 11.5 percent; investment in fixed capital: 20.2 percent; investment in inventories: -0.2 percent; exports of goods and services: 28.3 percent; imports of goods and services: -32.4 percent (2013 est.)

Inflation rate (consumer prices): 2.8 percent (2013 est.), country comparison to the world: 110; 3.2 percent (2012 est.) In 2005 consumer price inflation was 7.6 percent, up from 5.5 percent in 2004 and 3.0 percent in 2003. The rise in inflation reflected the combined impact of a depreciating peso, rising petroleum prices, and tariffs on electric power to offset losses at the state-owned power utility. The introduction of an expanded value-added tax is expected to provide an additional spur to inflation in 2006. Still, inflation remains well below the peak levels approaching 12 percent registered during the Asian financial crisis of 1997–98.

The IMF has accused the Philippine government of producing dodgy economic data.

Fiscal Year: Calendar year.

Money in the Philippines

Currency: The currency is the Philippine peso (PHP). Exchange rates: Philippine pesos (PHP) per US dollar : 42.69 (2013 est.), 42.229 (2012 est.), 45.11 (2010 est.), 47.68 (2009), 44.439 (2008). In mid-March 2006, the exchange rate was approximately PHP51 = US$1. The peso is made up of 100 centavos. Coins are issued in denominations of 1, 5, 10, and 25 centavos and 1, 5, and 10 pesos. Banknotes are issued in denominations ranging from 5 pesos to 1,000 pesos.

Spanish influence on Numbers, Name and Money: The Spanish money system (based on pesos) was adopted into the Filipino lifestyle as well as the use of Spanish numbers in business and money transactions. Today, using Spanish numerals is the marketplace norm. It is also interesting to note that the Spanish were the ones who appointed Manila as the capital city of the Philippines. They also named the islands “Filipinas” after Prince Philip os Asturias, who later became the King of Spain. [Source: by Rebecca, Philippines Baguio Mission, 2009-2011, the missionary website, preparetoserve.com =]

Macroeconomics in the Philippines

The Philippines has a macroeconomic economy and microeconomic economy that almost operate in two separate spheres. When national figures are strong the numbers often do not represent what is going on on the microeconomic level to ordinary Filipinos. Often high growth figures correlate with rising poverty rates.

High population growth is one of the Philippines biggest economic problems. Gains made by economic growth are usually cancelled out by increased numbers of people looking for work and suffering under poverty.

The Philippines used to known for having one of the best-educated, English-speaking populations in Asia. In the past this had given it a leg up on its rivals in Asia. But isn’t so true anymore other than Filipino English skills helping workers find jobs overseas. The Philippines economy is propped up by remittances from workers employed abroad.

The persistent underperformance of the Philippines economy has occurred in spite of the Philippines’ rich natural and human resources. The reasons are rooted partly in history, partly in policy. As a legacy of the U.S. colonial period, oligopolies have dominated the economy, particularly in agriculture, where farmland continues to be concentrated in large estates. In the post-World War II period, the Philippines pursued a strategy of import substitution industrialization, whereby domestic goods are substituted for imports. This strategy required protectionist measures, which led to inefficiencies and the misallocation of resources. Although some trade protectionist measures were relaxed in the early twenty-first century, the Supreme Court continues to support restrictions on foreign ownership of land and other assets in effect since the constitution of 1935. These restrictions, plus widespread graft and corruption, have suppressed inbound foreign direct investment. A historically low rate of taxation—only about 15 percent of gross domestic product (GDP), partly as a result of widespread tax evasion—has led to underinvestment in infrastructure and uneven economic development. [Source: Library of Congress, 2006 **]

The National Capital Region around Manila, which produces about 36 percent of GDP with only 12 percent of the population, is much more prosperous than rural areas, where much of the population depends on subsistence living. The traditional lack of job opportunities has led many Filipinos to seek employment outside the country, notably in the Persian Gulf states. Remittances to family members back home—equivalent to 10 percent of GDP—have partially offset a relatively low national rate of savings of about 15 to 18 percent, about average for the Organization for Economic Cooperation and Development, but below average for the region. Current account and budget deficits exacerbate the impact of the low savings rate on growth. Although trade barriers were scaled back, industrial cartels split up, and limited reform measures taken in the late twentieth century, political instability, continuing high levels of corruption, and resistance to reforms by entrenched interests have prevented the Philippines from pursuing a consistent and effective economic course. The industrial sector continues to decline relative to services, an economic bright spot in which the Philippines apparently enjoys a comparative advantage, although some argue that services represent an employer of last resort. In 2005 the services sector accounted for about 53.5 percent of GDP; industry, 31.7 percent; and agriculture, forestry, and fishing, 14.8 percent. **

