Philippines: From Crisis - World Bankdocuments.worldbank.org/curated/en/455281468327416301/... · 2016-07-12 · IFIs International Financial Institutions IMF International Monetary

W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N TW O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T

Philippines:From Crisis to Opportunity

COUNTRY ASSISTANCE REVIEW



T H E W O R L D B A N K

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49241

ISBN-0-8213-4294-0

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ADB Asian Development BankBOT Build-Operate-TransferBSP Bangko Sentral ng PilipinaCAS Country Assistance StrategyCAR Country Assistance ReviewCG Consultative GroupCODE Committee on Development EffectivenessDML Debt Management LoanEAP East Asia and PacificEIL Economic Integration LoanERL Economic Recovery LoanESW Economic and Sector WorkFDI Foreign Direct InvestmentFIAS Foreign Investment Advisory ServiceFSAL Financial Sector Adjustment LoanFY Fiscal YearGDP Gross Domestic ProductGNP Gross National ProductGOCC Government-Owned and Controlled

CorporationsIFC International Finance CorporationIFIs International Financial InstitutionsIMF International Monetary FundLGU Local Government Unit

LWUA Local Water Utilities AdministrationMIGA Multilateral Investment Guarantee AgencyMWSS Metropolitan Waterworks and Sewerage

SystemNGO Nongovernmental OrganizationNHMFC National Housing Mortgage Finance

CorporationNPC National Power CorporationOECF Overseas Economic Cooperation FundO&M Operations and MaintenanceOED Operations Evaluation DepartmentPER Public Expenditure ReviewPFP Policy Framework PaperPHRD Policy and Human Resources Development

FundPIDS Philippine Institute of Development StudiesQAG Quality Assistance GroupRGCL Reform of Government Corporations LoanSME Small and Medium-Size EnterpriseSRA Social Reform AgendaTA Technical AssistanceVAT Value-Added TaxWID Women in DevelopmentWTO World Trade Organization

ABBREVIATIONS AND ACRONYMS

W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T

1999

The World Bank

Washington, D.C.

Gianni Zanini



Copyright © 1999The International Bank for Reconstructionand Development/THE WORLD BANK

1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing February 1999

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Design: The Magazine Group/Jeff KiblerPhoto credits: Shepard Sherbell: cover

World Bank Photo Library: p. 2, p. 5, p. 28Edwin Huffman: p. 18, p. 25

ISBN 0-8213-4294-0

Library of Congress Cataloging-in-Publication DataZanini, Gianni, 1954–Philippines, from crisis to opportunity / [prepared by Gianni Zanini].p. cm. — (Operations evaluation studies)At head of title: World Bank Operations Evaluation Department. Country assistance review.ISBN 0-8213-4294-01. Philippines—Economic policy. 2. Philippines—Economic conditions—1986 3. World Bank—Philippines. 4. Economic assistance—Philippines. I. World Bank. Operations Evaluation Dept. II. Title. III. Series: World Bank operations evaluation study.HC453.Z36 1999338.9599—dc21

99-12535CIP

Printed on recycled paper.

iii

v Acknowledgmentsvii Foreword, Prefacio, Préfaceix Executive Summary, Resumen, Résumé Analytique

1 1. A Tumultuous Development Decade1 From Crisis to Peaceful Revolution2 A Vigorous Beginning3 Facing the Political Consequences of Reform4 Policy Weaknesses and Exogenous Shocks4 Consolidation and Revival of the Reforms5 A Solid Basis for Continuing Reform8 Targeted Poverty Alleviation9 Weathering the Storm of the Asian Crisis

10 The Prospect Ahead

11 2. Assistance Strategy: Satisfactory, but Uneven and Below Potential12 From Economic Recovery to Poverty Alleviation12 Away from the Stop-Go Syndrome13 Nurturing the Reforms for Public Sector Management and Private Sector

Development16 The Bank and OED Warned about Macroeconomic Weaknesses17 Sectoral Assistance: An Uneven Performance22 Instruments and Partnership

27 3. Toward a New Assistance Strategy: Moving to a Higher Plane28 Strengthening Macroeconomic Policy and Public Sector Management29 Supporting Private Sector Development and Basic Infrastructure30 Boosting Rural Development and Poverty Reduction31 Revisiting Human Development31 Mobilizing Partnerships

33 Endnotes

35 Bibliography

Boxes9 1.1 Overshooting on the Way Up and on the Way Down

13 2.1 Experiences of FIAS and MIGA14 2.2 IFC’s Roles and Strategies for Private Sector Development17 2.3 Microcredit Lessons by the Asian Development Bank23 2.4 Improved Quality at Entry of Bank Projects

C o n t e n t s

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Figures6 1.1 Rewarding Progress Since 1985: The Economy Has Recovered7 1.2 Slow Progress Since 1985: Neighbors Made More Headway

22 2.1 Comparative OED Evaluation Findings by Fiscal Year of Approval23 2.2 Ongoing Projects: Supervision Ratings

Annex A39 Table A.1: The Philippines at a Glance42 Table A.2: Summary of Project Information: The Philippines43 Table A.3: Completed and Evaluated Projects47 Table A.4: Ongoing and Recently Completed Projects48 Table A.5: List of Economic and Sector Work49 Table A.6: Bank Senior Management Responsible for Philippines Since 1985

Annex B50 The Philippines: From Crisis to Opportunity/Management Response

Annex C54 Report from CODE/Committee on Development Effectiveness

P h i l i p p i n e s : F r o m C r i s i s t o O p p o r t u n i t y

v

This Country Assistance Review benefited from com-ments provided by Bangko Sentral ng Pilipina (BSP).Their kind cooperation and valuable assistance aregratefully acknowledged.

This report was prepared by Gianni Zanini (TaskManager). Major contributors and members of the mis-sion included Per Bastoe (poverty, health, and educa-tion, on secondment from the Norwegian government),Yuen Loh Yee (agriculture and natural resource man-agement, on secondment from the Asian DevelopmentBank), Sonomi Tanaka (aid coordination, NGO partici-pation, and gender issues), and Julius Gwyer (portfoliomanagement, statistical annex, and general researchassistance). Desk contributions were provided by RajChhikkara (financial sector), Gary Wells (quality atentry), Art Bruestle (water supply and sanitation), JanDe Weille (transport), David Greene (energy, health, andeducation projects), Ron Parker (environment), Edgard

Rodriguez (decentralization and SMEs), and ZiaChoudhri (PBDDR).

Ponciano Intal (PIDS, Manila); Deena Khatkhate(Bank consultant); Donald Mathieson (IMF); Luis Lan-dau, Nicolas Mathieu, and Luis Ramirez (OEDCR)offered valuable comments on an early draft. JacquelineJackson provided administrative assistance.

This report was produced as part of OEDPK’spublication series by a team under the direction ofElizabeth Campbell-Pagé, consisting of Leo Demesmaker,Caroline McEuen, Kathy Strauss, and Tsige Kagombe.The design was by The Magazine Group.

Acknowledgments

Director-General, Operations Evaluation Department: Robert Picciotto

Director, Operations Evaluation Department: Elizabeth McAllister

Acting Manager, Country Evaluations and Regional Relations: René Vandendries

Task Manager: Gianni Zanini

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F o r e w o r d

FOREWORDCountry Assistance Reviews(CARs) are evaluations thattake the country as the unit of account and concentrateon the relevance, efficacy, andefficiency of the Bank’s over-

all program of assistance, as wellas its sustainability and its impacton institutional development.1

This CAR examines World Bankassistance to the Philippines since1986, a turning point in the eco-nomic and social policy landscapeof that country. The CAR is selec-tive as to time span, instruments,sectors, and issues covered. Thefocus is on issues that remain rele-vant today for government andBank decisionmakers.

The CAR is composed of thisOverview volume, which summa-rizes the evidence and presents thekey messages and recommenda-tions, and a Main Report, whichprovides supporting analyses, andis available from OED uponrequest.

The overview synthesizes OEDand Bank reports, including Perfor-mance Audit and ImplementationCompletion Reports, CountryAssistance Program/StrategyPapers, Country Briefs, CountryEconomic Memoranda, sectorreports, Country Risk Assessments,management briefs for the AnnualMeetings and high-level field visits,and project and general countryfiles. The overview is also based oninterviews with current and pastFilipino officials, including those atthe secretary level; academics andprivate sector representatives; for-eign donor representatives; andBank, International Finance Corpo-ration (IFC), and InternationalMonetary Fund (IMF) staff, con-ducted between April and Decem-

PREFACIOLos exámenes de la asistencia alos países son evaluaciones quetoman como unidad el país y seconcentran en la pertinencia, laeficacia y la eficiencia delprograma de asistencia general

del Banco, así como en susostenibilidad y sus efectos en eldesarrollo institucional.1 En el presenteexamen de la asistencia a un país seanaliza la asistencia que el BancoMundial ha prestado a Filipinas desde1986, año en que se produjeroncambios decisivos en el panorama de lapolítica económica y social de ese país.El examen es selectivo por lo que serefiere al período, los instrumentos, lossectores y las cuestiones que abarca yse centra en aspectos que siguen siendopertinentes hoy para los responsablesde la adopción de decisiones delGobierno y del Banco.

El examen de la asistencia al paísestá compuesto por el presentePanorama general, en el que seresumen los hechos y se presentan lasideas y las recomendacionesfundamentales, y un informe principalen el que figuran análisis de base y queestá a disposición de los interesados enel Departamento de Evaluación deOperaciones.

En el Panorama general seresumen los informes delDepartamento de Evaluación deOperaciones y del Banco, incluidos losinformes de evaluación ex post y deejecución de los proyectos, losdocumentos de estrategia y deprogramas de asistencia, las sinopsissobre el país, los memorandoseconómicos, los informes sectoriales,las evaluaciones de riesgos, las sinopsissobre la gestión para las reunionesanuales y para las visitas de alto nivelal país y la documentación generalsobre el proyecto y sobre el país. ElPanorama general también se basa en

PRÉFACELes Études sur l’assistance-payssont des évaluations dont l’unitéde compte est le pays. Ces étudesservent essentiellement à mesurerla validité, l’efficacité etl’efficience de l’ensemble du

programme d’assistance de la Banque,ainsi que sa viabilité et son impact surle renforcement institutionnel.1

La présente Étude examine l’aidefournie par la Banque mondiale auxPhilippines depuis 1986, année qui amarqué un tournant dans l’évolutionde la politique économique et socialedu pays. Elle porte sur une période,des instruments, des secteurs et dessujets bien précis, l’accent étant mis surles problèmes qui continuent de seposer au gouvernement et auxdécideurs de la Banque.

L’Étude se compose de la présenteVue d’ensemble, qui récapitule les faitset expose les principales conclusions etrecommandations, ainsi que d’unRapport principal contenant desanalyses explicatives, qui peut êtreobtenu sur demande auprès duDépartement de l’évaluation desopérations (OED).

Cette vue d’ensemble décritbrièvement les rapports de l’OED et dela Banque, y compris les Rapportsd’évaluation rétrospective et lesRapports de fin d’exécution, lesProgrammes d’assistance au pays et lesDocuments de stratégie, les Fiches-pays, les Mémorandums économiques,les rapports sectoriels, les Évaluationsdu risque-pays, les Notes de gestionpréparées en vue des Assembléesannuelles et des missions de hautniveau dans le pays, ainsi que lesdossiers sur les projets et sur le pays engénéral. Elle se fonde également sur lesentretiens qui ont eu lieu entre avril etdécembre 1997 avec des responsablesdu gouvernement actuel et desgouvernements précédents,

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ber 1997. The Bank ResidentMission provided excellentfacilities and staff assistancefor logistics and substantiveissues during the CAR mis-sion in June 1997, includingtwo roundtable discussions

with Filipino officials involved indecentralization issues and NGOrepresentatives.

1. The first CARs published in theseries are for Ghana (1995), Zambia(1996), Argentina (1996), Morocco(1997), Poland (1997), Côte d’Ivoire(1997), and Mozambique (1997).

las entrevistas que entre abril ydiciembre de 1997 semantuvieron con funcionariosfilipinos en activo y con suspredecesores, incluidosfuncionarios con nivel desecretario; representantes de

medios académicos y del sectorprivado; representantes de los donantesextranjeros, y personal del Banco, de laCorporación Financiera Internacional(CFI) y del Fondo MonetarioInternacional (FMI). La MisiónResidente del Banco facilitó unasinstalaciones y una asistencia depersonal excelentes para cuestioneslogísticas y sustantivas durante lamisión del examen de la asistencia alpaís de junio de 1997, incluidos dosdebates de mesa redonda confuncionarios filipinos dedicados acuestiones de descentralización y conrepresentantes de organizaciones nogubernamentales.

1. Los primeros exámenes de la asisten-cia a los países publicados en esta serieson los correspondientes a Ghana(1995), Zambia (1996), Argentina(1996), Marruecos (1997), Polonia(1997), Côte d’Ivoire (1997), yMozambique (1997).

dont certains ministres, desreprésentants des milieuxuniversitaires et du secteur privé,des représentants des bailleurs defonds étrangers, ainsi que desmembres du personnel de laBanque, de la Société financière

internationale (SFI) et du Fondsmonétaire international (FMI). LaMission résidente de la Banque auxPhilippines a mis des installationsd’excellente qualité à la disposition del’équipe de l’Étude lors de sa missionde juin 1997 et lui a fourni un appuilogistique et une aide sur les questionsde fonds, notamment en organisantdeux tables rondes avec desresponsables philippins s’occupant desquestions de décentralisation et dereprésentation des ONG.

1. Les premières Études publiées danscette série portaient sur les pays suiv-ants: Ghana (1995), Zambie (1996),Argentine (1996), Maroc (1997),Pologne (1997), Côte-d’ivoire (1997),et Mozambique (1997).


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Robert PicciottoDirector-General, Operations Evaluation Department

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E x e c u t i v e S u m m a r y

EXECUTIVE SUMMARYThis Country AssistanceReview (CAR) is the eighthof the new country-focusedstudies that evaluate the rele-vance, efficacy, and efficiencyof the Bank’s overall program

of assistance, as well as its sustain-ability and impact on institutionaldevelopment. The objectives are toestablish accountability, derivelessons of experience, and providerecommendations for action. Afterdiscussion with the government, arevised report will be distributedwithout restriction. This CAR con-centrates on Bank assistance since1986, which marks the turningpoint in the country’s economicand social policy frameworks.

Since 1986 the Aquino andRamos administrations havesecured many of the conditions thathave characterized the developmentpath trod by the East Asian miracleeconomies—macroeconomic stabil-ity and flexibility, absence of majorprice distortions, an educated workforce, and export orientation. ThePhilippines can today boast of moreopenness to foreign investment, lessgovernment involvement in the cor-porate sector, and a stronger bank-ing system.

Despite the political turmoil,natural calamities, and externalshocks that beset the country untilthe early 1990s, the incidence andintensity of poverty have been sub-stantially reduced since 1985. Theshare of the population livingbelow the international povertyline dropped by 7 percentagepoints, to below 26 percent. Thekey indicators of health and educa-tion point to substantial progress.In education and gender equity, thePhilippines is ahead of most neigh-boring countries. Gross national

RESUMENEl presente examen de laasistencia a un país es el octavode los nuevos estudios centradosen países cuyo objeto es evaluarla pertinencia, eficacia yeficiencia del programa general

de asistencia del Banco, así como susostenibilidad y sus efectos en eldesarrollo institucional. Los objetivosdel examen son determinarresponsabilidades, aprender de laexperiencia adquirida y hacerrecomendaciones para la acción. Uninforme revisado se distribuirá sinrestricciones después de lasdeliberaciones con el Gobierno. Elpresente examen se concentra en laasistencia prestada por el Banco apartir de 1986, año en que seprodujeron cambios decisivos en elmarco de la política económica y socialdel país.

Desde ese año, los gobiernos deAquino y Ramos han establecidomuchas de las condicionescaracterísticas del camino hacia eldesarrollo que han seguido laseconomías del milagro de Asiaoriental—flexibilidad y estabilidadmacroeconómica, ausencia de grandesdistorsiones de los precios, unapoblación activa instruida y unaeconomía orientada hacia laexportación. Actualmente puedeafirmarse que en Filipinas hay másapertura a la inversión extranjera,menos intervención estatal en el sectorempresarial y un sistema bancario mássólido.

A pesar de los trastornos políticos,las catástrofes naturales y lasconmociones debidas a causas externasque afectaron al país hasta comienzosdel decenio de 1990, la incidencia y laintensidad de la pobreza handisminuido sustancialmente desde1985. El porcentaje de población quevive por debajo del umbral

RÉSUMÉ ANALYTIQUELa présente analyse est lahuitième d’une nouvelle séried’études destinées à évaluer lavalidité, l’efficacité et l’efficiencede l’ensemble de l’aide fourniepar la Banque à un pays donné,

ainsi que la viabilité de ce programmed’aide et son impact sur lerenforcement institutionnel. Ces étudesont pour but de renforcer la prise deresponsabilités, de tirer les leçons de cequi a déjà été fait et de formuler desrecommandations. Une fois qu’il auraété examiné par le gouvernement, cerapport sera révisé et fera l’objet d’unelarge diffusion. La présente Étudeanalyse l’aide fournie par la Banqueaux Philippines depuis 1986, annéequi a marqué un tournant dansl’évolution de la politique économiqueet sociale du pays.

C’est à partir de cette date que lesgouvernements Aquino et Ramos ontmis en place un grand nombre desconditions qui ont caractérisé ledéveloppement miracle des économiesest-asiatiques—souplesse et stabilitémacroéconomique, distorsions limitéesdes prix, main-d’œuvre instruite,orientation vers l’exportation. LesPhilippines peuvent aujourd’hui setarguer d’être plus ouvertes auxinvestissements étrangers, d’avoirréduit le rôle de l’État dans le secteurdes entreprises et d’avoir renforcé leursystème bancaire.

En dépit des troubles politiques,des catastrophes naturelles et deschocs extérieurs qu’a connus le paysdepuis le début des années 90, laprévalence et l’intensité de la pauvretéont sensiblement diminué depuis 1985.Le pourcentage de la populationvivant en-dessous du seuilinternational de pauvreté a baissé de7 points et est maintenant inférieur à26%. Les indicateurs clés en matièrede santé et d’éducation témoignent des

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product (GNP) per capitamore than doubled, toUS$1,190 in 1996. Althoughmodest compared with theEast Asian tigers, grossdomestic product (GDP)growth since the early 1990s

reached above 5 percent in 1996and again in 1997, despite the fall-out from the Asian financial crisis.Price and exchange rate stabilityhave been accompanied by risingmoney demand, reflecting financialdeepening. The engine for eco-nomic growth has been privateinvestment, which increased by 6percentage points to above 20 per-cent of GDP. According to businesssurveys, today’s institutional envi-ronment in the Philippines com-pares favorably with that of othermiddle-income countries.

These positive features not-withstanding, judged by some criti-cal factors for economic and socialdevelopment, the Philippines stillfares below the norm for the EastAsia region: the country has lowernational savings and investment,higher import duties, more rapidpopulation growth, inadequateinfrastructure, an inefficientbureaucracy and judicial system,widespread corruption, and generalinsecurity. Some social develop-ment indicators such as incidenceof communicable diseases andaccess by the poor to educationalservices have regressed in recentyears.

On the whole, however, thecountry’s strengths outweigh itsfragile elements. Despite the finan-cial turmoil that has engulfed theregion, the economy is showingmore resilience and maintainingmomentum more effectively thanits neighbors. The government iscommitted to completing and deep-

internacional de pobreza se hareducido siete puntosporcentuales y es ahora inferioral 26%. Los indicadoresfundamentales de salud yeducación señalan progresosconsiderables. En cuestiones de

educación y de igualdad entre losgéneros, Filipinas es un país másavanzado que la mayoría de susvecinos. El producto nacional bruto(PNB) ha registrado un crecimientosuperior al doble de su valor anterior yen 1996 alcanzó los US$1.190. Si bienmodesto en comparación con el de lostigres del Asia oriental, el crecimientodel producto interno bruto (PIB) desdeprincipios del decenio de 1990 fuesuperior al 5% en 1996 y también en1997, a pesar de los efectos negativosde la crisis financiera de Asia. A laestabilidad de los precios y de los tiposde cambio se ha unido una demandamonetaria creciente, lo que indica quese ha producido una intensificaciónfinanciera. El motor del crecimientoeconómico ha sido la inversiónprivada, que ha aumentado seis puntosporcentuales hasta alcanzar un valorsuperior al 20% del PIB. Según lasencuestas de coyuntura, el entornoinstitucional actual de Filipinas esmejor que el de otros países de ingresomediano.

Pese a esos aspectos positivos, si elpaís se evalúa sobre la base de otrosfactores fundamentales para eldesarrollo económico y social, susresultados siguen siendo inferiores a lanorma en la región de Asia oriental: elvolumen de ahorro y de inversiónnacional es menor, los aranceles sonmás altos, el crecimiento de lapoblación es mayor, la infraestructuraes inadecuada, el funcionariado y elsistema judicial son ineficientes, lacorrupción está muy extendida y lainseguridad es un mal generalizado. Enlos últimos años se han producido

progrès substantiels qui ont étéaccomplis. En ce qui concernel’équité dans le domaine de laparité hommes-femmes ou del’éducation, les Philippines sonten avance sur la plupart de leursvoisins. Le produit national brut

(PNB) par habitant a plus que doublépour atteindre 1 190 dollars en 1996.Bien que modeste au regard de celledes tigres est-asiatiques, la croissancedu produit intérieur brut (PIB) adépassé les 5%, une première fois en1996, puis de nouveau en 1997, et ce,malgré les retombées de la crisefinancière en Asie. La stabilité des prixet des taux de change s’estaccompagnée d’une demandecroissante de monnaie, laquelletémoigne de la diversification descircuits financiers. Le moteur de lacroissance économique restel’investissement privé, qui a gagné6 points pour représenter plus de 20%du PIB. D’après des enquêtes réaliséesauprès de chefs d’entreprise,l’environnement institutionnelphilippin soutient aujourd’huifavorablement la comparaison aveccelui d’autres pays à revenuintermédiaire.

Malgré ces progrès, les Philippinesse situent encore en-deçà de la normeen Asie de l’Est, si on en juge parcertains facteurs d’une importancecritique pour le développementsocio-économique: ainsi, les tauxd’épargne et d’investissement intérieurssont plus faibles que dans l’ensemblede la région, et les droits sur lesimportations, plus élevés; la croissancedémographique est plus forte; leséquipements d’infrastructure sontinadéquats; la fonction publique et lesystème judiciaire sont inefficaces; lacorruption est répandue; et il règne unclimat général d’insécurité. Certainsindicateurs du développement social,comme l’incidence des maladies

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ening the reform agenda.During the past dozen

years, the Bank assistancestrategy has moved from eco-nomic recovery to povertyalleviation, in line with gov-ernment and Bank priorities.

But this shift started only in themid-1990s with new operations insupport of elementary educationand agrarian reform. Bank assis-tance has been both relevant andsatisfactory at the macro level, andin private sector (including smalland medium-size enterprises,SMEs) development, financial sec-tor strengthening, and municipaldevelopment. But its relevance andefficacy in other sectors has beenuneven. Assistance results haveranged from relevant and margin-ally satisfactory in some sectors(water and sanitation, and trans-port) to barely relevant or unsatis-factory in others (health, educa-tion, agriculture, energy, anddecentralization).

Bank projects have performedrelatively well. Ratings for com-pleted projects are almost at parwith the East Asia and PacificRegion (EAP) for outcome and sus-tainability, and even better forinstitutional development impact.At completion, all adjustment loans(US$1.4 billion) since the mid-1980shave received a satisfactory outcomeand likely sustainability ratings. Allbut one received a substantial insti-tutional development rating. Forinvestment lending (US$4.2 bil-lion), the picture is also positive.But Bank performance in identifi-cation, appraisal, and supervisionremains below the EAP average.

The current portfolio of 23projects ($2.2 billion) appears to beperforming even better, with satis-factory ratings above 90 percent, in

regresiones en algunosindicadores del desarrollo social,como la incidencia de lasenfermedades transmisibles y elacceso de las personas pobres alos servicios de educación.

