Poverty Monitoring, Measurement and Analysis(PMMA) Network

Poverty Monitoring, Measurement and Analysis(PMMA) Network

A paper presented during the 4th PEP Research Network General Meeting,June 13-17, 2005, Colombo, Sri Lanka.

Philippines

Effects of Trade Liberalizationin the Philippines:

Ex Ante Versus Post TradeReform Assessment

Ramon ClaretePhilippines

Effects of Trade Liberalizationin the Philippines:

Ex Ante Versus Post TradeReform Assessment

Ramon Clarete

Effects of Trade Liberalization in the Philippines: Ex-Ante versus Post Trade Reform Assessment *

Ramon L. Clarete

Professor of Economics University of the Philippines

Abstract

This paper examines the Philippine experience with trade liberalization policies and their impact on the economy. While the relationship between trade liberalization and poverty is not straightforward, empirical evidence indicates that there are beneficial effects of freer trade on the poor at least in the long-run. The Philippines had extensively lowered import restrictions since the 1980s and expanded trade. Ex-ante assessment of the impact of freer trade in the Philippines using models of the Philippine economy indicates net positive gains for economy and for the representative Filipino households. However, per capita income hardly changed over a period from 1980 to 2002. The paper seeks to explain the divergence with transaction costs.

* This paper was presented in a conference on “Adjusting to Trade Reforms: What are Major Challenges for Developing Countries”, organized by the Trade Analysis Branch, United Nations Conference on Trade and Development (TAB/UNCTAD), held in Geneva, Switzerland, 18- 19 January 2005.

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Effects of Trade Liberalization in the Philippines: Ex-Ante versus Post Trade Reform Assessment *

Ramon L. Clarete

Professor of Economics University of the Philippines

Introduction

This paper examines the Philippine experience with trade liberalization policies and their impact on the economy. While the relationship between trade liberalization and poverty is not straightforward, empirical evidence from over a hundred studies on the impact of trade liberalization on economic growth, productivity and stability, prices and markets, wages and employment, government revenues and spending indicates that there are beneficial effects of freer trade on the poor at least in the long-run (Winters, MuCulloch and McKay, 2004). In the Philippines, per capita income hardly changed over a period from 1980 to 2002, even as trade liberalization indeed had an impact on the economy. The country has been importing more and increasingly diverse merchandise from the rest of the world. Exports have expanded likewise but not as fast as imports, and recently their relatively large concentration in semi-conductors and electronic components has concerned policy makers and analysts. Agriculture’s performance continues to depend primarily on the weather and with freer trade imported agricultural commodities have come in increasing volumes and variety. The generally lack of jobs in the economy and the rise of overseas employment for Filipino workers coincided with increasing import competition because of freer trade. Thus when in 1997 and 1998 or three years after the country joined the WTO and the agriculture sector contracted because of the El Nino drought, de-globalization advocates have failed to resist the temptation to link the two events together to prove their point: trade is not good for Philippine agriculture and economy. It does present a puzzle. Ex-ante assessment of the impact of freer trade in the Philippines using equilibrium models of the Philippine economy indicates net positive gains for economy and for the average Filipino (e.g. Habito and Cororaton., 2000; Cororaton, 1998). Yet, roughly twenty five years after the first structural adjustment program in the early 1980s, ex-post reform assessment of the impact of trade liberalization falls short of positive expectations. This paper seeks to explain the problem with transaction costs. When new business opportunities unfold because of lower import restrictions, the owners of sector-specific capital and workers face adjustment costs, and they are not likely to benefit in the short term from trade-created opportunities. But the factor owners who have the option to * This paper was presented in a conference on “Adjusting to Trade Reforms: What are Major Challenges for Developing Countries”, organized by the Trade Analysis Branch, United Nations Conference on Trade and Development (TAB/UNCTAD), held in Geneva, Switzerland, 18- 19 January 2005.

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commit new resources are more likely to invest in export-oriented industries rather than in import substituting businesses in the absence of transaction costs. But if these costs are substantial, they have the potential of inducing partial adjustment or even preventing the expected re-allocation of productive resources. Those jobs in the import substituting industries that were lost due to freer trade are not likely not fully replaced with new ones in export-type activities. While consumers benefit because of lower import restrictions on final goods, trade liberalization on intermediate goods does not reinforce those benefits. Without new investments in new business activities, which utilize such intermediate goods, benefits from the economy-wide trade liberalization effort are limited and likely distorted.

Philippine economy: overview and recent trends

Overview of the economy The performance of the Philippine economy since the 1980s has been disappointing, having grown at the average annual rate of about 2.4 percent, barely without capacity to increase the standard of living of its population, now at least 80 million. One of the fastest growing in Asia, the Philippine population had expanded at the annual rate of 3.0 percent in the early 1970s, then at 2.5 percent in the mid-1980s and at 2.36 percent since the 1990s. There had been a decline in its growth but that fell short of those of Indonesia and Thailand. The two countries had population growth rates comparable to that of the Philippines in the early 1980s, but these had declined to about 1.5%, in 2000. By UN population forecast, the country's population was projected to reach 86 million in 2010, but based on its momentum that figure can be reached five years earlier. Thus comparing this with the average annual expansion of the Philippine economy, the two have virtually the same performance and imply that there had not been any substantial increase of its per capita income. Its relatively high population growth is dampening the effort to reduce unemployment and underemployment in the Philippines. As shown in Table 1, the demographic structure in the country has changed. Those aged 15 to 64 accounted for 54 percent in 1980 and by the turn of this century are 60 percent of the total population. Most of these are looking for but are not all getting jobs. In 2001, the unemployment rate was estimated to be 10.1 % out of the labor force of 32.6 million individuals. At present, the unemployed and under-employed exceed five million.1 The under-employment rate is higher, estimated at least 18 percent. If not for the over a million overseas Filipino workers, the employment problem would have been more serious. The annual remittances were at least USD 6 billion in 2000, which helped substantially in propping up disposable incomes in the Philippines and in easing balance of payments pressures on the exchange rate.

Of all those employed, nearly half is presently in the services sector of the Philippine economy, up from about a third in 1980. Agriculture, which accounted for half of all the jobs available in the Philippines a quarter of a century ago, has reduced that capacity to 1 This account is from the Alonzo et al. (2004).

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only 37.5 percent of total. Industry has been bogged down and offered not any significant amount of new jobs for those in the labor force. While the number of jobs offered in the services sector grew annually since 1980 at the rate of 1.7 percent, while that from industry expanded at less than a third of a percent. Orbeta and Pernia (1999) viewed this combination of slow growth of employment opportunities and rapid growth of the labor force as undermining effort to reduce unemployment rate in the Philippines. The problem could have been worse had roughly seven million overseas contract Filipino workers not found jobs outside of the country. The structure of employment shares reflects the respective contribution of economic sectors to the GDP. The respective shares of agriculture and industry have steadily declined since 1980. While agriculture's declining contribution to GDP is expected as development proceeds, industry's GDP share was declining at the annual rate of one percent, when the sector is expected to increasingly generate value added. Again, services share of the total GDP has risen from 36 percent in 1980 to 53.6 percent in 2001. Its growth per year averaged 1.92 percent since the 1980s. All these lead to the result that the per capita income in the Philippines hardly increased over a quarter of a century. At 1995 prices, a Filipino in 1980 had US$1,173 compared to his counterpart in 2001 who received a slightly lower income of US$1,165. The Philippines at present has a poverty incidence problem of about 33 percent. In order to bring this down by at least one percent, the Philippine economy would have to grow at least 3.36 percent or one percent higher than its current population growth rate per year. As the Figure 1 shows, the per capita GDP’s growth has been fluctuating around zero percent since the 1980s. In its current medium term development plan through 2010, the Philippine government aims to reduce this incidence to 20 percent and would require better than historical performance of its economy.

Recent trends Over the past quarter of a century, several patterns of changes in source and absorption of national income are observed. Table 2 shows the data at intervals of five years since 1980, but the results depicted here are obtained from an analysis on annual data since 1980. The first is that the Philippines has increasingly received net income transfers from the rest of the world, and this is linked to the rising incidence of overseas employment of Filipino workers. In the first half of the 1980s, this transfer was going in the other direction. However since 1990, the transfer became positive and its proportion to total national income rose from 2.7 percent in 1990 to nearly five percent in 2002. Since it became positive in 1991, the net transfer from the rest of the world has grown at the average of 49 percent each year until 2002. Secondly, the Philippine economy has become increasingly integrated with the rest of the world. One indicator is import penetration, or the proportion of imports to gross domestic product plus imports. In the 1980s, the average import penetration was 21 percent; this average moved up to the 32 percent since 1991 till 2002. This change if accompanied with growing domestic absorption would have indicated improving standards of living in the Philippines. However this is not the case as shown by a third pattern of changes.

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The average annual growth of personal consumption expenditure has fallen from 16.8 percent in the 1980s to only 14.3 percent in the 1990s. This has been likewise the observation with respect to government final consumption, which grew on average annual rate of 18.8 and 11.8 percent in the 1980s and 1990s, respectively. The contrasts would have been more pronounced if the growth analysis had been done at constant price level. On average the average consumer price and the GDP deflator in the 1990s were thrice their levels in the 1980s. It would appear that if the per capital income was growing at fairly good rate per year, which it did not, then final consumption would have been rising rather than falling. The period under observation did not usher in any substantive productivity improvements of the Philippine economy. Fourthly, reduced domestic absorption of GDP implies exports have been rising. The ratio of exports to final demand expenditures of households, government and the rest of the world was 24.2 percent on average in the 1980s. It rose to 32.3 percent in the 1990s. Merchandise exports and imports have expanded at the rate of 4 percent a year in the 1980s and 11 percent since 1990. The corresponding growth of services trade and total income flows hardly changed between the two periods, 7 percent for services and 9 percent for income flows. Trade in goods as a proportion to total flows, i.e. goods, services, and income, rose from an annual average of 65 percent in the 1980s to 69 percent in the 1990s. Services trade accounted 18 percent of total flows, and this did not change between the 1980s and the period since 1990. It is gross income flows which accommodated the increase of the share of merchandise trade, averaging at 17 percent in the 1980s to only 12 percent in the 1990s. Trade deficit has risen from an annual average of US$1,535 million in the 1980s to US$ 3,769 million since 1990. Imports rose much faster than exports. They averaged US$7.236 billion in the 1980s and reached US$25.427 billion in the 1990s. In 2002, the Philippines imported nearly US$34 billion. The average import expansion rate per year in the 1980s was 4 percent, compared to that of imports at 5 percent. In the 1990s, exports performance picked up and grew at a rate three percentage points higher than that for imports. Thus, trade deficit declined in the 1990s at the rate of nearly 14 percent per year. In the 1980s, the country export income averaged US$5.7 billion. This expanded to the average US$21.65 billion in the 1990s. The country exported a total of US$34.4 billion, nearly equal to imports. The surplus in services trade declined through the years. It was US$ 801 million in the 1980s and US$410 million in the 1990s. Expenditure on foreign services grew much faster in the 1990s at a rate nine percentage points higher than its rate in 1980s. On the other hand, the growth of the revenues from services sold to the rest of the world decelerated in the 1990s to 4 percent from 11 percent in the 1990s. Net income payments to the rest of the world fell from US$1,055 millions in the 1980s to -US$ 2,642 millions in the 1990s. This trend was particularly pronounced over the last five

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years ending in 2002, when the Philippines grossed an income inflow of about US$7,5 billion per year. This had helped pay for the country's deficit in merchandise trade. In Table 3, the Philippines had increasingly depended on income from overseas Filipino workers to support its balance of payments. Over the past two decades, net income flows shifted to becoming an important asset item in its balance of payments. By 2002, net income inflows more than exceeded the country's current account deficit. This is particularly important given another trend with respect to financial flows. Since 2000, net private FDI have declined to a littler over a billion dollars in 2002. Moreover, loans and particularly portfolio investments indicate international financing of investments are moving out of the country. This is happening in a year that the government was paying its foreign debt by more than it contracted new ones. The importance to the country of the net income payments from overseas Filipino workers is clear. If not for these receipts, the country would have been in a serious balance of payments difficulties in 2002. Exports and imports of the country had been declining since they peaked in 2000, which explain its negative resource balances during these years. While the Philippines had resource deficits in the first half of the 1990s, merchandise exports and imports were rising then. Since 2000, trade contracted but its exports contracted by far more than its imports. Exports of non-factor services as a proportion to total exports declined from about 20 percent in 1980 to a little over 8 percent in 2002. Services imports fell as well from 15.7 percent of total imports in 1980 to a little over 11 percent in 2002.

Foreign Trade Table 4a shows the share of the imports and exports of each key sector of the Philippine economy to the country's total trade. The composition of the country's trade appears to have moved away from increasing diversity to a concentration in a one key sector, machinery and transport equipment. Analyzing the basket of imports, the respective shares of the country's imports in such products as food and live animals, beverages and tobacco, crude materials, animal and vegetable oils and fats, chemicals and chemical products and miscellaneous manufacturing hardly changed over the last two decades. However, those of mineral fuels and manufactured goods declined, while that of machinery and transport equipment increased. More interesting observations emerge from the basket of exports. The respective contribution to total exports of the country's exports in such products as food and live animals, crude materials, animal and vegetable oils and fats, manufactured goods and miscellaneous manufacturing all declined. The significant increase in share occurs in the case of machinery and transport equipment. The country's trade has increasingly become concentrated in a few exportable items, while losing competitiveness in its traditional export items. For example, coconut exports used to be nearly ten percent of total merchandise exports in 1980, but after two decades accounted for slightly over a percent. Processed food exports were nearly a quarter of total exports in 1980. Their share dropped to nearly four percent in 2002. A similar pattern as processed foods applies as well to exports from the country's mining industry. In 1980, they accounted for a quarter but these cropped to less than a percent in 2002.

