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Philippines - ECONOMY

Philippines - The Economy


THE PHILIPPINE ECONOMY EXPERIENCED considerable difficulty in the 1980s. Real gross national product (GNP) grew at an annual average of only 1.8 percent, less than the 2.5 percent rate of population increase. The US$668 GNP per capita income in 1990 was below the 1978 level, and approximately 50 percent of the population lived below the poverty line. The 1988 unemployment rate of 8.3 percent (12.3 percent in urban areas) peaked at 11.4 percent in early 1989, and the underemployment rate, particularly acute for poor, less-educated, and elderly people, was approximately twice that of unemployment. In 1988, about 470,000 Filipinos left the country to work abroad in contract jobs or as merchant seamen.

The economy had grown at a relatively high average annual rate of 6.4 percent during the 1970s, financed in large part by foreign-currency borrowing. External indebtedness grew from $2.3 billion in 1970 to $24.4 billion in 1983, much of which was owed to transnational commercial banks.

In the early 1980s, the economy began to run into difficulty because of the declining world market for Philippine exports, trouble in borrowing on the international capital market, and a domestic financial scandal. The problem was compounded by the excesses of President Ferdinand E. Marcos's regime and the bailing out by government-owned financial institutions of firms owned by those close to the president that encountered financial difficulties. In 1983 the country descended into a political and economic crisis in the aftermath of the assassination of Marcos's chief rival, former Senator Benigno Aquino, and circumstances had not improved when Marcos fled the country in February 1986.

Economic growth revived in 1986 under the new president, Corazon C. Aquino, reaching 6.7 percent in 1988. But in 1988 the economy once again began to encounter difficulties. The trade deficit and the government budget deficit were of particular concern. In 1990 the economy continued to experience difficulties, a situation exacerbated by several natural disasters, and growth declined to 3 percent.

The structure of the economy evolved slowly over time. The agricultural sector in 1990 accounted for 23 percent of GNP and slightly more than 45 percent of the work force. About 33 percent of output came from industry, which employed about 15 percent of the work force. The manufacturing subsector had developed rapidly during the 1950s, but then it leveled off and did not increase its share of either output or employment. In 1990, 24 percent of GNP and 12 percent of employment were derived from manufacturing. The services sector, a residual employer, increased its share of the work force from about 25 percent in 1960 to 40 percent in 1990. In 1990 services accounted for 44 percent of GNP.

The Philippines is rich in natural resources. Land planted in rice and corn accounted for about 50 percent of the 4.5 million hectares of field crops in 1990. Another 25 percent of the cultivated area was taken up by coconuts, a major export crop. Sugarcane, pineapples, and Cavendish bananas also were important earners of foreign exchange. Forest reserves have been extensively exploited to the point of serious depletion. Archipelagic Philippines is surrounded by a vast aquatic resource base. In 1990 fish and other seafood from the surrounding seas provided more than half the protein consumed by the average Filipino household. The Philippines also had vast mineral deposits. In 1988 the country was the world's tenth largest producer of copper, the sixth largest producer of chromium, and the ninth largest producer of gold. The country's only nickel mining company was expected to resume operation in 1991 and again produce large quantities of that metal. Petroleum exploration continued but discoveries were minimal, and the country was required to import most of its oil.

Prior to 1970, Philippine exports consisted mainly of agricultural or mineral products in raw or minimally processed form. In the 1970s, the country began to export manufactured commodities, especially garments and electronic components, and the prices of some traditional exports declined. By 1988 nontraditional exports comprised 75 percent of the total value of goods shipped abroad.

<> Tourism




Economic Development Until 1970

In the mid-nineteenth century, a Filipino landowning elite developed on the basis of the export of abaca (Manila hemp), sugar, and other agricultural products. At the onset of the United States power in the Philippines in 1898-99, this planter group was cultivated as part of the United States military and political pacification program. The democratic process imposed on the Philippines during the American colonial period remained under the control of this elite. Access to political power required an economic basis, and in turn provided the means for enhancing economic power. The landowning class was able to use its privileged position directly to further its economic interests as well as to secure a flow of resources to garner political support and ensure its position as the political elite. Otherwise, the state played a minimal role in the economy, so that no powerful bureaucratic group arose that could pursue a development program independent of the wishes of the landowning class. This situation remained basically unchanged in the early 1990s.