No obstante, en conjunto,los aspectos positivos superan lasdeficiencias del país. A pesar de lostrastornos financieros que ha sufrido laregión, la economía de Filipinas estádando muestras de mayor resistencia yestá manteniendo su impulso máseficazmente que las de los paísesvecinos. El Gobierno ha adoptado elcompromiso de finalizar y profundizarel programa de reformas.

En los últimos 12 años, laestrategia de asistencia del Banco hapasado de centrarse en la recuperacióneconómica a hacerlo en el alivio de lapobreza, en consonancia con lasprioridades del Gobierno y del Banco.Pero este cambio no empezó aproducirse hasta mediados del deceniode 1990, con nuevas operaciones deapoyo a la educación primaria y a lareforma agraria. La asistencia delBanco ha sido pertinente y satisfactoriaen los planos de la macroeconomía, eldesarrollo del sector privado (incluidaslas empresas pequeñas y medianas), elfortalecimiento del sector financiero yel desarrollo de los municipios. Sinembargo, su pertinencia y eficacia hansido desiguales en otros sectores. Losresultados de la asistencia han variadoentre pertinentes y marginalmentesatisfactorios en algunos sectores(abastecimiento de agua y saneamientoy transporte) y poco pertinentes oinsatisfactorios en otros (salud,educación, agricultura, energía ydescentralización).

Los resultados de los proyectosdel Banco han sido relativamentebuenos. Las calificaciones de losproyectos terminados son casiequivalentes a las de la región de Asia

transmissibles et l’accès despauvres aux services d’éducation,ont même régressé ces dernièresannées.

Dans l’ensemble, les atoutsl’emportent toutefois sur leshandicaps. Malgré la tourmente

financière qui s’est abattue sur larégion, l’économie philippine se révèledavantage capable de résister et deconserver son élan que ses voisines. Legouvernement est résolu à mener àbien et à approfondir le programme deréformes.

Au cours des douze dernièresannées, la Banque a recentré sastratégie d’assistance—jusque-là axéesur le redressement économique—surla lutte contre la pauvreté,conformément aux priorités arrêtéespar le gouvernement philippin et laBanque. Ce recentrage s’est amorcé aumilieu des années 90 avec le lancementde nouvelles opérations à l’appui del’enseignement élémentaire et de laréforme agraire. L’aide de la Banque aété judicieuse et satisfaisante tant dupoint de vue macroéconomique qu’ence qui concerne le développement dusecteur privé (y compris les petites etmoyennes entreprises, PME), lerenforcement du secteur financier et ledéveloppement municipal. Elle l’a étémoins dans d’autres secteurs. Ainsi, sison action a été utile et relativementsatisfaisante dans certains domaines(eau et assainissement, transports), elles’est révélée inadaptée, voiretotalement inutile, dans d’autres(santé, éducation, agriculture, énergieet décentralisation).

Les projets de la Banque ontdonné d’assez bons résultats. Lesprojets terminés ont reçu une notationpratiquement identique à celled’opérations réalisées dans d’autrespays de la région Asie de l’Est etPacifique (EAP) s’agissant des résultatset de la viabilité, voire meilleure pour

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line with EAP averages. Inearly February 1998, therewere but four problem pro-jects, according to the QualityAssurance Group (QAG). Themost common causes of poorperformance were problems

associated with project manage-ment and procurement. The overallcost of Bank assistance has beenslightly above comparators’ rangesbecause of the higher cost of super-vision.

In structural adjustment, theBank aimed to enhance the abilityof the public sector to maintainmacroeconomic stability and itsefficiency and to improve theenabling environment for privatesector development. The Bank ledin the formulation and implemen-tation of reforms in public sectormanagement, trade and capitalaccount liberalization, internalcompetition, private sector partici-pation in infrastructure, and finan-cial sector strengthening. It sup-ported the reform process with awealth of high-quality economicand sector work (ESW); effectiveand, on the whole, harmoniouspolicy dialogue; good aid coordina-tion; relevant and efficaciousquick-disbursing adjustment loans;and judiciously reinforcedcovenants under investment pro-jects. The strong intellectual contri-bution of the Bank’s ESW, however,was reduced by inadequate partici-pation and in-country dissemina-tion, poor timing, and insensitivityto the concerns of government offi-cials and Bank resident staff.

The institutional and economicreforms introduced with the sup-port of the Bank since the mid-1980s, including those that restructured the central bank andstrengthened the financial sector,

oriental y el Pacífico en cuanto aresultados y sostenibilidad eincluso mejores por lo que serefiere a los efectos en eldesarrollo institucional. Desdemediados del decenio de 1980todos los préstamos de ajuste

(US$1.400 millones) han obtenidocalificaciones satisfactorias en cuanto asus resultados y su probablesostenibilidad. Todos menos uno hanrecibido una buena calificación enrelación con el desarrollo institucional.Por lo que se refiere a los préstamospara proyectos de inversión (US$4.200millones) el panorama también espositivo. Pero los resultados del Bancoen la identificación, la evaluacióninicial y la supervisión siguen siendoinferiores a la media de la región deAsia oriental y el Pacífico.

Los 23 proyectos de la carteraactual (US$2.200 millones) parecenestar dando resultados aún mejores:más del 90% se han calificadosatisfactoriamente, un porcentajeacorde con la media de la región.Según el Grupo de garantía de calidad,a principios de febrero de 1998 sólohabía cuatro proyectos problemáticos.Las causas más comunes de losresultados deficientes eran problemasrelacionados con las adquisiciones y lagestión de los proyectos. El costoglobal de la asistencia del Banco hasido algo superior a los de los paísesutilizados en la comparación, debido aunos costos de supervisión más altos.

En la esfera del ajuste estructural,el objetivo del Banco era fortalecer lacapacidad del sector público paramantener la estabilidadmacroeconómica y su propia eficienciay mejorar el entorno favorable para eldesarrollo del sector privado. El Bancopromovió la formulación y aplicaciónde reformas en la gestión del sectorpúblico, la liberalización del comercioy de las cuentas de capital, la

ce qui est de l’impact du projetsur le renforcementinstitutionnel. Les résultats detous les prêts d’ajustement(1,4 milliard de dollars) qui ontété menés à bien depuis le milieudes années 80 ont été jugés

satisfaisants, et leur viabilité, probable.Dans tous les cas sauf un, lerenforcement institutionnel a été jugésubstantiel. Pour ce qui est des prêtsd’investissement (4,2 milliards dedollars), le bilan est également positif.Mais la performance de la Banque dupoint de vue de l’identification, del’évaluation et de la supervision desprojets aux Philippines reste inférieureà la moyenne pour la région Asie del’Est et Pacifique. Le portefeuilleactuel, qui compte 23 projets (2,2milliards de dollars) semble encoreplus performant, à en croire lesappréciations positives qui dépassentles 90% et rejoignent donc lesmoyennes pour la région. Au début defévrier 1998, on ne dénombrait quequatre projets à problèmes selon leGroupe de contrôle de la qualité. Lesrésultats décevants s’expliquent le plussouvent par des problèmes liés à lagestion des projets et à la passation desmarchés. Le coût global de l’assistancede la Banque dépasse légèrement lesfourchettes établies pour des projetscomparables en raison du coût plusélevé de la supervision.

En matière d’ajustementstructurel, la Banque s’efforce derendre le secteur public mieux à même de maintenir la stabilitémacroéconomiques et d’être efficace etde créer des conditions plus favorablesau développement du secteur privé. LaBanque a joué un rôle moteur dans laformulation et la mise en œuvre desréformes visant la gestion du secteurpublic, la libéralisation du commerceet des opérations en capital, laconcurrence interne, l’ouverture du

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enabled the country to resistthe contagion from the stillunfolding East Asian crisis.The economy would havebeen even more resilient if theauthorities had heeded theBank’s early warnings of the

increasingly risky exposure tovolatile short-term capital flows.Reform fatigue of the governmentslowed institutional and policyreforms.

To help the economy reach itsgrowth potential, fortify itsresilience to domestic and globalexigencies, and reduce povertymore quickly, the government mustpursue and deepen its reformagenda. While expanding its liber-alized environment—a valuabledistinction from its neighbors—thecountry must apply the lessons ofthe East Asian miracle as well as ofthe most recent East Asian crisis.Investment levels must be increasedand sustained with less volatilesources of financing. Poverty mustbe targeted squarely, beyond thetrickle-down benefits from acceler-ated, broad-based growth. Imple-mentation capacity must beimproved. The challenge ahead isfivefold: (i) strengthen economicmanagement; (ii) expand privatesector and infrastructure development; (iii) accelerate ruraldevelopment and attack povertyaggressively; (iv) revisit humandevelopment; and (v) mobilizepartnerships.

Supporting the government inpursuing this medium-term agendashould be the central feature of theBank’s assistance strategy. TheBank should move quickly beyondthe immediate needs for emergencyassistance to ease the current liq-uidity constraint. This shouldencompass support for a final

competencia interna, laparticipación del sector privadoen la infraestructura y elfortalecimiento del sectorfinanciero. El Banco prestóapoyo al proceso de reformamediante abundantes estudios

económicos y sectoriales de altacalidad; un diálogo sobre políticaseficaz y, en general, armonioso; unacoordinación adecuada de la ayuda;préstamos de ajuste de rápidodesembolso pertinentes y eficaces, yestipulaciones prudentementereforzadas en el marco de losproyectos de inversión. Sin embargo, laimportante contribución intelectual delBanco en forma de estudioseconómicos y sectoriales quedólimitada por la insuficiencia de laparticipación y de la difusión en elpaís, la inoportunidad y la falta desensibilidad ante las preocupaciones delos funcionarios estatales y delpersonal residente del Banco.

Las reformas institucionales yeconómicas que desde mediados deldecenio de 1980 se han idointroduciendo con el apoyo del Banco,incluidas las de reestructuración delbanco central y de fortalecimiento delsector financiero, prepararon al paíspara resistir el contagio de la crisis deAsia oriental, que todavía sigueextendiéndose. La resistencia de laeconomía habría sido aún mayor si lasautoridades hubieran atendido lasprimeras advertencias del Banco sobrela exposición cada vez más arriesgadaa corrientes muy inestables de capital acorto plazo. La fatiga reformista delGobierno frenó la aplicación de lasreformas institucionales y normativas.

Para contribuir a que la economíaalcance su potencial de crecimiento,para aumentar su capacidad deresistencia frente a situaciones deemergencia a nivel nacional y mundialy para reducir la pobreza con mayor

secteur des infrastructures auxopérateurs privés et lerenforcement du secteurfinancier. Elle a appuyé leprocessus de réforme en réalisantde nombreuses analyseséconomiques et sectorielles de

qualité; en entretenant avec lespouvoirs publics un dialogue véritableet, dans l’ensemble, harmonieux surles mesures à prendre; en assurant unebonne coordination de l’aide; enaccordant des prêts d’ajustement àdécaissement rapide adaptés etefficaces; et en renforçantjudicieusement les dispositionscontractuelles des projetsd’investissement. Les analyseséconomiques et sectorielles de laBanque auraient cependant présentéencore plus d’intérêt si elles avaient étéplus participatives et mieux diffuséessur le territoire, s’il n’y avait pas eu deproblèmes de calendrier et si ellesavaient davantage pris en compte lespréoccupations des responsablesgouvernementaux et du personnel dela mission résidente.

Les réformes institutionnelles etéconomique introduites avec l’appui dela Banque depuis le milieu desannées 80, notamment celles qui ontabouti à la restructuration de labanque centrale et au renforcement dusecteur financier, ont permis au paysde résister à la crise qui continue desévir dans la région. Il aurait pu mieuxrésister encore si les autorités avaienttenu compte des mises en garde queleur avait déjà adressées la Banque surla vulnérabilité croissante del’économie face à la volatilité des fluxde capitaux à court terme. Sous l’effetd’une certaine lassitude, legouvernement a ralenti le rythme desréformes institutionnelles et despolitiques publiques. S’il veut aiderl’économie à réaliser son potentiel decroissance, à mieux résister aux

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contraintes nationales etmondiales et à réduire plusrapidement la pauvreté, legouvernement philippin doitpoursuivre et approfondir sonprogramme de réformes. Tout enlibéralisant davantage

l’économie, ce en quoi il sedistinguerait de bien de ses voisins, lepays doit appliquer non seulement lesleçons du miracle est-asiatique, maisaussi celles de la crise qui vient defrapper la région. Il faut relever lesniveaux d’investissement et les financeravec des capitaux moins instables. Ilfaut cibler directement la pauvreté etpas seulement compter sur lesretombées d’une croissance généraleaccélérée. La capacité de mise enoeuvre doit être améliorée. Les défisque doit relever le pays sont aunombre de cinq. Il lui faut: i) renforcerla gestion économique; ii) promouvoirle secteur privé et développer lesinfrastructures; iii) accélérer ledéveloppement rural et s’attaquerénergiquement à la pauvreté;iv) repenser la valorisation desressources humaines; et v) mobiliser lespartenariats.

La stratégie d’assistance de laBanque devrait avant tout viser à aiderle gouvernement philippin à poursuivrece programme à moyen terme. L’aided’urgence fournie par la Banque pourrépondre aux besoins immédiatsdevrait rapidement céder la place à uneassistance destinée à atténuer lescontraintes de liquidités actuelles. Ils’agit d’appuyer la phase finale de laréforme de la surveillance et de laréglementation des banques, y comprisle règlement des faillites. À partir de là,il faudrait en arriver à une nouvelleconvention entre le gouvernementphilippin, les organisations nongouvernementales (ONG), la Banque etles autres bailleurs de fonds pourmobiliser et utiliser plus efficacement


phase of reforms in bankingsupervision and regulation,including failure resolution.Beyond this, a new compact isneeded among the govern-ment, the nongovernmentalorganizations (NGOs), the

Bank, and the rest of the donorcommunity to mobilize and useexternal assistance effectively. Thiswill require avoidance of wastefulcompetition among donors. Thecompact should support a strongmedium-term development pro-gram, backed by long-term sourcesof foreign savings. Such an effort,which could take the form of ajoint Country Assistance Strategy(CAS) with all major donors by1999, could help the Philippinesrace ahead in social and economicprogress.

For its part, the Bank shouldincrease the selectivity of itsnonlending assistance to improvethe depth of its analysis and toincrease participation. Lendingassistance should be well coordi-nated with other donors, and largerin scale to support the unfinishedreform agenda and the additionalinvestment needs through quick-disbursing operations, financialintermediary loans, sector invest-ment loans, guarantees, and newadaptable lending instruments.

rapidez, el Gobierno debe aplicary profundizar su programa dereformas. El país, al mismotiempo que amplía su entornoliberalizado—un aspecto que lodistingue favorablemente de susvecinos—debe tener en cuenta las

experiencias derivadas del milagro deAsia oriental, así como las de lareciente crisis de esa región. Hay queaumentar los niveles de inversión ymantenerlos con fuentes definanciación menos inestables. Lapobreza debe combatirse de formadirecta, más allá de los efectosbeneficiosos que vaya produciendo uncrecimiento acelerado de base amplia.Hay que mejorar la capacidad deaplicación. El desafío para el futuroconsistirá en el logro de cincoobjetivos: i) fortalecer la gestióneconómica; ii) aumentar el desarrollodel sector privado y de lainfraestructura; iii) acelerar eldesarrollo rural y luchar enérgicamentecontra la pobreza; iv) ocuparsenuevamente del desarrollo humano, yv) movilizar las asociaciones.

La característica central de laestrategia de asistencia del Bancodebería ser el apoyo al Gobierno en laaplicación de ese programa demediano plazo. Para aliviar losproblemas de liquidez actuales esnecesario que la actuación del Bancotranscienda con rapidez la esfera de lasnecesidades inmediatas de asistencia deemergencia. Su actuación debe abarcarel apoyo a una fase final de reformasde la supervisión y la reglamentaciónbancarias, incluidas soluciones para loscasos de quiebra. Además, es necesarioun nuevo pacto entre el Gobierno, lasorganizaciones no gubernamentales(ONG), el Banco y el resto de lacomunidad de donantes para movilizary emplear la asistencia exterior de unmodo eficaz. Para ello habrá que evitarla competencia antieconómica entre

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donantes. El pacto debe prestarapoyo a un firme programa dedesarrollo a mediano plazo,respaldado por fuentes de ahorroexterno a largo plazo. Unainiciativa de ese tipo, quizá enforma de estrategia conjunta de

asistencia al país para 1999 en la queparticiparan todos los donantesprincipales, podría contribuir a queFilipinas registrase un rápido progresoeconómico y social.

El Banco, por su parte, debemejorar la selectividad de su asistenciano financiera para aumentar laprofundidad de sus análisis y ampliarla participación. La asistencia crediticiadebe estar bien coordinada con losdemás donantes y alcanzar un mayorvolumen para respaldar el programainacabado de reformas y lasnecesidades adicionales de inversiónmediante operaciones de rápidodesembolso, préstamos aintermediarios financieros, préstamospara inversiones sectoriales, garantías ynuevos instrumentos de créditoadaptables.

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l’assistance extérieure, ce quipermettrait d’éviter le gaspillagecausé par la concurrence entredonateurs. Cette conventiondevrait étayer un solideprogramme de développement àmoyen terme financé par des

apports à long terme d’épargneétrangère. Un tel effort, qui pourraitprendre dès 1999 la forme d’uneStratégie d’assistance au pays (SAP)commune à tous les principauxdonateurs, pourrait contribuer àaccélérer le progrès économique etsocial aux Philippines.

Pour sa part, la Banque devrait semontrer plus sélective dans sesopérations d’aide hors prêt. Ellepourrait ainsi approfondir ses analyseset suivre une approche plusparticipative. Son assistance sousforme de prêts devrait être biencoordonnée avec les autres donateurset mobiliser davantage de ressourcespour financer les réformes restant àmettre en oeuvre et les besoinsd’investissement supplémentaires, quece soit par le biais d’opérations àdécaissement rapide, de prêts auxintermédiaires financiers, de prêtsd’investissements sectoriels, degaranties et de nouveaux instrumentsde prêts évolutifs.

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1

A TumultuousDevelopment Decade

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The Philippines has made solid economic and social progress since 1985—the last year

of the economic recession coinciding with the end of the Marcos era. The succeeding

Aquino and Ramos administrations have been committed to structural reform

intended to trigger rapid, broad-based, sustained economic growth and social development. The

Bank has provided a comprehensive package of intellectual, structural, and sectoral assistance

to support those reforms, and has helped nurture country ownership of the reform program.

The country has shown its ability to deal withdomestic, natural, and external crises. This resilience,commitment to reform, and the strengthened democra-tic institutions give grounds for hope that the Philippineswill accelerate economic and social progress and emergeas a strong economic contender in the region. So far,reforms have yielded substantial results. Key economicand social indicators have improved, including povertyincidence, GNP per capita, GDP growth, life expectancy,and secondary and tertiary school enrollment. However,the government and the Bank must work closelytogether to secure both high, sustained economic growthand rapid poverty alleviation.

The constraints include, most notably, low levels ofnational savings and investment, high import duties,high population growth, a seriously strained infrastruc-ture, an inefficient bureaucracy and judicial system, and

a high incidence of communicable diseases. The poorhave limited access to social services, and the quality ofthose services has declined.

From Crisis to Peaceful RevolutionA legacy of economic dependence on U.S. trade, capital,and aid, coupled with the concentration of wealth, land,and power in a few hundred families undermined thepromise of political independence in 1946. Against abackground of inefficient administration, corruption,and violence, President Marcos declared martial law in1972. He proceeded to repress the political opposition,to centralize further an already overcentralized govern-ment, and to rely heavily on an interventionist publicsector to achieve economic development. Investmentrates of around 30 percent of GNP and savings rates ofabout 27 percent did induce rapid economic growth, but

2

distortions in the incentive framework produced ineffi-ciencies (mainly in highly protected sectors) and slowgrowth in employment. Cronyism and an inward-look-ing development strategy perpetuated high poverty ratesand inequality.

By the early 1980s, the economy, heavily dependenton imports and foreign capital, had ground to a halt.The Marcos administration had pursued some policyadjustments to liberalize trade and the financial sector,

and to improve export and investment incentives. How-ever, the ruling elite’s reluctance to loosen its controlover the economy, political unrest, expansionarydemand policies, a worldwide debt crisis, and the struc-tural inability of the economy to adjust quickly to thesevere external shocks of the post-1979 period (higheroil prices, an international recession, and decliningexport prices) precipitated a dramatic loss of investorconfidence, a foreign debt moratorium, and a severerecession. Amid armed insurgencies, military defections,mounting international pressure, and a people powerrevolution, a fractious anti-Marcos coalition led byCorazon Aquino won the February 1986 elections.

The new democratic regime inherited a divided andtraumatized country in deep economic crisis. Per capitaoutput had fallen to the early 1970s levels. About 32percent of Filipino families subsisted on incomes belowthe poverty line. Foreign debt service was placing aheavy burden on the limited resources the governmentcould muster. The economy remained highly protected,with a strong anti-export bias. Private investment bot-tomed-out during 1985–87 at less than 14 percent ofGDP. A bloated public sector contributed heavily to thefiscal deficit and to external debt. Local governmentshad collapsed in many parts of the country.

A Vigorous BeginningThe Aquino administration immediately launched aseries of macroeconomic and structural reforms underits 1987–89 Economic Recovery Program. This soughtto accelerate growth and alleviate poverty by (i) enhanc-ing economic efficiency, (ii) reducing government inter-vention in productive activities in favor of private sectorparticipation, and (iii) focusing more heavily on anti-poverty and employment-generating efforts, particularlyin rural areas, and accelerating agricultural productionand exports. The program called for reducing specialprivileges, tax exemptions, and subsidies.

In 1986 the government implemented a majorreform to simplify the overall tax structure, reduce itsburden on the poor, and improve collection perfor-mance. In 1988 it introduced a value-added tax to sub-stitute for a series of sales and excise taxes that haddistorted production incentives. The administration alsomoved (although more slowly) to liberalize trade. By theend of the 1980s, it had liberalized copra and coconutoil exports and removed import restrictions on a varietyof products, including wheat, fertilizer, pesticides, tex-tiles, chemicals, and paper products. In 1991 it intro-


3

duced a new tariff code, reducing the dispersion and thenumber of tariff bands and lowering overall protectionin stages, with the aim of bringing the import-weightedtariff rate to 14 percent by 1995. It also removed quan-titative restrictions from all nonagricultural commodi-ties except petroleum and coal products.

At the same time, it began tackling the problems ofthe public enterprise sector—including heavy financiallosses, duplicative functions among state-owned firms,interlocking directorates with conflicts of interest,monopolistic practices, hidden subsidies, and displace-ment of private investment. The government embarkedon the privatization of state-owned banks and 132nonfinancial corporations, while improving the opera-tions of those remaining in the public sector. The priva-tization program proceeded slowly at the outset, mainlybecause of the institutional safeguards on the dispositionof public assets.

The new administration moved quickly to restruc-ture the two main government-owned banks and bringthem under closer supervision. By end-1988, both bankswere showing profits for the first time in several years,and one of these had been partially privatized. The gov-ernment also privatized three other commercial banks.By 1989 the few remaining regulated interest rates hadbecome market-determined.

In agriculture the Aquino administration had elimi-nated or reduced taxes on fertilizer and pesticides, dis-mantled the monopolies in sugar and coconut trading,and initiated subsector institutional reforms by 1988. Italso adopted new initiatives in land reform to acceleratethe transfer of land titles in rice and corn growing areasand to expand the land reform program. In 1990 Con-gress passed legislation to address the mounting power-generation crisis, allowing the testing of modelinnovative build-operate-transfer (BOT) schemes.Meanwhile, the government reconstituted a Departmentof Energy and made progress in depoliticizing energyprice setting. Legislation passed in 1991 liberalized theenvironment for foreign investment.

Facing the Political Consequences of ReformMany of President Aquino’s early policies alienated keyinterest groups and generated strong resistance. Much ofthe administration’s energy was devoted to investigatingthe sources of wealth of the former president and hisassociates, a goal that had some serious negative sideeffects, such as the closure of a 600 MW nuclear plant(a victory of the anti-nuclear lobby) without adequate

provisions for alternative power-generating capacity andthe numerous legal suits that slowed down the privati-zation drive. Other limited resources had to be divertedfor relief operations following a string of natural disas-ters, including typhoons, a powerful 1990 earthquake,and a major 1991 volcanic eruption. The removal ofmany senior and middle-level officials, coupled with amassive reorganization of the bureaucracy and layoffsfollowing the abolishment of some departments andagencies, had reduced implementation capacity. Finally,the administration’s effectiveness was undermined byweaknesses in communicating to the public about—andrallying broad support for—the goals and scope of thereforms and by the lack of an institutional mechanismfor the executive and legislative branches to resolve theirdifferences on policy reforms and spending programs.