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Services payments of the country with respect to the rest of the world had steadily increased from about 1.5 billion USD in 1980 to 4.3 billion in 2002, based on the data shown in Table 4b. Receipts for services likewise grew from nearly 1.5 billion in 1980 to slightly over 3 billion in 2002. Payment for transportation services, which were provided by non-residents to Philippine residents, is the top contributor at nearly 52 percent in 2002. The share of travel-related services to import of total services rose from 7.37 percent to 20.16 percent in 2002. Another services items claiming rising share include royalties and license fees and insurance. Those items with declining contribution to total services-related payments of the country include other business services, communications, and government services. On the receipt side, the largest contributor is travel-related services. In 2002, their share reached nearly 57 percent of total receipts amounting to about 3 billion USD. Services items whose receipts in proportion to total declined include financial services, computer and information, while communications is the lone services sector with rising contribution to total receipts. Table 5 has a more detailed listing of the country's imports and exports by sector than Table 4a. The data in this Table for two years, 1996 and 2002, supports the two observations about the changing structure of Philippine merchandise trade. In 1996, the peak contribution to total imports was at 22.41 percent. There were 17 items with contribution of up to two percent and twelve sectors with imports amounting to from at least two to at most fifteen percent. Six years later, there were 19 sectors with contribution to at most two percent, while those having shares between two to fifteen dropped in number by two. Moreover, the peak contribution went up from 22.41 to 38.31 percent in 2002, and that is coming from the sector components of electronic products. These are materials in producing components of electronic communication equipment, TV or radio. In 1996, there were thirteen sectors contributing to up to one percent, and their number increased by four in 2002. The four used to contribute between 4 and 8 percent to total exports six years ago. The peak contribution in 1996 was nearly 37 percent and in 2002 this increased to 48.3 percent, supporting the observation made earlier about increasing concentration of the country's trade in the sector on electronic components and at the same time losing competitive advantage in the sectors it used to have such as processed food items, mining, and coconut oil.

Liberalizing trade in the Philippines

Unilateral reform program The Philippine government adjusted import restriction policies, starting in 1973 when it reduced the tariff rate structure to six tariff rate category but at the same time implemented non-tariff measures to restrict trade. It was in 1980, that it implemented a comprehensive trade reform program aimed at increasing the competitiveness of the Philippine economy. The Tariff Reform Program (TRP) in 1981 to 1985 narrowed down the tariff rate structure from a range of 100-0 to 50-10 percent range. This was accompanied with the Import

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Liberalization Program (ILP), which did away with non-tariff import measures but got interrupted by the economic and political crises of the country in the middle of the 1980s. With the change of government in 1986, the program was resumed. The number of regulated items was reduced from 1,802 in 1985 to 609 in 1988, and export taxes on all products except logs were removed. These trade reforms were unilateral although those done in the 1980s were done in the context of the World Bank structural adjustment programs. In the 1990s, the government continued with its trade liberalization programs. In Annex 1, the relevant executive issuances providing for tariff reforms in the 1990s are listed down. The government continued its Tariff Reform Program II in 1991 with Executive Order (EO) 470, lowering tariff rates over a five-year period. The realignment involved the narrowing of the range of the tariff rate structure through a series of reductions in the number of commodity lines with high tariffs and an increase in the commodity lines with low tariffs. In particular, the program was aimed at clustering the commodities with tariffs within the range 10–30 percent at the end of the program. At about the same period, quantitative import restrictions (QRs) for 153 commodities were converted into their corresponding tariff protection measures in 1992 with EO 8. The tariffication of QRs by EO 8 raised the tariff rates applicable to affected commodities by 100 percent of their pre-EO 8 levels. In effect, the tariff rates imposed were higher than the tariff equivalent rates in a number of cases, especially during the initial years of the conversion. However, EO 8 had a built-in program for a five-year phase-down of the tariffied rates. The EO likewise re-aligned tariff rates for 48 items. Two laws were passed in the early 1990s which provided for trade protection in agriculture. The Magna Carta for Small Farmers in 1991 and the Seed Industry Development Act in 1992 required that the entry of imported agricultural products be regulated for the protection of the country’s farmers and seed producers. Accordingly Memorandum Order No. 95 was issued in late 1992 and re-regulated those farm products of small farmers such as corn. QRs were re-imposed on 93 items, bringing up the number of items with continuing quantitative import restrictions to 257. Without these laws, the import liberalization program opened up to all the importation of some 286 items, such that by the end of 1992 only 164 commodities remained with QRs. The unilateral tariff reform program entered its third phase in 1994 with three Executive Orders. EO 189 issued on January 1, 1994 reduced tariff rates on capital equipment and machinery; EO 204 issued on September 30, 1994 lowered tariff rates on imported textiles, garments, and chemical inputs. By far the largest overhaul of the country’s tariff code, EO 264 released on July 22, 1995 reduced tariffs on 4,142 harmonized lines (HS) in the manufacturing sector while EO 288 on January 1, 1996 reduced tariffs on “non-sensitive” agricultural products. The TRP Phase III provided for a 4-tier structure of tariff rates: 3 percent for raw materials and capital equipment which are not available locally; 10 percent for raw materials and capital equipment that are available from local sources; 20 percent for intermediate goods; and 30 percent for finished goods. The objective was to eventually maintain a “low, nearly uniform” tariff rate in the Philippines by 2002. In fact, this was

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offered by the Philippine government in its Individual Action Plan during the Subic Summit of APEC Leaders in 1996. This was also seen as needed in light of the impending implementation of the ASEAN Free Trade Agreement. When the country acceded as a founding member of the WTO in 1995, it committed to do away with all its quantitative import restrictions in agriculture, except rice, and convert the underlying trade protection ordinary customs duties. The Philippine Congress passed R.A. 8178 on March 29, 1996 to implement this international treaty obligation. EO 313 was likewise issued specifying the underlying equivalent tariff rates for each agricultural QR. Rice was not covered because the Philippine government asked for special treatment in accordance with Annex 5 of the WTO Agreement on Agriculture, which expires in 2005.

Reform Accomplishments

The tariff policy reforms since the 1980s accomplished the following: o It simplified the tariff structure and removed unjustified discrimination by reducing

the number of tariff lines from 6,193 in 1990 to 5,720 in 2000. o The tariff structure gradually shifted to one with five categories of tariff rate duties,

10 to 50 percent range in 1990 and to one with three categories of tariff rates, 3-20 percent range in 2000.

o The overall average nominal tariff rate was lowered by more than 40 percent, i.e. from 33.3 percent in 1990 to 19.5 percent in 2000.

o The average cut is about 81.2 percent over a fifteen year period ending in 2003 using trade-weighted average tariff rates.

o The trade-weighted average tariff duties by sector came down by at least 38 percent from their respective 1988 levels.

o The sectors which lost relatively low protection include motor vehicles, other transport equipment, agriculture and processed food.

o The peak tariff rates, 8 to 12 percent, apply to processed foods, motor vehicles, other transport equipment, wearing apparel, and rubber and plastic products.

o The relative protection between agriculture and manufacturing shifted from one with a bias against agriculture in 1990-1995 to one for agriculture since 1996.

Table 6a shows the trade-weighted average tariff rate duties. The reductions in tariff rates by sector appear larger for the manufacturing group than for agriculture. However between 1994 and 1998, agriculture protection increased as a result of the “tariffication” of non-tariff import restrictions in that sector as provided for by the WTO agreement on agriculture. David (1997) observed that the quantitative trade restrictions were replaced by applied tariffs that are mostly equal to the high binding tariffs which then had the effect of increasing agriculture protection. Even imports that are close substitutes for “tariffied” imported commodities such as feed wheat and barley substitutes to corn were likewise raised to ensure protection of corn farmers. Instead of taking the path offered by the WTO towards making agriculture more competitive, the policy makers in the Philippines instead took the other road for more protection. The dramatic drop in agriculture tariff protection between 1998 and 2000 reflects the changing basket of agriculture imports. Between 1996 and 1997, the agriculture products that were imported were those subject to the tariff

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quotas and were slapped a relatively high out quota tariff rate. Thus, the trade-weighted average was high. Since then other agriculture imports came into the country, affecting the average tariff rate on agricultural imports. Manasan and Pineda (2000) observed that the respective standard deviations of nominal tariff rates during in 2000 by sector were higher than those in 1990. The reforms reduced the average but not the dispersion of the tariff rates. The policy towards a nearly uniform low tariff rate is not supported by the data. This observation holds as well for implicit tariff rates and effective protection rates. While the overall standard deviation in the price-comparison implicit tariff rates and effective protection rates decreased by some 15 percent, their coefficients of variation increased in 1990-2000. The downward stickiness of tariff adjustments in agriculture and food processing is a key factor explaining the increased dispersion of tariff rates after the reforms. The majority of tariff rates were cut sharply but those for agriculture and food processing were cut lightly because these products were political sensitive. Table 6b reproduces the changes of effective protection rates (EPR) induced by the tariff reforms in the 1990s. These estimates were computed and reported by Manasan and Pineda (2000) who assessed the effect of the reforms on protection. The EPR of a given sector is the proportionate increase in domestic value added to value added at undistorted world prices and indicates how capable the sector pulls economic resources to itself. The average effective protection rate in 2000 is lower by 48 percent compared to its level in 1990, expectedly reflecting the tariff reforms in the 1990s. As in nominal tariffs, the cuts in effective protection were larger for industry compared to agriculture. The industry EPRs were reduced by at least a third compared to agriculture whose EPR was reduced by only 31 percent for the same duration. Food processing is relatively the most protected in the manufacturing sector, while it is agriculture that enjoys the highest effective protection among the primary and mining sectors. Both these sectors experienced an increase of their effective protection in 1996. Moreover, the dispersion of sectoral EPRs for industry was lower in 2000 compared to what it used to be in 1990.

Recent movements of import duties

Recent policy pronouncements indicate that the “low and nearly uniform” tariff policy is not going to happen at least in the first half of this decade. In early 2003, at the request of local producers both from the industrial and the agriculture sectors, the announced tariff rate cuts were put on hold and reviewed (Medalla, E. and Aldaba, R., 2003). In November 2003, the assessment recommended the rolling back of tariffs for many industries to their 1998 levels.2 These changes occurred as the financially insolvent National Steel Corporation was re-opened after it was bought out by a consortium of investors who asked for higher tariff protection. This report is similar to that of the local producers of polymers, who asked for higher tariff protection to make their investments in the second half of the 1990s viable. They tied this request to a plan of a group of prospective investors in a naphtha-cracker plant in the Philippines, who as in the steel industry case asked for higher than three 2 See World Bank (2004), “Sustaining Trade Liberalization”. WB 2004 Phil DB10.

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percent rate tariff protection and proposed to increase as well the tariff protection for the downstream industry of plastic and plastic products. The investment in the naphtha cracker plant has not occurred, but the discussions for higher trade protection for its downstream polymers and plastic products continue on their own. In agriculture, sugar producers convinced the government to seek an Article 28 negotiation in the WTO to increase the country’s tariff binding on sugar so that tariff protection for the sugar industry can be increased further. These current measures to restore trade protection in selected industries are reflected in the statistics regarding average tariff rates and effective protection rates. Citing data from the Philippine Tariff Commission, the World Bank reported that effective protection rates in agriculture and manufacturing in 2004 are in the 14–15 percent, higher than their 1998 levels. The trade protection is hardly uniform. For example, effective protection for machinery is around 4 percent while that for food processing is nearly 32 percent. In agriculture, the continuing quantitative import restrictions for rice, fish and fish products; the implementation of the tariff rate quotas; and the processes with respect to the issuance of the sanitary and phyto-sanitary import permits explain why effective protection in agriculture remain high.

These increases of tariff protection in selected industries raise the issue as to the stability of trade liberalization. In the Philippines, tariff rates are set by the President under an authority provided for in the country’s Tariff and Customs Code. In general, the Philippine Congress has been active in raising concerns about low trade protection and stressing the need of providing safeguards to domestic industries that face tough competition from imports. The Office of the President in turn has generally shared these concerns and has been looking for ways of addressing these. In a way, the recent movements of selected tariff rates reflect the apparently shared view of the leaders of both branches of government, which is to make local industries survive the increasingly global trading regime. There had not been an instance in which the exercise of the tariff setting authority by the President was done in a way as to provoke a confrontation between the executive and legislative branches. There has been generally cooperation. During the time the provisions in the WTO agriculture agreement were adopted as local law, Congress set the agriculture tariff rates at the bound rates. The President in this period went along with the legislative decision, when he could have asked Congress to issue those tariff rates as an executive order. As with its counterparts in other parts of the world, the Philippine Congress reflects the conflicting concerns about trade policies. If it decided to set tariffs by law, the process can be tedious and prolonged. Transaction cost associated with forging an agreement on a major tariff reform program is high, and this may be an added reason why the authority has been delegated to the President. The path to freer trade is stable, even though in a few industries such as sugar, steel, or polymers, local producers succeed in recovering lost protection. Tariffs that were lowered in turn generate beneficiaries, who would defend those rates. For example, producers of

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plastics which can import polymers at the low tariff rates reluctantly agreed to go along with the proposal of the petro-chemical producers to increase tariff protection if the tariff rates on imported plastics and plastic products were increased as well. The petro-chemical industry in fact were the ones that offered this deal in order to organize a coalition for increasing tariff protection on imported polymers, plastics and plastic products.

Ex-ante Economic Impacts

Arguments For and Against

The key purposes of the government in liberalizing trade policies in the Philippines have been to make resource allocation more efficient and to make consumers better off. Trade protection distorts the allocation of resources, which move towards economic sectors protected by import restrictions rather than to those in which the country has a comparative advantage. As trade reforms take place, this distortion is undone and the economy gains from the ensuing re-allocation of resources towards industries with the greatest export potential arising from any technology or resource endowment advantages, as well as those whose products the consumers value the most. High import restrictions raise prices of final goods at the expense of consumers. The domestic markets for these goods contract, and consequently consumers forgo the benefits they would have enjoyed had international market prices prevailed. The intermediate goods, if these import substitutes are protected with trade measures, will become more expensive to producers, who use them in producing other goods. The latter forgo income in otherwise internationally competitive businesses without trade protection. The competitiveness of the domestic producers in the domestic and export markets is impaired by trade protection. Eliminating it results in significant benefits to the consumers of these processed products in the form of lower prices and raises export receipts.