Poverty is a serious problem in the Philippines. In 2003 per capita gross national income was US$1,080, below the US$1,390 average for lower-middle-income countries. Reflecting regional disparities, in 2003 about 11 percent of Filipinos lived on less than US$1 per day and 40 percent on less than US$2 per day, according to the World Bank. The overall poverty rate declined from 33 percent (25.4 million people) in 2000 to 30.4 percent (23.5 million people) in 2003. Poverty is more concentrated in rural than in urban areas. **

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. [Source: Library of Congress, 1991]

Public debt: 50.2 percent of GDP (2013 est.), country comparison to the world: 68; 51.5 percent of GDP (2012 est.). Data cover debt issued by the national government, and excludes debt instruments issued by government entities other than the treasury; the data include treasury debt held by foreign entities; the data exclude debt issued by social security institutions, government-owned and controlled corporations, the Central Bank, and local government units.

Central bank discount rate: 5.3 percent (31 December 2012 est.), country comparison to the world: 63; 5.6 percent (31 December 2011 est.). Commercial bank prime lending rate: 5.8 percent (31 December 2013 est.), country comparison to the world: 138, 5.68 percent (31 December 2012 est.)

Debt - external: $72.81 billion (31 December 2013 est.), country comparison to the world: 54. As of 1995, the Philippines was burdened with a huge foreign dept of $42 billion (62 percent of the GDP) left behind by Marcos. Reserves of foreign exchange and gold: $85.04 billion (31 December 2013 est.), country comparison to the world: 26; $83.83 billion (31 December 2012 est.)

Deficits, Debts and Other Problems with the Philippine Economy

The Philippines is known for having one of Asia’s most erratic and underperforming economies. Corruption, tax evasion and fraud by wealthy families and big corporations have hurt the economy for decades. The Philippines has lost foreign investment to China and more stable, faster-growing Southeast Asian rivals like Thailand in the electronics industry. On top of everything else the Philippines is hit with several deadly and devastating natural disasters every year—usually typhoons and floods but also earthquakes, tsunamis and volcanic eruptions.

In 2012, Floyd Whaley wrote in the New York Times, “Recent flooding, which by some estimates submerged 50 percent of Manila, illustrates a shortage of modern infrastructure that makes the Philippines highly vulnerable to disasters. “The Philippines is hit with several deadly and devastating natural disasters every year,” Trinh D. Nguyen, an economist with HSBC in Hong Kong said. But government officials have said that the recent flooding might actually help economic growth, because reconstruction will require an increase in public spending and the country will have to put into place programs to make it more resistant to the effects of natural disasters. “Another hurdle is the fact that the Philippines has traditionally underexploited its natural resources. The government estimates that there are 21.5 billion tons of metal deposits in the country, including large deposits of nickel, iron, copper and gold. But they have never been a significant driver of economic growth because extraction has been mismanaged, Frederic Neumann, a senior economist at HSBC in Hong Kong said . [Source: Floyd Whaley, New York Times, August 27, 2012]

Under Estrada, foreign investors were turned off by cronyism, scandals and favoritism towards Philippines companies. Under, Arroyo investors were scared off by kidnappings, bombings and other security problems and the affect of the media on amplifying these problems. High levels of borrowing sucked up of the country’s savings leaving little money for the banks to lend businesses that might create factories and jobs or improve infrastructure, education and health care.

As of mid-1990s, the Philippines was still burdened with a huge foreign dept of $42 billion (62 percent of the GDP) left behind by Marcos. By the early 2000s the Philippines’ deficit ballooned as a result of increased spending and an inability to take in taxes and other revenues. At the time the $4.8 billion that the Philippines government paid on interest of debt consumed more than a third of the budget, leaving a fifth of the budget for infrastructure and poverty alleviation. At least half the debt was foreign. There were concerns that a serious economic crisis could evolve if the value of the peso against the dollar plummeted or interest rates shot up.

See Agriculture, Corruption, Infrastructure, Taxes

Poor Infrastructure in the Philippines

The Philippines economy and everyday life is hampered by poor infrastructure. Visitors often get a taste of this immediately after they arrive at the chaotic international airport and drive on the overcrowded roads. A lack of power and transportation has traditionally limited development in the country.