At the time of independence in 1946, and in the aftermath of a destructive wartime occupation by Japan, Philippine reliance on the United States was even more apparent. To gain access to reconstruction assistance from the United States, the Philippines agreed to maintain its prewar exchange rate with the United States dollar and not to restrict imports from the United States. For a while the aid inflow from the United States offset the negative balance of trade, but by 1949, the economy had entered a crisis. The Philippine government responded by instituting import and foreign-exchange controls that lasted until the early 1960s.

Import restrictions stimulated the manufacturing sector. Manufacturing net domestic product (NDP) at first grew rapidly, averaging 12 percent growth per annum in real terms during the first half of the 1950s, contributing to an average 7.7 percent growth in the GNP, a higher rate than in any subsequent five-year period. The Philippines had entered an import-substitution stage of industrialization, largely as the unintended consequence of a policy response to balance-of-payments pressures. In the second half of the 1950s, the growth rate of manufacturing fell by about a third to an average of 7.7 percent, and real GNP growth was down to 4.9 percent. Import demand outpaced exports, and the allocation of foreign exchange was subject to corruption. Pressure mounted for a change of policy.

In 1962 the government devalued the peso and abolished import controls and exchange licensing. The peso fell by half to P3.90 to the dollar. Traditional exports of agricultural and mineral products increased; however, the growth rate of manufacturing declined even further. Substantial tariffs had been put in place in the late 1950s, but they apparently provided insufficient protection. Pressure from industrialists, combined with renewed balance of payments problems, resulted in the reimposition of exchange controls in 1968. Manufacturing recovered slightly, growing an average of 6.1 percent per year in the second half of the decade. However, the sector was no longer the engine of development that it had been in the early 1950s. Overall real GNP growth was mediocre, averaging somewhat under 5 percent in the second half of decade; growth of agriculture was more than a percentage point lower. The limited impact of manufacturing also affected employment. The sector's share of the employed labor force, which had risen rapidly during the 1950s to over 12 percent, plateaued. Import substitution had run its course.

To stimulate industrialization, technocrats within the government worked to rationalize and improve incentive structures, to move the country away from import substitution, and to reduce tariffs. Movements to reduce tariffs, however, met stiff resistance from industrialists, and government efforts to liberalize the economy and emphasize export-led industrialization were largely unsuccessful.

<> Martial Law and its Aftermath, (1972-86)
<> The Aquino Government


Philippines - ECONOMY - Martial Law and its Aftermath


The Philippines found itself in an economic crisis in early 1970, in large part the consequence of the profligate spending of government funds by President Marcos in his reelection bid. The government, unable to meet payments on its US$2.3 billion international debt, worked out a US$27.5 million standby credit arrangement with the International Monetary Fund (IMF) that involved renegotiating the country's external debt and devaluing the Philippine currency to P6.40 to the United States dollar. The government, unwilling and unable to take the necessary steps to deal with economic difficulties on its own, submitted to the external dictates of the IMF. It was a pattern that would be repeated with increasing frequency in the next twenty years.

In September 1972, Marcos declared martial law, claiming that the country was faced with revolutions from both the left and the right. He gathered around him a group of businessmen, used presidential decrees and letters of instruction to provide them with monopoly positions within the economy, and began channeling resources to himself and his associates, instituting what came to be called "crony capitalism." By the time Marcos fled the Philippines in February 1986, monopolization and corruption had severely crippled the economy.

In the beginning, this tendency was not so obvious. Marcos's efforts to create a "New Society" were supported widely by the business community, both Filipino and foreign, by Washington, and, de facto, by the multilateral institutions. Foreign investment was encouraged: an export-processing zone was opened; a range of additional investment incentives was created, and the Philippines projected itself onto the world economy as a country of low wages and industrial peace. The inflow of international capital increased dramatically.