Despite these obstacles, by the early 1990s theAquino administration’s reforms had rendered the econ-omy among the most deregulated in the region. By 1992the bias toward capital-intensity in investment incentiveshad been removed: the remaining problems (notably intax collection, privatization, transport, agriculturaltrade, energy and oil, and capital markets) now becamea matter of improving institutions and speeding imple-mentation. In a notable break with the past, the privatebusiness sector and nongovernmental organizations(NGOs) became active in public affairs, and majordecentralization legislation was passed in 1991.

Given these policy changes, the economic recoverywas broadly based, with gross national product (GNP),gross domestic product (GDP), and the principal sectorsgrowing steadily. Through 1989, consumption andinvestment grew strongly and inflation was kept at sin-gle-digit levels. Macroeconomic management in theearly years of the Aquino administration was character-ized by a prudent fiscal stance, conservative monetarygrowth, and responsible actions to reduce external debt.(This was in strong contrast to the option of unilateralselective debt repudiation that had been under discus-sion).1 The country’s achievements were impressive, andthe growth and adjustment performance of the Philip-pines ranked near the top among highly indebted coun-tries. While not as high as in some East Asian countries,growth had been relatively stable compared with that ofArgentina, Brazil, and Mexico—all of which had experi-enced negative growth episodes. The Philippines’ fiscaladjustment had been deeper and more consistent, itsinflation lower and less volatile, and its external debtreduction more rapid.

A T u m u l t u o u s D e v e l o p m e n t D e c a d e

4

Policy Weaknesses and Exogenous ShocksInadequacies in design and slippages in implementationof reforms seriously undermined stabilization in 1990,derailing the program agreed with the IMF and acceler-ating inflation during 1990–91. The agreed macroeco-nomic framework during 1986–89 did not call for a realdevaluation, which could have stimulated export-ori-ented private investment. Nor did it address the worsen-ing financial situation of the central bank, whichcompromised the conduct of monetary and exchangerate policy, making trade reform more difficult. Taxreform did not yield the expected revenue increases: taxadministration remained weak, while the shift to a valueadded tax (VAT, more complex than the sales tax itreplaced) was too hasty and resulted in a revenue loss.Adjustment to higher energy prices was delayed, andgrowing energy subsidies, uncompensated by the low-yielding tax reform, added to the consolidated fiscaldeficit (which increased from 4.2 percent of GDP in 1989to 5.5 percent in 1990) and crowded-out development-oriented public expenditures. Fiscal imbalances and arigid exchange rate policy led to deterioration of the cur-rent account deficit from 3.4 to 6.3 percent of GDP.

Fiscal constraints on spending and institutionalweaknesses retarded public investment—to 5–6 percentof GDP—and Operations and Maintenance (O&M)expenditures in priority social and economic sectorswere scaled back to their real 1982 levels. Infrastructurebottlenecks worsened, particularly in power, transport,and other utilities, further discouraging private invest-ment. A series of exogenous shocks compounded the cri-sis—several attempted coups (including a violent one in1989), terms-of-trade losses, worldwide interest rateincreases (partly a result of the Gulf crisis), major powershortages, an unprecedented succession of typhoons, apowerful earthquake, and a major volcanic eruption.

Under these conditions, the government had nochoice but to accept what many technicians in govern-ment and at the Bank thought was an unduly restrictiveprogram with the IMF, which was concerned about theprobability of renewed slippages in the period leadingup to the mid-1992 elections. Once it recommitted itselfto macroeconomic discipline, however, the governmentsucceeded in stabilizing the economy. It reduced the fis-cal deficit—to 1.7 percent of GDP by 1992—in excess ofprogram targets, although it had to accommodate majorunforeseen expenditures for disaster relief. The externalcurrent account deficit fell from 6.1 percent of GDP in1990 to 1.6 percent by 1992. However, the cost of macro-

economic tightening, political instability, and exogenousshocks was a decline in GDP of 1 percent in 1991, stag-nation in 1992, and a parallel slow-down of exports.

In 1989 President Aquino expressed to Bank staffher wish not to be known merely as the “president whorestored democracy,” but to leave a legacy of substantialimprovements in the quality of life of her people. Thisshe did, despite the persistent efforts of dissidents in themilitary and the political opposition to take advantageof the population’s discomfort with the social costs ofadjustment and stabilization. Compared with 1985,poverty incidence was 4 percent lower in 1991, socialindicators were measurably higher, GDP was 26 percenthigher in 1992, and solid foundations had been laid forhigher achievements in the future.

Consolidation and Revival of the ReformsIn mid-1992 the country’s political landscape was stillfractured. The government was battling insurgent forcesfrom the extreme left and right and from secessionistgroups in Mindanao. Natural calamities, persistentpower outages, recession, and criminality had becomethe most pressing concerns of the electorate. GeneralFidel Ramos, who had been instrumental in the defenseof the Aquino government against military coups, wonthe May 1992 elections by campaigning as a nontradi-tional politician and gathering support among grass-roots organizations.

The tone for the new administration was set by“Philippines 2000,” a long-term vision that saw thePhilippines entering the twenty-first century among theranks of the high-performing, newly industrializingcountries. Economic prosperity, social equity, and polit-ical stability were the goals. Improved quality of life forevery Filipino, enhanced global competitiveness, and amore participatory approach characterized the vision.The new administration recognized the need for a stableand liberalized economic environment, for openness andintegration in the world economy, for private sector ini-tiative in achieving and sustaining high growth rates,and for government innovation to complement, facili-tate, and ensure a level playing field for private sectorinitiatives. The country’s rich human resources were tobe drawn into the development mainstream by employ-ment-generating economic growth, increased invest-ments in human capital, and varied venues forbroad-based participation in planning and executinggovernment programs. Agrarian reform remained partof the agenda. To deal with the short-term dislocations


5

expected to arise from structural adjustment, safety netswere to be put in place for vulnerable groups.

With broad support among the military, little debt tothe traditional elites, and skillful political alliances, Presi-dent Ramos engineered a smooth administrative transi-tion, opened peace initiatives with urban insurgents andMoslem separatists, and embarked on a bold economicreform agenda in strong partnership with key legislativeand civic leaders (some of whom are now presidentialcandidates). The administration acted to dismantle long-entrenched monopolies and cartels, as well as to prosecuteserious tax evaders, bring NGOs and their agendas intothe mainstream, and even oppose the Catholic Church onpopulation policies. Poverty reduction through economicgrowth and social development indeed became the Ramosadministration’s top operational priority.

A Solid Basis for Continuing ReformPresident Ramos succeeded in rallying a popular consen-sus behind his vision and in deepening the reforms. Thegovernment made incremental (but substantial) improve-

ments in the macroeconomic structure of the fiscalaccounts (chiefly through skillful external debt manage-ment, but also through lower subsidies and a higherreliance on indirect revenues). The government com-pleted a Brady-type debt restructuring agreement with itscreditor banks in December 1992. Medium- and long-term commercial bank debt of US$4.5 billion wasrestructured, generating savings of around $1.5 billionand gross interest savings of around $1.8 billion over thefollowing five years. The government continued taxreform (including the expansion of VAT in 1996), raisingtax revenues from 15.3 percent in 1993 to an estimated16.6 percent in 1997. Following a prolonged debate,Congress finally approved a new comprehensive taxreform at end-1997, aimed primarily at rationalizing thetax system, assuring its buoyancy, lowering (still ram-pant) tax evasion, and reducing current tax exemptions.

In the financial sector, by 1993 the administration hadadopted new institutional arrangements to strengthen banksupervision and the regulatory framework, to reduce inter-mediation costs, and to introduce depositor protection. It


6

successfully restructured and recapitalized the centralbank, a major source of quasi-fiscal losses. Its successor isnow a strong independent institution. The administrationalso accelerated and completed the privatization process.Both the Development Bank of the Philippines and theNational Power Corporation are slated for privatizationwithin the next few years. The still outstanding issue ofhow public corporations should be regulated is the subjectof a Bank study under preparation.

The country made further substantial progress intrade liberalization (a highly contentious issue). In 1992the foreign exchange market was fully deregulated forboth current and capital transactions. By 1997 mostquantitative restrictions had been lifted, with the impor-tant exception of rice. The share of regulated importitems to the total number of tariff code lines decreasedfrom 32 percent in 1985 to less than 3 percent in 1996.Domestic marketing and imports of petroleum products


FIGURE 1.1: REWARDING PROGRESS SINCE 1985—THE ECONOMY HAS RECOVERED

50

45

40

35

30

25

20

15

10

0

-5

5

-10

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1996

Average GDPgrowth (annual %)

Average inflation,consumer prices(annual %)

Marcosadministration

Aquino administration

Ramos administration

Year

Percent

1994

Life expectancy

GNPpercapita

Gross secondaryenrollment

Access to safe water

Philippines 1985

Life expectancy

GNPpercapita

Gross secondary enrollment


Philippines 1995

East Asia 1995

Philippines 1995

Income Per Capita Has More Than Doubled Since 1985, Social Indicators Have Improved, And Economic And Social Development Remains Above Regional Average

Positive Growth and Contained Inflation (Although Uneven Performance) Until the Early 1990s

Income per Capita Has More than Doubled Since 1985, Social Indicators Have Improved, and Economic and Social DevelopmentRemain above the Regional Average

Note: The diamonds show four key indicators in the country for 1995 (in gray) compared with either its own 1985 levels or those of itsneighbors for 1995.

Source: 1997 World Development Indicators, World Bank.

7


FIGURE 1.2: SLOW PROGRESS SINCE 1985—NEIGHBORS MADE MORE HEADWAY

1991–95

1991–95

1995

1996

1996

40

35

30

25

20

15

10

5

0

18.2 19.6

Philippines

30.2 30.8

Indonesia

32.335.4

Malaysia

34.8 35.5

Thailand

Gross National Savings (% of GNP)

Philippines Indonesia Malaysia Thailand

12

10

8

6

4

2

0

Real GDP Growth (%)

4.8

2.3

5.6

7.17.8

9.5

6.7

8.78.1

10.4

8.4

7.1

40

35

30

25

20

15

10

5

0Philippines Indonesia Malaysia Thailand

32.4

25.5

32.2

11.4 10.8

1

10

1

37.3

21.2

East Asia

Head Count Index (%)

1986–90

1985–90

1985

20.3

27

31.5 30

National Savings, Although on the Rise, Remain Lowest within ASEAN Region

Economic Growth Performance Was Lowest within ASEAN Region

Poverty Reduction Was Substantial, but Short of East Asia’s Record

Source: World Bank and IMF staff estimates.

8

were fully liberalized in February 1997, but the SupremeCourt struck the oil deregulation law down at end-1997,on the grounds that it did not provide a level playingfield for newcomers. Congress passed a new oil deregu-lation law in February 1998.

With the power emergency successfully ended by1994, the Ramos administration rationalized the BOTschemes by introducing competitive bidding andextended the BOT approach to the roads, water andsanitation sectors, and other infrastructure projects. ThePhilippines’ BOT schemes have pioneered new forms ofprivate sector involvement in infrastructure.

Targeted Poverty AlleviationThe government’s social reform agenda (SRA), launchedin September 1994, coordinates various interventions. Itincludes measures for access to and provision of health,nutrition, education, and shelter services for targetedgroups. Twenty provinces, some with the highest inci-dence of poverty, have been identified under the SRA forspecial focus in poverty alleviation programs.

President Ramos and his key legislative allies deep-ened the reform agenda at a time when the economyenjoyed political stability and there was a worldwidesurge of international capital to emerging markets.Reaping the benefits of stabilization and structuraladjustment, macroeconomic outcomes strengthenedsubstantially until mid-1997. In a much improvedenabling environment for private sector development,the economy has responded with continued povertyreduction (another 3 percent between 1991 and 1995),accelerating growth, low inflation, and a strong cur-rency though mid-1997.

Public sector deficits were rapidly reduced, onceagain beyond the targets agreed with the IMF, in thecontext of the June 1994 three-year Extended FinancingFacility. The national government deficit shifted to a sur-plus in 1994, which was maintained through 1997, inspite of the slow-down in growth caused by the currencycrisis. Displaying similar progress, the consolidated pub-lic sector deficit was kept below 1 percent of GNP. Out-put growth resumed in 1993, boosted by exports andprivate investment, and accelerated in the followingyears, reaching 5.7 percent in 1996. Private investmentrose to above 21 percent of GDP, compared with lessthan 15 percent during 1985–88. Returning flight capi-tal and other foreign exchange inflows nurtured reservelevels to record highs (until mid-1997).

The economic recovery was characterized by a

robust expansion of foreign direct investment, whichalmost tripled between 1991 and 1996 (it increased morethan tenfold between 1986 and 1996), and of exports,which had increased fivefold since 1985 and were stillracing ahead at an annual rate of around 23 percent dur-ing 1997. End-year inflation was reduced to 6.1 percentby 1997 (since the mid-1980s, inflation had not passed11 percent) and domestic and external debts to 58 and48 percent of GNP by 1996 (from their peak of 85 per-cent and 62 percent in 1993), respectively. By 1994 theimprovement in the external accounts was such that thePhilippines did not require further exceptional financingfrom rescheduling of official debt. Total debt service dueas a share of exports was reduced from above 24 percentin 1992 to below 18 percent for the medium-term. In thefirst half of 1997, it stood at 11 percent.

Private perceptions of economic management, insti-tutions, and prospects improved in parallel with the lib-eralization of foreign investment and the trade andcapital accounts, the smooth 1992 political transition,the Ramos government’s strengthening of law and order,and its quick resolution of the inherited power crisisthrough the BOT schemes. The Brady agreement, alongwith macroeconomic stability and rising foreignexchange reserves, improved creditworthiness suffi-ciently to allow the government and some large Filipinocompanies to reenter international capital markets. TheNovember 1993 price of the Philippines’ new moneybonds on the secondary market was 88 cents to the dol-lar, up from 50 cents in 1991, and well above the invest-ment-grade threshold of 70 cents.

With the improvement in policies and institutionsduring the last dozen years, the country has now securedmost of the conditions that have characterized the suc-cessful development path trod by its East Asian neigh-bors—stable but flexible macroeconomic policies,absence of major price distortions, an educated workforce, an export-oriented production structure, moreopenness to foreign investment, limited governmentdirect and indirect involvement in the corporate sector,and a strong banking system. These achievements givemany analysts hope that the Philippines will continue tostrengthen its policy framework and move up the devel-opmental ladder.

Weathering the Storm of the Asian CrisisAlthough the country has made substantial progress infour key dimensions of human development—income,poverty, life expectancy, and educational achievement—


9

over the past dozen years, progress has been slower thanfor other East Asian countries. In economic and socialdevelopment, the Philippines still fares below the normfor the East Asia region. The country has regressed insome dimensions of social development, such as the inci-dence of communicable diseases and access by the poor toeducational services of acceptable quality. It retains rela-tively low national savings (around 18–20 percent ofGNP), low investment (22–24 percent of GNP), higherimport duties (19 percent), higher population growth (2.2percent), inadequate infrastructure, an inefficient bureau-cracy and judicial system, corruption, and insecurity.

A combination of a severe, unexpected externalshock—the loss of investor confidence in the sustain-ability of economic growth, corporate profitability, andthe soundness of the region’s banking system—andunderlying, unaddressed structural weaknesses under-mined the recent trend of accelerating growth, much asother policy weaknesses and exogenous shocks under-mined economic performance during 1990–91.

East Asian economies, and the Philippines amongthem, certainly enjoyed too good a ride in the interna-tional financial markets. Careless investment createdbubbles in the real estate, capital, and foreign exchangemarkets. But in the second quarter of 1997, interna-tional investors awakened to the risks involved, discov-ered structural economic weaknesses, and began revisingtheir investment strategies. Because of two of its weakfundamentals—low and stagnant national savings andan appreciated real exchange rate—the Philippines wasrelying heavily on foreign savings to finance the largeand growing gap between private investment and sav-ings and the smaller (and shrinking) gap in the publicsector. Rising dependence on short-term foreign capitalinflows and loss of competitiveness left the countryexposed to the contagion of the Asian financial crisis.

The foreign exchange exposure of banks and someof their prime borrowers—already a cause of concernfor the regulatory authorities—had grown sharply. Asharp rise in short-term capital flows was partly mis-classified in the balance of payments accounts underworkers’ remittances because of the component chan-neled through (peso conversions of) foreign currencydeposit units. The loss of competitiveness had its rootsin the labor market, which experienced stagnant laborproductivity, and the high level of capital flows, whichput downward pressure on the peso/dollar exchangerate. Monetary policy had to contend with the new con-cern of limiting the market-driven rise of the nominal

exchange rate, while preventing excessive monetaryexpansion. However, the real effective exchange ratecontinued to appreciate through mid-1997 (by 38 per-cent since 1990).

The strengthening of the peso imparted an increasingbias toward higher growth in sectors mainly producingnontradables, such as utilities and construction, holdingback the potential expansion of tradable goods produc-tion, especially in the subsectors most heavily based onunskilled labor, such as textiles. Imports had risen muchfaster than exports and the mounting trade deficit hadreached 13 percent of GNP in 1996. This pattern ofgrowth was both unhealthy and unsustainable.

The Philippines has weathered the storm better thanits neighbors, an achievement of its young economicrecovery and short-lived asset bubble relative to theother Asian countries, its committed government, andlimited moral hazard with respect to private investorsand banks. The banking sector was in a strong position


Arecent study bysenior managersof a Washing-

ton-based think-tankgrouping major interna-tional banks that investin emerging marketsexamined the trends inthe spreads betweenmarket yields on emerg-ing markets securitiesand the yields of U.S.Treasuries (the bench-mark for safety). Itfound that the spreadsaccepted by interna-tional investors up tomid-1997 had narrowedmore than could beexplained by either theperiodic upgrading byrating agencies or theimproved economic fun-

damentals as measuredby standard variablessuch as economicgrowth, inflation, anddebt ratios. Overall,more than half thedecline of spreads wasattributable to risingglobal capital supplyrather than improvedborrowing-country fun-damentals. The implica-tion of their findings,together with currentlevels of the spreads, isthat spreads overshotonce again in the thirdtrimester, but this timeon the way up, at leastfor the two South Asiancountries included in theeconometric sample of20 countries.

BOX 1.1: OVERSHOOTING ON THE WAY UP ANDON THE WAY DOWN

Source: Cline and Barnes, Spreads and Risk in EmergingMarket Lending, IMF, Washington, DC, November 1997.

10


with good asset quality, competent management, and arelatively small exposure to a property sector with lowvacancy rates, the result, over the last decade, of open-ing up the financial sector to increased foreign competi-tion, rationalizing financial institutions, improving theregulatory environment, and the short span and limitedscope of the economic boom.

In early December 1997, and in stark contrast to thedowngrading of ratings for Korea, Indonesia, and Thai-land, Moody once again upgraded the Philippines’ debt.This was an important signal of improved confidence inthe country’s economic fundamentals, and in the ade-quacy of the response by the government to the currencycrisis (and its renewed commitment to macroeconomicdiscipline, openness, and liberalization). But to under-score that the crisis is not over, or perhaps as anotherillustration of two-way overshooting, S&P has justdowngraded the Philippines’ long-term currency ratingfrom stable to negative.

Fiscal balance was achieved for 1997 through aseries of measures to boost tax collections and to limitcurrent and capital expenditures. Both the extent of cur-rency depreciation (about 37 percent in foreign currencyterms) and the correction in the stock market (about 40percent) remain less than in the other countries affectedby the financial storm. No systemic problems haveemerged in the banking and corporate sectors (althoughnonperforming loans rose from 4 percent at end-Sep-tember to 5 percent reported by end-December), but thepeso depreciation, brought about by the negative effecton domestic absorption, caused GDP growth rate for1997 (at around 5.1 percent) to fall short of early pro-jections (approaching 7 percent).

The Prospect AheadDespite the 1997 currency crisis and its ripple effects, thePhilippines’ economy is stronger now than it was a year

ago. To be sure, the currency crisis is likely to cause atemporary slowdown in economic growth, with somepain for highly leveraged enterprises (and their workers)highly dependent on domestic demand. It is also possiblethat a few (likely small) financial institutions with weakloan portfolios and large short-term exposures in foreigncurrency will face bankruptcy or consolidation. The fall-out on the real economy, however, is likely to be con-tained. Unhedged exposure to foreign liabilities by thecorporate and banking sectors, accompanied by the sus-pected imprudent lending, was built up from only 1994to early 1997 and, thus, did not rise to crippling levels.The government has repeatedly scaled back its growthprojections for the current year to around 1.0–1.5 per-cent (as of September 1998) because of the continuingturmoil in global financial markets, the deepening Japan-ese recession, and an El Niño drought that has severelyaffected agricultural output. Nonetheless, the latest pro-jection remains well above the short-term growthprospects of neighboring countries.

Over the medium term, growth is expected to benefitfrom the country’s improved competitive position derivedfrom depreciation of the real exchange rate. The tradablesectors will receive a boost. The export orientation offuture investment will be reinforced. Paradoxically, thebursting of the bubble in the asset markets and the realexchange depreciation provides an opportunity to putlong-term growth on a more sustainable policy footing.The authorities have received a strong reminder of theneed to strengthen the financial sector, address the criticalneed to boost national savings, and correct the perversetax and reserve incentives that favor dollar intermedia-tion by banks through foreign currency deposits. If, asexpected, the authorities will act on these signals, specu-lative capital flows will be discouraged in favor of longer-term portfolio and direct investments, and the bankingsector will emerge strengthened and wiser.

11

Assistance Strategy:Satisfactory, but Unevenand Below Potential

22

Despite exogenous shocks, the Bank’s assistance strategy over the past dozen years has

been relevant and efficacious, although uneven and below potential. Throughout the

period, the Bank’s goals, concerns, and views were largely in tune with those of gov-

ernment and mainstream academia. The Bank reassessed its strategy regularly to optimize its

response to the fast-changing political and economic environment, and often undertook retro-

spective self-evaluation. Economic recovery was the focus of Bank assistance in the late 1980s.

In the 1990s, however, poverty alleviation became thecentral part of the country assistance strategy, in linewith the evolution of Bankwide priorities. The Bank hasproved flexible enough to work effectively under some-times trying political circumstances. Bank projects per-formed well. The current portfolio is at par with that ofthe East Asia and Pacific (EAP) Region.

Bank support for government policy reform helpedusher in fundamental changes following the economicand political crisis of the mid-1980s. Untenable financialimbalances have been rectified, the country’s externalcreditworthiness has been restored, growth has acceler-ated, and poverty has been reduced. The incentiveframework has been strengthened, and the private sectorhas increasingly become the engine for export-ledgrowth. Fundamentals in the banking sector haveimproved—the state has curtailed its direct involvement

in the sector, and the supervisory institutions have beenstrengthened. The institutional environment and publicexpenditure management have benefited from Bank-supported ESW, aid coordination, and lending opera-tions. By nurturing broad public and institutionalsupport for and ownership of the reforms, Bank assis-tance helped solidify their gains and strengthen their sus-tainability. However, Bank assistance has only a mixedrecord in social sector and infrastructure developmentbecause of institutional and policy constraints.

In the three years up to end-1997, with surging pri-vate capital inflows and a more confident national eco-nomic stewardship, the Bank’s leverage and importanceto the Philippines’ economic development has decreased.The pace of policy reforms has become increasingly dic-tated by internal political factors. The Bank has becomemore open with civil society in sharing information and

12

with its partners. In parallel, the Bank’s policy dialoguehas become more focused and its ESW and lending pro-grams have become more responsive and selective.

Lower lending commitments and disbursements,and the winding-down of adjustment lending, however,represent a missed opportunity in the shape of an unfin-ished reform agenda, low national savings, and inade-quate public investment. Both the government and theBank should search for avenues to enhance the scale, rel-evance, and impact of Bank operations.