Medalla (1998) observed that the trade protection policies in the 1960s and 1980s favoring heavy over light industry, import competing manufacturing over exports and agriculture, and in favor of consumer goods over capital and intermediate goods have created an “imperfectly competitive structure characterized by unrealized scale economies and poor economic growth performance”. The unilateral trade liberalization reforms in the 1980s and 1990s were directed at “improving efficiency and resource allocation, and attaining global competitiveness and sustained economic growth”. The unilateral trade policy reforms improved resource allocation the overall competitiveness of domestic industries (Austria, 2001). When the government batted for Philippine Senate’s approval to become a member of the WTO in 1994, the public debates that occurred had mirrored those which transpired in the unilateral trade liberalization process, as membership in the WTO has come to mean free trade. But besides the arguments propounded why trade protection needs to be lowered, greater market access and high agricultural commodity prices are added into the public discussion. Since the country’s trading partners were committed to ease trade restrictions and lower import tariffs, WTO membership was expected to provide Philippine exporters even greater access to markets abroad, including and especially in its most dominant

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trading partners, i.e. the United States, Japan, and Western Europe. The WTO itself serves to be a forum for reciprocal exchange of trade concessions and as such is an institution where the country may get more export access.

Particularly in agriculture, the WTO membership was expected to effect the reduction or elimination of trade-distorting domestic supports and subsidies to agriculture, especially in developed countries. These provisions would have the effect of raising international commodity prices as these start to incorporate the true costs of production in subsidizing countries. In turn, this should have the effect of raising the export earnings of the domestic producers of such products. Critics have expressed their reservations about trade liberalization and the serious threats to the country’s economy of globalization. The country’s producers in their view are not prepared for increased market competition. While they acknowledge that winners may emerge, their number is exceeded by that of individual firms, which being ill prepared to face the competition, are expected to close shop and destroy job opportunities for Filipinos. Workers displaced by freer trade face adjustment costs in searching for and developing the appropriate skills for new job opportunities. Reduced prices are expected to be a bane for producers, particularly the primary producers or those at the top of the supply chain. In agriculture for example, the growing competition provided by competitive imported fruits and vegetables are generally expected to push prices down of tropical fruits and vegetables in the domestic market. With logistics costs relatively higher for local farmers, increased trade will reduce farm incomes and aggravate poverty in rural areas. Opponents of globalization further cast doubt on the sincerity of the country’s trading partners in making good their commitments of providing improved market access to the products of developing countries. Developed countries have found ways to circumvent the agreed rules and disciplines of the WTO and their respective trade concessions. There are lobby groups in these countries, which are better able to persuade their respective governments to become creative in their implementation of the multilateral trade treaty obligations. For example, environmental concerns have been used as a trade barrier such as the US ban on shrimps from countries with no protective devices for turtles. Small countries like the Philippines tend unable to countervail effective these protectionist tendencies of developed countries. Clarete (1996) approached the public debate on the country’s WTO membership issue from the question as to what would have happened to the Philippine economy if the country stayed out of the WTO. He measured the benefit to the Philippines most favored nation (MFN) treatment. The methodology involves computing the reduction in the country’s merchandise exports if the country would have lost MFN treatment, which he depicted to be an increase by five percentage points of the tariff rates faced by Philippine exporters in the importing countries. The World Bank-UNCTAD’s SMART computer program was used for this purpose. The result of the exercise indicates that the country stood to lose up to eighty percent of its export earnings. The simulated forgone exports were then introduced as a shock to an applied general equilibrium model of the Philippines to calculate the income lost due to reduced exports. Even at a conservative export

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earning loss of only twenty percent of its exports, in consideration of the possible bilateral deals that may continue MFN treatment on selected merchandise exports, the Philippine GDP would contract by nearly eight percent. Trade liberalization can catalyze competitiveness-enhancing programs. Commenting on the trade-related problems of Philippine agriculture, Clarete (1999) looks at the lack of competitiveness in Philippine agriculture stems from two types of failures. The first pertains to the government’s failure to provide the required public support services that are necessary to increase productivity. The other type of failure comes from the producers who fail to keep their production costs down to the minimum. The policy in 1996 to provide maximum trade protection to the country’s farmers may have adverse consequences on the farmers’ quest to be competitive. The problem with high tariff protection is that it creates disincentives on the part of the producers to achieve higher levels of productive efficiency. Thus, the high tariff protection rate accommodates the costs of inefficiencies in the sector, which arise from both government failure and producer failure. This accommodation adds the danger that the flow of investments in public infrastructure and common service facilities required by the sector may slow down, since the producers’ incomes are being artificially increased by trade protection and accordingly the government is not politically compelled to act on the lack of infrastructure and common service facilities. In short, the high tariff protection rate currently in place makes the task of modernizing the grains sector, as well as the rest of agriculture, less obvious and urgent.

Simulated Effects of Trade Liberalization

Habito and Cororaton (2000) simulated the effects of trade liberalization using the APEX Model of the Philippine economy.3 The model is relatively more expansive compared to other similar models built for the Philippines.4 Its benchmark year is 1994, which makes the model particularly appropriate for simulating the actual trade policy reforms that took place after the WTO ratification at the end of that year. The analysis involves simulating the effects of tariff rate changes from 1995 to 2000. These changes reflect both unilateral and multilateral tariff reforms, the latter comprising the country’s concessions to its trading partners covering applied tariffs on agriculture imports. The tariffication of non-tariff measures in agriculture ended up increasing the agriculture tariff protection in 1996. With respect to non-agriculture tariffs, the changes depicted in the analysis are unilateral. The authors did the following sets of calculation covering nominal tariff reforms, implicit tariff reforms, and transaction valuation reform.

Table 7a reproduces the results from the ex-ante assessment by Habito and Cororaton using the APEX model. The series of tariff reforms from 1995 to 2000 yielded a cumulative impact on real GDP by 2.3 percent. The government’s income decreased

3 As mentioned earlier, the APEX model belongs to a class of models called computable general equilibrium (CGE) models. It is described and documented in Clarete and Warr (1991) and Clarete and Cruz (1991). 4 Examples are the CGE models built by Habito (1986), and Cororaton (1998), which are more aggregated than the APEX model.

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because of lower tariffs, which reduced likewise public spending. However, the impact on balance of trade is positive; exports expanded much faster than imports. The results indicate a relatively smaller drop in the number of jobs available in both the agriculture and services sector. This is nonetheless more than compensated for by new jobs created in the industrial sectors. Thus, generally not only did real GDP increase, but also the inequality of its distribution had declined. The poorest quintile income group received the largest share of the GDP growth.

Table 6d shows the effects on production of reducing tariff protection, which indicate there was substantial reallocation of resources due to trade liberalization. Grouping these sectors by the accumulated percentage change, the study identified the following as those whose outputs declined: rice, corn, coconut, fruits and nuts, flour milling, inland fishing, forestry and logging, crude oil, wood products, paper products, motor vehicles, cement, basic metals and non-metallic mineral products, metal products and non-electrical machineries, and electrical machineries. These industries lose resources to other industries whose production expanded. The sectors that gained resources include: meat and meat products, oils and fats, fertilizer, electricity, gas and water, rubber, plastic and chemical products, garments and textiles and semi-conductors.

Ex-post Effects

Merchandise Trade

In this section, we track down through the years a few indicators starting with merchandise trade and compare these with estimates of the effects of trade liberalization that are obtained using a general equilibrium model of the Philippine economy. One important effect is that trade liberalization expands trade as more imports come into the country due to lower restrictions. Exports likewise gain resources, which move out of import substituting industries as a result of increased competition. If trade liberalization is accompanied with improved market access, it creates new export opportunities, which reinforce the same effect of pushing resources towards the export sector. Figure 2 shows a panel of merchandise export and import charts starting with overall merchandise trade. Aggregate imports had exceeded exports for most of the years since 1985, contributing to the build up of trade deficit. Export growth in the 1980s was flat, but starting in 1990 aggregate exports expanded dramatically and peaked in 2000, despite the Asian financial crisis. However, aggregate exports expanded at a rate lower than that of imports. These caught up with aggregate imports after the Asian financial crisis. Both exports and imports were at their lowest in 1985 when the country's economy contracted because of balance of payments problems coupled with the political crisis in the early 1980s. Imports expanded as well about the same period of time as exports, at a rate faster than exports. Aggregate Imports peaked in 1997 when the financial crisis hit East Asia and since that year had declined until its modest recovery in 2002.

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Habito and Cororaton (2000) observed as well that merchandise exports have exhibited a good performance after the accession to the WTO and during the financial crisis. Except in 1993, their growth from1991 to 1998 was significant. They concluded that such a performance of merchandise exports indicated that the export sector generally benefited from the opening up of markets and removal of trade barriers in other countries as offshoots of the agreements in WTO. Even the slowdown in the economy in 1997-98 did not prevent the export sector from posting consistently high rates of growth. The depreciation of the peso following the Asian crisis must have helped boost export performance through the crisis. Merchandise export growth was not robust as it could have been because “the reductions in tariff and import restrictions have not been accompanied by a consistent exchange rate policy that favours (or is neutral to) exports” (Austria, 1997). The real effective exchange rate depreciated by 31.1 percent during the period 1982-1988, but appreciated from 1989 to 1996 because of the increase in foreign investment from about half a billion in the 1980s to 1.5 billion dollars in the 1990s. Intal (1997) noted that the Philippines lost its competitiveness relative to its East Asian competitors in the 1990s. As a result, export expansion decelerated in the 1990s from an average annual growth of 11.3 percent in the second half of the 1980s to only 9.7 percent in the first half of the 1990s. The depreciation of the peso because of the financial crisis in 1997-1998 failed to arrest the slowing down of export growth. In the second half of the 1990s, exports only expanded by 3.6 percent. However, a different finding may be reached when one breaks down overall export performance by sector. In Figure 2, merchandise trade is analyzed by each of the nine sectors of the Philippine economy. The finding one gets from this analysis is that exports of machinery and transportation equipment virtually explain aggregate export performance in the 1990s. Although exports of coconut oil, which is an important part of the sector of animal and vegetable oils and fats, recovered in the first half of the 1990 and boosted the overall export performance, their contribution was less than a billion dollars. Miscellaneous manufacturing had larger export receipts, which significantly rose through the 1990s peaking at nearly five billion dollars in 2000. However, exports of miscellaneous manufacturing products fell since then. The rest of the export sectors either had been declining or their performance hardly improved at all. Food and beverages and manufactured goods did not register any discernible pattern of expansion in terms of exports. Merchandise imports, as earlier noted, expanded much faster than exports in the 1990s, and this may be explained by the build up of imports in the 1990s in the food and live animals, beverages, crude materials, mineral fuels, chemicals and chemical products, manufactured goods, miscellaneous manufacturing. Almost all sectors' imports responded positively to the lowering of import restrictions and the economic expansion in the 1990s. The Asian crisis halted that pattern but few sectors recovered but moderately since 2000 including beverages and tobacco and food and live animals. Figure 2 shows as well the growing resource imbalances. There are four sectors, whose imports have always exceeded exports, and these are mineral fuels, chemicals and chemical products, manufactured goods, and beverages and tobacco. The net imports

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range from about a quarter to a billion dollars. The sectors producing animal and vegetable oils and fats as well as miscellaneous manufactured goods, on the other hand, have always been a net exporter. There used to be two other sectors – those producing food and live animals as well as crude materials – that had been consistently selling more exported than imported goods. In the 1990s, the two had become net importers. Only machinery and transport equipment that switched from being net importer to exporter. How much of those changes in merchandise trade may be attributed to reductions in applied tariffs on Philippine imports and those faced by Philippine exporters? Figure 3 and Table 7b provides the information about the trade-weighted averages of these tariffs by sector from 1988 to 2003 for about 27 industries starting with agriculture. A general pattern of change is that the changes in applied import tariffs do reflect the trade liberalization process that had occurred in the 1990s in the Philippines. While the generally applied import tariffs in the Philippines had been going down as a result of the unilateral trade liberalization, these import duties recovered partly their levels between 1990 and 1994, for the following sectors, namely, fisheries, textiles, tobacco, processed foods, wood products, leather products, wearing apparel, paper products, non-metallic mineral products and furniture. In the case of agriculture, the increase in applied tariffs occurring between 1994 and 1998 reflect the WTO's provisions for the tariffication of agricultural non-tariff measures. Since then those out-quota tariffs had been going down as provided for in the same agreement. These changes in applied import tariffs are correlated with the increases in import values since 1990 as discussed earlier using the data in Figure 2. The impact is relatively immediate particularly those destined for final consumption. As import duties are lowered, the prices of these products to consumers go down as well. What may have slowed down any responses to reduce import duties would be the logistics costs of bringing in the imported goods to the country. The response of imported intermediate goods was also positive such as for example the increase in imported chemicals and chemical products, or machinery and transport equipment. Reduced import restrictions translate to higher imports. It is unclear if the average tariffs against Philippine exports had gone down at all to indicate improved market access of Philippine products. On the contrary and in agriculture, average tariffs against Philippine agricultural exports were raised by the country’s trading partners since 1998. A similar pattern is observed for fisheries, tobacco, paper products, basic metals, motor vehicles and other transportation equipment. There are moderate reductions of tariffs faced by Philippine exporters of such products as processed food, leather products, publishing and printing, fabricated metal products, office equipment, radio, TV, and communication equipment, furniture and mining. After increasing between 1998 and 2001, the average tariffs on motor vehicles and other transportation equipment declined. The average tariffs in the rest of the sectors hardly changed at all. The results obtained from this assessment of the impact using secondary data differ from those that came out of the ex ante analysis using an equilibrium model of the Philippine economy. For the most part of the period covered by the analysis, imports exceeded imports or the country had a trade deficit as a result of trade liberalization. Secondly,

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rather than documenting a fairly diverse basket of exports, from a large number of industries as the simulation-based analysis indicates, ex-post assessment yield results indicating concentration in a few of these industries.