Roads, airports, ports are all need drastic improvements. The government need to collect more tax revenues and reduce its deficit to pay for them. More money is spent on servicing debts than on much needed infrastructure projects and improvements in education, health care and power reduction.

Transportation of products is difficult since the highway system beyond metropolitan Manila consists of two-lane roads that are under constant repair and sometimes are washed out by typhoons. Interisland shipping costs add to the expense of manufacturing. Congress, governmental agencies, and the financial community are attempting to find solutions to these problems. The rate of road construction is accelerating and a light rail system is planned. [Source: everyculture.com]

Suicide, Scams and Scandals Trap Philippines in Poverty

In 2011, William Pesek of Bloomberg wrote: “The Philippines can be a scandalmonger’s paradise. At this very moment, editors are pressed to decide which controversy goes on the front page: the suicide story, the car scam, Chopper-gate or the asylum follies. Each of them sells newspapers and each is linked to a central figure: Gloria Arroyo, who until June 2010 was president. Arroyo’s successor, Benigno Aquino III, is pursuing her on corruption allegations and the campaign’s success will say much about whether the Philippines moves ahead or becomes an even-less-significant draw for investors than it already is. [Source: William Pesek, Bloomberg, August 11, 2011 /*/]

“The country’s ranking as Asia’s 13th-biggest economy says it all. In the 1960s, the resource-rich, politically stable Philippines was seen as the coming Japan of Southeast Asia. Today, its economy is smaller than Pakistan’s and a quarter of its 102 million people live on less than $1.25 a day. What happened? Well, Ferdinand Marcos happened. The dictator did quite a job of wrecking the economy from 1966 to 1986, and it’s still recovering.” His legacy proved too much for his successors to overcome. “Corruption remained rampant and the hopes and expectations of the 1960s became the stuff of nostalgia. Although growth now is a healthy 4.9 percent, politicians and businesspeople hoard most of the gains. The country ranks 134th out of 178 countries in Transparency International’s corruption perceptions index, tied with Nigeria and Bangladesh. /*/

Filipinos deserve better. Their nation is welcoming, vibrant, fascinating and boasts some of the most beautiful landscapes anywhere. Thanks to corruption, it is an afterthought in terms of foreign investment and tourism. Nothing demonstrates the backwardness of Philippine infrastructure like its dilapidated airports. The good news is that Aquino is homing in on the problems. The three major debt-rating companies have raised the country’s sovereign grade within the past year. While the Philippines still bears a “junk” rating, it’s getting credit for improving tax collection and tracking down cheats, helping to curb budget deficits. Now, Aquino is redoubling an anti-corruption effort that, at least rhetorically, is cheering investors. /*/

“Talk about fertile ground for investigations. Aquino’s team is busily auditing many big-money deals approved during the Arroyo years. A halt was placed on one plan to borrow about $440 million to remove silt from Laguna Lake that would have re-accumulated before the debt could be paid. A state-run gaming agency spent $23 million on coffee during Arroyo’s rule. Must have been quite a brew. /*/

“That gets us back to the four scandals mentioned earlier. The first involves a probe Aquino ordered into the suicide earlier this month of a lawyer associated with the Development Bank of the Philippines. Benjamin Pinpin reportedly was a key witness in investigations into bank transactions during Arroyo’s rule. The second refers to the Japanese SUVs that Arroyo allegedly gave to the Catholic Church in about 2006 when she faced impeachment. Around that time, Arroyo tried to curry favor with the powerful church by opposing giving women access to contraception. Chopper-gate is an investigation into whether Arroyo’s husband had owned helicopters that were later sold to the police. The question is whether they were listed on her sworn statements of family assets, net worth and liabilities. The fourth concerns press reports that Arroyo is seeking political asylum overseas as criminal accusations multiply. Arroyo’s lawyers and advisers have had to come out and deny that she may flee to Portugal.” /*/

“The Philippines’ people deserve a thorough and public accounting of why their living standards haven’t improved. There needs to be a serious reconsideration of a political culture that serves itself, not the tens of millions toiling in poverty. The only way the Philippines will reach its true potential is to get the spoils of economic growth out of the pockets of politicians to those who most need it — and earn it. An end to the scandals and corruptions might help, too. /*/