From Economic Recovery to Poverty Alleviation In 1986 the primary objective of Bank assistance was tosupport economic recovery. This entailed improvingpublic resource management to maintain macreconomicdiscipline and renewing private sector confidence. A sec-ondary objective was to improve the monitoring effortsand institutional framework for addressing poverty, par-ticularly in rural areas. The Bank’s objectives in socialdevelopment were to strengthen the government’s polit-ical and resource commitments to population programs,and to strengthen the institutional capacity of relevantagencies in the field.

As economic recovery and structural adjustmentunfolded in the 1990s, Bank strategy became more bal-anced. The Bank lifted its sights to long-term growthissues such as capital market development and naturalresource management. Reflecting the renewed internalprominence of its poverty alleviation mission, the strat-egy in 1990 called for a two-pronged approach—areform program that would sustain economic growth,particularly with private sector initiatives, and a broad-based effort to support poverty alleviation. To supporteconomic growth, the Bank was to provide technicaladvice and lending support to reinforce IMF efforts inmacroeconomic management, especially in publicinvestment monitoring and structural change. It soughtto improve the enabling environment for the private sec-tor with similar instruments through advice on—andlending for—reforms in the incentive framework for for-eign investment, the regulatory framework for privatesector activity, export development and diversification,ongoing deregulation (especially in transport and indus-try), basic infrastructure investment, and ongoing finan-cial sector reform (particularly to develop the market forlong-term finance).

In pursuit of poverty alleviation, Bank assistancesought to target three main elements—rural develop-ment (particularly infrastructure and credit facilities),

family planning to reduce the high level of populationgrowth, and human resource development. The Bankrecommended that increased expenditures be directed toprimary education, vocational training, urban health,nutrition, and urban infrastructure, and that the effi-ciency of public and private expenditures be enhancedby rationalizing and reorienting sectoral policies.

Away from the Stop-Go SyndromeIn 1993, with signs of an economic recovery under way,the Bank recognized that the country had the opportu-nity to break out of its stop-go growth cycles, andshifted its focus from stabilization and structural reformissues to consolidating gains, attracting private invest-ment, and addressing emerging supply constraints ininfrastructure. It called for a corresponding shift fromadjustment lending to project lending, given the highlevels of foreign exchange reserves and the availability ofmarket solutions to its balance of payments problems.New lending was to focus on infrastructure, such aspower, roads, water supply, and sanitation; on familyplanning and urban health; and on quality schoolingand training. In 1994, under the Private Sector Infra-structure Initiative, the Bank began to address questions(including legal, regulatory, promotional, competitive,risk-unbundling, and mitigation issues) emerging fromincreasing private sector participation in infrastructure.

In 1995 and 1996, the Bank reaffirmed these samebroad objectives, although its concerns about macroeco-nomic management shifted, appropriately, to issues ofcontingent liability management in the budget, deepeningdomestic capital markets, improving resiliency to poten-tially volatile private capital flows, and generally foster-ing an environment conducive to rising domestic savings.The Bank also intended to provide support for the gov-ernment’s social reform agenda (SRA), launched in Sep-tember 1994 to provide health, nutrition, education, andshelter to targeted groups. The Bank recognized thatgrowth needed to be supplemented with effectively tar-geted poverty alleviation measures. The shares of publicinvestment in health, education, and agriculture wereexpected to increase sharply through 1998. With theincreasing responsibilities assumed by local governments,the Bank came to pay closer attention to devolution anddecentralization issues and agreed to assist in designingand implementing pilot programs of poverty alleviationin the selected priority provinces.

Over time, the Bank’s attention touched virtuallyevery area critical to long-term growth, including civil


13

service reform (a subject of the 1995 Public ExpenditureReview), housing finance, and social security reforms(beginning in 1996). With a substantially deregulatedlabor market, the only area of critical institutional weak-ness not on the Bank’s radar screen during the past tenyears seems to have been reform of the judicial system.

Nurturing the Reforms for Public Sector Management and Private Sector Development

A Comprehensive and Effective PackageThe last quick-disbursing, policy-based Bank project,the Economic Integration Loan (EIL) in 1992–95,brought to an end an extended cycle of Bank support forstructural adjustment in the Philippines. Since March1987, the government has borrowed $1.2 billion to fundfive major operations with complementary objectives.

These provided an appropriate continuum of lendingsupport for the policy reform process that began underPresident Marcos and deepened under PresidentsAquino and Ramos. The Bank also supported structuralreforms with a large body of ESW and covenant workunder other investment projects.

Bank assistance covered all critical areas in publicsector management, trade and capital account liberal-ization, internal competition, private sector participa-tion in infrastructure, and financial sector strengthening.The EIL extended and deepened the sequence of eco-nomic reforms, as in the process of tariff reform andimport liberalization that had been included in earlierBank operations—Structural Adjustment Loans I and II,the Agriculture Sector/Inputs Loan, and the EconomicRecovery Loan (ERL, which also supported a major taxreform). Similarly, while the government’s financial

A s s i s t a n c e S t r a t e g y : S a t i s f a c t o r y , b u t U n e v e n a n d B e l o w P o t e n t i a l

The Foreign Invest-ment AdvisoryService (FIAS), a

joint agency of the Inter-national Finance Corpo-ration (IFC) and theWorld Bank, has beenactive in the Philippinesfor almost ten years, com-pleting a range of projectsrelating to both the policyenvironment and promo-tion strategies. In 1988 itprepared a study of howpolicy and institutionalchange could stimulateinvestment in agribusi-ness. FIAS also helped thecentral bank to review itsdebt-to-equity swap pro-gram in 1989. The mostrecent projects completedwere advice on the formu-lation of a NationalInvestment Promotion

Plan (FY96) and assis-tance with refining theregulations for BOT pro-jects (FY97). CurrentlyFIAS is preparing toundertake a review (cofi-nanced by AusAID) of theimpediments to foreigndirect investment (FDI) inMindanao. The projectwill also examine theexisting capacity of theprovincial governments tocarry out effective invest-ment promotion activities.

Multilateral Invest-ment Guarantee Agency(MIGA) staff have visitedthe country regularly,about once a year. In spiteof these promotionalactivities, there has beenlow demand for MIGA’sservices from the Philip-pines. Only two contracts

of guarantees in thePhilippines for a maxi-mum outstanding liabilityof US$60 million in thebanking and power sec-tors (Internationale Ned-erlanden Bank, N.V., andMagma Netherlands,B.V.) have been issued.MIGA has over 20 pre-liminary applications out-standing for guarantee inthe oil and gas, mining,and power sectors, total-ing US$1.8 billion in pro-posed investment. TheRegion has not requestedany substantial inputfrom MIGA in pastCountry AssistanceStrategies (CASs), eco-nomic work, or policydialogue. The reasons forthe low demand forMIGA services from

prospective investors in the Philippines areunclear, but perceivedpolitical risk, economicinstability, and the avail-ability of cheaper cover-age elsewhere could beexplanatory factors.MIGA’s outstanding lia-bilities are far from pastor current per-countrycoverage ceilings. How-ever, this is not out of linewith other countries,being about 25 percentand 80 percent of MIGA’sexposure to Pakistan($160 million) andIndonesia ($76 million),respectively. The recentcurrency crisis may wellbring more applicationsto MIGA from all overthe East Asia region,including the Philippines.

BOX 2.1: EXPERIENCES OF FIAS AND MIGA

Source: FIAS and MIGA.

14

institutions were restructured under the ERL, financialrestructuring of the central bank was supported by con-ditionality added to the second tranche of the FinancialSector Adjustment Loan (FSAL, 1989–92), and concur-rently by the EIL.

The Reform of Government Corporations Loan(RGCL, 1988–92) supported the government privatizationprogram, focusing on the critical institutional arrange-ments necessary for the sale or divestiture of government-owned corporations and the adoption of a framework

for improving the functioning of corporations that wouldremain in the public sector. Conditionality in this areawas extended further by the EIL. The Debt ManagementLoan (DML, 1990–92) supported a first-phase debt anddebt-service reduction agreement with commercial banks(the first such operation supported by the Bank). The sec-ond and final stage of the commercial bank debt reductionprogram, completed in December 1992, was considered akey part of the EIL. This project was important inreestablishing international confidence in the Philippines.


The IFC has beenactive in thePhilippines for

three and a half decades,and its operations haveinevitably reflected thechanging business environ-ment. It has supported thedevelopment of the finan-cial sector; facilitated andencouraged the entry ofother investors, especiallyin private infrastructure;and demonstrated, throughthe success of projects inwhich it has made invest-ments, profitable newbusiness opportunities for project sponsors. Since 1963 the IFC hasapproved US$1.84 billionin financing, includingUS$1.0 billion for its ownaccount, for 79 invest-ments in the Philippineswith a total project cost of US$8.4 billion. TheIFC’s current committedand disbursed portfoliocontains 20 projects withIFC financing of US$266million.

In the 1970s, becauseof easier access to foreigncurrency credits forPhilippine businesses, andlater because of theincreasing role of govern-ment, the IFC’s operationswent through a change inemphasis from financingthe expansions of largeestablished companies,such as the dominant tele-phone and electricity util-ity, to investing inmedium-size enterprisessuch as mining, chemicals,and agribusiness. To facil-itate investments in theregion, the IFC estab-lished the regional officefor East Asia and thePacific, one of the firstfield offices in Manila, in1977. In the early 1980sthe adverse economic situ-ation seriously affectedmany firms. During thisperiod, projects were heldback, and the IFC tried toreach out to companieswith smaller and moreimmediate financing

needs. The IFC helped tofinance All Asia Capital,which has since becomethe second-largest non-bank finance company inthe Philippines.

In the second half ofthe decade, a set of newpolicies provided animproved environment fordevelopment of the pri-vate sector, which was,however, still constrainedby lack of access to for-eign capital. The IFC pro-vided funding to severalagribusinesses, to manu-facturing projects, and totwo major hotel projects.It resumed lending to thetelephone utility and tothe reprivatized Meralco,again to fund their foreign-currency-denomi-nated capital expendi-tures. To help small andmedium enterprises, IFCmade an equity invest-ment in a venture capitalfund, provided a creditline to All Asia Capital,and separately made

equity investments in fourmedium-size companiesunder this program. Thegrowing electricity crisisraised new challenges.The turning point camewith the introduction ofBOT contracts for theconstruction of newpower plants. The IFCmade the pioneeringinvestment in HopewellEnergy (Phil.) for thecountry’s first indepen-dent private power pro-ject. IFC financialparticipation providedsponsors and other in-stitutions with therequired comfort to makesignificant long-termcommitments.

With improved politi-cal stability and a morefavorable macroeconomicenvironment after 1992,the economy moved to afaster growth track. TheIFC provided funding foradditional power pro-jects—in all, helping tofinance over 2,200 MW

BOX 2.2: IFC’S ROLES AND STRATEGIES FOR PRIVATE SECTOR DEVELOPMENT

Source: IFC.

15

Against heavy odds, the Aquino administrationmade substantial progress in structural adjustment. Itsefforts were supported by four major Bank loans—theERL ($300 million), the RGCL ($200 million), the DML($200 million), and the FSAL ($300 million). Theseloans yielded mixed and gradual results. Their true valuewas in getting the structural reform ball rolling, whichyielded substantial results once political and fiscal sta-bility became increasingly secure after 1991–92.

After the Philippines returned to macroeconomic

discipline in 1991, the Bank continued its support withtranche releases from the three ongoing adjustmentoperations (FSAL, RGCL, and DML). A new opera-tion—the EIL ($200 million)—sought to complete theoriginal reform agenda by assuring sustained improve-ments in macroeconomic management and the environ-ment for private investment. Its specific objectives wereto strengthen the finances of the central bank, set appro-priate energy pricing policies, continue to deepen tradeliberalization, promote liberalization in the transport


of additional capacity inthe Philippines. Theseearly projects helped thecountry address the prob-lem of power shortages,and had an importantdemonstration effect andprovided a model for fur-ther investments in powerand other infrastructureprojects, using the BOTand related contractualarrangements. The IFCalso provided funding forthe expansion of cementand oil refining capacities,needed for the growingeconomy. In addition, IFCinvested in several venturecapital funds to help smalland medium enterprises(SMEs) in the construc-tion materials and infra-structure sectors andprovided start-up capitalfor companies in emerg-ing fields such as semicon-ductors and computersoftware.

For about three yearsuntil the regional currencycrisis in mid-1997, the

increased confidence ofinvestors in the Philip-pines, as well as the liber-alization of the financialsector, made it easier forestablished companies togain access to funds onboth domestic and inter-national markets. Thisreduced the need for IFCfunding for establishedcompanies, and its invest-ments declined signifi-cantly in FY95 and FY96.The IFC refocused itsstrategy to emphasizeregional development,SMEs, complex infra-structure projects requir-ing longer-term funding,and privatization services.In FY97, the IFC investedin a newly licensed tele-phone company, a ship-ping line, and a greenfieldpetrochemical project andarranged a long-termcredit line aimed at infra-structure projects for alocal bank. The IFC alsoprovided advisory servicesfor the successful privati-

zation of MetropolitanWaterworks and SewerageSystem (MWSS), Asia’slargest water sector priva-tization, which hasalready delivered privatesector efficiencies in theform of significantlylower prices. Over thenext few years, water sup-ply will be upgraded andextended to cover 3.5 mil-lion previously unservedresidents of MetroManila. The estimatedUS$7 billion cost of theseimprovements will nowbe funded by privateinvestors.

Following the cur-rency crisis, the IFC plansto focus even more on thefinancial sector. It is look-ing for ways to supportfurther deepening andstrengthening of thefinancial sector by help-ing to establish a newcredit-rating agency andthrough investments inleasing, housing finance,factoring, and the mutual

fund industry. Given therecent increase in interestrates and the decline inequity markets, the IFC isalso working with estab-lished companies to helpthem increase access anddiversify their sources oflong-term funds. The IFCis looking to help financehealth care and educationin the Philippines, usingits recent experience inother countries in theregion. In addition, it hasinitiated and helped inarranging funds for stud-ies on microcredit andSMEs, along with sectorstudies on tourism andfisheries, focused on theless-developed southernislands. These and otherstudies by FIAS will helpthe overall developmentof the private sector andfurther help IFC to for-mulate its own strategyfor how best to supportthe private sector anddevelopment in thePhilippines.

16

sector, open the economy to foreign investment, com-plete the government’s’ privatization program, and lib-eralize the foreign currency market.

The EIL was highly successful. The loan achieved orexceeded all its immediate targets and its broader devel-opment goals. The government restructured the centralbank and brought the Oil Price Stabilization Fund intosurplus, correcting a key source of the persistent fiscaldeficit in previous years. It made impressive gains in lib-eralizing the foreign exchange regime. It recognized thehitherto informal liberalized entry and fare-setting prac-tices in the transport sector. New legislation openedmost sectors to foreign ownership, increasing foreigninvestment considerably. The government reduced thedebt of commercial banks and its debt services (helpingexternal creditworthiness), privatized more than 100government corporations, reduced import tariffs, elimi-nated most quantitative restrictions (with the naggingexception of agricultural products), and promoted amore competitive environment. Notwithstanding delaysin the privatization and energy-pricing initiatives andfinal compromises about agricultural quantitativerestrictions, the Bank has supported substantial eco-nomic strengthening and has helped the government toestablish a track record of sound macroeconomic man-agement since 1992.

The Bank and OED Warned about MacroeconomicWeaknessesUp until the end of 1996, international investors hadrushed to shower the Southeast Asian economies withhuge and mounting capital flows; they then rushed out,pulling along domestic investors. But the IMF, the Bank,and OED did not neglect to alert the authorities to therisks imposed by the country’s weaknesses in the face ofthis volatile investment environment. They issuedrepeated warnings, beginning in 1994—including one bythe Bank’s Regional vice-president in 1995—about thelow level of domestic savings, the appreciating realexchange rate and rising trade deficit, and the mountingexposure to short-term capital inflows.

The June 1995 OED audit of the Debt ManagementLoan had warned that encouraging large short-termcapital inflows was not a good objective. Evidence wasalready visible that the increased capital inflows of the1990s had brought about some complacency about seri-ous macroeconomic problems. In the 1994 CountryEconomic Memorandum, the Bank analyzed the prob-lems of low investment and savings levels, and of inter-

national competitiveness (including factors broughtabout by the appreciating real exchange rate). The 1996Financial Sector Assessment mission highlighted therisks to the financial sector, including those from risingexposure to real estate, the stock market, and foreignexchange. The government heeded only some of theserecommendations, postponing action on others untilafter “exiting” from the IMF program. All this waspartly a matter of complacency and partly a matter of“reform fatigue” among politicians.

All concerned knew that excessive capital inflowscan become destabilizing, and the Philippines had directexperience of that as a consequence of the Mexican crisisin the first half of the 1990s. Here too, the governmentonly partially heeded the full lessons from the crisis—pre-sented to the government by the Bank in a June 1995informal policy note. The Bank had indeed warned thata sudden shift in investor sentiment could quickly drainthe Philippines’ $6–7 billion reserves and cautioned thatearly market signals should be monitored closely.

The Bank did recommend that tight fiscal and finan-cial management be maintained; that foreign exchangereserves not be squandered to resist a market-drivenexchange rate adjustment, except for intervention tosmooth excessive day-to-day volatility; that the govern-ment not experiment by issuing debt linked to ordenominated in foreign currency (which it did, with var-ious bond issues that established a benchmark and facil-itated private sector access to the international capitalmarkets; see Statistical Annex Table 5.1); and that thegovernment consider a temporary capital inflow tax thatwould penalize short-term flows (as in Brazil) to avoidthe risk of overdependence on private short-term capitalin financing the current account (no action was taken todiscourage short-term capital inflows); that the authori-ties monitor, supervise, and keep under control theforeign exchange exposure of the government, govern-ment-owned and controlled corporations (GOCCs), andfinancial institutions; and that government undertakemore aggressive intervention to buy foreign exchange toavoid upward pressure on the peso not justified by eco-nomic fundamentals, balanced by a tighter fiscal policyto preserve monetary targets and to affect the currentaccount directly (instead, the real exchange rate wasallowed to appreciate by 17 percent between 1994 andJuly 1997).

However, all analysts within and outside the Bankwere caught by surprise in mid-1997 by the extent of thecrisis of confidence that led to the rapid depreciation of


17

the peso. Indeed, the strong yet short-lived macroeco-nomic expansion of the mid-1990s, the rapid progresstoward a more market-oriented economy, the goodexport performance, and the large net capital inflowslong dampened fears that the (recognized) macroeco-nomic weaknesses posed a serious risk to growth andcurrency stability in the short run.

Sectoral Assistance: An Uneven PerformanceStrengthening the Financial Sector. At the end of 1986,the Philippines had 29 commercial banks. Four wereforeign-owned, one was government-owned, and theremainder were generally small and family-controlledindigenous banks with high operational costs. As of Sep-tember 1997, there were 52 commercial banks—all but3 privately owned, and 17 under foreign ownership. Of

these, 5 are engaged in derivative trading, and 17 mayalso invest in and underwrite equities. Three specializedgovernment financial institutions remain, the Develop-ment Bank of the Philippines, the Land Bank, AlAmanah Bank, in addition to the National HousingMortgage Finance Corporation.

The growth and shift in configuration of the bank-ing sector shows the effectiveness of government policyreform in opening up the sector, and of the Bank’s pack-age of assistance, designed to build on the significantderegulation implemented during the 1980s. The Bankprovided its support with an appropriate mix of policy-based sectoral adjustment and investment operations,well-grounded in prior ESW. Most of this was under-taken with the endorsement of the government, and theBank endeavored to ensure, especially in the 1990s, that


The Asian Devel-opment Bank(ADB) approved

a US$8 million loan formicrocredit in 1988. Thiswas the first microcreditprogram aimed at provid-ing credit to cottage enter-prises in rural areas. Theloan was disbursedthrough the Departmentof Trade and Industry’snetwork of NGOs: 312NGOs participated in dis-bursing loans to 21,000sub-borrowers, who gen-erated 46,000 jobs ataround US$200 each. Theloan was disbursed 15months in advance, and itwas rated as successful.

According to theADB, the program,despite its lack of empha-sis on group lending as

used by the GrameenBank, “has enjoyed anastonishing 86 percentrepayment rate, which,when late payment iscounted, soars to 99 per-cent.” One-quarter of theprogram’s independententrepreneurs—most ofthem under the povertyline—have graduated tobecome bankable SMEs.The ADB is not only usingcredit to reduce poverty,but it is also helping “tobuild a middle class soimportant to Asia’s grow-ing economies.” A secondloan for US$31 millionhas already been dis-bursed, and, as of 1996,the NGO II loan hadgenerated 190,000 jobsamong 100,000microenterprises.

In contrast, theWorld Bank approved aUS$15 million loan formicrolending in 1989.The project closed oneyear ahead of time in1993, and 90 percent ofthe loan was canceled.The loan was retailed bycommercial banksthrough the DevelopmentBank of the Philippines.The project aimed at sub-stituting collateralthrough mutual guaranteeassociations that groupedpotential borrowers andprovided guarantees forloans made to their mem-bers. Individual contribu-tions of US$400 to theassociation made mem-bers eligible for a loan ofup to US$3,600.

However, neither the

commercial banks nor the individual borrowerswere much interested inthe new associations.Commercial banks didnot consider the associa-tions attractive clients.Only 39 associationswere established, and thenumber of members perassociation had to bereduced from 60 to 40 tomake smaller associationseligible for the loan. The1996 OED audit of theproject found that “themain lesson of the projectis that an untestedapproach for lending tomicroenterprises shouldnot be adopted on anational scale withoutfirst trying a pilot opera-tion . . . to test the feasi-bility of the scheme.”

BOX 2.3: MICROCREDIT LESSONS BY THE ASIAN DEVELOPMENT BANK

Source: Asian Business (December 1996) and OED Précis No. 135 (January 1997).

18

all major stakeholders retained ownership of ESW-basedreform. One notable exception—an example of thesometimes testing relationship between the Bank and thegovernment—was the 1996 Financial Sector Assessmentstudy. Despite a solid review of urgent financial issuesand concrete, relevant policy recommendations, Bankstaff undertook the assessment over the objections ofboth the central bank’s governor and the Bank residentrepresentative about its timing and modalities. This dis-agreement led to a distancing of the Bank from activeinvolvement in banking sector reform.

Nevertheless, the overall effect of the Bank’s assis-tance to the financial sector has been highly satisfactory.Domestic financial markets have become considerablystronger, deeper, and more deregulated since the wrench-ing crisis of the mid-1980s. The ratio of broad money(inclusive of foreign currency deposits) to GNP has sincemore than doubled, while loan portfolios have remained

relatively healthy. Reforms supported by the FSALenabled the strengthened central bank and the Philip-pines’ financial system to cope effectively with the after-shocks of the Mexican crisis in 1994 and 1995 and withthe recent and more severe Asian crisis. In retrospect, theFSAL may be considered one of the most successful ofthe Bank’s financial sector operations. With the Bank,the government deserves considerable credit for itsstrong commitment, decisive action, and exemplaryleadership.

But financial deepening and strengthening in thePhilippines still has some way to go. Its broad money-to-GNP ratio of 52 percent in 1996 is still low in compar-ison with Malaysia (at 95 percent) and Thailand (at 81percent). And the sector still suffers from weaknesses inthe regulatory and supervisory regime—the absence ofrisk-weighted capital adequacy and of prudential regu-lations, and a lag in supervisors’ technical ability to


19

assess with rigor the recently introduced, complex finan-cial derivatives. The banking secrecy laws, personal lia-bility of supervisory officials, and cumbersomelegal/judicial procedures constrain enforcement.

Modest Assistance to SMEs. Between 1976 and1992, the Bank provided US$180 million to financeSMEs through four consecutive lines of credit. The ADBcontributed US$100 million to the last line of credit. Allfour lines of credit were retailed as subloans to eligibleSMEs. Over that period, the Bank financed almost2,600 subprojects, which generated around 64,000 jobs.Besides channeling credit to SMEs, the Bank also sup-ported a number of nonlending activities affectingSMEs, directly and indirectly, such as the overall policydialogue with the government, SME-specific economicand sector work, and direct technical assistance toSMEs.

The Bank’s SME strategy had two major objectives.First, the Bank sought to increase the availability oflong-term funds to SMEs directly through the participa-tion of financial institutions. Second, the Bank sought togenerate jobs (especially outside Manila), which wouldultimately reduce poverty. Cumulatively, the SME pro-jects were an effective credit allocation program, butmodest in job-generating capacity. These projectsyielded satisfactory outcome ratings in the increasedavailability of long-term funds (market rates wereobtained) and creation of jobs, but made only a smalldent in the aggregate unemployment picture and inreducing poverty.

