The Philippine Economy(POST-WAR TO POST-COLD WAR)

Kristine Angeli S. SabilloPhilippine Studies 201, U.P. Diliman

Aftermath of World War II (1946-1949)

• Struggle to rebuild. Approx P40 billion invested to re-construct physical capital.

• Foreign aid flowing, $803 million from the US (= debt).

• Rehabilitation funds from the US through the Tydings Rehabilitation Act which required:

• Bell Trade Act- prohibited Philippines from protecting new industries, manufacturing or selling products that may be in competition with US goods.

- no import duties for US products.

- pegging of peso to dollar at P2:$1 rate.

- quotas on PH export to US and free trade.

- Parity Clause allowing US citizens and corporations access to natural resources and operation of public utilities.

Aftermath of World War II (1946-1949)

• Heavy importation. American goods flooded the country, draining Philippine dollar reserves and causing local prices to depress by 50 percent = large accumulated balance of payments deficit

• Pre-control era (before import and foreign exchange restrictions)

• With peso overvalued, trade deficit rose (averaging around $300 million for each of the four pre-control years).

• Dollars from aid were lost on imported goods instead of developmental purposes.

Controls (1950s)

• Controls were then activated by the newly-established Central Bank and Congress to save Philippine economy

• There was an exchange control system - peso was depreciated from P2:$1 to P2.40:$1. - quantitative limitation- gov’t channeled the dollars into dev’t projects.

• Import substitution industries prospered, created jobs, taught skills.

• Manufacturing output grew and by 1959 its share innational output doubled. Filipino businessmen demanded dollar priority = Filipino First

Decontrol Program (1962 onwards)• Lifting of controls, devaluation of peso (from P2:$1 to P3.90:$1).

• PROs: - Wider field of financial business opportunities. (Financial institutions multiplied. There were 22 new banks with 111 branches from 1960 to 1967 compared to 7 new banks in the 1950s.)

- Evolution of a Philippine money and capital market.

- Improvement in climate of foreign investment.

• CONs: - Slow down in the industrial sector.

- Cost of imports increased which resulted in industrial weakening.

- Economy was flooded w/ imports even as prices soared

• Resulted in trade deficit again.

Decontrol Program (1960s)

• In exchange of letting go of the foreign exchange control system, IMF lent us a $300M stabilization loan. From a natl debt of $150M, we had a $600M debt by 1965.

• Even as author of import control law, Marcos thought decontrol was inseparable from free enterprise. Congress thought otherwise.

• After his re-election in 1969, Marcos attested to the ills of devaluation. But in 1970, the peso was devalued from P3.90:$1 to P5.50 to P6:$1.

• In 1970, the Philippine peso was subjected to a floating rate, meaning its value will be determined by market transactions.

Floating Rate (1970s)

• Finance Secretary Cesar Virata admitted that the floating rate was among the conditions of the IMF for new loans.

• Debt reached $1 billion. Unpaid loans had to be paid at much higher rates.

• Some industrial projects (Iligan Steel, Elizalde Steel Rolling Mills) had to be aborted

• Far Eastern Economic Review: « When a country is in the throes of a political crisis as the Philippines is today, a floating exchange rate makes no sense. »

• In 1973, the Bureau of Investments removed heavy industries from the Priorities Plan andgave emphasis on labor-intensive, export-oriented (LIEO) industries.

Industrialization plans (1970s to 80s)• By 1979, while almost every country in Asia had developed its basic

industries, Philippines had none.

• Marcos’ 11 major projects (1979): integrated steel mill, petrochemical complex, copper smelter, phosphate fertilizers, aluminum smelter, diesel engine manufacturing, integrated pulp and paper, cement industry, expansion and rationalization of coconut industry and dev’t of non-conventional sources of energy. But the World Bank recommended caution in launching large-scale projects, substantial investments from gov’t.

• In 1983, Ninoy Aquino was assassinated. People Power.