Production and Employment

Freer trade policies are expected to move resources towards industries in which the country has the comparative advantage. Table 8 shows the production data of about 27 manufacturing sectors of the Philippines between 1980 and 1996. The proportion of each manufacturing sector to the total manufacturing production is calculated. Changes of these ratios would indicate how resources had shifted through time, which may indicate an effect of trade policy reforms. There is hardly any change that one may observe from these ratios. Food products and refined petroleum are the top two industries in terms of production since 1980. Food products and refined petroleum, on average, contribute about 21.5 and nearly 14 percent respectively to total manufacturing output. In 1990, food products accounted for a quarter of total manufacturing output. The two are followed by sectors including other chemicals, transport equipment, textiles, wearing apparel, and beverages. About 21 of the 27 manufacturing sectors in this Table are contributing no more than five percent to total manufacturing output. Over the past two decades, nearly an average of a million Filipinos become economically active each year but only about sixty three percent of them find jobs in the country. In Figure 4, the employment growth rate averaged about 2.73 percent, which falls short of the 2.81 percent annual growth rate of the population with ages 15 to 64. Total employment growth fluctuated around its average of two decades. Two of these swings were fairly large downturns, which occurred in the middle of the 1980s and the late 1990s when the El Nino drought hit agriculture and the Asian financial crisis adversely affected overall economic performance. Agricultural employment growth pulled down total employment growth, with troughs occurring during the same years as total employment. The El Nino drought in 1997 explains why agriculture not only failed to provide new jobs to the entrants into the work force in that year, but also took away existing jobs. There were also weather-related problems adversely affecting agriculture in the 1980s. Agriculture recovered in the early 1990s and also in early 2000s, and resumed employing the Filipinos entering the work force. Those who opposed trade liberalization and Philippine membership in the WTO used this loss of jobs in agriculture to prove their point that more trade is bad for Philippine agriculture. They linked the contraction of agriculture during the El Nino drought to the implementation by the Philippine government of provisions in the WTO's agriculture agreement particularly those related to market access, which simply was a case of spurious correlation (Clarete, 1999). As Figure 4 indicates, agriculture employment recovered starting in 2000 even as the Philippines continued to implement the multilateral trade reforms in agriculture.

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Industrial employment growth appears not as bad as expected. On average, the sector's employment growth averaged 2.88 percent or above the growth rate of the economically active members of the Philippine population. The economic contraction in 1985 appeared to have a moderate impact on the number of jobs available in industry. The Asian crisis had a worse effect on industrial employment than the 1985 economic contraction; it reduced employment by about 4.7 percent or about two percentage points better than the negative 6.94 percent of agricultural employment growth. This only shows that agricultural production activities respond to a larger extent to the weather situation, such as the El Nino drought, rather than to changes in economic policies. The services sector provides the best job opportunities for Filipinos. It generated jobs each year at the rate of about 4.5 percent. The services employment growth has been positive, except in 1991 when it dipped slightly below zero percent. The outstanding problem about employment growth is that it is simply unstable. As earlier mentioned, the average total employment growth was only about one-tenth of a percent short of the entry rate of Filipinos into the work force. But over the past two decades, there were seven instances in which industries failed to provide the adequate number of jobs to those Filipinos just joining the labor force. That is one in every three years. As earlier discussed, the agriculture sector is continues to be a very important generator of jobs in the Philippines. The problem about the sector is that it is substantively affected with weather-linked disturbances. Just like industry, the performance of the sector in terms of providing jobs in the rural areas falls short of requirement. The services sector has since 1998 exceeded agriculture in providing jobs to Filipinos. In 1980, agriculture provided nearly nine million jobs as against the services sector’s 5.63 million, following the employment data in Table 9. By 1998, the latter provided 12.55 million jobs or over a million jobs more than agriculture. Industry's job creation capability needs improvement. In 1980, it provided only 2.64 million jobs, and two decades later the sector only managed to add two million more or about a hundred thousand jobs each year. Industry and the services sector, which are insulated from weather-related problems of agriculture, can make up for the latter’s vulnerability to natural shocks. However as the foregoing discussion implies, many tasks may need to be done in order to accomplish this objective. The employment to active population rate has hardly changed through the last two decades of the last century. Only an average of nearly two-thirds of the active population has jobs each year. This performance needs to improve in order to provide more incomes for the country's population, create a more effective domestic market for goods and services in the country, and reduce poverty. If industry only added a hundred thousand jobs each year, agriculture provided ten thousand jobs more than industry. Services provided jobs each year by more than the two combined, 410, 000 jobs. However, the country needed to provide nearly a million jobs each year, based on the number of Filipinos entering the economically active cohort of the population.

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Important differences between the ex-ante and ex-post effects on production and employment are worth noting down. The former results indicate the number of jobs created by the agriculture and services sector had gone down because of trade policy reforms. But that these losses were more than compensated with new jobs created in the industrial sectors. The latter results place the services sector as leading in creating jobs for the Philippine labor force, and that industry rather than making up for the simulated reduction in jobs in agriculture and services turned out to be part of the problem. In terms of production, the simulated changes in the allocation of resources shown in Table 6d indicated a substantial response to trade liberalization. Resources based on those results moved out of industries which trade liberalization rendered not competitive into those given a boost by policies for lower import restrictions. However as the results in Table 8 indicate, the allocation of resources hardly changed at all.

Development Indicators Is the Philippines better off with freer trade over the past quarter of a century? If one assesses the performance on the basis of whether or not per capita income had increased over the period when trade was liberalized, the country is not. In Table 1 above, a Filipino in 1980 had US$1,173 at 1995 prices compared to his counterpart in 2001 who received a slightly lower income of US$1,165. Not only is per capita income unchanged, its annual growth had fluctuated around zero percent since the 1980s (see Figure 1). There were years when the average Filipino was worse than what he got in 1980, but relative to 1980 when the trade policies started to be reformed, the average Filipino’s standard of living is roughly even as it was in 1980. However, that per capita income failed to rise as expected by advocates of freer trade does not show that the country is better off or worse off because of freer trade. One may proceed with this claim that per capita income growth could have been worse than was realized, if trade was not liberalized or if the Philippines did not join the WTO. On the other hand, per capita incomes would have increased had trade protection not been reduced at all or worse increased. Looking at a few other development indicators at least for the years for which data is available, there are positive trends of progress. Life expectancy at birth had risen by slightly over eight years. The literacy of Filipinos improved in the period from1980 to 2001. The proportion of illiterate adult females, shown in Table 10, dropped from 13.2 percent in 1985 to slightly less than five percent in 2001. Similarly, the illiteracy rate of adult males declined from 11.22 percent to 4.73 percent in 2001. The data indicate that through the past quarter of a century more Filipinos have had access to current infrastructure and technologies. While the incidence of computer use is low, it has been rising from nearly 3,500 per thousand persons in 1990 to nearly 21,700 in 2001. The use of mobile phones in the Philippines is among the highest in the world. In 2001, 15 percent of Filipinos use mobile phones.

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The poverty problem appeared to have alleviated as shown in Figure 5, although it worsened in the early 1990s. The drop in the proportion of poor families in urban areas is impressive. However, the situation for the poor in rural areas is disturbing. Urban poverty incidence dropped by 15.1 percentage points over the period from 1985 to 1997. Rural poverty incidence is worse at 50.7 percent of families in 1985 compared to 33.6 percent in urban areas. The decline in the number of the rural poor in the same period had dropped by only 6.3 percentage points. Overall poverty incidence declined from 44.2 percent in 1985 to 32.1 percent in 1997 over the same period of time.

Income Inequality The literature on the effect of trade liberalization on income distribution appears divided. One view is that trade aggravates income inequality and there are those who claim that it has no impact at all on income inequality. Several researchers have discovered that expanded trade has no bearing on the distribution of income (Dollar and Kraay, 2000; Adams, 2003; Birdsall and Londono, 1997; Li, Squire and Zou, 1998). Dollar and Kraay (2000) find that the mean income of the poorest quintile has an elasticity of economic growth equal to 1.06. That is for both developing and developed countries, the poorest quintile’s mean income increases roughly in step with economic growth, regardless of whether the economy is in crisis or not. Moreover, the authors observe that trade openness, as measured by the share of imports plus exports to GDP, is ‘distribution-neutral’, implying that trade tends to benefit by an equal proportion all income groups. Adams (2003), using income and trade data of fifty low-income and low-middle income countries, also supports this view. Other authors observe that trade liberalization increases income inequality in poorer countries, but reduces it in richer countries. Agenor (2003), examining the relationship between trade and poverty, finds that at lower levels of income, countries experience increasing poverty incidence with higher levels of average tariff levels. However beyond some threshold income level, lower tariff protection reduces poverty. Lundberg and Squire (1999), using a panel data of 125 countries covering the 1960-1998 period, note that the Sachs-Warner trade openness indicator (Sachs and Warner, 1995) has no or negligible negative effect on the lowest income quintile of the poorest countries. However as they consider cohorts of richer countries, trade openness significantly and positively affect economic growth. Cornia and Kiiski (2001) report that in two-thirds of their sample of 73 developed and developing countries, income inequality worsened because of domestic deregulation and external liberalization. Using a trade model, Kremer and Maskin (2003) argue that that freer trade leads to greater inequality. Milanovic (2003) finds that at trade openness, measured by the trade to GDP ratio and direct foreign investment affect relative income shares among the various cohorts of individual households across the entire income distribution. At low mean income levels, the rich benefit from trade openness, which is also corroborated with similar results from Barro (2000) and Ravallion (2001). As income rises, the relative incomes of the poor and the middle-income households rise with trade openness compared to that of the richer households.

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Table 11 shows how each of the sixteen administrative regions of the country fared during the second half of the 1990s. To highlight the economic importance of each of these regions, national capital region (NCR) or Metro Manila accounts for thirty percent of the country's GDP. NCR is followed by the Southern Tagalog, or the region immediately south of the NCR, which contributed about 15.27 of the country's GDP in 2000. Although this pattern fits the observation that areas surrounding major cities tend to benefit from the latter's growth, the Southern Tagalog region which comes second to NCR may be large because it is a geographically large regional economy. Central Luzon or the region immediately north of NCR, is third, contributing nearly nine percent in 2000. Then there are the Central and Western Visayan regions as well as Southern Mindanao, with the contribution between 6.3 to 7 percent. These regions host the cities of Cebu, Iloilo, and Davao. The rest of the regions are farther from the country's economic center, and expectedly each of these contributed at most four percent to national GDP in 2000. The regional gross domestic product data in Table 11 reveal that the Philippine's per capita GDP expanded by one and two-thirds percent between 1997 and 2000 or a slightly over half of a percent each year. Most of the sixteen regions expanded economically by a range from nearly a percent to 9.37. The per capita GDP of four of the sixteen regions fell by an average of 2.2 percent per year between 1997 and 2000. Despite this, it is not possible to conclude that there standards of living in the Philippines had deteriorated. It is indeed ironic that the regional GDPs of two of the contiguous regions to the NCR contracted heavily, by two to three percentage point drop in regional GDP per capita. Because Central Luzon and Southern Tagalog are highly agriculture regions of the country, the El Nino drought in 1997 and 1998 must have affected adversely their respective regional products. Northern Mindanao is likewise an important agriculture region, and Autonomous Region of Muslim Mindanao suffered peace and order problems in addition to the drought. In Table 12, the Gini coefficients of income inequality and poverty incidence rates are shown by region for the period between 1997 and 2000. The Gini coefficients for 11 regions of the Philippines declined by margins ranging from at least to 0.6 of a percent to nearly 5.5 percent in the case of the CARAGA region. The data indicate that between both years, the problem of income inequality alleviated in the Philippines. Tuano (2004) tested the relationship between regional trade and income inequality in the Philippines. He finds that trade openness (measured as the proportion of exports and re-exports to RGDP) is a statistically significant factor explaining why regional per capita income rises, poverty incidence falls, and Gini coefficient increases. The observed negative relationship between income growth and the Gini coefficient of inequality is consistent with the findings made in cross-country studies. This result contrasts with that coming out of the ex-ante simulation of the effect of trade liberalization. Habito and Cororaton (2000) noted that not only did real GDP increase, but also the inequality of its distribution had declined.