Poor Result-Orientation of Social Sector Projects.The Bank’s strategy to alleviate poverty did not translateinto concrete action on the ground in the social sectorsuntil recently. In general, supervision missions havefocused on disbursing funds and obtaining compliancewith specific loan covenants. Until recently, relatively lit-tle attention was devoted to actual accomplishments inthe field. The Bank’s subsector-specific lending hasyielded contrasting results—progress on key indicatorsof social development, but regression in some areas.

Bank Assistance for Health: No Measurable Impact.The recorded improvements in health indicators and the(modest) reduction of the population growth rate to themid-1990s cannot be credited to Bank activities. Sincethe late 1980s, the Bank has stepped-up its direct lendingsupport for priority areas (reproductive health, primarycare, and disease control) and has been the main coordi-nator of donors in the sector. But its lending assistancehas remained modest, mainly because of the govern-

ment’s preference for concessionary donor financing.Only one project has been completed, and it has not yetbeen evaluated. Consequently, it is not possible to assessthe impact of the Bank’s assistance on health indicators.On the positive side, the Bank has pushed successfully forefforts to control malaria and tuberculosis. On the nega-tive side, broad input indicators—such as O&M expen-ditures and public investment in the sector—haveremained minuscule (and inadequate), as in the preceding15 years. With the added leverage of structural adjust-ment lending, the Bank could certainly have done morein health, especially in pushing for a change in resourceallocation and in policies related to hospital utilization.

A 1991 Bank study, New Directions in the Philip-pines Family Planning Program, contributed to the gov-ernment’s substitution of a new “health” rationale forfamily planning in place of the old and ineffective “pop-ulation growth reduction” approach. It also provided anappropriate agenda, focused on reproductive health, forBank lending for family planning. This agenda wasindeed reflected in the Women’s Health and Safety pro-ject (1995), but the government’s advocacy, leadership,and institutions remain too weak for the family planningprogram to have substantial influence against the strongopposition by the Catholic Church.

Bank Assistance in Education: A Mixed Impact.Although the Bank has supported textbook production,in-service teacher training, and the development of sub-ject curricula, overall project performance and institu-tional achievements have been disappointing. Thereallocation and expansion of budgetary expenditures infavor of the education sector has also been unsuccessful.And although enrollment rates have increased, the qual-ity of education and access to services for students frompoor families have not improved.

The Bank’s current emphasis on the quality of ele-mentary education and its accessibility to students frompoor families serves its poverty alleviation objectiveswell. Its secondary emphasis on improving vocationaland technical training to meet the needs of an expandingeconomy appears less justified. Little evidence is avail-able that the Bank has identified the market failures thatwould justify government involvement. The quality ofthese projects at entry is highly unsatisfactory.

The most recent loan, the Third Elementary Edu-cation project, addresses areas of weakness with ahigh-risk, high-reward approach. It seeks to replacethe centralized educational system with a decentral-ized mechanism, involving greater participation by


20

stakeholders, including parents’ associations, localcommunities, and NGOs. It specifically targets poorprovinces and disadvantaged children and is introduc-ing the use of in-service training and grant mecha-nisms to promote school-based improvements inmanagement and innovative approaches to education.The project intends to improve institutional capacityso that the relevant agencies can effectively implementtheir strategy. Coverage is limited to the 20 provincestargeted by the Social Reform Agenda (SRA), plus 6other poor provinces. Supervision ratings indicate thatproject start-up has proceeded well—but caution iswarranted, given the ambition of the effort and sectorexperience.

Adequate Attention to Gender. Improvements ingender equality in public policy have been made duringthe past dozen years. Women’s legal status, althoughalready high by international standards, improved fur-ther. But problems in reproductive health (high total fer-tility, maternal mortality, and morbidity rates) and thelabor market (gender gap in labor force participationrate, wages, and unemployment rate) have persisted.The Bank’s focus on the reproductive health issueappears warranted. Consultation and communicationwith government agencies, women’s NGOs, and donorswith gender-related programs need to be intensified.

Limited Impact for Bank Assistance in Many OtherSectors. Government policy reform, expenditures, andBank support for the basics of the economy—agricul-ture, natural resource management, energy, transport,and water and sanitation—have yielded little in the wayof substantive outcomes. The government and the Bankcan claim success only in two sectors—water and sani-tation and municipal development—but even these arequalified successes. A variety of problems have thwartedmore effective and supportive development throughoutthe core economic sectors—a dearth of institutionalcapacity, project implementation delays, unresolved pol-icy issues, and poorly timed Bank support. The Bankcertainly overestimated the development learning curveof the new Aquino administration. Most developmentprograms in the late 1980s were plagued with budgetaryand procurement problems.

In agriculture, the Bank’s track record of assistance isless than satisfactory.1 In the implementation of its strat-egy, the Bank’s priorities included fostering agriculturalgrowth, but without adequate emphasis for the equitydimensions of such growth, or for land reform or the tar-geting of projects to assure rapid poverty reduction. The

National Irrigation Authority, which the Bank had helpedbuild into one of the most effective irrigation institutionsin the developing countries in the 1970s and early 1980s,had deteriorated by the late 1980s. So far, there has beenno effort to support product diversification strategies,except for some indirect support through the rural creditprojects. The Bank’s reform efforts in the sector, whichhad a good start in the mid-1980s, have failed to preventserious backsliding in trade liberalization.

On the positive side, Bank assistance for irrigationhelped the Philippines achieve self-sufficiency in rice pro-duction. The areas with irrigation systems financedunder the Bank’s programs have the lowest incidence ofrural poverty. In agricultural education and technologytransfer, the Bank helped finance the development of arenowned international center for agricultural education.The Bank also helped capitalize on the green revolution.

Yet growth in the sector remains disappointing.Poverty in rural areas has declined slowly, and less sothan in urban areas. Institutional capacity among sec-toral agencies remains weak at both the national and thelocal government levels. After more than three decadesof lending and policy advice, there is no sign that thesector is on the road to sustained recovery. However, arecent study, Promoting Equitable Rural Growth(1997), outlines a new comprehensive strategy for ruraldevelopment.

In environmental management, the adoption of thePhilippine Strategy for Sustainable Development in1989 has not yet addressed the factors that threatenenvironmental sustainability. The Bank’s pioneeringenvironmental work in the Philippines laid the founda-tions for a program of donor support for environmentalreform, with extensive NGO participation. The CentralVisayas Regional project innovations related to uplandtenure were important catalysts for the adoption of the25-year lease under the Social Forestry Program thatbecame a centerpiece of the Aquino administration’senvironmental policy. The Bank has adequately inte-grated environmental management concerns in its strat-egy and has correctly diagnosed the conditions thatwould allay resource degradation and ease serious envi-ronmental stress. However, it has not moved forcefullybeyond that stage. Its project work is rated as satisfac-tory, because it has pushed the government in the rightenvironmental direction—at least to an abiding aware-ness of its slowly deteriorating environment. But thateffort has taken a long time, and has not yet yielded sub-stantive results.


21

In energy, Bank assistance since 1986 has not beensuccessful, although performance of all but one com-pleted Bank project has been rated as satisfactory. Forthe Energy Sector Loan approved in 1990, however, adraft OED audit is proposing to rate outcome as mar-ginally unsatisfactory, sustainability as uncertain, andinstitutional development impact as modest. The gov-ernment, its own National Power Corporation (NPC),and the Bank all failed to anticipate the disastrous impli-cations for power supplies of the mothballing of thehalf-completed 600 MW nuclear power plant and thelack of planning and alternative investment. Moreover,Bank input into the design and implementation of thegovernment’s BOT initiative, which effectively solvedthe severe power shortages of the early 1990s by 1994,was minimal. At best the Bank was unenthusiastic, atworst it opposed the program out of concern for its highdirect cost. In neither case did the Bank adequatelyappreciate the high cost of inaction.2 The IFC, however,made a pioneering investment in the first arrangement,thus offering its partners the comfort to make long-termcommitments and providing a model for subsequentarrangements (see Box 2.3). Compared with the early1990s, consumers today are undoubtedly better-served,but transmission bottlenecks persist, and the quasi-gov-ernmental distribution sector (which has unacceptablyhigh technical and nontechnical losses) continues to suf-fer from underinvestment.

The Bank’s efforts at restructuring NPC since 1991have not yielded sustained results. The Bank has lentnearly a billion dollars to a noncreditworthy NPC overthe past decade, but NPC’s estimated 1997 internalcash-generation was still negative, in contravention ofloan covenants. The recent peso depreciation, unaccom-panied by adequate tariff adjustments, has furtherincreased NPC’s losses. Because of NPC’s continuingfinancial troubles, several large, recently commissioned,and privately financed power plants will sit idle for longperiods, pending completion of the transmission lines(Bank-financed) by NPC. Other Bank-financed plantsaffected by lack of transmission lines are expected toresume production after March 31.

The Bank has highlighted the right issues in the sec-tor dialogue, particularly those relating to energy pric-ing, power sector restructuring, and oil sectorderegulation. In 1992 the Bank extended a Policy andHuman Resources Development Fund (PHRD) grant fortechnical assistance to support NPC’s preparation forprivatization. This should yield positive results soon

after the May presidential elections, as passage isexpected of the Omnibus Bill, which would allow theprivatization of NPC and would complete the regulatoryframework for private participation, including tariff set-ting. Supervision ratings depicted all five projects in theBank’s active portfolio during 1997 as satisfactory per-formers, but caution is warranted: all were rated unsat-isfactory for quality at entry, and one (the RuralElectrification project) is now suffering from seriousimplementation delays.

In water and sanitation, the Bank has extended 10loans totaling US$540 million since the late 1970s. Con-cluding in the early 1980s that the Local Water UtilitiesAdministration (LWUA) was not a suitable borrower,yet wishing to support the sector and development inprovincial areas, the Bank made loans to the Metropol-itan Waterworks and Sewerage System (MWSS), servingManila, and a nationwide sector loan in 1990 for watersupply and sanitation, relying on three governmentdepartments and local governments as implementingagencies.

The Bank’s completed lending operations for watersupply and sanitation have had mixed results and arerated as only marginally satisfactory. Under the projects,some physical targets were met (for example, distribu-tion extensions), others (service coverage and reductionof unaccounted-for water) were not. Projects wereinvariably completed several years behind schedulebecause of delays in procurement, poorly performingcontractors, and shortages of local funds. Despite signif-icant accomplishments, which kept the Philippinesahead of most other Southeast Asian countries (exceptMalaysia), some 35 percent of the 28 million residents inlarge urban areas do not have piped water, and mosthave no satisfactory way of disposing of waste; the situ-ation in rural areas is worse. But the Bank’s substantialefforts at policy review in the 1990s, its decision to forgosubstantial lending opportunities rather than channelfunds though an unreformed LWUA, and its recentapproach in the sector—bottom-up planning and localgovernment participation—may help improve the port-folio’s performance.

In municipal development, several lending opera-tions in urban infrastructure have adapted to the realityof local governments and have become useful tools indecentralization efforts. Since the mid-1980s, municipaldevelopment loans have become effective mechanisms tofinance local programs and open the doors of credit-worthy local governments to the domestic credit mar-


22

kets through the Municipal Development Fund (a fourthline of credit is in the pipeline).

However, in decentralization policy, analytical workto provide in-depth advice to the country was not com-pleted as planned and achieved only partial results. TheBank started planning an analysis of local governmentfinance in June 1988. But the resulting study, FiscalDecentralization, was released in early 1993, when mostof the key issues had already been settled and parliamenthad already adopted final changes to the local govern-ment code. The government has preferred to tap otherdonors for analytical work in recent years. However, a1996 Bank policy note and two 1994–97 studiesfinanced with IDF grants helped prepare a policy frame-work for financing local investments that has beenadopted by the donor community. We should note thatconsideration of long-standing Bank recommendationsregarding the introduction of equalization criteria in theallocation of national revenues and of incentives forlocal revenue mobilization have been postponed untilafter the coming elections.

In transport, the Bank’s strategy has been ambitiousand has focused on the removal of three constraints—financial, institutional, and policy—with mixed results.The Bank has supported deregulation, private sectorparticipation, institution-building, and higher O&Mexpenditures. Lending operations have focused on thekey road subsector. From 1985 to the present, seventransport projects—including one structural adjustmentoperation with a substantial transport reform compo-nent—were under implementation (five were completedand two are ongoing). The Maritime Improvementproject, which has been under preparation since 1992,was canceled in 1997 because of disagreement with thegovernment on its policy content. Coordination withother donors—in project and sector work—was good.

The deregulation that the Economic IntegrationLoan supported was largely an acceptance and legaliza-tion of existing conditions. And the impressive initialgains made in private involvement in the road and portsubsectors have been rolled back. For instance, privatesector participation in road maintenance increased from10 percent in 1984 to 70 percent in 1994, but was thenforced down to 50 percent through political interfer-ence. The most important objective of Bank assistance,maintenance of the road system, has been underminedby insufficient budgetary allocations (about 0.2–0.3 per-cent of GNP in recent years for the transport and com-munications sectors).

Instruments and Partnership

High-Quality Economic and Sector Work, but with MisstepsThe Bank’s diagnosis of the Philippines’ ills has beencorrect and based on solid economic and sector work(ESW)—at both the macro and the sectoral levels. Thegovernment has valued the Bank’s intellectual contribu-tions, embodied in consistently high-quality reports cov-ering all key areas. Country economic memorandumsand public expenditure reviews, drawing from manyother internal and external studies and policy papers,have contributed to developing the broad reformagenda. Informal policy notes, summarizing the Bank’sviews on specific issues or drawing lessons from theBank’s worldwide experience, have facilitated policydialogue. The donor community has also benefited fromthis work.

But problems with dissemination and timing havelimited ESW effectiveness and impact. Key middle andsenior managers in government, parliamentary commit-tee chairmen, business leaders, former cabinet members,and prominent intellectuals are frequently unaware ofthe content (and sometimes even of the existence) ofnonsensitive Bank reports (for example, the 1994 PublicExpenditure Review, a very expensive report, had only amodest impact on the allocation of expenditures). Insome cases, the country arrived at strategic or legal deci-sions before the Bank was able to complete work on itsreports (as in the case of the Bank’s 1993 Fiscal Decen-tralization Study). Similarly, the 1996 A Strategy to


FIGURE 2.1: COMPARATIVE OED EVALUATIONFINDINGS BY FISCAL YEAR OF APPROVAL (US$ MILLION)

100

80

60

40

20

0

Percent

Satisfactoryoutcome

Likely sustainability Substantialinstitutional development

Philippines

Bankwide

East Asia and Pacific Region

63 6052

41

8581789492

23

Fight Poverty proved poorly timed, given the extensivework already conducted under the umbrella of a presi-dential commission in preparation for a poverty sum-mit.3 The 1996 Financial Sector Assessment failed toaccount adequately for the sensitivities of the authori-ties. The Bank fell short in providing adequate technicaland policy reform analysis in an area critical for thesocial and economic reform agenda—the judicial sys-tem’s institutional weaknesses—and in exploring genderdiscrimination issues in the labor market.

Sound Project Lending PerformanceIn the twelve years from FY86 to FY97, the total annualdirect cost of delivering the Philippines’ country pro-gram (lending and nonlending services) has rangedbetween US$5.5 million and US$7.6 million (in constantFY97 dollars), FY97 being the lowest cost, and FY91the highest. Total costs in staff time have rangedbetween 31 and 34 staffyears. In the same period, theBank approved 49 projects to the Philippines, totalingnearly US$5.7 billion. Of this amount, about 74 percent(US$4.2 billion as of February 1998) has been dis-bursed. About 25 percent of commitments (US$1.4 bil-lion) have gone to adjustment lending, and 75 percent(US$4.2 billion) to investment lending. Adjustment lend-ing was concentrated in the 1987–93 period. It washalted after FY93.

Overall Relevance and Efficacy. Bank assistance hasbeen both relevant and satisfactory at the macro level,and in private sector development (including SME lend-ing), financial sector strengthening, and municipal development, using a variety of instruments—adjustment

loans and policy dialogue, specific investment loans forfinancial intermediaries and local infrastructure, aidcoordination, and technical assistance. The Bank effec-tively deployed the investment resources of the IFC andFIAS. In addition, the Bank and the IMF developed arobust, cooperative relationship.

Relevance and efficacy in other sectors has beenuneven, despite good project-specific outcomes. Infra-structure, the quality of education, and bureaucraticquality have not kept up with the needs of a rapidlyrecovering economy in an integrated global market-place. Bank assistance did not focus on assuring accessby the poor to educational services until recently, andwas limited in health and family planning. In the powersector, it was only partially helpful in coping with thecrisis of 1990–92 and resolving the institutional andfinancial weaknesses of the public generation and trans-mission utility. The performance of the agriculture sec-


FIGURE 2.2: ONGOING PROJECTS: SUPERVISIONRATINGS (AS OF OCTOBER 17, 1998)

100

95

90

85

80

75

Percent

Satisfactorydevelopment

objectives

Satisfactoryimplementation

progress

Philippines

East Asia and Pacific Region

84 8486

898887

Bankwide

A review of thequality at entryof all 33 pro-

jects approved duringFY90–97 shows a majorimprovement over time,which places the Philip-pines’ close to the goalof a 100 percent satis-factory quality at entry.The review was con-ducted independentlyand without the hind-sight benefit of supervi-sion or completionevaluations, followingthe standard criteriaused by the 1996 ECONIII study of projectsBankwide.

A striking finding ofthe review is that all theenergy projects werefound unsatisfactory or

highly unsatisfactory,largely because of theweakness of the imple-menting agencies andthe consequent risks.Many other projectswere too dependent onthe financial and institu-tional support of gov-ernment, withinadequate contingencyplanning or risk analy-sis. Thus, for example,three of the four educa-tion projects werejudged unsatisfactory orhighly unsatisfactory forquality at entry, mainlybecause their successdepended on a high levelof government participa-tion/coordination anddonor cofinancing.

BOX 2.4: IMPROVED QUALITY AT ENTRY OF BANKPROJECTS

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tor and the welfare of the poor remain negativelyaffected by high protective barriers on food products.Bank assistance fell short in supporting the government’sagrarian reform until very recently. Thus, assistance overthe years 1986–97 ranged from relevant and marginallysatisfactory in some sectors (water and sanitation andtransport) to poorly relevant or unsatisfactory in others(health, education, agriculture, and energy).4 These sub-par ratings are attributed to various shortcomings of theinstitutional and policy environment, but also to thetiming, design, or implementation of the Bank’s lendingand nonlending interventions.

Project-Specific Efficacy, Sustainability, and Institu-tional Development. The Bank’s lending has improvedconsiderably compared with its pre-1986 performance; itis now almost at par with EAP regional standards. About92 percent of approved and completed projects (by value)received a satisfactory (or better) outcome rating, which issubstantially higher than performance Bankwide (78 per-cent) and in the South Asia Region (72 percent), and onlyslightly lower than the performance of the EAP region (94percent). The Philippines’ ranking for likely sustainabilityis equally high, at 81 percent; its ratings for the institu-tional development impact of projects were higher (60percent) than the EAP standard (52 percent).

All five adjustment operations approved since FY86have earned satisfactory outcomes and likely sustain-ability ratings (a 100 percent success rate), and four hada substantial institutional development impact (the DebtManagement Program Loan had a negligible institu-tional development (ID) impact because of the nature ofthe operation). For investment projects, the percentagesof satisfactory outcomes, likely sustainability, and sub-stantial institutional development for investment pro-jects have also risen substantially since 1985, to 87percent, 68 percent, and 43 percent respectively. Amongthe completed investment projects approved in the1990s, unsatisfactory outcomes were recorded in energy,education, and microfinance operations.

Recent Project Portfolio. The Philippines had ahealthy project portfolio through 1997. It was (andremains to date) the third-largest in the EAP Region,after China and Indonesia, both in total commitments($2,212 million) and in the number of projects (23). Itsperformance was in line with EAP averages, which werebetter than those of any other region. Among the pro-jects under implementation as of October 1997, 93 per-cent (by value) received a satisfactory rating fordevelopment objectives and 91 percent for implementa-

tion progress. These figures compared well with 93 and90 percent, respectively, for the East Asia and PacificRegion.

More recent portfolio performance indicators (as ofFebruary 2, 1998) indicated a slight weakening of thePhilippines’ relative performance: 16 percent of commit-ments were at risk, compared with 13 percent for theregion and 22 percent Bankwide, according to theBank’s Quality Assurance Group (QAG). Two pro-jects—the Highway Management project and the UrbanHealth and Nutrition project—carried an unsatisfactorysupervision rating for both development objectives andimplementation progress. Two other projects—theManila 2nd Sewerage project and the Rural Electrifica-tion project—were experiencing serious implementationdelays. The most common reasons for poor performancewere project management and procurement problems.Finally, the realism of supervision ratings among taskmanagers had improved greatly, yielding small discon-nect ratios between supervision and completion ratings.5

Efficiency. The overall cost of Bank assistance iswithin comparators’ ranges. Other efficiency indicatorsappear within reasonable bounds. Both the total admin-istrative budget and ESW resources declined appropri-ately, in parallel with the decline in lending commitmentsand the improvements in the country’s economic andsocial performance.

The average cost of an ESW product over the ten-year period FY88–97 has been lower than in the EAPregion, but significantly higher than in most other com-parators except Indonesia. Although the average cost oflending per project is lower than the regional averageand other comparators, the cost grew by 27 percent instaffweeks and 33 percent in direct dollar costs fromFY85 to FY97. A large part of this increase can beattributed to the increase in dropped projects. Thisreflects important shifting government attitudes—firstwelcoming the Bank’s intellectual and planning contri-butions, but then resorting to cheaper sources of financ-ing among the donors. By FY97 the lending portfoliounder supervision had shrunk by 44 percent since FY85(with 50 projects) to 28 active projects. However, thecost of supervision increased, in line with the generaltrend in EAP and the Bank, reflecting the growingimportance attached to portfolio management fromFY94 onward. Projects in the Philippines had only aslightly higher cost of supervision, on average, than didEAP projects overall, but costs were significantly higherthan in Malaysia and Thailand. The highest average cost


25

of lending completion per project was in humanresource development (more than 140 staffweeks), andthe least in multisector lending (around 40 staffweeks).The completion costs in agriculture and public sectormanagement were also among the highest.

Good Aid CoordinationThe Bank has been active in coordinating and buildingconsensus among donors and in the government throughregular dialogues at both formal levels, by chairing Con-sultative Group (CG) meetings, and informal levels, andby arranging Manila-based working group meetings withother donors. The Bank supported the government’sefforts to improve its own capacity and to assume anincreasingly assertive position in aid coordination. Regu-lar policy dialogue and the CG process helped the gov-ernment to address the concerns of donors and toprioritize aid and budgetary allocations. Bank ESW andlending operations helped the government provide thedonor community with clear policy frameworks to buildand coordinate their own strategies. And Bank projectpreparation facilities helped the government preparewell-designed projects, and then tap the cheapest avail-able financing sources. The government has increasinglyassumed responsibility for program-level coordinationand preparation for donor meetings.

The Bank has done a good job in helping to coordi-nate external assistance. It has recently pioneered effortsto add project copreparation activities to its cofinancingarrangements. Cofinancing has been effectively used.The government has been able to obtain additional con-cessional resources that individual donors would havefound difficult to channel through their own projectpipelines. And donors have been able to commit and dis-burse their available aid funds much more quickly, with-out compromising project quality.

The high priority placed on aid coordination by theBank is evident in the high percentage of staffyears andbudget spent on related activities against the total. Bothin cost and time, the Philippines exceeds both the EAPaverage and the Bankwide average by a large degree allthrough this period: this is largely explained by the highfrequency of CG and other donors’ meetings. The Bankhas used these resources well, consolidating its leader-ship in shaping the structural reforms and the publicinvestment program. Overall, the Bank’s emphasis ondonor coordination was highly relevant and effective,because it fostered essential harmony among the majordonors in the policy arena, without which the govern-

ment’s reforms may have been delayed.CG meetings have also provided an open forum for

coordinating policy advice and different donor activitiesin the Philippines, monitoring progress in policy reformsand program/project implementation, providing oppor-tunities and a clear agenda for many informal meetingsaround different topics, creating an opening for the gov-ernment to take more leadership in aid coordination,and providing an opportunity for broader constituenciesto air their views.