• From 1973-1986, importation of luxuries reached a level 10x higher than South Korea’s

• Led by NEDA (under Solita Monsod) and DOF (Jaime Ongpin), import liberalization was intensified. LIEO thrustwas continued.

Free trade, free reign (Post-EDSA)• AQUINO administration: $26 or 28 billion external debt was a pressing

problem, honored instead of repudiated.

• Progress was hampered by Pinatubo , coup attempts, and daily brownouts.

• Industrial growth fell from 6.9 percent in 1989 to 1.9 percent in 1990.

• Amid stagnation of industrialization, growth rate increased from 1.9 percent in 1986 to 6.7 percent in 1988. As growth increased, so did trade deficit.

• Privatization of crony and bad assets. Sold hundreds ofsaid assets. Build-Operate-Transfer Law was enacted.

• 10% value-added tax imposed (EO 273, 1987)

Free trade, free reign (1990s to present)

• RAMOS administration: Philippines 2000. Further privatization of public utilities such as electricity, telecommunications, banking, domestic shipping and oil.

• World Trade Organization membership.

• PROS: Helps in handling disputes. Creates trade rules. Free trade makes products cheaper. Working with other countries provides more product choices and export opportunities.

• CONS: Erosion of national sovereignty. More beneficial to developed than developing countries. Damaging to local agriculture.

• Asian Financial crisis. Why did the Philippines fare better than the other countries amid hitting 0.6% growth in 1998?

Where are we going?

• ESTRADA administration: deficit increased , though GDP and GNP rose (from almost 0% during the Asian crisis).

• ARROYO administration: fastest growth in three decades (2007),fared relatively well in the 2008 global financial crisis. However, it has been criticized for a jobless growth and a stagnant poverty rate.

• Japan-Philippines Economic Partnership Agreement (2006).

• AQUINO administration: Philippine Development Plan of 2011 – targets globally competitive industries and services (foreign tourism, BPOs, electronics, extractive mining, ship building), public-private partnerships (PPP), conditional cash transfer program (CCT)

Where are we going?

Pressing issues:• OFW Remittance.

• Inflation. Price increase of basic commodities.

• Issue of stagnant wages.

• Debt management

IBON Foundation:3 decades of globalization

• Economic results…– Greater trade & foreign investment– Rapid growth

• … yet underdevelopment– Manufacturing & agricultural decline– High & rising joblessness– Growing poverty– Severe inequality

Philippines Real GDP Growth by Administration, 1986-2010

7.3

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Year

%

Aquino 1:ave. 3.9% Ramos:

ave. 3.8% Estrada:ave. 2.4%

Arroyo:ave. 4.5%

Aquino 2:7.3%

Source: IBON estimates on NSCB data

Gross Domestic Product, by Industry1946-2010 (% of GDP, current prices)

0

10

20

30

40

50

60

1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

Year

%

Agriculture, fishery & forestryIndustry ManufacturingServices

Manufacturing (23.0%)

as small as in 1950s

Agriculture (16.8%) smallest in history

Source: IBON estimates on data from NSCB

References

• Constantino, Renato, The Philippines: The Continuing Past

• David, Fernando, Economic Perspective 1945-1968

• IBON Foundation, “Midyear 2011”

• Lichauco, Alejandro, Nationalist Economics

• Lichauco, Alejandro, The Financial Crisis in Asia

• NEDA Report on the Economy 1975

• Noland, Marcus, “Philippines in the Asian Financial Crisis: How the Sick Man Avoided Pneumonia.”

• Padilla, Arnold, “EDSA 25”, http://arnoldpadilla.wordpress.com/2011/02/22/edsa-25-economic-legacy-of-the-first-aquino-administration/

• Philippine Development Plan 2011-2016

• Rivera, Temario, Landlords and Capitalists

• Sicat, Gerardo, The Philippine Economy in the 1960s