Transaction Costs From the discussion in the last two sections of the paper, important differences are noted between the results coming out of ex-ante analysis of the effects of trade liberalization using a general equilibrium model of the Philippines and this ex-post assessment of

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secondary data. The former reflect the underlying assumptions of the model, while the latter are the realization of a host of factors and economic shocks. The paper does not proceed from a perspective that the two ought to be identical. However the paper pursues the query if movements of key development indicators over more than a quarter of a century of freer trade in the Philippines are consistent with a-priori expectations. The analysis indicates that these deviated from the anticipated results. The role of transaction costs in decision making with respect to resource allocation cannot be emphasized enough. If trade protection is reduced, the expected re-allocation of resources towards export-oriented industries may not happen as quickly or not happen at all because of transaction costs. In conventional models of international trade, transaction costs are zero. That is, the producers, consumers, and the government have perfect information about everything that is relevant for their respective decisions and agreements are easy to make and property rights are well defined and easily enforced. When the effects on resource allocation of lower import restrictions are analysed with those models, resources are expected to move towards export-oriented industries and consumers purchase more imported products. Transaction costs have the potential of dampening these effects and worse preventing these from occurring at all. It is not surprising that critics claim that globalization has resulted in less import substitution without the corresponding gain in export revenues, resulting in the loss of jobs and worsening of the poverty situation. The examination of the economic data on production, employment and merchandise trade in the Philippines would seem to validate this theme. Reducing tariff protection goes as far as it can in generating jobs, lowering prices, and improving productivity. However if the country has a serious problems with transaction costs, then the effect of trade reforms will not be maximized. This is consistent with the advice of Rodriguez and Rodrik (2000) who cautioned readers against oversimplifying the case that trade policies are a substitute to other macroeconomic reforms fundamental to economic development. To illustrate how transaction costs impede or prevent transactions from taking place, consider a household-firm with its supply and demand curves. Suppose the WTO agreement on agriculture is successfully implemented and prices of farm products increase, the household firm now faces a higher price and at that price it can generate a marketable surplus. However, if it faces transaction costs in selling its product in the world market, such that it has a net price equal (p*- t), where t is the transaction cost and which is large enough as to exceed any gains from trade, selling any amount makes it worse off. The household-firm is better off not participating at all in the international trade. There are two interpretations of transaction costs in the literature (Allen, 1991). The type of transaction cost faced in the example above covers the costs associated with the transfer of property rights. The lack of market-related infrastructure including highways, feeder roads, sea and air ports, and communication, banking facilities, and such other common service facilities which if taken together define the capability of a group of producers to take advantage of known market opportunities – all these fall under this neo-classical definition of transaction costs. These costs cannot be passed on to the market because the producers concerned are price-takers. The incidence of these costs is on

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them and provides a disincentive in participating in any market exchange. If the volumes are large such that the combined supply of producers in a given area represents a significant share in the market, then these necessary logistic costs can be passed on to the market. However if other suppliers of the same homogeneous product or of a close substitute can demonstrate they have lower logistic costs, then the former group of producers have a comparative disadvantage and will set benchmark costs for the industry. Non-marginal suppliers with higher than benchmark costs can supply but bear these transaction costs. The relatively poor Philippine export performance may reflect this problem of transaction costs rather than a market access issue. As earlier discussed, most export sectors in the Philippines had declining contribution to total export receipts, with the notable exception of the industries producing electronic products. Because lack of market access involves MFN tariffs, other trading partners face the same set of import duties in importing countries. For example, when Philippine coconut oil exporters lost market share to their competitors producing coconut oil substitutes including palm oil or other lauric oils, that problem reflected the growing perception of importers that the Philippines can not be relied upon in terms of meeting the lauric oil requirement of the various industries in importing countries. Hence, those firms that used to patronize coconut oil shifted to substitutes with reliably adequate supply. This is a logistics rather than a market access issue, the inability of the Philippines to improve its efficiency in moving the product from point of production to the market. The problem likely stems from logistics cost disadvantages and lack of responsiveness of Philippine exporters to the fairly changing demands of the country's importers. Exports require investments, which in turn depend upon the investment climate of the country, which takes us to the other meaning of transaction costs, and this is Coasean5 definition is based on property rights, and that is transaction costs are the costs for establishing and enforcing property rights6. These costs cover those expended in acquiring information, negotiation for the terms of the transaction, monitoring of the performance of the parties to the agreement, enforcing the terms of the agreement, adapting the agreement to changing environment, and settling disputes. Absence of information per se is not a transaction cost but it is an important component of the latter if considered in the context of making an economic transaction. Acquiring adequate information is important to minimize the costs associated with the tendency of transacting parties to take advantage of asset specificity situations.7

Illustrating Its Effect

The effect of transaction cost on resource allocation is illustrated in Figure 6. Suppose there are two sectors in the economy, which produce y and x. The production possibility 5 See Coase, R. (1937). Coase first used the term “transaction costs” but failed to define it. 6 See Allen (1991) 7 See Williamson (1971), considered the founder of the transaction cost economics, highlighted the need for a ‘governance structure’ with appropriate incentives for parties in an agreement to cooperate and seize any gains from the transaction. He is the first to note the contracting problems sunk costs can provide in a transaction.

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frontier is the curve AA'. If there is transaction cost in trading, part of the resources will be devoted to the transacting activity, which are indicated in the Figure by the inward shift of the production frontier to BB'. The economy will produce at Q and consumes at C, or the point of tangency between the world price line through Q or C and the production frontier or the indifference curve, U. It exports y by an amount equal to the vertical distance between Q and C, and imports the quantity of x equal to the horizontal distance between Q and C. U represents how well off is the population of the home country. Such equilibrium is inferior to one in the absence of transaction costs. Without transaction cost, the economy trades with the rest of the world at the same relative world prices of x and y, depicted by the slope of the price line through Q* and C*. It exports more x and imports more y. The country is better of as indicated by a higher indifference curve U*. The comparison provides economic managers the effect of reducing trade transaction costs on productivity and trade. Transaction costs dampen the competitiveness of the country. Potential gains of one country from trade based on factor endowment or production technology advantages over its trading partners are not fully exploited. It is possible that the transaction costs underlying the equilibrium at Q and C are larger than shown in this Figure, and accordingly push down the economy to an equilibrium that is dominated by the autarchy, as depicted by production and consumption point Q'' or C”. It is likely that the trading developing countries are better off than autarchy but their well being can be improved if transaction costs were reduced. This indicates that even if market access is created because of unilateral or negotiated trade liberalization, developing countries may not avail fully of the new access opportunities because of transaction costs. A computable general equilibrium model of a hypothetical small open economy was developed in order to calculate the numerical magnitude of the effect of transaction cost. The hypothetical economy has an aggregate consumer who is endowed with fixed amounts of primary factors. The economy faces the possibility of participating in international trade, and indeed it engages in international trade at the going world prices of food and clothing when transaction cost is zero. The results of these calculations are shown in Table 13. The economy produces 9.46 units of food, exports 3.51 of these, and consumes the rest. It also consumes 4.43 units of clothing and imports 3.51 units of clothing to add to its cloth production of 0.92 units. Transaction cost comes in when the country exports food to the rest of the world. This cost is featured in this model as an export tax except that the aggregate consumer does not get the revenues. Instead the tax revenue is all used up to pay for the value of resources used up in the transaction activity, i.e. to pay for transaction cost. The equilibrium in the high transaction cost case turns out to be autarchic. Because of high transaction cost, it chooses not to export, and because there are no export receipts to pay for the import bill, there are no imports as well. No transaction cost is spent, but real income is lower than in the absence of transaction cost, with the difference, which is 2.44, representing the gains from trade. Had the economy exported food, it would have generated more transaction cost than trade gains.

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In the fourth column of Table 13, the transaction cost is lower and this allows trade to occur. The economy exports 2.82 units of food and the same amount of clothing. There is trade but the real income is slightly lower than in the case when transaction cost was zero. There is now positive transaction cost expended equal to 0.03 units. This scenario likely depicts what most developing countries are in.

Concluding Remarks

In this paper, the experience of the Philippines with trade liberalization since the 1980s is described and an attempt is made to correlate this with the observed performance of the economy including production, trade, income, income inequality and poverty. The sceptics of trade liberalization appear to have the upper hand in the Philippines today particularly because it has not been as successful as its neighbours have been. Critics of trade liberalization are bolder in saying that trade policy reforms have simply brought the Philippine economy to the brink of a crisis. The trade liberalization program started out to be unilateral and picked up by the multilateral trade reforms under the WTO in the second half of the 1990s. After this, the regional trading arrangements such as the ASEAN Free Trade Agreement will open up further the Philippine economy to international competition. The unilateral and multilateral trade liberalization programs have succeeded to bring import tariff protection down to an average of 22.4 percent in 1988 to 2.6 percent in 2004. Effective tariff protection likewise was reduced from nearly 28 percent in 1990 to 14.4 percent in 2000. In 2003, the Philippine government reviewed its tariff reduction program and restored for a few tariff lines the levels their respective 1998 tariff protection levels. Lowering applied import tariffs resulted in contemporaneous increases in import values since 1990, particularly those destined for final consumption. Almost all sectors' imports responded positively to the lowering of import restrictions and the economic expansion in the 1990s. The Asian crisis halted the pattern but few sectors recovered but moderately since 2000 including beverages and tobacco and food and live animals. Imported intermediate goods such as for example imported chemicals and chemical products, or machinery and transport equipment, likewise expanded. The growth of imports got a boost from a real effective exchange rate, whose level was driven down by an unprecedented increase in long term capital inflows during the period from 1989 to 1996. The appreciation of the real exchange rate in the first half of the 1980s slowed down the growth of merchandise exports. Exports expanded at a rate lower than that at which imports increased. The access of Philippine exports to the country’s markets was only hardly opened up. The average tariffs against Philippine exports have not gone down, and in fact those against Philippine agricultural exports increased. The composition of the country’s merchandise export changed from the traditional exports comprising of coconut, sugar, forest products, mineral products, fruits and vegetables, abaca and tobacco to semiconductors, electronic micro-circuits, garments and wood furniture. The basket of the country’s exports has continued its concentration on semiconductors and electronic micro-circuits, so much so that policy makers are getting increasingly concerned. With the end of

26

the multi-fibre arrangement, this concentration may further continue as the country’s garment exports will no longer be protected by export quotas. Variations in the share of each manufacturing sector to the total manufacturing production indicate resource movements among the various industries of the economy in response to trade policy reforms. The data point to the finding that there is hardly any change in the relative contribution of the various industries in the manufacturing sector. Nor has the manufacturing sector expanded as a whole at a pace as to provide jobs to the roughly a million Filipinos joining each year the economic active group. Industry offers about a hundred thousand jobs each year, or ten thousand jobs less than what the agriculture sector generates. Services provide jobs each year by more than the two combined, 410, 000 jobs. But that is not good enough. The country needs nearly a million jobs each year. Agriculture continues to be a very important contributor to the effort of employing the population, but its problem is that the sector is heavily influenced by weather-related disturbances. Industry and services would need to take over agriculture's function of providing jobs to the country's economically active population. While economic performance cannot all be attributed to trade policies, the Philippines is neither better off nor worse off because of freer trade. Per capita income hardly changed; its annual growth had fluctuated around zero percent since the 1980s. This roller-coaster performance aggravates the underlying weakness of the Philippine economy. Its lack of international competitiveness indicates the seriousness of transaction costs in the Philippine economy. Economic transactions appear to be relatively more costly as in other countries, or multi-national businesses transferred its production to other countries having the logistics cost advantage such as China. While export opportunities arise, the responsiveness of direct investments to create new productive capability appears to be slow again it would appear due to poor investment climate or the relative difficulty of enforcing property rights over sector-specific assets. The paper compares the ex-ante effects of trade liberalization which were calculated using a general equilibrium model of the Philippines with the realized values of a few economic indicators through time. It noted important differences between two. This exercise does not proceed from a perspective that the two ought to be identical. However the paper pursues the query if movements of key development indicators over more than a quarter of a century of freer trade in the Philippines are consistent with a-priori expectations. The analysis indicates that these deviated from the anticipated results. The discrepancies that had been observed may highlight the role that transaction costs play in seizing opportunities for acquiring gains from trade. These costs have the potential of wiping out any trade gains, and this point is illustrated using a small general equilibrium model of a hypothetical small open economy. The theme is not that trade does not improve the welfare of the residents of a given economy particularly the poor, but rather that transaction costs need to be attended to if trade makes a positive difference for the country’s poor. It is important for the Philippines to tread the globalization path from the “transaction cost lens”. Improved economic performance, which freer trade enables, reflects a growing

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number of economic agents that are voluntarily locked with each other in a cooperative, competitive, and mutually gainful exchange of assets to create additional wealth. Lower transaction costs are necessary for this to happen.

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1980 1985 1990 1995 2000 2001Population

Ages 0-14, (% of total) 43.05 42.03 40.86 39.45 37.40 36.83Ages 15-64, (% of total) 53.76 54.78 55.91 57.30 58.79 59.05Ages 65 and above, (% of total) 3.18 3.19 3.24 3.24 3.81 3.85Total (in million persons) 48.04 54.23 61.04 68.34 76.63 78.32

GDP and Sectoral ContributionGDP (in billion USD at 1995 prices) 56.34 52.84 66.59 74.12 88.23 91.23Agriculture value added (% of GDP) 25.12 24.58 21.90 21.63 15.93 15.22Industry value added (% of GDP) 38.79 35.07 34.47 32.06 31.13 31.21Services value added (% of GDP) 36.10 40.35 43.62 46.31 52.94 53.57

Education, School EnrollmentPrimary (% gross) 111.91 107.37 111.28 114.13 112.62 ..Secondary (% gross) 64.21 64.39 73.21 77.49 77.29 ..Tertiary (% gross) 24.36 24.88 28.21 28.97 31.21 ..