The Bank and NGO Partnership: A MaturingRelationshipThe presence of a strong and diverse NGO community,a supportive government, and the knowledge and expe-rience of donor agencies has created a favorable envi-ronment for stakeholder participation. The Bank haseffectively promoted NGO participation at different lev-els of Bank operations, especially since the early 1990s.The increased openness of the Bank, particularly of theresident mission, over the past few years has been wellreceived.

Project work done in the Philippines in the last threeto five years has focused increasingly on ethnic minoritiesamong the poor, and on participatory strategies withactive community involvement. This is reflected in someof the targeting for the social sector projects and in naturalresource management. For example, the Conservation ofPriority Protected Areas Project, which covers a combina-tion of protection of biodiversity, natural resource man-


26

agement, and community-based resource management,involves NGOs directly and focuses on the legalization ofancestral domainal lands of indigenous peoples.

Yet many NGOs remain skeptical about the Bank’sconversion to participation. Some of their skepticism ismerely a practical matter. For instance, although NGOstend to see the Bank’s consulting and procurementrequirements as a sign of mistrust or imposition, this per-ception usually fades as they become more familiar withthe operational environment of the Bank. But some oftheir skepticism stems from their resentment at beingtreated as less than full “partners.” A few NGOs believethat their interest in policy formulation is deliberatelyplayed down by both the government and the Bank infavor of the “contractors” or the consultancy role. Someinterpersonal mistrust is the result of occasional arro-gance by Bank headquarters staff.

The Bank has generally been responsive to the needsof NGOs involved in projects. It has also learned lessonsthat it has integrated effectively into new project designsin irrigation, rural finance, health, and education. But itappears to be more interested in capacity-using thancapacity-building, unlike other donors. The Bank doesnot track the status or number of NGO participants inBank-funded projects after the completion of theirinvolvement. And local representatives of donors work-ing in NGO capacity-building activities have noted thatthe Bank does not risk working with NGOs in the for-mative stage, but takes the less risky route of selectingthose with records of working well with other donors.

Unfulfilled Development Lending PotentialThe Bank was not nimble at the outset of the Aquinoadministration, although it did release the undisbursedportion of its earlier Agriculture Sector/Inputs Loan tojump-start agricultural production. Reflecting thelagged effect of the previous slow-down in commit-ments, loan disbursements in 1986 bottomed-out atUS$168 million and remained below US$300 millionin 1987 and 1988. Bank staff believed that ensuring apositive net flow of resources from the Bank was notjust desirable, but necessary to support continuedgrowth and developing policy dialogue with govern-ment. And although senior management had autho-

rized about US$500 million in annual lending to theAquino administration, in the four-year periodFY86–89, the Bank fell 25 percent short of its lendingplans. Lack of budgetary resources to process an ade-quate pipeline of projects on the part of the Bank wasthe main reason for the shortfall.

Lending commitments increased sharply to almostUS$1,877 billion in FY90–91, as the Bank stepped-upits quick-disbursing balance of payments support andadvanced several operations in the pipeline. These were,however, scaled back again, to between US$430 millionand US$628 million in the next three years (FY92–94).This time, the reason was attributed to poor absorptivecapacity by borrowing agencies, manifested by imple-mentation problems in ongoing projects and delays inthe preparation of new projects. During these years theBank could have shifted back to adjustment lending tonurture policy reform. The policy debates within thecountry during the second half of the 1980s becamemuch more contentious because of the negative resourcetransfer to the donor community. The pace of imple-mentation of reforms might have been faster with morevigorous Bank involvement and less stringency.

Borrowing by the government from the Bank since1994 has been consistently lower than the amounts theBank was willing to make available, and less than whatwas appropriate to support the investment needs of afast-recovering economy. During the most recent three-year period, FY95–97, commitments have averagedUS$252 million a year. A decision in 1993 on the part ofthe government to limit further public borrowing fromabroad (and, in consequence, from the Bank) appears tobe the main reason for these low lending levels. TheBank had obtained Board endorsement for an annuallending program of around US$500 million.

The total net resource flow out of the country andto the Bank was US$2.7 billion during the period1986–97, and was projected (December 1997) atUS$536 million for 1998, and to rise in subsequentyears. Such a large net negative resource flow at thisearly stage of the Philippines’ development raises ques-tions about the wisdom of phasing-out adjustment lend-ing in the mid-1990s, with an agenda of structuralreform still incomplete.6


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Toward a New CountryAssistance Strategy:Moving to a Higher Plane

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Just as the Philippines has emerged stronger from the economic and social disarray that pre-

vailed before 1986, it is likely to surmount the challenge posed by the current regional cri-

sis. The resilience of the country and its people—tested repeatedly by domestic, natural, and

global exigencies—augurs well for deeper and more rapid economic and social advancement in

the wake of the Asian crisis. Its fallout provides an opportunity for policy and institutional

reforms to fuel the economy’s renewed competitiveness. The Philippines has the key factors to

move up the developmental ladder—political stability;broad consensus; government commitment; supportfrom the donor community; an educated, skilled, hard-working, and English-speaking population; and now a12-year record of good economic management. Thesepositive conditions must now be mobilized to help thecountry gather momentum and make the leap needed tojoin the newly industrialized countries.

To help the economy reach its growth potential, for-tify its capacity to withstand domestic and global exi-gencies, and reduce poverty, the Bank should focus itsassistance on helping the government pursue and deepenits unfinished reform agenda. While expanding its liber-alized environment—a valuable distinction from itsneighbors—the country will need to apply the lessons ofthe East Asian miracle, as well as of those painfullydrawn from the most recent East Asian crisis. Investment

levels must be increased and sustained with less volatilesources of financing. The country must shift the compo-sition of foreign savings by tapping external sources oflong-term funds to reduce the economy’s dependence onfuture short-term capital flows. Poverty must be targeteddirectly, through broad-based programs beyond thetrickle-down benefits from accelerated growth. Remain-ing policy and institutional constraints in the social sec-tors, in agriculture, in natural resource management, andin infrastructure must be eased or removed. Implemen-tation capacity must be improved.

A new compact is needed among the government,the NGOs, the Bank, and the donor community tomobilize and use external assistance effectively. It shouldsupport a strong medium-term development program,backed by long-term sources of foreign savings and min-imal competition among donors. Such an effort could

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help the Philippines race ahead in social and economicprogress during the next administration. The Bankshould increase the selectivity of its nonlending assis-tance to improve the depth of its analysis and to increaseparticipation. Lending assistance should be selective, incoordination with other donors, but also greater to sup-port the unfinished reform agenda and the additionalinvestment needs through a diversified set of instru-ments—quick-disbursing operations, financial interme-diary loans, sector investment loans, guarantees, andnew adaptable lending instruments. An expansion ofbudgetary resources allocated to the Philippines will berequired to support such enlarged assistance.

Strengthening Macroeconomic Policy and Public SectorManagementIn the very short term, the Bank should stand ready tooffer, depending on the severity of the capital outflowand on the need for fair burden-sharing, emergencylending assistance to help ease the current liquidityshortage manifested in very high real interest rates. This

could well take the form of an economic recovery loan,conditioned on the country entering a precautionarystand-by arrangement with the IMF, actions alreadytaken, and the government’s commitment to a compre-hensive medium-term reform program. If used toincrease the depleted official reserves, instead of foradditional expenditures, the loan would directly reducegovernment refinancing requirements in the domesticcapital market. This would lower market interest rates,reducing the severity of the economic slowdown for1998. However, the Bank should move quickly beyondsuch emergency assistance to intensify support—begin-ning this year—for the reforms necessary to correct themacroeconomic weaknesses that have constrained highgrowth and left the economy vulnerable to downturns.

In the financial sector, Bank assistance should aim atstrengthening the banking sector and the capital marketso as to increase private sector savings, channel domes-tic and foreign savings more efficiently into investment,and minimize the impacts of future financial crises,domestic or global. A combination of action-oriented


29

technical assistance and adjustment lending would beappropriate. The Bank could extend an adjustment loanwith a technical assistance component to address theweaknesses remaining in the legal, regulatory, andsupervisory regimes and in failure resolution for finan-cial institutions. This loan could also support the cor-rection of the distorted incentives that favor dollar overpeso intermediation by the banking system, as well asother measures to manage future short-term capitalflows. A technical assistance loan for housing financereform, currently under preparation, might beexpanded. Technical assistance by the Bank and IFCadvisory services is also required to draw up an actionplan for deepening the undeveloped bond market andfor pension reform. With the country’s demographicsposing only a very distant threat to fiscal discipline, pen-sion reform may not appear an urgent priority. How-ever, it is one of the few instruments available to boostprivate savings. A capital market adjustment loan canthen support the implementation of the agreed reforms.

In public expenditure management, a combinationof regular public expenditure reviews, jointly conductedwith the government, and adjustment lending is recom-mended to help restructure expenditures in favor ofhigher public investment and maintenance expenditures(in infrastructures and the social services) and to imple-ment civil service reform. This operation could also sup-port the introduction of equalization considerations inallocations across regions—and all units of local gov-ernments—and of incentives to strengthen the raising oflocal revenues. Other institutional measures to improvethe efficiency of the bureaucracy (such as the recentlyadopted Anti-Corruption Initiative) and of publicexpenditure management (such as multiyear budgetingand rolling public investment programs) could also besupported by a combination of grants and technicalassistance. For sectors with appropriate policies andinstitutions already in place, regular public expenditurereviews should open the door to sectoral investment andadaptable program loans with low conditionalities. TheBank should embark on an in-depth study of the judicialsystem and its options for reform in support of the coun-try’s economic development efforts and for serving thepoor and vulnerable, followed by lending support tocomprehensive judicial reform in the medium term.

Considering the initial conditions, much progresshas already been achieved in openness, especiallythrough trade liberalization, except for agriculturalproducts. The recent depreciation of the peso offers the

opportunity to go further in reducing import tariffs,especially on food products. In addition to boosting pro-ductivity as comparative advantage is allowed to oper-ate, poor consumers (now heavily taxed by protectionon food) would benefit from such liberalization. TheBank could support such a move with adjustment lend-ing to help the government initiate the reform and pro-vide a safety net for the poor and disadvantaged andcompensatory measures for the displaced.

Supporting Private Sector Development and BasicInfrastructureIn addition to supporting reforms to improve the effi-ciency of the bureaucracies, the Bank Group should domore to help the private sector contribute to the solutionof the problem of inadequate infrastructure. The PrivateSector Infrastructure Initiative has already laid out therequired elements to support a strategy of expandingprivate sector participation, but technical assistance isneeded to complete the regulatory framework (forexample, in the guidelines regarding government guar-antees and the treatment of unsolicited proposals) gov-erning private participation. A renewed Bank Groupstrategy is needed to lay out clearly the contributions ofthe Bank, IFC, and Multilateral Investment GuaranteeAgency (MIGA) in support of private sector develop-ment, along the lines suggested in the 1994 Private Sec-tor Assessment report. This is particularly important inlight of the slow progress in expanding private activitiesin key sectors—particularly energy transmission, roadand maritime transport, and water and sanitationbeyond Manila.

In the right macroeconomic and institutional envi-ronment, which is expected to remain in force in thePhilippines, the Bank can reinforce progress by supple-menting the supply of private (mostly short- andmedium-term) credit with long-term funds. Thus, theBank should re-insert financial intermediary loans,including to SMEs, in its instrument menu. These loanscan also support and extend financial sector reforms.With regard to microcredit, possibly the most direct andbeneficial intervention for poverty alleviation in themedium term, the Bank should draw on experience,design an attractively simple vehicle, and offer funds foronlending to microenterprises. Here, the Bank couldreplicate other successful models with minimal studyand processing costs, while studying and piloting inno-vations and improvements separately. To avoid limiteduse of technical assistance, a demand-driven and pri-

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vate-sector-oriented approach could be adopted in thedesign of technical assistance components.

In power, NPC urgently needs financial assistancebefore privatization. The Bank can help by linkingfuture lending in the sector to congressional passage oflegislation to allow NPC’s privatization and to completethe regulatory framework for private participation. Inlight of the poor quality-at-entry ratings, the Bankshould intensify supervision of the entire portfolio in thepower sector. The Bank Group’s goal for the short termshould be to privatize virtually every dimension of thepower sector and to put it on a sound commercial foot-ing under a depoliticized regulatory framework. Oncethese conditions are in place, the IFC could do more tomeet the sector’s investment needs, and the Bank couldshift its resources to support other infrastructure areasthat are less financially attractive to private investors(and where the need for public investment remains sub-stantial). In the meantime, intensified supervision (andpossibly restructuring of some parts of the portfolio)will be needed to mitigate poor quality at entry.

For water supply and sanitation, the Bank Groupshould intensify its assistance to develop a sound regu-latory framework and to quickly accomplish privatiza-tion outside Manila to demonstrate the process andpresent a model. This could go beyond current technicalassistance proposals and policy notes, and include Bankguarantees and IFC advisory services and financialresources. A new Bank strategy should incorporate thefindings of ADB’s ongoing sector work and of the Bankstudy on institutional reforms of government-ownedand controlled corporations (which includes the LocalWater Utilities Administration, LWUA), and explicitlyaddress the issue of future support for LWUA. TheWorld Bank, the ADB, and the government shoulddecide a joint donor policy for LWUA.

The Bank remains a large lender in this sector. Onlya limited number of local government units and waterdistricts may be suited for private sector participation(these being the larger systems, which hold promise forfinancial viability and progressive administration), butmost will require a public sector approach for the next5–7 years. As the same principle applies to other infra-structure sectors, and given the Bank success with grad-uating the beneficiaries of past loans for MunicipalDevelopment to the capital market, the Bank could con-tinue, and indeed scale-up, its lending to include all non-creditworthy local government units. Such lending couldinclude an expansion of the capacity-building compo-

nent (such as training provided by the Local Govern-ment Academy). A participatory strategy is urgentlyneeded to assist local governments to cope with one ofthe fastest urbanization rates in the world and its infra-structure, social, and environmental implications.

Assistance to the transport sector falls in the samecategory. The Bank should continue to be active in trans-port, given the sector’s important strategic place, theexisting institutional weaknesses of the sector, the needfor public investment, and the Bank’s considerable expe-rience in transport. But the Bank should adopt a partic-ipatory approach to the preparation of a detailed policyreform discussion paper and subsequent assistance strat-egy paper, including explicit discussion of phasing ofindividual reforms and an assessment of the losses andmodalities for compensating the losers. Its sector workshould focus—and Bank sector lending should be contin-gent—on the government addressing the five key remain-ing areas for reform: (i) privatizing road maintenanceactivities; (ii) establishing a Road Fund, a National RoadAuthority, and other related changes; (iii) introducingautonomy and increased private sector involvement inthe port system and in the maritime sector in general; (iv)strengthening managerial and staff capacity in the trans-port sector, including the context of devolution to theprovinces; and (v) encouraging competition.

Boosting Rural Development and Poverty ReductionIn the past few years, the Bank has made a determinedeffort to address more directly the situation of the ruralpoor. Recently approved projects in water resource man-agement and agrarian community development are evi-dence of the Bank’s renewed determination to adopt amore forceful strategy to reduce rural poverty. Therecent Bank study, Promoting Equitable Rural Growth(1997), outlines a new comprehensive strategy for ruraldevelopment, which is well timed to inform the plannedparticipatory process to arrive at a new sector develop-ment strategy endorsed by the government, and subse-quently to an agreed Bank assistance strategy.

Through synergy with a trade adjustment loan andassociated sector lending, the Bank should supportimport tariff reductions for corn and other cereals, theremoval of the rice monopoly and promotion of riceexports, and increased private sector participation inproduction, marketing, and distribution of agriculturalproducts and inputs. The Bank should provide technicalassistance (or undertake a joint study of public expendi-tures with the government and other major donors) to


31

develop shared priorities for domestic and externalresources expended in the sector. Areas that requiremore attention and resources in both the government’sexpenditure program and in the Bank’s own lending andnonlending assistance are rural infrastructure and asso-ciated O&M, post-harvest facilities, and research andextension services.

Special efforts should be made to target assistance tothe poor and to the regions where the poor live, and toinvolve the NGOs, local community organizations, andthe beneficiaries in the review of ongoing projects and inthe formulation and design of new ones (not only intheir implementation). Two recently approved projects(the Water Resources Development project and theAgrarian Reform Community Development project)were designed in this direction. The Bank should expandits support for land reform, which is crucial for a moreequitable distribution of assets. Beyond technical assis-tance to its beneficiaries, temporary budgetary supportto help the government quickly complete its final phaseof land reform will help reestablish certainty for theremaining landowners and revitalize private investmentin the sector.

Finally, in environmental protection and naturalresources management, the government lacks sufficientdomestic resources (both human and local counterpartfunding) to manage the recent surge in external fundingassistance and to devise efficient ways to transfer someof these externally funded projects to the local govern-ments. The Bank could provide technical assistance tohelp strengthen the institutional capacities of the rele-vant agencies in investment planning, project design andimplementation, and to promote community-basedapproaches to protect the environment and improve themanagement of natural resources.

Revisiting Human DevelopmentGiven the Bank’s limited and risky portfolio of ongoingprojects in such critical sectors for poverty alleviation ashealth, population planning, and education, the Bankought to give intense and immediate attention to super-vision for all the ongoing projects and, failing a quickturnaround, to the restructuring of the Urban Healthand Nutrition project. The government’s reluctance toborrow externally (especially from the Bank) in thesesectors has led to a series of projects that have beendropped after considerable energy had been spent intheir preparation. Given the expected continuing avail-ability of softer money within the donor community, the

Bank could consider dropping new lending initiatives inthese sectors and allowing government and other donorresources to fill the void.

However, the Bank can and should continue to ana-lyze policy and institutional constraints in all areas ofhealth, family planning, education, and social protectionand advise the government on future reforms and effec-tive interventions. Supervision of the existing portfolioought to be expanded from narrow project-related con-cerns to adequate monitoring and analysis of sectordevelopments. Other donors’ knowledge and sectorwork should be effectively absorbed. Future publicexpenditure reviews can then integrate, supplement, andanalyze this information. It would be useful for the Bankto pull together the experiences in developing countriesregarding the social returns to government investmentsin providing family planning, primary health care ser-vices, and improved quality of primary education inpoor areas to make the argument for higher investment(and higher external long-term borrowing) for thesepurposes.

With respect to gender, it would require little effortto consult and better communicate with the agencies ofgovernment and women’s groups on Bank gender stud-ies and project-related activities. To this end, a modestextension to explore gender discrimination in the studyof the Philippine labor market contained in the mostrecent economic report is recommended.

Should the Bank wish to remain an active lender inthese sectors, it might look for an opportunity to lend forfamily planning, primary health care, and disease controlwith sector-type operations financing or cofinancing atime-slice of an agreed expenditure program. In educa-tion, the Bank should seek lending opportunities in pri-mary education and limit its involvement with vocationaland tertiary education to an advisory capacity.1

Mobilizing PartnershipsThe Bank’s ability to successfully deliver this refocusedprogram of assistance would be enhanced by deepeningits relationships with NGOs and civil society andenhancing their participation in the preparation of Bankstrategy, ESW, and projects. The Bank should dissemi-nate its policy views, strategy, and ESW outside govern-ment (albeit with its consent) to influence debate in civilsociety and parliament. While doing so, it should respectand support the strategies and priorities finally adoptedby the country through its own consultative and demo-cratic process.

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The Bank should help the Philippines maximizelong-term sources for required foreign savings throughits own lending, continued aid coordination, andenhanced aid mobilization. It should also work toachieve better results on the ground at the sectoral level.Regular public expenditure reviews would be very valu-able to donors in this respect. But the Bank should estab-lish a new compact among the government, the Bank,and the donors. Although aid coordination by the Bankwas praised by donors and government alike, there ismuch friendly (but wasteful) competition, especially inlending to the social sectors, and little reciprocal concernabout other donors’ results.

A more promising approach than each agency’s pro-ceeding with bilateral strategy discussions (or the project-specific multidonor copreparation/cofinancing route)

would be a joint strategy and a clearer delineation ofresponsibilities, especially at the lending level, amongdonors. The process of preparing a joint CAS for all themajor donors would help the government to enlarge itsaid coordination efforts and leverage external assistancefor maximum impact on the ground. The Bank hasalready piloted such an approach with its external assis-tance to Mindanao during the past two years. It is nowtime to scale-up such good partnership experience,building on the successes of the past. The process couldbegin with a broad agreement on a document akin to aPolicy Framework Paper and matrix of medium-termreforms and sectoral development strategies, and couldend with a matrix of each donor’s proposed contribu-tion. A truly participatory CAS covering all externalassistance should be the Bank’s goal by 1999.2

33

Chapter 11. In addition to their association with the failed Marcos

regime, the net negative transfer of resources by the World Bankwas another strong source of antipathy for the InternationalFinancial Institutions in the late 1980s.

Chapter 21. The Region disagrees with the conclusion that the Bank’s

assistance has been ineffective and unsatisfactory. The results havebeen mixed, according to the Region, partly because of the natureof the interventions (some well-intentioned projects were poorlydesigned), but mostly because of the vulnerability of the opera-tions to the depth of the crisis in the 1980s.

2. The Region believes such a statement does not do justiceto the efforts of the Bank’s sectoral specialists. It reports that,while there were concerns in the energy team that the terms of thefirst BOT project were skewed too much in favor of Hopewell,and there was a danger that the government would end up payingfor power it could not use, this was not a view shared by all.Through their contacts with investment bankers and BOT propo-nents, staff had helped create a more favorable climate for theirinvolvement; the Bank had organized a roundtable on BOT oppor-tunities (in power and other sectors), it had generally been sup-portive of the government’s efforts, and most of its policydialogue, including that on pricing, was crucial for setting theright foundations for the BOT operations.

3. The Bank objects to such characterization, as much of theanalysis and discussion of the poverty report took place before thesummit.

4. The Region disagrees with such characterization of Bankassistance in the health, education, agriculture, and energy sectors.

5. The performance of the most current portfolio (24 projects,$2.2 billion, as of October 1998), however, has deteriorated over

the past year in both absolute and relative terms, mainly becauseof the effects of the financial crisis. Only 84 percent of projectsunder supervision are rated satisfactory, down from 93 percent.Three projects now carry an unsatisfactory rating for both devel-opment objectives and implementation progress (the TransmissionGrid Reinforcement project, the Urban Health and Nutrition pro-ject, and the Women’s Health and Safety project). A fourth projectis deemed potentially at risk by QAG (the Second Subic Bay pro-ject). The country’s portfolio performance, which continues totrail that of the region (86 percent), has recently fallen below theBankwide average (88 percent).

6. In their comments to this report, BSP stressed that the netnegative transfers during 1986–96 took place when the productiv-ity of capital was high, while net positive transfers from the Banktook place during 1975–84, when the productivity of capital wascomparatively low. BSP expressed want of a single, quantifiableestimate of the value of World Bank assistance to the country, onethat would weigh appropriately the negative impact of the Bank’sdirect financial contribution to growth with its (presumably posi-tive) indirect contributions to policy and institutional reforms,overall donors’ aid levels, and international confidence.

Chapter 31. The Region disagrees with OED’s recommendations to

leave lending to others in the social sectors, as it believes that thereis a lending role for the Bank, including in the reform of the voca-tional and higher education sectors, if the government were to takesome difficult decisions.

2. The Region notes that discussions with the major donorsin the context of the upcoming CAS preparation are planned, butthat a joint CAS does not appear feasible, given other donors’ con-straints and the substantial additional costs involved—especiallyin light of the already relatively high spending on aid coordinationnoted in the report.

ENDNOTES

35

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Asian Development Bank. Emerging Asia: Changes andChallenges. Manila, 1997.

Baird, Michael. Note on the Lessons for the World Bankof the Mexican Crisis. Office of the SVP, Develop-ment Economics, Washington, DC: World Bank, June1996.

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—— “Agricultural Growth, Policy Regime, and RuralPoverty in the Philippines.” Draft Provisional Paper,Agriculture and Environment Operation Division,East Asia and Pacific Region, Washington, DC:World Bank, 1996.