Philippines Debt Declines

Michelle V. Remo wrote in the Philippine Daily Inquirer, at the end of 2013, “the debt-to-GDP ratio is expected to settle at 49.22 percent—the first time the ratio would end a fiscal year below the 50-percent benchmark. In 2012, the ratio stood at 51.5 percent. According to international standards, a comfortable debt burden is one that is equivalent to or below 50 percent of an economy’s GDP. The continuing decline in the debt burden was cited by international credit rating agencies as a key reason why the country attained an investment grade this year. [Source: Michelle V. Remo, Philippine Daily Inquirer, November 22, 2013 \^\]

“The government’s debt burden reached its peak in 2004 when it settled at 74 percent. The Philippines secured an investment grade from all three major credit watchdogs—Fitch Ratings, Standard & Poor’s, and Moody’s Investors Service. Fitch was the first to upgrade the country’s credit rating in March 2013. S&P and Moody’s followed suit in May and October, respectively. \^\

“The drop in the debt burden was credited partly to the country’s growing economy. Although the absolute amount of the debt has been rising, the increase has been outpaced by the economy’s expansion, which hit 7.6 percent in the first half of the year—the fastest in Asia during the period. \^\

“Rising tax collection also helped in keeping the budget deficit within manageable levels, the DOF said. The Bureau of Internal Revenue, an attached agency of the DOF, has been tasked to implement administrative and legal measures to boost tax collection. The BIR has been filing tax evasion cases every two weeks in an effort to discourage taxpayers from underdeclaring their incomes. Earlier this year, the BIR also issued various tax regulations to plug loopholes in existing tax laws. One example is the regulation requiring hospitals, health maintenance organizations, and clinics to withhold taxes of doctors and medical practitioners. The regulation is seen to address tax evasion among medical practitioners, which the BIR suspected to be rampant. Another example is a regulation stating the tax obligations of operators of privilege stores, or “tiangges,” to enforce tax compliance. \^\

“In raising the country’s investment rating, the credit agencies cited the government’s favorable fiscal position. The agencies also noted the country’s benign inflation, stable banking system, rise in foreign exchange reserves, and robust economic growth driven by strong domestic demand. Last year, the BIR for the first time hit the P1-trillion mark in annual tax collection, generating P1.06 trillion. This year, the BIR expects to post at least 10-percent growth in tax collection. Also, the DOF tasked the tax bureau to breach the P2-trillion mark in annual tax collection by 2015, a goal revenue officials said was achievable. The assignment of the higher collection goal was meant to reduce foregone revenue for the government—estimated at P450 billion a year, according to the World Bank—due to tax evasion. \^\

Fiscal Policy in the Philippines

Historically, 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. [Source: Library of Congress, 1991 *]

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 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 Policy in the Philippines

The 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. [Source: Library of Congress *]

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.

Business Elite and Large Landowners

The Philippine economy is dominated by a powerful elite. Decisions have traditionally been made in the backrooms of business clubs and the presidential palace. Business has been described as oligarchical, political and quasi-feudal. The ruling oligarchy of the Marcos era remains entrenched.

Large landowning families still largely rely on a feudal land system that gives them their wealth and power. In many cases these families trace their origin back to Spanish era and endured through the American period and remained powerful after independence. Those friendly with Marcos during his regime thrived in that period. Marcos expanded the feudal land system to the economy as a whole by carving the country up into economic fiefs in the 1970s, with one crony controlling logging, another bananas, another coconuts and so on.

Clans and family are important in determining social status in the Philippines. Large landowning families have been able to thwart legal efforts to break up the feudal land system by taking advantage of legal loopholes, government apathy, political influence, and even violence through close ties with the police and military or with private militias.

In personal alliance systems extended far beyond the local arena, becoming pyramidal structures going all the way to Manila, where members of the national political elite represented the tops of numerous personal alliance pyramids. The Philippine elite was composed of weathly landlords, financiers, businesspeople, high military officers, and national political figures. Made up of a few families often descended from the ilustrados, or enlightened ones, of the Spanish colonial period, the elite controlled a high percentage of the nations's wealth. The lavish life-styles of this group usually included owning at least two homes (one in Manila and one in the province where the family originated), patronizing expensive shops and restaurants, belonging to exclusive clubs, and having a retinue of servants. Many counted among their social acquaintances a number of rich and influential foreigners, especially Americans, Spaniards, and other Europeans. Their children attended exclusive private schools in Manila and were often sent abroad, usually to the United States, for higher education. In addition, by 1990 a new elite of businesspeople, many from Hong Kong and Taiwan, had developed. [Source: Library of Congress *]