EmploymentAgriculture (% of total employment) 51.80 49.60 45.20 44.10 37.40 37.50Industry (% of total employment) 15.40 13.80 15.00 15.60 16.00 16.10Services (% of total employment) 32.80 36.50 39.70 40.30 46.50 46.40

Saving and InvetmentNet national savings (% of GNI) 18.40 6.10 11.90 9.30 20.30 16.80

GDP per capita in USD 1,173 974 1,091 1,085 1,151 1,165Source: World Development Indicators 2003

Table 1. Basic Economic Indicators, Philippines: 1980-2004

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1980 1985 1990 1995 2000 2001 2002GNP and domestic absorption

GNP (in billion PhPesos)Gross National Income (GNI) 243 551 1,071 1,959 3,566 3,919 4,290Net Primary Income from Abroad 0 -20 -6 53 211 245 268Gross Domestic Product 244 572 1,077 1,906 3,355 3,674 4,023

Domestic Absorption (in billion PhPesos)Government Consumption Expend. 22 44 109 217 439 445 489Househ.Cons.Expend.,incl.NPISHs 157 421 767 1,412 2,336 2,565 2,751Exports of Goods and Services 57 137 296 693 1,859 1,785 1,969Imports of Goods and Services -69 125 359 842 1,795 1,899 1,989

Resource Balance (USD Millions) Goods: Exports f.o.b. 5,788 4,629 8,186 17,447 37,295 31,243 34,383 Goods: Imports f.o.b. -7,727 -5,111 -12,206 -26,391 -33,481 -31,986 -33,975

Balance on Goods -1,939 -482 -4,020 -8,944 3,814 -743 408 Services: Credit 1,447 2,235 3,244 9,348 3,972 3,148 3,056 Services: Debit -1,439 -867 -1,761 -6,926 -6,402 -5,198 -4,320

Balance on Goods & Services -1,931 886 -2,537 -6,522 1,384 -2,793 -856 Income: Credit 762 1,053 1,598 6,067 7,804 7,152 7,931 Income: Debit -1,182 -2,353 -2,470 -2,405 -3,367 -3,483 -3,381

Balance on Goods, Services & Income -2,351 -414 -3,409 -2,860 5,821 876 3,694Other Data

Government Finances (PhP million) Revenue 34,151 68,577 178,346 360,232 504,349 561,857 566,089 Grants Received 222 380 2,556 988 1,376 1,991 1,052 Expenditure -32,561 -64,084 -211,184 -341,726 -638,665 -706,443 -775,256 Lending Minus Repayments -5,197 -16,031 -6,912 -8,420 -3,170 -4,428 -2,626Surplus -3,385 -11,158 -37,194 11,074 -136,110 -147,023 -210,741

GDP Deflator (2000=100) 11 28 43 68 100 106 110Source: IMF International Finance Statistics

Table 2. Economic Performance

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1980 1985 1990 1995 2000 2001 20021. Current Account

Resource balance -1,931 886 -2,537 -6,522 1,384 -2,793 -856Exports, GNFS 7,235 6,864 11,430 26,795 41,267 34,391 37,439

Merchandise 5,788 4,629 8,186 17,447 37,295 31,243 34,383Imports, GNFS -9,166 -5,978 -13,967 -33,317 -39,883 -37,184 -38,295

Merchandise -7,727 -5,111 -12,206 -26,391 -33,481 -31,986 -33,975Net income -420 -1,300 -872 3,662 4,437 3,669 4,550Net current transfers 434 378 714 880 437 447 503Net capital account, n.i.e. 0 1 0 0 38 -12 -19

Current+Capital account balance -1,917 -35 -2,695 -1,980 6,296 1,311 4,1782. Financial Account

Net private FDI -106 12 530 1,079 1,453 1,142 1,026Long term loans (net) 1,262 1,601 825 782 473 1,478 697

Official 1,258 1,596 875 -408 41 807 -826Private 4 5 -50 1,190 432 671 1,523

Other capital flows 1,528 -1,285 702 3,448 -5,968 -3,014 -4,463Financial account balance 2,684 328 2,057 5,309 -4,042 -394 -2,740

3. Net Errors and OmissionsNet Errors and Omissions 124 545 593 -2,094 -2,630 -433 -1,432

4. Overall BalanceOverall Balance 891 838 -45 1,235 -376 484 6Change in reserves -891 -838 45 -1,235 376 -484 -6

Source: IMF International Finance Statistics

Table 3. Balance of Payments(USD million)

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1980 1985 1990 1995 2000 2001 2002Total Imports (in USD million) 8,295 5,445 13,040 28,485 33,768 31,336 35,407 Share to total imports (%)

Food and live animals 6.90 8.87 9.30 7.40 6.67 7.37 6.43 Beverages and tobacco 0.62 1.45 0.69 0.59 0.57 0.67 0.65 Crude materials 3.90 3.09 4.57 4.34 3.22 3.30 2.28 Mineral fuels 28.39 27.70 14.87 9.18 12.13 11.46 9.25 Animal and vegetable oils and fats 0.25 0.27 0.20 0.15 0.22 0.16 0.14 Chemicals and chemical products 9.82 11.85 11.40 9.10 8.55 8.58 7.00 Manufactured goods 12.87 10.03 14.76 14.03 11.81 12.15 8.88 Machinery and transport equipment 23.85 14.16 25.96 32.16 51.99 51.76 38.10 Miscellaneous manufacturing 2.30 1.89 2.44 3.82 4.81 4.53 3.16 Other imports 11.10 20.69 15.79 19.24 0.04 0.02 24.10

Total Exports (USD millions) 5,751 4,589 8,091 16,978 37,934 32,085 35,121Share to total exports (%)

Food and live animals 24.37 17.98 13.28 7.88 3.39 4.06 3.93 Beverages and tobacco 0.55 0.67 0.71 0.25 0.13 0.17 0.16 Crude materials 25.14 10.46 6.74 3.13 1.32 1.26 0.95 Mineral fuels 0.66 0.75 2.23 1.54 1.33 0.85 1.08 Animal and vegetable oils and fats 9.97 8.10 4.64 4.97 1.26 1.35 1.07 Chemicals and chemical products 1.56 3.48 3.27 1.97 0.88 1.03 1.02 Manufactured goods 9.25 10.19 9.41 6.57 3.68 3.86 2.82 Machinery and transport equipment 2.15 6.65 12.23 22.26 76.20 73.93 39.77 Miscellaneous manufacturing 10.60 11.73 16.54 13.37 11.77 13.46 7.23 Other exports 15.73 29.99 30.94 38.06 0.03 0.04 41.97

Source: UN COMTRADE

Table 4a. Philippine Merchandise Trade: By Sector, 1980 - 2002

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1980 1985 1990 1995 2000 2001 2002Total debit (in USD million) 1,439 867 1,761 6,926 6,402 5,198 4,320Share to total debit (%)

Transportation services 52.05 42.91 55.65 29.61 46.67 46.50 51.76Travel 7.37 4.27 6.30 6.09 15.70 23.64 20.16Communications n.a. n.a. n.a. n.a. 4.08 4.14 1.99Construction n.a. n.a. 0.28 0.84 1.94 5.75 2.85Insurance 0.76 0.69 3.35 1.57 2.53 2.37 6.81Financial n.a. n.a. n.a. n.a. 7.33 1.44 1.04Computer and information n.a. n.a. n.a. n.a. 1.47 1.60 1.06Royalties and licence fees 1.32 1.96 2.16 1.43 3.08 3.06 5.32Other business services 30.09 47.64 29.98 60.16 14.90 10.37 8.40Personal, cultural, and recreational n.a. n.a. n.a. n.a. 2.03 1.10 0.39Government 8.41 2.54 2.27 0.29 0.28 0.04 0.21

Total Credit (USD millions) 1,447 2,235 3,244 9,348 3,972 3,148 3,056Share to total exports (%)

Transportation services 14.24 8.95 7.58 2.93 22.43 20.93 20.65Travel 22.11 22.64 14.36 12.15 53.73 54.73 56.94Communications n.a. n.a. n.a. n.a. 4.58 10.42 10.14Construction n.a. n.a. 0.09 0.11 2.44 2.03 0.92Insurance n.a. 0.18 0.43 0.66 1.66 1.52 1.15Financial n.a. n.a. n.a. n.a. 2.01 1.05 1.05Computer and information n.a. n.a. n.a. n.a. 1.91 0.70 0.69Royalties and licence fees n.a. n.a. 0.03 0.02 0.18 0.03 0.03Other business services 47.55 51.54 66.80 83.86 9.04 6.96 7.33Personal, cultural, and recreational n.a. n.a. n.a. n.a. 1.08 0.48 0.23Government 16.10 16.69 10.70 0.27 0.93 1.14 0.88

Source: UN COMTRADE

Table 4b. Philippine Services Trade: By Sector, 1980 - 2002

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1996 2002 1996 2002Total Merchandise Trade (USD millions) 34,441 34,721 20,253 34,835Share to total (%)

Agriculture, Forestry and fishing Agriculture hunting and related service activities 3.10 2.57 2.62 1.62 Forestry, logging and related service activities 0.38 0.14 0.27 0.12 Fisheries and aquaculture 0.01 0.01 0.45 0.38

Mining Mining of coal and lignite; extraction of peat 0.01 0.01 0.00 0.00 Extraction of natural gas and industry-specific services 0.33 0.31 0.00 0.12 Mining of metal ores 7.42 6.52 1.09 0.34 Other mining and quarrying 1.41 0.84 0.08 0.05

Manufacturing Food products and beverages 0.38 0.30 7.42 3.37 Tobacco products 5.62 5.07 0.04 0.04 Textiles 0.03 0.33 2.13 1.38 Wearing apparel; dressing and dyeing of fur 3.51 3.00 11.17 6.23 Tanning and dressing of leather; luggage, handbags, footwear 0.22 0.15 1.80 0.60 Wood and of products of wood and cork, except furniture; 0.50 0.35 1.50 0.63 Paper and paper products 0.74 0.44 0.44 0.28 Publishing, printing and reproduction of recorded media 1.31 1.09 0.13 0.09 Coke, refined petroleum products and nuclear fuel 0.37 0.27 0.54 0.06 Chemicals and chemical products 0.74 0.57 1.71 0.98 Rubber and plastics products 8.65 7.54 0.76 0.72 Other non-metallic mineral products 2.16 1.87 0.48 0.52 Basic metals 1.06 0.52 3.29 1.09 Fabricated metal products, except machinery and equipment 5.86 4.03 0.85 0.39 Machinery and equipment n.e.c. 1.45 0.91 1.34 1.20 Office, accounting and computing machinery 10.50 4.84 13.69 21.11 Electrical machinery and apparatus 5.64 11.25 3.70 3.40 Radio, television, and communication equipment 4.29 2.97 36.73 48.30 Medical, precision and optical instruments, watches 22.41 38.31 2.16 1.96 Motor vehicles, trailers and semi-trailers 1.82 1.18 1.46 2.35 Other transport equipment 5.55 2.88 0.47 0.67 Furniture; manufacturing n.e.c. 3.54 1.01 3.36 1.70 Electricity,gas,steam and hot water supply 0.71 0.58

Source: UN COMTRADE

Imports ExportsTable 5. Philippine Merchandise Trade: By Sector, 1996 and 2002

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1988 1990 1994 1998 2000 2001 2002 2003Agriculture, Forestry and fishing

Agriculture hunting and related service activities 18.18 16.86 15.67 20.35 9.27 7.77 6.77 6.30 Forestry, logging and related service activities 10.65 10.11 5.61 0.67 0.77 0.88 0.70 0.70 Fisheries and aquaculture 31.45 23.46 25.34 8.29 5.82 5.45 5.80 4.42

Mining Mining of coal and lignite; extraction of peat 19.98 10.00 14.05 9.62 6.55 6.54 4.14 3.57 Extraction of natural gas and industry-specific services 10.00 10.00 10.00 3.00 3.00 3.00 3.00 3.00 Mining of metal ores 10.00 10.00 10.00 3.00 3.00 3.00 2.99 2.99 Other mining and quarrying 11.91 11.43 4.22 3.23 3.24 3.01 2.18 2.18

Manufacturing Food products and beverages 32.16 20.93 30.57 25.49 12.93 11.73 12.73 11.97 Tobacco products 49.54 29.89 49.66 20.00 9.98 9.96 6.98 6.98 Textiles 38.73 27.63 28.36 13.90 9.37 8.97 6.58 4.96 Wearing apparel; dressing and dyeing of fur 49.92 30.00 49.40 24.88 19.22 19.48 14.53 9.73

Tanning and dressing of leather; luggage, handbags, footwear 36.21 23.80 30.97 13.25 8.49 8.37 6.71 5.45 Wood and of products of wood and cork, except furniture; 32.36 21.35 21.80 13.68 9.82 9.56 7.82 5.64 Paper and paper products 34.50 19.89 20.87 10.04 6.82 6.68 4.58 3.60 Publishing, printing and reproduction of recorded media 25.05 18.66 18.60 10.62 6.43 6.17 4.43 3.98 Coke, refined petroleum products and nuclear fuel 19.71 11.49 10.31 3.00 3.00 3.00 2.64 2.64 Chemicals and chemical products 19.36 12.66 11.94 5.55 4.79 4.29 3.76 3.63 Rubber and plastics products 31.13 24.88 23.87 10.87 8.25 10.43 9.77 9.16 Other non-metallic mineral products 36.70 14.78 20.63 12.73 7.62 7.52 5.70 4.54 Basic metals 15.18 12.82 12.68 6.39 5.35 3.95 2.88 2.79 Fabricated metal products, except machinery and equipment 30.17 26.51 26.54 13.44 9.28 9.17 6.51 5.05 Machinery and equipment n.e.c. 22.36 12.24 12.29 4.70 3.33 3.27 1.90 1.71 Office, accounting and computing machinery 19.36 10.44 10.03 3.01 0.04 0.02 0.02 0.02 Electrical machinery and apparatus 26.45 17.76 18.42 7.81 5.24 4.64 3.25 2.68 Radio, television, and communication equipment 21.83 11.43 11.62 3.21 0.47 0.29 0.12 0.09 Medical, precision and optical instruments, watches 17.63 13.92 13.66 4.80 2.72 2.61 2.30 2.29 Motor vehicles, trailers and semi-trailers 31.70 25.06 21.49 15.05 13.07 11.36 11.14 11.14 Other transport equipment 14.23 11.84 11.67 7.20 9.78 9.72 8.80 8.79 Furniture; manufacturing n.e.c. 41.96 27.07 31.36 16.33 10.00 9.32 6.74 5.40 Electricity,gas,steam and hot water supply 10.00 10.00 10.00 3.00 3.00 3.00 3.00 3.00

Total average 22.43 14.79 15.22 7.16 4.13 3.86 2.82 2.60 Source: WTIS/Trains UNCTAD Computations

Table 6a. Trade-Weighted Averge Tariff Rates Applied on Philippine Imports: 1988 to 2003(in percent)

37

1990 1992 1994 1996 1998 2000 Total average 27.86 32.20 27.09 25.43 18.68 14.43 Agriculture, forestry and fishing 23.63 24.32 22.94 22.19 18.43 16.39