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B i b l i o g r a p h y

39

LOWER-EAST MIDDLE-

PHILIPPINES ASIA INCOME

Poverty and Social IndicatorsPopulation mid-1996 (millions) 71.9 1,726 1,125GNP per capita 1996 (US$) 1,160 890 1,750GNP 1996 (US$ billions) 83.3 1,542 1,967

Average annual growth, 1990–96Population (percent) 2.3 1.3 1.4Labor force (percent) 2.7 1.3 1.8

Most recent estimate (latest year available since 1989)Poverty: headcount index

(percent of population) 54 .. ..Urban population (percent of

total population) 55 31 56Life expectancy at birth (years) 66 68 67Infant mortality (per 1,000 live births) 37 40 41Child malnutrition

(percent of children under 5) 30 .. ..Access to safe water (percent of population) 85 49 78Illiteracy (percent of population age 15+) 5 17 ..Gross primary enrollment

(percent of school-age population) 116 117 104Male .. 120 105Female .. 116 101

Key Economic Ratios and Long-term Trends 1975 1985 1995 1996

GDP (US$ billions) 15.0 30.7 74.2 83.8Gross domestic investment/GDP 30.9 15.3 22.2 24.2Exports of goods and services/GDP 21.0 24.0 36.4 42.0Gross domestic savings/GDP 24.8 17.4 14.4 14.4Gross national savings/GDP 26.6 15.9 18.3 19.0Current account balance/GDP -6.2 -0.1 -4.4 -4.5Interest payments/GDP 0.8 3.1 2.6 2.1Total debt/GDP 27.8 86.6 53.2 49.2Total debt service/exports 14.4 32.0 16.8 14.2Present value of debt/GDP .. .. .. 46.1Present value of debt/exports .. .. .. 95.0

1975–85 1986–96 1995 1996 1997–05

(average annual growth)GDP 3.0 3.1 4.8 5.7 5.5GNP per capita 0.3 1.3 2.6 4.5 3.5Exports of goods and services 7.6 8.8 12.0 20.3 10.5

annex A

TABLE A.1: THE PHILIPPINES AT A GLANCE

GNPpercapita

Gross primaryenrollment

Philippines

Lower-middle-income group

DEVELOPMENT DIAMOND*

Life expectancy


ECONOMIC RATIOS*

Openness of economy

Savings Investment

Indebtedness

Philippines

Lower-middle-income group

* The diamonds show four key indicators in the country (in bold) compared withits income-group average. If data are missing, the diamond will be incomplete.

Note: Data for 1996 are preliminary estimates. (table continued on following page)

40

Structure of the Economy 1975 1985 1995 1996

Agriculture 30.3 24.6 21.6 21.4Industry 34.6 35.1 32.1 31.7

Manufacturing 25.7 25.2 23.0 22.6Services 35.0 40.4 46.3 46.9Private consumption 64.5 75.0 74.2 73.9General government consumption 10.7 7.6 11.4 11.7Imports of goods and services 27.1 21.9 44.2 51.7

1975–85 1986–96 1995 1996

(average annual growth)Agriculture 2.2 1.8 0.8 3.0Industry 2.6 3.2 7.0 6.3

Manufacturing 1.8 3.1 6.8 5.6Services 3.8 3.8 5.0 6.5Private consumption 3.3 3.9 8.5 5.3General government consumption 0.4 4.2 5.4 5.2Gross domestic investment -0.4 6.7 3.0 15.6Imports of goods and services 3.9 12.0 16.0 21.1Gross national product 2.7 3.8 5.0 6.9

Prices and Government Finance 1975 1985 1995 1996

Domestic prices (percent change)Consumer prices 6.8 23.1 8.1 8.4Implicit GDP deflator 9.3 17.6 7.5 9.0

Government finance (percent of GDP)Current revenue .. 12.1 18.8 19.5Current budget balance .. 2.4 3.4 3.1Overall surplus/deficit .. .. -1.4 -0.4

Trade 1975 1985 1995 1996

(US$ millions)Total exports (fob) .. 4,629 16,720 19,809

Coconut oil .. 347 826 571Sugar .. 185 66 136

Total imports (cif) .. 5,111 26,391 31,885Food .. 256 1,204 1,578Fuel and energy .. 1,452 2,461 3,008Capital goods .. 769 8,029 10,472

Export price index (1987=100) .. 81 124 124Import price index (1987=100) .. 63 128 137Terms of trade (1987=100) .. 127 97 90


0

5

10

15

20

91 92 93 94 95 96

GDP def.

CPI

INFLATION (%)

0

10,000

20,000

30,000

40,000

90 91 92 93 94 95 96

Exports

Imports

EXPORT AND IMPORT LEVELS (MILL. US$)

TABLE A.1: THE PHILIPPINES AT A GLANCE (CONTINUED)

GROWTH RATES OF OUTPUT AND INVESTMENT (%)

-30

-20

-10

0

10

20

91 92 93 94 95 96

GDI

GDP

GROWTH RATES OF EXPORTS AND IMPORTS (%)

-10

0

10

20

30

91 92 93 94 95 96

Exports

Imports


Note: Data for 1996 are preliminary estimates.

(percent of GDP)

41

Balance of Payments 1975 1985 1995 1996

(US$ millions)Exports of goods and services 3,000 6,864 21,978 28,708Imports of goods and services 4,116 5,961 33,314 42,254Resource balance -1,116 903 -11,336 -13,546

Net income -126 -1,317 7,157 9,185Net current transfers 318 379 882 589

Current account balance,before official capital transfers -923 -35 -3,297 -3,772

Financing items (net) 912 867 3,928 7,879

Changes in net reserves 11 -832 -631 -4,107

Memo:Reserves including gold (US$ millions) 1,458 1,098 7,755 11,717Conversion rate (local/US$) 7.2 18.6 25.7 26.2

External Debt and Resource Flows 1975 1985 1995 1996

(US$ millions)Total debt outstanding and disbursed 4,171 26,637 39,446 41,214

IBRD 238 2,421 5,002 4,666IDA 17 84 183 193

Total debt service 457 2,534 5,337 5,778IBRD 26 285 789 766IDA 0 1 3 3

Composition of net resource flowsOfficial grants 72 139 276 246Official creditors 185 360 -626 -310Private creditors 348 796 1,141 1,859Foreign direct investment 98 12 1,478 1,408Portfolio equity 0 0 1,961 1,333

World Bank programCommitments 114 104 168 528Disbursements 94 276 402 457Principal repayments 12 110 415 426Net flows 82 166 -13 31Interest payments 14 176 377 343Net transfers 68 -10 -390 -312

A n n e x

CURRENT ACCOUNT BALANCE TO GDP RATIO (%)

-7

-6

-5

-4

-3

-2

-1

090 91 92 93 94 95 96

COMPOSITION OF TOTAL DEBT, 1996 (MILL. US$)

Bilateral12085

IDA193IMF405

IBRD4666

Short-term7969

Othermultilateral3079

Private12817

TABLE A.1: THE PHILIPPINES AT A GLANCE (CONTINUED)


Note: Data for 1996 are preliminary estimates.

42

TOTAL APPROVED PROJECTSa

Number Percent Value ($m) Percent

Adjustment loans 9 6 2,076.3 20Nonadjustment loans 140 94 8,082.0 80Total 149 100 10,158.3 100

OED OUTCOME RATINGS


Satisfactory outcomeAdjustment loans 6 75 1,350.0 73Nonadjustment loans 79 76 3,610.0 80Total 85 76 4,960.0 78Unsatisfactory outcomeAdjustment loans 2 25 502.0 27Nonadjustment loans 25 24 924.5 20Total 27 24 1,426.7 22TOTAL RATED 112 6,386.7

OED SUSTAINABILITY RATINGS


Likely sustainabilityAdjustment loans 5 83 1,200.0 89Nonadjustment loans 36 57 2,253.5 67Total likely sustainability 41 59 3,453.5 73Uncertain sustainabilityAdjustment loans 1 17 150.0 11Nonadjustment loans 16 25 544.7 16Total uncertain

sustainability 17 25 694.7 15

Unlikely sustainabilityAdjustment loans 0 0 0.0 0Nonadjustment loans 11 17 554.1 17Total unlikely

sustainability 11 16 554.1 12TOTAL RATED 69 100 4,702.3 100

OED INSTITUTIONAL DEVELOPMENT RATINGS


Substantial IDAdjustment loans 4 67 1,000.0 74Nonadjustment loans 21 36 1,194.4 39Total substantial ID 25 38 2,194.4 49Moderate IDAdjustment loans 1 17 150.0 11Nonadjustment loans 25 42 1,328.8 43Total moderate ID 26 40 1,478.8 33Negligible IDAdjustment loans 1 17 200.0 15Nonadjustment loans 13 22 561.0 18Total negligible ID 14 22 761.0 17TOTAL RATED 65 100 4,434.7 100


TOTAL APPROVED PROJECTS, BY PERIOD (FY)

Period Number Percent Value ($m) Percent

1958–80 73 49 2,512.1 251981–85 26 17 1,925.8 191986–89 13 9 1,493.6 151990–98* 37 25 4,226.8 42TOTAL 149 100 10,158.3 100

OED SATISFACTORY OUTCOME RATINGS BY PERIODb

Loans % Value % Rated Satisfact. ($m) Satisfact.

1958–80Adjustment loans 6 75 1,350.0 73Adjustment loans 0 0.0Nonadjustment loans 65 74 2,211.9 72Period total 65 74 2,211.9 72

1981–85Adjustment loans 3 33 652.2 23Nonadjustment loans 22 77 689.2 86Period total 25 72 1,341.4 55

1986–89Adjustment loans 3 100 800.0 100Nonadjustment loans 8 100 509.4 100Period total 11 100 1,309.4 100

1990–97Adjustment loans 2 100 400.0 100Nonadjustment loans 9 67 1,124.0 81Period total 11 73 1,524.0 86

All: 1958–97Adjustment loans 8 75 1,852.2 73Nonadjustment loans 104 76 4,534.5 80TOTAL RATED 112 76 6,386.7 78

ARPP RATINGS OF ONGOING PROJECTS

Number Percent Value($m) Percent

Development objectives

Satisfactory 22 96 2,062.4 93Unsatisfactory 1 4 150.0 7TOTAL 23 100 2,212.4 100Implementation progressSatisfactory 21 91 2,005.4 91Unsatisfactory 2 9 207.0 9TOTAL 23 100 2,212.4 100

DISCONNECT FOR PHILIPPINES

Number of ARPP % OED % Net disc. at projects Sat. Sat. exitc

99 92 76 16%

TABLE A.2: SUMMARY OF PROJECT INFORMATION: THE PHILIPPINES

Note: Includes projects evaluated through October 6, 1997.a. Through December 1997.b. Based on FY of Board approval.c. Based on projects evaluated by OED through October 6, 1997. The disconnect is the difference between the share of projects rated satisfactory duringthe last supervision year and the share of projects rated satisfactory after completion. Thus it is an indication of the optimism in supervision ratings.Source: OIS, FDB.

43

An

ne

x(table continued on following page)

TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997)

Agriculture (38)Second rural credit S I 12.5 27-May-69 PAR 01277 18-Aug-76 1976 L0607Upper Pampanga River irrigation S I 33.9 12-Aug-69 PAR 03063 30-Jun-80 1980 L0637Rice processing and storage S I 14.3 26-Jan-71 PAR 04554 15-Jun-83 1983 L0720Livestock development S I 7.5 04-May-72 PAR 02128 30-Jun-78 1978 L0823Fisheries credit S I 11.6 15-May-73 PAR 04222 13-Dec-82 1982 L0891Aurora – Penaranda irrigation S I 18.9 30-Apr-74 PAR 04555 16-Jun-83 1983 L0984Third rural credit S I 22.0 11-Jun-74 PAR 02784 27-Dec-79 1979 L1010Tarlac irrigation systems improvement S I 17.0 17-Dec-74 PAR 05969 12-Dec-85 1985 L1080Rural development S I 25.0 08-Apr-75 PAR 05978 18-Dec-85 1985 L1102Magat River multipurpose S Lik Napl I 42.0 22-Jul-75 PAR 07923 30-Jun-89 1989 L1154Second livestock development S I 20.5 16-Mar-76 PAR 04753 21-Oct-83 1983 L1225Chico River irrigation U Unc Napl I 50.0 23-Mar-76 PAR 07923 30-Jun-89 1989 L1227Second grain processing S I 11.5 25-May-76 PCR 05448 06-Feb-85 1985 L1269Second fisheries S I 12.0 25-May-76 PAR 04222 13-Dec-82 1982 L1270Jalaur irrigation S I 14.9 01-Feb-77 PAR 05969 12-Dec-85 1985 L1367Fourth rural credit S I 36.5 05-Apr-77 PCR 06016 31-Dec-85 1985 L1399National irrigation systems

improvement U Lik Sub I 38.2 03-May-77 PAR 10669 22-May-92 1990 L1414Rural development II (land settlement) U Unc Neg I 13.0 17-May-77 PCR 10175 16-Dec-91 1991 L1421Smallholder tree farming and forestry U I 4.2 22-Dec-77 PAR 07585 31-Dec-88 1988 L1506Second national systems improvement U Lik Sub I 48.7 28-Feb-78 PAR 10669 22-May-92 1989 L1526First rural infrastructure S Unc Neg I 21.5 11-Apr-78 PAR 07936 30-Jun-89 1989 C0790Magat River multipurpose, stage two S Lik Napl I 149.6 11-May-78 PAR 07923 30-Jun-89 1989 L1567National extension U I 20.0 07-Nov-78 PAR 07286 13-Jun-88 1988 L1626Second Magat River multipurpose,

stage two S Lik Napl I 26.1 12-Dec-78 PAR 07923 30-Jun-89 1989 L1639Small farmer development land bank U Unc Mod I 15.7 21-Dec-78 PCR 10349 21-Feb-92 1992 L1646Samar Island rural development U Unl Mod I 27.0 04-Dec-79 PCR 09208 21-Dec-90 1990 L1772Medium-scale irrigation U Unl Sub I 33.0 13-Mar-80 PCR 11511 30-Dec-92 1992 L1809Rainfed agricultural development

(ILOILO) S Lik Mod I 5.3 20-Mar-80 PAR 07949 30-Jun-89 1989 L1815Watershed management and erosion

control U Unl Mod I 32.8 08-Jul-80 PAR 16408 27-Mar-97 1991 L1890Third livestock and fisheries credit S Unc Mod I 23.5 15-Jul-80 PCR 07871 28-Jun-89 1989 L1894Agricultural support services U Unc Mod I 19.9 14-Jul-81 PAR 15223 29-Dec-95 1992 L2040National fisheries development U Unl Neg I 1.9 25-May-82 PCR 09891 16-Sep-91 1991 L2156Communal irrigation development S Lik Sub I 38.1 08-Jun-82 PCR 11512 29-Dec-92 1992 L2173Central Visayas regional development S Lik Mod I 22.1 06-Dec-83 PAR 16661 10-Jun-97 1993 L2360Agricultural sector/inputs S Unc Mod A 150.0 04-Sep-84 PAR 10314 10-Feb-92 1990 L2469Agricultural credit S Lik Mod I 100.0 06-Jun-85 PAR 10969 28-Jul-92 1991 L2570Irrigation operations support S Lik Sub I 23.5 02-Jun-88 PCR 13826 29-Dec-94 1994 L2948Rural finance S Lik Mod I 150.0 21-Jun-91 PCR 15233 31-Jan-96 1996 L3356

NET LATEST LATEST LATEST

OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OED

PROJECT NAME COME1 SUST2 INST3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID

44 Ph

ilipp

ine

s:

Fr

om

C

ris

is

to

Op

po

rtu

nity

TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) (CONTINUED)

Education (9)Agricultural education S I 5.9 13-Oct-64 PAR 00820 30-Jul-75 1975 L0393Second education S I 12.7 12-Dec-72 PAR 04162 01-Nov-82 1982 C0349Third education S I 24.7 16-Mar-76 PAR 06279 27-Jun-86 1986 L1224Fourth education S I 24.9 01-Mar-77 PAR 06348 17-Jul-86 1986 L1374Educational radio technical assistance S I 1.2 21-Mar-78 PCR 05004 23-Mar-84 1984 LS008Fishery training U Unl Neg I 35.1 18-Dec-79 PAR 08788 25-Jun-90 1990 L1786Elementary education sector loan S Lik Sub I 80.0 30-Jun-81 PAR 12632 29-Dec-93 1991 L2030Vocational training S Lik Sub I 14.9 21-Sep-82 PAR 13062 17-May-94 1992 L2200Second elementary education U Unl Neg I 175.0 03-Jul-90 EVM 1997 L3244

Electric Power and Other Energy (9)Fourth power S I 12.0 04-Apr-67 PAR 00980 16-Jan-76 1976 L0491Fifth power S I 31.8 21-Mar-72 PCR 04388 16-Mar-83 1983 L0809Sixth power S I 60.5 02-Jul-74 PCR 04847 22-Dec-83 1983 L1034Seventh power S Lik Mod I 58.0 14-Jun-77 PAR 08574 20-Apr-90 1990 L1460Rural electrification S I 60.0 04-Apr-78 PAR 05732 24-Jun-85 1985 L1547Geothermal exploration S Lik Sub I 8.2 30-Sep-82 PAR 09667 21-Jun-91 1990 L2203Bacon-Manito geothermal power S Lik Sub I 93.6 23-Jun-88 EVM 1996 L2969Manila power distribution S Lik Mod I 59.8 08-Jun-89 EVM 1997 L3084Energy Sector4 S Lik Sub I 370.6 01-Feb-90 EVM 1997 L3163

Finance (11)Third development corporation S I 23.7 01-Jul-69 PAR 01576 29-Apr-77 1977 L0630Industrial investment and smallholder

tree-farmers U I 49.6 11-Jun-74 PAR 05744 28-Jun-85 1985 L0998Fourth development corporation S Lik Sub I 29.8 05-Nov-74 PAR 08781 21-Jun-90 1983 L1052Second industrial investment credit U I 75.0 16-Dec-75 PAR 05744 28-Jun-85 1985 L1190Fifth development corporation S Unc Sub I 29.3 31-Jan-78 PAR 08781 21-Jun-90 1989 L1514Investment systems organization S I 14.5 27-Apr-78 PCR 06006 27-Dec-85 1985 L1555Third industrial investment credit U Unl Neg I 71.2 18-May-78 PAR 08781 21-Jun-90 1990 L1572Industrial finance S Lik Sub I 44.6 07-May-81 PAR 08781 21-Jun-90 1990 L1984Financial sector adjustment S Lik Sub A 300.0 04-May-89 PAR 15834 28-Jun-96 1995 L3049Industrial investment credit S Lik Mod I 65.0 05-Oct-89 PCR 12127 30-Jun-93 1993 L3123Cottage enterprise finance U Unl Neg I 1.5 26-Mar-91 PAR 15834 28-Jun-96 1995 L3312

Industry (6)Small and medium industries

development S I 30.0 27-May-75 PAR 03969 16-Jun-82 1982 L1120Second small and medium industries

development S Lik Sub I 24.9 12-Jun-79 PAR 08781 21-Jun-90 1989 L1727Textile sector restructuring U Unl Mod I 15.4 20-Apr-82 PCR 08107 06-Oct-89 1989 L2127Third small and medium industries

development S Lik Mod I 63.2 03-Jun-82 PAR 08781 21-Jun-90 1990 L2169

NET LATEST LATEST LATESTOUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OED

PROJECT NAME COME1 SUST2 INST3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID

45

An

ne

x(table continued on following page)

TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) (CONTINUED)NET LATEST LATEST LATEST

OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OEDPROJECT NAME COME1 SUST2 INST3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID

Fourth small and medium industrial development S Lik Neg I 60.0 25-Apr-89 PCR 14055 15-Mar-95 1995 L3038

Industrial restructuring S Lik Sub I 175.0 08-Jan-91 EVM 1996 L3287

Mining (1)Coal exploration S Unc Sub I 6.6 15-Jun-82 PAR 09667 21-Jun-91 1987 L2181

Multisector (6)Structural adjustment loan U A 200.0 16-Sep-80 PAR 05813 31-Jul-85 1985 L1903Second structural adjustment loan U A 302.3 26-Apr-83 PAR 05813 31-Jul-85 1985 L2266Economic recovery program S Lik Sub A 300.0 17-Mar-87 PAR 10866 30-Jun-92 1992 L2787Debt management program S Lik Neg A 200.0 21-Dec-89 PAR 14811 30-Jun-95 1993 L3149Earthquake reconstruction S Unc Mod I 109.3 09-Oct-90 EVM 1997 L3263Economic integration S Lik Sub A 200.0 10-Dec-92 EVM 1996 L3539

Oil and Gas (2)Petroleum exploration promotion S Lik Sub I 7.8 30-Sep-82 PAR 09667 21-Jun-91 1990 L2201Petroleum exploration promotion S Lik Sub I 7.3 30-Sep-82 PAR 09667 21-Jun-91 1990 L2202

Population, Health, and Nutrition (2)Population U I 23.3 02-Jul-74 PAR 05544 19-Mar-85 1985 L1035Second population U Unc Neg I 32.2 05-Jun-79 PAR 09380 15-Feb-91 1991 C0923

Public Sector Management (2)Economic recovery technical

assistance NRAT Unc Neg I 0.0 17-Mar-87 PAR 10866 30-Jun-92 1992 L2788Program for government corporation S Lik Sub A 200.0 15-Jun-88 PAR 15614 13-May-96 1993 L2956

Telecommunications (1)Telecommunications technical

assistance S Lik Mod I 4.0 19-Feb-85 PCR 09609 31-May-91 1991 L2495

Transportation (11)Highway S I 8.0 06-Apr-71 PAR 02449 02-Apr-79 1979 L0731Second port S I 6.0 16-Oct-73 PAR 05698 07-Jun-85 1985 L0939Second highway S I 68.0 04-Dec-73 PAR 04757 25-Oct-83 1983 L0950Shipping S I 19.4 15-Oct-74 PAR 04910 31-Jan-84 1984 L1048Third highway S I 95.0 23-Dec-76 PAR 07316 30-Jun-88 1988 L1353Fourth highway S Lik Mod I 99.6 06-Mar-79 PCR 08053 07-Sep-89 1989 L1661Third port S I 66.9 27-May-80 PCR 07570 31-Dec-88 1988 L1855Rural roads improvement U Unc Mod I 50.2 29-May-80 PCR 09522 15-Apr-91 1991 L1860Fifth highway S Lik Neg I 90.9 17-May-84 EVM 15503 08-Apr-96 1995 L2418Second rural roads improvement S Unc Mod I 81.9 10-Jun-86 EVM 1996 L2716Provincial ports S Lik Neg I 30.1 26-May-87 PCR 14712 26-Jun-95 1995 L2823

46 Ph

ilipp

ine

s:

Fr

om

C

ris

is

to

Op

po

rtu

nity

Urban Development (8)Manila urban development S I 39.3 27-May-76 PAR 07092 19-Jan-88 1986 L1272Second urban development S I 30.5 21-Dec-78 PAR 07092 19-Jan-88 1988 L1647Third urban development S Lik Mod I 67.1 25-Mar-80 PCR 07897 30-Jun-89 1989 L1821Urban engineering S I 7.3 08-Dec-81 PCR 07009 16-Nov-87 1987 L2067Regional cities development S Unl Mod I 35.9 31-Mar-83 PAR 14780 30-Jun-95 1995 L2257Municipal development S Lik Sub I 35.8 05-Jun-84 PAR 16800 27-Jun-97 1995 L2435Housing sector S Unl Mod I 125.3 24-Jun-88 PCR 15810 25-Jun-96 1996 L2974Second municipal development S Lik Sub I 40.0 14-Dec-89 PAR 16800 27-Jun-97 1997 L3146

Water Supply and Sanitation (7)Provincial cities water supply S I 21.8 03-May-77 PAR 06422 29-Sep-86 1986 L1415Second Manila water supply S I 88.0 25-Jul-78 PCR 07153 04-Mar-88 1988 L1615Second provincial cities water supply U Unc Mod I 25.0 29-May-79 PCR 08937 27-Jul-90 1990 C0920Manila sewerage and sanitation S Lik Sub I 44.5 20-Mar-80 PAR 13204 24-Jun-94 1990 L1814Rural water supply and sanitation U Unc Neg I 28.9 19-Oct-82 PCR 10225 17-Dec-91 1991 L2206Metropolitan Manila water distribution S Lik Mod I 35.3 03-Apr-86 PCR 14293 11-Apr-95 1995 L2676Angat water supply optimal U Unc Mod I 37.6 05-Oct-89 EVM 1997 L3124

1. Outcome ratings: S = satisfactory, U = unsatisfactory.2. Sustainability ratings: Lik = likely, Unc = uncertain, Unl = unlikely, Nrat = not rated.3. Institutional Development Impact ratings: Sub = substantial, Mod = modest, Neg = negligible, Napl = not applicable.4. A recent but not yet finalized OED audit is proposing to downgrade all the project completion ratings.