Land Ownership in the Philippines

Large amounts of arable land remain in the hand of absentee landowners who were given land grants during the Spanish colonial period. Although land reform legislation has been passed, loopholes allow owners to retain possession. Those responsible for enacting and enforcing the legislation often come from the same families that own the land. Peasant groups such as the HUKs (People's Liberation Army, or Hukbong Magpapayang Bayan ) in the 1950s and the NPA (New People's Army) at the present time have resorted to guerrilla tactics to provide land for the poor. There is an ongoing demand to clear forests to provide farmland. The clearing technique is slash and burn. Environmentalists are concerned because timber is destroyed at random, eliminating the homes of endangered species of plants and animals. [Source: everyculture.com]

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. [Source: Library of Congress *]

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 in coconuts was on farms larger than ten hectares. Sugarcane, however, generally was planted on large farms. Nearly 80 percent of land planted in sugarcane was on farms larger than ten hectares. Pineapple plantations were a special case. Because the two largest producers were subsidiaries of transnational firms--Del Monte and Castle and Cooke--they were not permitted to directly own land. The transnationals circumvented this restriction, however, by leasing land. In 1987 subsidiaries of these two companies leased 21,400 hectares, 40 percent of the total hectarage devoted to pineapple production. *

Land Reform in the Philippines

Land reform has been a concern since independence. Spanish and American rule left arable land concentrated in the hands of 2 percent of the population and those owners will not give up their land without compensation. Attempts made to provide land, such as the resettlement of Christian farmers in Mindanao in the 1950s, have not provided enough land to resolve the problem. Until land reform takes place, poverty will be the nation's primary social problem. [Source: everyculture.com]

In September 1972, the second presidential decree that Marcos issued under martial law declared the entire Philippines a land reform area. A month later, he issued Presidential Decree No. 27, which contained the specifics of his land reform program. On paper, the program was the most comprehensive ever attempted in the Philippines, notwithstanding the fact that only rice and corn land were included. Holdings of more than seven hectares were to be purchased and parceled out to individual tenants (up to three hectares of irrigated, or five hectares of unirrigated, land), who would then pay off the value of the land over a fifteen-year period. Sharecroppers on holdings of less than seven hectares were to be converted to leaseholders, paying fixed rents. [Source: Library of Congress *]

The Marcos land reform program succeeded in breaking down many of the large haciendas in Central Luzon, a traditional center of agrarian unrest where landed elite and Marcos allies were not as numerous as in other parts of the country. In the country as a whole, however, the program was generally considered a failure. Only 20 percent of rice and corn land, or 10 percent of total farm land, was covered by the program, and in 1985, thirteen years after Marcos's proclamation, 75 percent of the expected beneficiaries had not become owner-cultivators. By 1988 less than 6 percent of all agricultural households had received a certificate of land transfer, indicating that the land they were cultivating had been registered as a land transfer holding. About half of this group, 2.4 percent, had received titles, referred to as emancipation patents. Political commitment on the part of the government waned rather quickly, after Marcos succeeded in undermining the strength of land elites who had opposed him. Even where efforts were made, implementation was selective, mismanaged, and subject to considerable graft and corruption. *

Land Reform Efforts Under Corazon Aquino

The Corazon Aquino government introduced laws in the 1980s and 90s to break up big landholdings and limit individual property ownership to roughly 12 acres. Under the law, landowners could either sell their land to the government at prices set by the government or sell it voluntarily, preferably to peasants, and receive a cash bonus. According to the plan peasants would receive loans and financial assistance from the government and pay back loans at a discounted rate over 20 years. The Department of Agrian Resources was set up to hand over the transfer of land. As of 2002, it had managed to give out about 80 percent of the 10.6 million acres targeted by the plan to 1.8 million peasants.

Getting the last 30 percent was difficult. In many cases it was the best land and it was owned by the richest and most powerful landlords, who had thwarted government effort to claim the land using lawyers, armed militias and political influence. In many cases the landowners create conditions, namely high montage rates, that made peasants feel they have no choice but to lease back land to the landowners under terms that made them worse off than they were before.