Agriculture hunting and related service activities 26.42 26.39 25.92 28.70 24.97 22.48 Forestry, logging and related service activities 17.86 23.84 19.30 10.90 6.19 4.61 Fisheries and aquaculture 18.31 11.52 11.52 4.66 2.88 2.86

Mining 1.67 1.68 1.24 0.30 0.32 0.28 Manufacturing 31.02 36.99 30.18 28.15 19.86 14.52 Food Processing 40.40 57.98 42.88 51.61 36.43 27.26 Beverages and Tobacco 51.93 49.21 48.29 26.37 16.41 7.94 Textile, Garments and Footwear 25.35 24.25 22.22 13.55 11.15 8.38 Wood and Wood Products 33.81 20.46 20.16 22.64 17.37 10.30 Furniture and Fixtures 21.32 22.74 15.20 15.01 14.18 11.83 Paper, Rubber, Leather and Plastic Products 32.37 28.85 25.16 20.27 13.35 8.52 Chemicals and chemical products 23.50 18.26 17.99 11.89 7.33 5.85 Non-metallic mineral products 10.59 15.29 16.68 5.30 4.19 3.34 Basic metals and metal products 23.15 20.28 18.98 14.16 9.45 7.41 Machinery 24.22 22.29 16.36 10.67 8.13 6.26 Miscellaneous Manufactures 20.58 17.85 14.59 10.53 6.02 3.78 Source: Manasan and Pineda (2000)

Table 6b. Trade-Weighted Average Effective Protection Rates: 1990 to 2000 (in percent)

1995 1996 1997 1998 1999 2000 95-00Real GDP 8.60 -28.10 7.50 3.30 7.10 3.90 2.30Government Income -44.20 -21.20 -16.90 -51.00 -18.20 -29.60 -181.10Government Expenditures -8.40 -5.60 -2.40 1.20 -1.10 -5.30 -21.50Aggregate Tariff Revenue -20.50 -17.80 -6.50 -21.60 -6.20 -13.80 -86.50Exports 3.50 -1.60 1.30 -1.70 0.50 2.10 4.20Imports 2.30 -0.60 0.60 0.10 0.40 1.50 4.30

Lowest quintile household (HH1) 1.70 0.90 0.70 1.00 0.50 1.00 5.80Second quintile household (HH2) 0.90 0.30 0.40 0.50 0.30 0.50 3.00Third quintile household (HH3) 0.90 0.30 0.40 0.60 0.30 0.50 3.00Fourth quintile household (HH4) 0.90 0.30 0.40 0.60 0.30 0.50 3.10Highest quintile household (HH5) 1.00 0.50 0.40 0.80 0.30 0.60 3.60

Change in employment ('000)Agriculture -29.07 12.00 -7.07 24.59 -2.50 -16.21 -18.27Industry 85.46 23.37 68.88 -89.64 27.50 57.48 173.04Service Sector -28.50 -3.73 -4.32 33.39 2.85 -15.88 -16.20Government Service -83.77 -47.49 -22.43 1.63 -11.11 -47.69 -210.86Total: 27.89 31.63 57.49 -31.67 27.84 25.39 138.58

Source: Habito and Cororaton (2000)

Table 7a. Simulated Effects of Trade Liberalization in the Philippines: 1995 to 2000 (in percent)

Change in Gross Income of Households:

38

1988 1990 1994 1998 2000 2001 2002 2003Agriculture, Forestry and fishing

Agriculture hunting and related service activities 17.88 16.16 17.36 11.98 14.64 14.25 14.43 21.97 Forestry, logging and related service activities 0.94 0.68 0.79 2.65 2.94 2.73 1.87 4.03 Fisheries and aquaculture 5.03 3.76 5.31 2.01 2.69 3.54 4.93 4.40

Mining Mining of coal and lignite; extraction of peat 13.00 25.00 0.98 - Extraction of natural gas and industry-specific services 1.31 - 0.98 - Mining of metal ores 0.88 0.02 0.01 0.10 0.02 0.04 0.02 0.01 Other mining and quarrying 4.20 0.76 0.16 0.13 0.46 1.79 0.29 0.57

Manufacturing Food products and beverages 8.02 8.33 10.28 7.51 6.87 7.60 7.88 5.65 Tobacco products 47.45 45.61 36.20 4.63 54.93 67.49 213.48 116.96 Textiles 6.61 14.56 12.86 11.67 12.17 11.68 12.04 11.92 Wearing apparel; dressing and dyeing of fur 9.85 16.92 11.88 13.84 13.19 13.09 12.96 13.03

Tanning and dressing of leather; luggage, handbags, footwear 16.36 15.84 15.56 11.98 11.77 11.58 11.26 12.02 Wood and of products of wood and cork, except furniture; 4.89 6.18 5.26 3.90 3.43 3.52 3.42 4.69 Paper and paper products 0.36 2.32 4.00 1.96 3.48 4.48 2.84 2.65 Publishing, printing and reproduction of recorded media 3.94 6.07 5.12 3.17 2.20 2.58 1.61 1.24 Coke, refined petroleum products and nuclear fuel 3.92 6.95 20.58 4.18 4.88 4.42 4.76 3.91 Chemicals and chemical products 2.96 3.25 6.81 3.81 4.68 6.42 3.58 3.95 Rubber and plastics products 5.64 5.88 5.94 5.27 6.83 8.75 6.23 5.64 Other non-metallic mineral products 4.40 8.50 10.28 6.42 5.73 5.96 6.91 5.27 Basic metals 4.89 2.29 1.10 0.87 2.31 1.72 2.65 2.04 Fabricated metal products, except machinery and equipment 3.12 5.41 9.24 2.33 4.18 4.07 2.70 2.08 Machinery and equipment n.e.c. 2.13 5.14 3.44 1.83 3.07 3.90 3.21 2.53 Office, accounting and computing machinery 1.42 2.84 1.75 0.32 0.84 0.59 0.13 0.08 Electrical machinery and apparatus 2.56 4.21 3.24 2.94 3.86 3.98 2.75 2.82 Radio, television, and communication equipment 4.43 3.98 7.58 0.59 0.67 0.77 0.39 0.28 Medical, precision and optical instruments, watches 2.22 5.30 3.10 1.94 2.12 2.30 2.05 2.83 Motor vehicles, trailers and semi-trailers 0.28 1.25 0.52 2.55 14.37 18.41 4.95 2.26 Other transport equipment 1.84 2.05 1.46 1.75 5.97 7.09 4.53 2.17 Furniture; manufacturing n.e.c. 5.31 5.73 5.43 2.12 1.83 2.02 2.09 1.75

Total average 7.47 8.35 7.90 3.16 2.91 2.91 2.23 2.42 Source: WTIS/Trains UNCTAD Computations

Table 7b. Trade-Weighted Average Tariff Rates Facing Philippine Exports: 1988 to 2003(in percent)

39

1980 1985 1988 1990 1992 1994 1996 1997Total manufacturing (USD million) 17,368 12,081 18,252 24,322 28,805 32,273 46,003 45,935 Share to total (%)

Food products 21.72 21.87 21.65 24.69 20.16 19.84 20.28 20.28 Beverages 2.70 6.26 6.54 5.64 5.79 5.59 5.93 5.93 Tobacco 5.77 5.86 4.21 3.10 3.01 3.16 2.92 - Textiles 7.27 4.59 5.08 4.68 3.98 3.12 3.21 - Wearing apparel 2.68 2.15 3.95 4.34 4.43 4.29 4.17 - Leather products 0.15 0.08 0.14 0.19 0.20 0.14 0.15 - Footwear 0.22 0.24 0.17 0.19 0.36 0.42 0.40 - Wood products 3.91 2.42 2.84 1.84 1.36 1.08 1.08 - Furniture 0.96 0.52 1.00 0.88 0.68 0.66 0.64 - Paper and products 2.93 2.41 2.66 2.12 2.58 2.03 2.04 - Printing and publishing 1.51 1.08 1.08 1.24 1.27 1.29 1.48 1.48 Industrial chemicals 4.53 3.26 3.75 3.12 3.28 2.67 2.73 2.73 Other chemicals 8.22 6.77 7.94 7.08 7.79 7.42 7.28 7.28 Petroleum refineries 15.33 21.46 11.55 11.31 11.81 13.10 12.29 12.29 Misc. petroleum and coal products 0.04 0.10 0.13 0.09 0.13 0.10 0.13 0.13 Rubber products 1.56 1.26 2.19 1.50 1.89 1.16 1.20 1.20 Plastic products 1.40 1.17 1.74 1.59 1.91 1.83 1.83 1.83 Pottery 0.36 0.17 0.20 0.20 0.32 0.29 0.27 0.27 Glass and products 0.65 0.82 0.78 0.65 0.65 0.67 0.64 0.64 Other non-metallic mineral products 0.94 1.81 1.97 2.36 2.55 2.60 2.51 2.51 Iron and steel 3.00 4.24 5.13 4.98 4.62 4.15 4.63 4.63 Non-ferrous metals 0.67 2.43 3.10 2.27 1.60 2.06 2.16 2.16 Machinery and equipment n.e.c. 2.40 1.70 1.58 1.87 1.72 1.93 1.87 1.87 Office, accounting and computing mach 1.29 0.75 0.86 0.82 0.93 1.35 1.60 1.60 Transport equipment 4.04 4.81 6.66 8.22 10.95 11.99 11.58 11.58 Professional & scientific equipment 5.01 1.13 2.31 4.13 5.15 5.99 5.89 5.89 Other manufactured products 0.05 0.14 0.16 0.07 0.11 0.20 0.23 0.23

Source: UNDSTAT 2003 ISIC Revison2

Table 8. Manufacturing Production: 1980 to 1997

1980 1985 1990 1995 1998 2000 2001Total Population (millions) 48.04 54.23 61.04 68.34 73.18 76.63 78.32 Population with ages 15-64 (millions) 25.83 29.71 34.13 39.16 42.59 45.05 46.25

Total Employment (millions) 17.15 20.33 22.53 25.70 28.26 27.78 30.09 Agriculture 8.89 10.08 10.18 11.33 11.28 10.39 11.25 Industry 2.64 2.81 3.38 4.01 4.44 4.44 4.69 Services 5.63 7.42 8.95 10.36 12.55 12.92 14.14

Employment rates (%)Employment to population rate 35.71 37.48 36.91 37.60 38.62 36.25 38.41 Employment to active population rate 66.42 68.42 66.03 65.62 66.35 61.66 65.05 Unemployment to active population rate 33.58 31.58 33.97 34.38 33.65 38.34 34.95

Source: ILO-KILMS

Table 9. Employment: 1980-2001

40

1980 1985 1990 1994 1995 1997 2000 20011. Health

Life expectancy at birth, female (years) 63.32 65.52 67.78 .. 69.90 70.70 71.30 71.50 Life expectancy at birth, male (years) 59.44 61.40 63.58 .. 65.70 66.50 67.34 67.62 Life expectancy at birth, total (years) 61.33 63.41 65.63 .. 67.75 68.55 69.27 69.51 Hospital beds (per 1,000 people) 1.71 1.76 1.39 .. .. .. .. ..Health expenditure per capita (current US$) .. .. 21.00 31.00 37.00 41.00 33.00 ..

Malnutrition prevalence, height for age (% of children under 5) .. .. 37.20 .. .. .. .. ..Birth rate, crude (per 1,000 people) 36.36 34.46 32.44 .. 29.68 28.40 26.72 26.16

2. Population&UrbanizationPopulation growth (annual %) 2.43 2.40 2.26 2.26 2.27 2.29 2.18 2.06 Population density (people per sq km) 161.10 181.88 204.72 224.08 229.20 239.87 256.99 262.66 Urban population (% of total) 37.48 43.05 48.78 52.93 54.03 55.79 58.55 59.33 Urban population growth (annual %) 3.65 5.00 4.73 4.24 4.20 3.76 3.43 3.17

3. Distribution of IncomeIncome share held by highest 10% .. .. .. .. .. .. 36.27 ..Income share held by highest 20% .. .. .. .. .. .. 52.28 ..Income share held by lowest 10% .. .. .. .. .. .. 2.20 ..Income share held by lowest 20% .. .. .. .. .. .. 5.38 ..

4. Education Illiteracy rate, adult female (% of females ages 15 and above) 13.20 10.72 8.79 7.19 6.80 6.16 5.22 4.98 Illiteracy rate, adult male (% of males ages 15 and above) 11.22 9.29 7.75 6.51 6.20 5.68 4.92 4.73 Daily newspapers (per 1,000 people) 41.64 40.01 55.70 64.15 61.46 .. .. ..