TABLE A.3: COMPLETED AND EVALUATED PROJECTS (THROUGH OCTOBER 6, 1997) (CONTINUED)NET LATEST LATEST LATEST

OUT- INVESTMENT/ COMMIT. APPROVAL REPORT REPORT REPORT EVALUATION OEDPROJECT NAME COME1 SUST2 INST3 ADJUSTMENT (US$M) DATE TYPE NUMBER DATE YEAR ID

47

An

ne

x

Agriculture (7)Coconut farms development Active S S Nonrisky Satisfactory I 5/24/90 11/14/90 6/30/98Second communal irrigation Active S S Nonrisky Unsatisfactory I 10/4/90 1/11/91 12/31/98Environment and natural resource management Active S S Nonrisky Unsatisfactory A 6/25/91 10/10/91 12/31/98Second irrigation operational support Active S S Nonrisky Satisfactory I 5/20/93 10/15/93 6/30/99Second rural finance Active S S Nonrisky Satisfactory I 9/14/95 4/23/96 6/30/02Water resources development Active S S Nonrisky Highly satisfactory I 11/26/96 3/20/97 12/31/02Agrarian reform communication Active S S Nonrisky Satisfactory I 11/26/96 4/8/97 12/31/03

Education (3)Engineering and science Active S S Nonrisky Highly unsatisfactory I 1/28/92 6/3/92 6/30/98Second vocational training Active S S Nonrisky Highly unsatisfactory I 6/18/92 12/11/92 12/31/98Third elementary education Active S S Nonrisky Highly satisfactory I 11/26/96 7/2/97 6/30/04

Electric Power and Energy (5)Rural electricification Active S U Actual Unsatisfactory I 2/25/92 10/22/92 4/30/98Power transmission and rehabilitation Completed S S Unsatisfactory I 6/22/93 12/6/93 12/31/97Leyte Cebu geothermal Active S S Nonrisky Unsatisfactory I 2/3/94 7/18/94 6/30/98Leyte Luzon geothermal Active S S Nonrisky Highly unsatisfactory I 6/7/94 3/1/95 6/30/99Trans Grid reinforcement Active S S Nonrisky Unsatisfactory I 4/4/96 11/12/96 12/31/00

Industry (1)Second Subic Bay Active n.a. n.a. Nonrisky Satisfactory I 11/26/96 10/15/97 12/31/00

Population, Health, and Nutrition (3)Health development Completed S S I 6/22/89 1/10/90 12/31/97Urban health and nutrition Active U U Actual Satisfactory I 6/8/93 4/7/94 12/31/00Womens’ health and safety Active S S Nonrisky Satisfactory I 3/9/95 7/27/95 12/31/01

Public Sector Management (1)Tax computerization Active S S Nonrisky Highly satisfactory I 5/11/93 12/1/93 6/30/99

Telecommunications (1)Telephone system expansion Completed S S Highly satisfactory I n.a. n.a. 12/31/98

Transportation (2)Highway management Active U U Actual Satisfactory I 12/20/91 6/1/92 6/30/99Subic Bay freeport Active HS S Nonrisky Satisfactory I 6/2/94 8/17/94 6/30/99

Urban Development (1)Third municipal development Active S S Nonrisky Satisfactory I 3/31/92 8/3/92 6/30/99

Water Supply and Sanitation (3)Water, sewerage, and sanitation Completed S S Satisfactory I 6/28/90 1/15/91 12/31/97Second Manila sewerage Active S U Actual Highly satisfactory I 5/21/96 n.a. 12/31/01Water district development Active n.a. n.a. Nonrisky Satisfactory I 9/9/97 n.a. 6/30/03

Note: For definition of abbreviations, see Table 3.n.a. = Not available.

TABLE A.4: ONGOING AND RECENTLY COMPLETED PROJECTSLATEST LATEST QUALITY

DEVELOPMENT IMPLE- ASSURANCE

OBJECTIVES MENTATION GROUP (QAG) OED INVESTMENT

SUPER- PROGRESS RISK QUALITY OR BOARD

VISION SUPERVISION RATING AT ENTRY ADJUSTMENT APPROVAL EFFECTIVENESS CLOSING

PROJECT NAME STATUS RATING RATING (2/26/98) RATING OPERATION DATE DATE DATE

48

ECONOMIC OR REPORT TITLE SECTOR REPORT DATE REPORT #

Agriculture (8)Sugarlands diversification study SR 05/30/86 6042Agricultural sector memorandum SR 06/01/86 6250Agriculture: its present condition and future needs SR 02/01/87 6613Agrarian reform issues: an assessment of the proposal for an accelerated

land reform program SR 05/01/87 6779Agricultural sector strategy review SR 10/01/87 6819Forestry, fisheries, and agricultural resource management study (FFARM study) SR 01/01/89 7388Irrigated agriculture sector review SR 04/01/92 9848Promoting equitable rural growth SR 05/30/97 15782Education (3)Education sector study – Philippines SR 12/01/88 7473Vocational training for operatives and craftsmen SR 01/24/90 8259Education financing and social equity: a reform agenda SR 06/11/96 15898Electric Power and Other Energy (3)Energy sector study SR 09/01/88 7269Rural electrification sector study: an integrated program to revitalize the sector SR 11/01/89 8016Power sector study: structural framework for the power sector SR 11/30/94 13313Environment (1)Environmental sector study toward improved environmental policies

and management SR 12/08/93 11852Finance (3)Financial sector study SR 08/01/88 7177Regional financial sector report: lessons of financial liberalization in Asia:

a comparative study SR 11/23/88 7512Capital market study ER 02/01/92 10053Industry (2)Issues and policies in the industrial sector SR 07/01/87 6706Private sector assessment (PSA) SR 07/12/94 11853Mining (1)Mining sector review SR 10/01/87 6898Multisector (8)A framework for economic recovery ER 11/01/86 6350Toward sustaining the economic recovery: country economic memorandum ER 01/30/89 7438Country economic memorandum: issues in adjustment and competitiveness ER 10/01/90 8933An opening for sustained growth ER 04/01/93 11061Infrastructure assessment study – Philippines SR 06/01/93 11944Recent macroeconomic developments and reform efforts ER 06/30/94 13109Strengthening economic resiliency ER 11/08/96 15985Managing global integration SR 11/17/97 17024Population, Health, and Nutrition (2)New directions in the Philippines family planning program SR 10/01/91 9579Devolution and health services: managing risks and opportunities SR 05/23/94 12343Poverty (2)The challenge of poverty ER 10/01/88 7144A strategy to fight poverty SR 11/13/95 14933Public Sector Management (6)Key issues in the nonfinancial public corporate sector: a special economic report ER 06/01/86 6338Selected issues in public resource management ER 04/01/88 6887Country economic report: public sector resource mobilization and

expenditure management ER 02/01/92 10056Fiscal decentralization study SR 01/01/93 10716Public expenditure management for sustained and equitable growth SR 09/05/95 14680An agenda for the reform of the social security institutions SR 09/29/95 13400Transportation (1)Transport sector review SR 03/31/88 7098

Note: Reports include only formal ESW outputs.


TABLE A.5: LIST OF ECONOMIC AND SECTOR WORK (ESW)

49

A n n e x

FISCAL DEPARTMENT ORYEAR VICE PRESIDENT COUNTRY DIRECTOR

1985 Attila Karaossmanoglu Gautam Kaji1986 Attila Karaossmanoglu Gautam Kaji1987 Attila Karaossmanoglu Gautam Kaji1988 Attila Karaossmanoglu Gautam Kaji1989 Attila Karaossmanoglu Gautam Kaji1990 Attila Karaossmanoglu Gautam Kaji1991 Attila Karaossmanoglu Gautam Kaji

TABLE A.6: BANK SENIOR MANAGEMENT RESPONSIBLE FOR PHILIPPINES SINCE 1985

1992 Gautam Kaji Callisto Madavo1993 Gautam Kaji Callisto Madavo1994 Gautam Kaji Callisto Madavo1995 Russell Cheetham Callisto Madavo1996 Russell Cheetham Callisto Madavo1

1997 Russell Cheetham Javad Khalilzadeh-Shirazi1998 Jean-Michel Severino Vinay K. Bhargava

Note: There was a change in the organizational structure of the Bank in FY88 when the vice presidencies for East Asia andSouth Asia were merged. In FY93 this arrangement ended when the two regions were again split into separate vice presidencies.1. Division Chiefs act as Director in last three months of the year.

FISCAL DEPARTMENT ORYEAR VICE PRESIDENT COUNTRY DIRECTOR

50


Major OED Recommendations

Strengthening Economic ManagementESW, policy advice, technical assistance, andresumed adjustment lending are recommended for:(i) emergency assistance to help ease the current liq-uidity crunch; (ii) strengthening the banking sector(legal, regulatory, and supervisory regimes and fail-ure resolution), and the capital markets (manage-ment of short-term capital flows, housing finance,and pension reform); (iii) restructuring expendituresin favor of higher public investment and mainte-nance expenditures, implementing civil servicereform, and improving local government finance;and (iv) further reduction in import tariffs. For sec-tors with appropriate policy and institutionalframeworks, the seal of approval of regular PublicExpenditure Reviews (PERs) should open the doorto sectoral investment loans and adaptable programloans with low conditionalities. A study and subse-quent support for judicial system reform are alsorecommended.

Management Response

This is largely consistent with the CAS ProgressReport submitted to the Board on 3/3/98 for discus-sion on 3/24/98, which proposes (i) adjustmentlending as well as lines of credit that would, amongother things, address liquidity constraints; (ii) moreemphasis on the banking sector through adjustmentand TA operations, covering both the banking andnonbanking financial sector, as well as a PHRDgrant for financial sector training and TA; and (iii)public sector reform and expenditure managementin the context of upcoming adjustment lending, inaddition to intensive work on local governmentfinance in ongoing projects and others under prepa-ration. The policy dialogue with the governmenthas included discussions on a tariff reduction strat-egy. Instead of regular PERs, we are pursuing sec-toral program reviews in view of their greatercost-effectiveness and receptivity by the client.Adaptable program loans are already under prepa-ration in the urban, rural, and transport sectors.The government has so far not approached theBank for support for judicial system reform, but wewould respond positively to any request from thenew administration.

ANNEX B: THE PHILIPPINES: FROM CRISIS TO OPPORTUNITY/MANAGEMENT RESPONSE

51

A n n e x

Expanding Private Sector and InfrastructureDevelopmentThe Bank could resume financial intermediaryloans. Learning from others’ experience, the Bankcould resume microcredit with simple financialproducts, supported by market-oriented technicalassistance.

Intensified technical assistance is needed to com-plete regulatory reform for private participation inall infrastructure sectors. Bank Group support—including conditional sectoral lending—is necessaryto achieve privatization quickly in NPC, water sup-ply and sanitation, and transport.

The Bank could scale-up its successful lending forMunicipal Development, including capacity build-ing.

This is a useful suggestion in the current circum-stances. As the CAS Progress Report indicates, weare looking into the possibility for new financialintermediary operations; a preparation mission iscurrently in the field.

We agree that continued technical assistance for further regulatory reforms and privatization isneeded. This is part of our sectoral policy dialogue,investment projects, and the subject of planned sec-tor work on government-owned corporations. Weare coordinating closely with ADB to avoid overlap.

Agreed and already in line with our current assis-tance strategy, which focuses on lending to andcapacity building of local government units (LGUs),including municipal governments, with increasingemphasis on poorer and smaller LGUs. Specificoperations are under preparation.

52


Accelerating Rural Development and PovertyReductionAn agreed new sector development and assistancestrategy targeting the rural poor is required alongthe lines of recent Bank ESW for rural develop-ment.

The Bank could expand its support for land reformbeyond assistance to the beneficiaries by includingdirect budgetary support for the completion of thefinal phase of land reform.

With adjustment and sector lending, the Bankcould support tariff reductions for cereals, removethe rice monopoly, promote rice exports, and fos-ter private participation in production, marketing,and distribution.

Revisiting Human DevelopmentThe continued availability of softer money fromother donors and their interest in lending to socialsectors could justify the Bank’s stepping aside aslender, while keeping its important analytical andadvisory role.

Should the Bank remain an active lender in the sec-tor, family planning and primary health are priori-ties. In education, the Bank should limit itsinvolvement with vocational and tertiary educationto an advisory role.

Agreed. The rural development strategy was com-pleted in 1997 and widely discussed with all stake-holders. This is the basis for the Bank’s currentpreparation of a Sector Assistance Strategy Note,which will include plans for an expansion of activi-ties in the rural development sector.

Our current approach focuses on assistance to ben-eficiaries through ongoing projects. Direct bud-getary support would likely be in support of thehigh costs of land acquisition (estimated at overUS$1 billion) and cannot be financed by the Bank[OP 12.00, para. 2(b)].

Currently not requested or foreseen. These issuesare currently largely subject of discussions with theWorld Trade Organization (WTO) and ADB in thecontext of an ADB sector reform loan. In the inter-est of focus and selectivity of the Bank’s strategyand effective donor coordination, we are addressingthese issues through our ongoing policy dialogue.

This would be premature. The Bank has been oneof the largest funding agencies in the education sec-tor and there is continued interest in Bank lending.In the health sector, our more limited lending isdemand driven, with cofinancing to achieve moreconcessional terms.

The Bank can be more effective (i) in the health sec-tor by providing support not only to FP and pri-mary care, but to reorienting delivery and financingof all public health services in the decentralizedgovernment structure and building capacity at thelocal level and (ii) in education, by maintaining theprimary education focus, but exploring support inother subsectors to promote reforms regarding sub-sidies and private sector involvement.

53

A n n e x

Mobilizing PartnershipsEnhance participation of NGOs and civil society in the Bank’s strategy; its wide dissemination is recommended.

Successful aid coordination by the Bank could betaken to a higher plane to maximize long-termsources of foreign savings and to achieve betterresults on the ground at the sectoral level. A trulyparticipatory CAS covering all major donors shouldbe the Bank’s goal by 1999.

Agreed. We are planning to discuss Country andSectoral Assistance Strategy Notes, prepared tobuild up to the FY99 CAS, with stakeholders ineach sector. The resident mission has a strong out-reach program to promote participation in allaspects of our work, including dialogue, ESW, andlending.

A participatory CAS is already planned, involvingstakeholders. The preparation will also take fullaccount of other donors’ activities. A joint donorCAS will, however, not be possible under currentconditions: such an effort would first require gov-ernment leadership, high-level commitment in otherdonor agencies, and additional resources for thePhilippines program.

54

The Philippines: Country Assistance Review (CAR)On March 11, 1998, the Committee on DevelopmentEffectiveness (CODE) reviewed a report prepared by theOperations Evaluation Department (OED) entitled ThePhilippines: Country Assistance Review (CAR)(SecM98-165), together with a draft managementresponse prepared by the Philippines Headquarters Unit(EACPQ). The Committee welcomed the opportunity todiscuss the CAR in advance of the Board review of thePhilippines CAS Progress Report and commended OEDfor the effort to produce a very good and useful docu-ment in a timely manner. In particular, the Committeecommended OED for ensuring that the observationsabout the Philippines were made in a regional context.The Committee noted that, due to the severe time con-straint, OED has not been able to obtain the country’sofficial comments on the CAR. It looks forward to theCAR’s being finalized after further discussions with theGovernment and the Region.

The Committee appreciated the historical perspec-tive provided in the CAR and welcomed the finding thatduring the past 12 years, Bank assistance has been bothrelevant and satisfactory at the macro level, and in someareas of private sector (including SME) development,financial sector strengthening, and municipal develop-ment, but noted with concern that its relevance and effi-cacy have been uneven in other sectors such as waterand sanitation, transport, health, education, agriculture,and energy. The Committee also noted that the assis-tance strategy has moved effectively from economicrecovery to poverty alleviation in line with governmentand Bank priorities, but that the shift is not yet com-plete. The CAR recommends that to help the economyreach its growth potential, fortify its resilience to domes-tic and global exigencies, and reduce poverty faster, thegovernment must pursue and deepen its unfinishedreform agenda.

The challenge for the government is fivefold:strengthen economic management; expand private sec-tor and infrastructure development; accelerate ruraldevelopment and attack poverty aggressively; revisithuman development; and mobilize partnerships. TheCAR recommends that supporting the government inpursuing this medium-term agenda should be the centraltenet of the Bank’s assistance strategy. The Committeewelcomed management’s assertion that several of the

recommendations in the CAR have been incorporatedinto the program of lending and nonlending activitiesfor the Philippines, as reflected in the CAS ProgressReport. Others will feed into the sector strategy notesthat are being prepared as background for the full CASscheduled for next year. Several specific issues relevantto the Board discussion of the CAS Progress Report wereraised during the Committee’s discussion and are high-lighted below.

Bank Group Role in Specific SectorsThe Committee asked for clarification of OED’s findingthat the continued availability of softer money fromother donors and their interest in lending to social sec-tors could justify the Bank’s stepping aside as lender inthese sectors. In OED’s view, since the governmentprefers not to borrow from the Bank for soft sectors, theBank should respond by focusing lending on other sec-tors such as infrastructure, while continuing to provideanalytical and advisory services in the social sectors.OED also offered the opinion that the Bank’s overallperformance would have been better had it concentratedlending in fewer sectors. The Committee noted manage-ment’s response that to retreat from the social sectorswould be premature. The Bank has been one of thelargest funding agencies in the education sector, andthere is continued interest in Bank lending in this area.In the health sector, the Bank’s more limited lending isdemand driven, usually with cofinancing to achievemore concessional terms.

The Committee was interested in the Bank’s activi-ties in and lessons learned from experience in the finan-cial sector. OED reported that the overall impact of theBank’s assistance to the financial sector has been satis-factory. But the financial deepening and strengthening inthe Philippines has some way to go. The sector still suf-fers from weaknesses in the regulatory and supervisoryregime. Therefore, OED recommends that ESW, policyadvice, technical assistance, and adjustment lending beused to strengthen further the banking sector. The Com-mittee was satisfied that the CAS Progress Report pro-poses more emphasis on the banking sector throughadjustment and technical assistance (TA) operations,covering both the banking and nonbanking financialsector, as well as a PHRD grant for financial sectortraining and TA.


ANNEX C: REPORT FROM CODE/COMMITTEE ON DEVELOPMENT EFFECTIVENESS

55

Dissemination of ESWThe Committee was concerned about the finding thateven though the Bank’s diagnosis of the Philippines’ illshas been correct, based on solid ESW, the problems withdissemination and time have limited the effectivenessand impact of ESW. Key middle and senior managers ingovernment, parliamentary committee chairmen, busi-ness leaders, former cabinet members, and prominentintellectuals are frequently unaware of the content and,sometimes, of the existence of nonsensitive Bankreports. The Committee took note of the response thatwith the decentralization of management to the Philip-pines, a greater effort is being made to disseminate ESWinformation, including the establishment of a publicinformation center.

Partnerships, Aid Coordination, and a Joint CASIn order to deepen reform and achieve sustainablepoverty reduction, OED suggests that a new compactamong the government, the NGOs, the Bank, and therest of the donor community is needed to mobilize anduse external assistance effectively. The Committee wel-comed the finding that the Bank has played a key role incoordinating and building consensus among donors andthe government through regular dialogues. But evenmore important, the Bank supported the government’sefforts to improve its own capacity and to assume anincreasingly assertive role in aid coordination. However,even with a high level of aid coordination in evidence,OED found that there is much friendly but ultimatelywasteful competition, especially in lending to the socialsectors, and little reciprocal concern about other donors’results. The Committee was not supportive of the rec-ommendation that the Bank should aim for a joint CAScovering all major donors by 1999. The view wasexpressed that it would not be appropriate for the Board

to review and pass judgment on a document that explic-itly includes the assistance strategies of donors. Instead,the Committee agreed with management that a partici-patory CAS involving stakeholders should be prepared,and that the preparation should take full account ofdonors’ activities.

The Committee raised the issue of the Bank’s com-parative advantage vis-a-vis the Asian DevelopmentBank (ADB), and wanted to know how decisions weremade about where the Bank focuses its activities. Itnoted the response that the decentralization of manage-ment to the resident mission has contributed signifi-cantly to better coordination between the ADB and theBank. To avoid overlap, consultation at the RegionalVice President and project levels was now the norm.

Negative Net TransfersThe Committee noted the high level of total net resourceflows out of the Philippines to the Bank (US$2.7 billionfrom 1986 to 1997). It also noted OED’s view that alarge negative resource flow at this still early stage of thePhilippines’ development raises the question of the wis-dom of phasing out adjustment lending in themid–1990s, with an agenda of structural reform stillincomplete. OED further pointed out that public infra-structure investment is a severe constraint to growth.The opinion was expressed by the Committee that thequestion of whether adjustment lending should beresumed or not should be based on the reform effort andcommitment of the government, and not on a desire toreverse the net outflow of capital from the Philippines tothe Bank.

Leonard GoodVice ChairmanCODE

A n n e x

57

The Operations Evaluation Department (OED), an inde-pendent evaluation unit reporting to the World Bank’sexecutive directors, rates the development impact andperformance of all the Bank’s completed lending opera-tions. Results and recommendations are reported to theexecutive directors and fed back into the design andimplementation of new policies and projects. In additionto the individual operations and country assistance pro-grams, OED evaluates the Bank’s policies and processes.

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OPERATIONS EVALUATION DEPARTMENT PUBLICATIONS

Nongovernmental Organizations in World Bank–Supported Projects (1999)

Evaluation and Development: The Institutional Dimension (1998)

1997 Annual Review of Development Effectiveness (1998)

India: The Dairy Revolution (1998)

The World Bank’s Experience with Post-Conflict Reconstruction (1998)

Financial Sector Reform: A Review of World Bank Assistance (1998)

Rebuilding the Mozambique Economy: Assessment of a Development Partnership (1998)

Mainstreaming Gender in World Bank Lending: An Update (1997)

Agricultural Extension and Research: Achievements and Problems in National Systems (1997)

Fiscal Management in Adjustment Lending (1997)

Reforming Agriculture: The World Bank Goes to Market (1997)

Paddy Irrigation and Water Management in Southeast Asia (1997)

Poland Country Assistance Review: Partnership in a Transition Economy (1997)

1995 Evaluation Results (1997)

Zambia Country Assistance Review: Turning an Economy Around (1997)

The Aga Khan Rural Support Program: A Third Evaluation (1996)

Lending for Electric Power in Sub-Saharan Africa (1996)

Industrial Restructuring: World Bank Experience, Future Challenges (1996)

Social Dimensions of Adjustment: World Bank Experience, 1980–93 (1996)


Ghana Country Assistance Review: A Study in Development Effectiveness (1995)

Evaluation and Development: Proceedings of the 1994 World Bank Conference (1995)

Developing Industrial Technology: Lessons for Policy and Practice (1995)

The World Bank and Irrigation (1995)


Structural and Sectoral Adjustment: World Bank Experience, 1980–82 (1995)

Gender Issues in World Bank Lending (1995)

The World Bank’s Role in Human Resource Development in Sub-Saharan Africa: Education, Training, and Technical Assistance (1994)


New Lessons from Old Projects: The Workings of Rural Development in Northeast Brazil (1993; contains summaries in French, Portuguese and Spanish)

World Bank Approaches to the Environment in Brazil (1993; contains summaries in French, Portuguese, and Spanish)

Rapid Appraisal Methods (1993)

Trade Policy Reforms Under Adjustment Programs (1992)

World Bank Support for Industrialization in Korea, India, and Indonesia (1992)

Population and the World Bank: Implications from Eight Case Studies (1992)

The Aga Khan Rural Support Program in Pakistan: Second Interim Evaluation (1990)

OED Study Series