The failure of the Marcos land reform program was a major theme in Aquino's 1986 presidential campaign, and she gave land reform first priority: "Land-to-the-tiller must become a reality, instead of an empty slogan." The issue was of some significance inasmuch as one of the largest landholdings in the country was her family's 15,000-hectare Hacienda Luisita. But the candidate was quite clear; the land reform would apply to Hacienda Luisita as well as to any other landholding. She did not actually begin to address the land reform question, however, until the issue was brought to a head in January 1987, when the military attacked a group of peasants marching to Malacañang, the presidential residence, to demand action on the promised land reform killing 18 and wounding more than 100 of them. The event galvanized the government into action: a land reform commission was formed, and in July 1987, one week before the new Congress convened and her decree-making powers would be curtailed, Aquino proclaimed the Comprehensive Agrarian Reform Program. More than 80 percent of cultivated land and almost 65 percent of agricultural households were to be included in a phased process that would consider the type of land and size of holding. In conformity with the country's new Constitution, provisions for "voluntary land sharing" and just compensation were included. The important details of timing, priorities, and minimum legal holdings, however, were left to be determined by the new Congress, the majority of whose members were connected to landed interests. [Source: Library of Congress *]

Criticism of Aquino's plan came from both sides. Landowners thought that it went too far, and peasant organizations complained that the program did not go far enough and that by leaving the details to a landlord-dominated Congress, the program was doomed to failure. A World Bank mission was quite critical of a draft of the land reform program. In its report, the mission suggested that in order to limit efforts to subvert the process, the Comprehensive Agrarian Reform Program needed to be carried out swiftly rather than in stages, and land prices should be determined using a mechanical formula rather than subjective valuation. The World Bank mission also was critical of a provision allowing incorporated farm entities to distribute stock to tenants and workers rather than the land itself. The scheme would be attractive, the mission argued, "to those landowners who believed that they would not have to live up to the agreement to transfer the land to the beneficiaries." The mission's recommendations were largely ignored in the final version of the government's program. *

On June 10, 1988, a year after the proclamation, Congress passed the Comprehensive Agrarian Reform Law. Landowners were allowed to retain up to five hectares plus three hectares for each heir at least fifteen years of age. The program was to be implemented in phases. The amount of land that could be retained was to be gradually decreased, and a non-land-transfer, profit-sharing program could be used as an alternative to actual land transfer. *

Especially controversial was the provision that allowed large landowners to transfer a portion of the respective corporation's total assets equivalent in value to that of its land assets, in lieu of the land being subdivided and distributed to tenants and farm laborers. In May 1989, the 7,000 tenants of the Aquino family estate, Hacienda Luisita, agreed to take a 33 percent share of the hacienda's corporate stock rather than a portion of the land itself. Because the remaining two-thirds of the stock (the value of non-land corporate assets) remained with Aquino's family, effective control of the land did not pass to the tillers. Proponents of land reform considered the stock-ownership provision a loophole in the law, and one that many large landowners would probably use. Following the example of the Hacienda Luisita, thirty-four agrocorporations had requested approval for a stock transfer as of mid-1990. Although legal, the action of the president's family raised questions as to the president's commitment to land reform. *

It is difficult to estimate the cost allowing for inflation of the Comprehensive Agrarian Reform Program. Early on, in 1988 estimates ranged between P170 billion and P220 billion; the following year they were as high as P332 billion, of which P83 billion was for land acquisition and P248 billion for support services and infrastructure. The lowest mentioned figure averages to P17 billion a year, 2.1 percent of 1988 GNP in the Philippines and 8.9 percent of government expenditure that year. The sum was well beyond the capacity of the country, unless tax revenues were increased substantially and expenditure priorities reordered. To circumvent this difficulty, the Aquino government planned to obtain 50 to 60 percent of the funding requirements from foreign aid. As of 1990, however, success had been minimal. *

Government claims that in the first three years of implementation the Comprehensive Agrarian Reform Program met with considerable success were open to question. Between July 1987 and March 1990, 430,730 hectares were distributed. About 80 percent of this, however, was from the continuation of the Marcos land reform program. Distribution of privately owned lands other than land growing rice and corn, 3,470 hectares, was insignificant not only in absolute terms, but it was also only 2 percent of what had been targeted. The inability of the Department of Agrarian Reform to spend its budget also indicated implementation difficulties. As of June 1990, the department had utilized only 44 percent of the P14.2 billion allocated to it for the period January 1988-June 1990. In part because of Supreme Court rulings, the Department of Agrarian Reform cut its land acquisition target in late 1990 by almost half from 400,000 hectares to 250,000 hectares. *

Privatization in the Philippines Under Cory Aquino in the 1980s

When 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. [Source: Library of Congress, 1991 *]

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. *

Economic Planning and Policy in the Philippines

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. [Source: Library of Congress, 1991 *]

The 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."

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Philippines Department of Tourism, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated June 2015

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