5. Infrastructures&Technology - Vehicles (per 1,000 people) .. .. 9.89 25.34 27.01 30.89 .. ..Electric power consumption (kwh per capita) 354.68 333.33 342.28 368.07 389.12 444.39 477.04 ..Mobile phones (per 1,000 people) .. .. .. 2.57 7.20 18.55 84.37 149.58

High-technology exports (% of manufactured exports) .. .. .. 28.60 31.10 64.30 71.30 70.20 High-technology exports (USD millions) .. .. .. 1,815 2,474 14,371 25,263 21,032 Internet users (thousand persons) .. .. .. 4.00 20 100 1,540 2,000 Personal computers (per 1,000 people) .. .. 3.46 7.92 9.62 13.39 19.35 21.73 Television sets (per 1,000 people) 21.73 27.44 49.42 103.05 104.93 107.70 143.79 172.59

Source: World Development Indicators 2003

Table 10. Development Indicators: 1980-2001

41

Growth (1997-

1997 2000 1997 2000 2000) 1997 2000Region

Ilocos 26,776 29,737 3.00 3.06 3.6 6,400 7,057 Cagayan Valley 18,450 22,619 2.07 2.32 7.0 6,506 8,013 Central Luzon 86,177 87,227 9.65 8.97 0.4 11,513 10,810 Southern Tagalog 140,913 148,608 15.78 15.27 1.8 13,788 12,521 Bicol 26,041 27,117 2.92 2.79 1.4 5,566 5,781 Western Visayas 61,627 68,461 6.90 7.04 3.6 9,616 10,996 Central Visayas 59,926 68,715 6.71 7.06 4.7 10,884 12,005 Eastern Visayas 20,973 22,746 2.35 2.34 2.7 5,681 6,280 Western Mindanao 24,909 27,064 2.79 2.78 2.8 8,180 8,718 Northern Mindanao 39,736 37,481 4.45 3.85 -1.9 14,663 13,585 Southern Mindanao 48,541 61,864 5.43 6.36 8.4 9,704 11,865 Central Mindanao 24,135 25,762 2.70 2.65 2.2 9,600 9,871 CAR 19,643 24,730 2.20 2.54 8.0 14,091 18,054 CARAGA 13,731 14,566 1.54 1.50 2.0 6,293 6,929 ARMM 8,582 9,200 0.96 0.95 2.3 3,924 3,795 NCR 272,991 297,065 30.56 30.53 2.9 28,781 29,785 Philippines 893,151 972,962 100.00 100.00 2.9 12,488 12,697 Note: The acronyms CAR, ARMM and NCR stand for Cordillera Administrative Region, Autonomous Region of Muslim Mindanao and National Capital Region. Regional GDP and Regional GDP per capita figures are in Philippine pesos at 1994 prices.Source: National Statistical Coordinating Board, Philippine Statistical Yearbook (2003) as reported in Tuano (2004)

PHP mln at 1994 prices Percent PHP at 1994 prices

Regional GDP Share of RGDP RGDP per capita

Table 11. Regional GDP, share and growth, and per capita figures, 1997 and 2000

42

1997 2000 1997 2000Region

Ilocos 0.426 0.407 37.7 35.5Cagayan Valley 0.413 0.422 32.6 29.7Central Luzon 0.364 0.357 16.8 20.9Southern Tagalog 0.426 0.423 26.9 25.9Bicol 0.437 0.447 53.8 56.2Western Visayas 0.441 0.460 43.2 45.7Central Visayas 0.475 0.470 34.7 37.4Eastern Visayas 0.446 0.482 47.4 45.4Western Mindanao 0.468 0.460 37.1 44.5Northern Mindanao 0.495 0.471 43.3 38.7Southern Mindanao 0.450 0.459 37.1 36.5Central Mindanao 0.454 0.439 51.6 55.3CAR 0.465 0.445 42.8 38.0CARAGA 0.438 0.414 51.0 50.2ARMM 0.349 0.342 55.6 62.9NCR 0.463 0.446 6.5 7.6

Gini Index Poverty Incidence Table 12. Gini index and Poverty Incidence, By Region, 1997 and 2000

Note: The acronyms CAR, ARMM and NCR stand for Cordillera Administrative Region, Autonomous Region of Muslim Mindanao and National Capital Region. Source: National Statistical Coordinating Board, Philippine Statistical Yearbook (2003), as reported in Tuano, P. (2004).

43

Zero transaction cost(t=0)

High transaction cost(t=.2)

Moderate transaction cost(t=.01)

ActivitiesExports of food 3.51 0.00 2.82Imports of cloth 3.51 0.00 2.82Food production 9.46 6.60 8.89Cloth production 0.92 4.40 1.60

Real income 12.74 10.31 12.63Transaction cost 0.00 0.00 0.03

Table 13. Illustrating the Effect of Transaction Cost

Source: National Statistics Office, as reported in Alonzo et al. (2004)

Figure 1. Philippines: GDP per capita annual growth rate: 1981 -2004

-8

-2-4

0246

-6

-10

1980 1985 1990 1995 2000 2005

44

Source: UN COMTRADE

Figure 2. Philippine Merchandise Trade: By Sector, 1980-2002

Philippine Trade: 1980-2002

-

10,000

20,000

30,000

40,000

50,000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Million USD

Imports

Exports

Food and Live Animals: 1980-2002

-

500

1,000

1,500

2,000

2,500

3,000

1980 1985 1990 1995 2000

Million USD

ImportsExports

Miscellaneous Manufacturing: 1980-2002

-500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

1980 1985 1990 1995 2000

Million USD

Exports

Imports

Manufactured Goods: 1980-2002

-

1,000

2,000

3,000

4,000

5,000

6,000

1980 1985 1990 1995 2000

Million USD

Imports

Exports

Crude Materials: 1980-2002

-

200

400

600

800

1,000

1,200

1,400

1,600

1980 1985 1990 1995 2000

Million USD

Imports

Exports

Chemicals and Chemical Products: 1980-2002

-

500

1,000

1,500

2,000

2,500

3,000

3,500

1980 1985 1990 1995 2000

Million USD

Imports

Exports

Mineral Fuels: 1980-2002

-

1,000

2,000

3,000

4,000

5,000

1980 1985 1990 1995 2000

Million USD

Imports Exports

Machinery and Transportation Equipment: 1980-2002

-

7,500

15,000

22,500

30,000

37,500

1980 1985 1990 1995 2000

Million USD

Exports

Imports

Animal and Vegetable Oils and Fats: 1980-2002

-

200

400

600

800

1,000

1980 1985 1990 1995 2000

Million USD

Exports

Imports

Beverages and Tobacco: 1980-2002

-

50

100

150

200

250

1980 1985 1990 1995 2000

Million USD

ExportsImports

45

Figure 3. Trade-Weighted Average Tariffs Applied on Imports and Facing Exports of the Philippines: 1988-2003

Forestry

-

2

4

6

8

10

12

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Agriculture

-

5

10

15

20

25

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Fisheries

-

5

10

15

20

25

30

35

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Tobacco

-

50

100

150

200

250

1988 1990 1994 1998 2000 2001 2002 2003

%Facing Phil Exports

On Phil Imports

Food Processing

-

5

10

15

20

25

30

35

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Textiles

-5

1015202530354045

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Leather Products

-

5

10

15

20

25

30

35

40

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Wearing Apparel

-

10

20

30

40

50

60

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Wood Products

-

5

10

15

20

25

30

35

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Publishing and Printing

-

5

10

15

20

25

30

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Paper Products

-

5

10

15

20

25

30

35

40

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Petroleum Products

-

5

10

15

20

25

1988 1990 1994 1998 2000 2001 2002 2003

%

Facing Phil Exports

On Phil Imports

Rubber Products

-

5

10

15

20

25

30

35

%

Facing Phil Exports

On Phil Imports

Chemical Products

-

5

10

15

20

25

%

Facing Phil Exports

On Phil Imports

Non-metallic Mineral Products

-

5

10

15

20

25

30

35

40

%

Facing Phil Exports

On Phil Imports

46

Source: ILO-KILMS

Figure 4. Employment Growth: 1981-2001

Total Employment and Economic Active Population

-4

0

4

8

12

1981 1985 1989 1993 1997 2001

%

Agriculture Employment

-8.00

-4.00

0.00

4.00

8.00

12.00

1981 1985 1989 1993 1997 2001

%

Industrial Employment

-10.00

-5.00

0.00

5.00

10.00

15.00

1981 1985 1989 1993 1997 2001

%

Services Employment

-4.00

0.00

4.00

8.00

12.00

1981 1985 1989 1993 1997 2001

%

47

Source: National Statistics Office, as reported in Habito et al. (2000)

Figure 5. Poverty Incidence: 1975-1997

33.630.1 31.1

2418.5

44.240.2 39.9

35.532.1

50.746.3 48.6 47

44.4

-

10

20

30

40

50

60

1985 1988 1991 1994 1997

%

Urban Overall Rural

48

Issuance Date Issued Key Provisions

EO 470 01-Jul-91 - increases number of commodity line with high tariffs- reduces number of commodity line with low tariffs

EO 478 23-Jun-92 - imposes special duties of P0.95 per liter of P151.05 per barrel on imported crude oil falling under Hdg. No. 27.09 and P1.00 per liter on imported oil products

EO 1 30-Jun-92 - reduces rates of import duty on electric generating sets to 0% until June 30, 1995.- intended to provide partial remedy to the energy crisis.

EO 2 01-Jul-92- extends the affectivity of the zero rate of duty on cement and cement clinker up to June 30, 1995 (under e.o. No. 470, these articles will be subjected to rates of duty of 20% and 10%, respectively, beginning July 1, 1992) - intended to stop possible shortage of localy supply if zero duty will be lifted

EO 5 14-Jul-92 - shortens the operation of the zero rate of import duty on cement and cement clinker from June 30, 1995 (as provided in E.O. No. 2) to June 30, 1993.

EO 8 24-Jul-92

- provided for interim increased tariff protection in lieu of import restrictions- items covered include livestock, meat, fish, crustaceans, mollusks, sausages and other prepared meat, cane or beet sugar, maize, cereal grains, air or vacuum pumps, fans, aircon, refrigerators/freezers, centrifuges, washing machines, sewing machines, electric accumulators, thermionic/cold cathode, public transport type passenger motor vehicle and parts.- import restrictions lifted on November 1, 1992.

MO No. 95 05-Nov-92 - held in abeyance until February 28, 1993 the implementation of E.O. No. 8 with respect to maize

EO 43 29-Dec-92 - modified the rate of import duty on certain imported articles to implement the 1991 and 1992 Phil program submitted to the Third ASEAN summit providing a minimum level of 25% margin of preference.

EO 61 26-Feb-93 - modified the nomenclature and tariff rates on certain agricultural products; animals fresh chilled or frozen, corn and feedwheat in line with R.A. No. 7607 (The Magna Carta of Small Farmers)

EO 94 01-Jun-93

- reduced the import duty on cement to 5% and cemnt clinker to 3% until June 30, 1994 (per E.O. No. 5, the zero duty on these items will only be effective until June 30, 1993 and therefore the rates of 20% on cement and 10% on cement clincker under E.O. No. 470 will be applied thereafter)- implemented due to uncertainty in the power supply and therefore possible shortage in the local supply of cement

EO 106 16-Jul-93 - lifted the suspension of the application of the tariff concessions granted by the Philippines in refractory bricks under the AFTA

EO 115 24-Jul-93 - increased the special duty of P1.90 per kiter or P302.10 per barrel on imported crude oil and oil products under Hdg. No. 27.09 and P2.00 per liter on imported oil products falling under Hdg. No. 27.10 and 27.11

EO 116 29-Jul-93 - amended E.O. No. 94 to conform with nomenclature

EO 119 29-Jul-93 - lifted the suspension of the application of the tariff concessions granted by the Philippines on refractory bricks under the AFTA, amending E.O. 106 to reflect technical modifications

EO 145 09-Aug-93 - modified rates of duty on certain imported articles under the CEPT-AFTAEO 146 27-Dec-93 - amended E.O. 43 and modified the margin of preference and the applicable ASEAN preferential tariffs

EO 147 27-Dec-93 - modified the rate of import duty on certain imported articles to implement the agreement on the global system of trade preference among developing countries

EO 148 27-Dec-93 - modified the rate of duty on certain imported articles

EO 153 25-Jan-94 - modified the rate of duty on certain imported articles to implement the minimum 90% margin of preference included in the NESTLE ASEAN Industrial Joint Ventures

EO 160 23-Feb-94 - reduced the special duties on crude oil products from p1.90 to P0.95 under Hdg. No. 27.09 and from p2.00 to P1.00 on imported oil products falling under Hdg. No. 27.10 and 27.11

EO 172 24-Apr-94 - increased the minimum tariff rate from 0% to 3%

EO 189 18-Jul-94 - modifies the nomenclature and rates of duty on capital equipment from 10%-20% to 3%-10% (Note: major changes)

EO 204 30-Sep-94 - modifies the nomenclature and rates of duty on textile and chemical input thereto (Note: major changes)

EO 227 04-Mar-95 - reduced the import duty on Portland cement (3%), cement clinker 93%), and Pozzolan Cement (10%); this suspends the implementation of the 20% and 10% under E.O. 470

EO 264 22-Jul-95 - modified the nomenclature and rates of duty on manufacturing industries in line with the Tariff Reform Program; involves 4142 HS lines (Note: major changes)

EO 287 01-Jan-96 - modified the rate of duty on certain imported articles to implement the 1996 Philippine schedule of tariff reductions under the new frame of the accelerated CEPT scheme for the AFTA

EO 288 12-Dec-95 - modified the nomenclature and rates of import duty on certain imported articles, i.e., non-sensitive agricultural products; (Note: major changes)

EO 313 29-Mar-96- modified the nomenclature and rates of import duty on certain imported articles, i.e., sensitive agricultural products- implements tariffication after import restrictions were lifted under R.A. 8178- IRR only issued on July 1 and effective July 10, 1996

EO 328 23-Apr-96 - modified the nomenclature and rates import duty on imported wheat for foodEO 365 16-Apr-96 - modified the rates of duty on crude oil (from 10% to 3%) and refined petroleum product from 20% to 7%).

EO 487 & 488 1997 - modified the rate of duty on imported articles from ASEAN to implement the CEPT scheme for the AFTAEO 390 17-Jan-97 - lowered the rate of duty for six tariff lines including aluminum and compact discs mediaEO 388 21-Jan-97 - adjusted 45 tariff lines to increase the competitiveness of the economyEO 427 21-Jul-97 - reduced tariff rate on tinplates and tin-free steelEO 439 15-Sep-97 - reduced duties on 34 tariff linesEO 461 31-Dec-97 - lowerd tariff duties on imported crude oil and petroleum products

EO 465 13-Jan-98- correct remaining distortions in the tariff structure - to smoothen the schedule of tariff reduction in selected industries- adjusted the tariff reduction schedule for 23 priority sectors considered export winners

EO 486 11-Jun-98 - modified the rates for items not covered by EO 465

Annex 1 Trade-Related Executive Issuances Amending the Philippine Tariff and Customs Code: 1991-1998

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