A general rise in world raw material prices in the early 1970s helped boost the performance of the economy; real GNP grew at an average of almost 7 percent per year in the five years after the declaration of martial law, as compared with approximately 5 percent annually in the five preceding years. Agriculture performed better that it did in the 1960s. New rice technologies introduced in the late 1960s were widely adopted. Manufacturing was able to maintain the 6 percent growth rate it achieved in the late 1960s, a rate, however, that was below that of the economy as a whole. Manufactured exports, on the other hand, did quite well, growing at a rate twice that of the country's traditional agricultural exports. The public sector played a much larger role in the 1970s, with the extent of government expenditures in GNP rising by 40 percent in the decade after 1972. To finance the boom, the government extensively resorted to international debt, hence the characterization of the economy of the Marcos era as "debt driven."

In the latter half of the 1970s, heavy borrowing from transnational commercial banks, multilateral organizations, and the United States and other countries masked problems that had begun to appear on the economic horizon with the slowdown of the world economy. By 1976 the Philippines was among the top 100 recipients of loans from the World Bank and was considered a "country of concentration." Its balance of payments problem was solved and growth facilitated, at least temporarily, but at the cost of having to service an external debt that rose from US$2.3 billion in 1970 to more than US$17.2 billion in 1980.

There were internal problems as well, particularly in respect of the increasingly visible mismanagement of crony enterprises. A financial scandal in January 1981 in which a businessman fled the country with debts of an estimated P700 million required massive amounts of emergency loans from the Central Bank of the Philippines and other government-owned financial institutions to some eighty firms. The growth rate of GNP fell dramatically, and from then the economic ills of the Philippines proliferated. In 1980 there was an abrupt change in economic policy, related to the changing world economy and deteriorating internal conditions, with the Philippine government agreeing to reduce the average level and dispersion of tariff rates and to eliminate most quantitative restrictions on trade, in exchange for a US$200 million structural adjustment loan from the World Bank. Whatever the merits of the policy shift, the timing was miserable. Exports did not increase substantially, while imports increased dramatically. The result was growing debt-service payments; emergency loans were forthcoming, but the hemorrhaging did not cease.

It was in this environment in August 1983 that President Marcos's foremost critic, former Senator Benigno Aquino, returned from exile and was assassinated. The country was thrown into an economic and political crisis that resulted eventually, in February 1986, in the ending of Marcos's twenty-one-year rule and his flight from the Philippines. In the meantime, debt repayment had ceased. Real GNP fell more than 11 percent before turning back up in 1986, and real GNP per capita fell 17 percent from its high point in 1981. In 1990 per capita real GNP was still 7 percent below the 1981 level.


Philippines - ECONOMY - The Aquino Government


In 1986 Corazon Aquino focused her presidential campaign on the misdeeds of Marcos and his cronies. The economic correctives that she proposed emphasized a central role for private enterprise and the moral imperative of reaching out to the poor and meeting their needs. Reducing unemployment, encouraging small-scale enterprise, and developing the neglected rural areas were the themes.

Aquino entered the presidency with a mandate to undertake a new direction in economic policy. Her initial cabinet contained individuals from across the political spectrum. Over time, however, the cabinet became increasingly homogeneous, particularly with respect to economic perspective, reflecting the strong influence of the powerful business community and international creditors. The businesspeople and technocrats who directed the Central Bank and headed the departments of finance and trade and industry became the decisive voices in economic decision making. Foreign policy also reflected this power relationship, focusing on attracting more foreign loans, aid, trade, investment, and tourists.

It soon became clear that the plight of the people had been subordinated largely to the requirements of private enterprise and the world economy. As the president noted in her state-of- the-nation address in June 1989, the poor had not benefited from the economic recovery that had taken place since 1986. The gap between the rich and poor had widened, and the proportion of malnourished preschool children had grown.

The most pressing problem in the Philippine international political economy at the time Aquino took office was the country's US$28 billion external debt. It was also one of the most vexatious issues in her administration. Economists within the economic planning agency, the National Economic and Development Authority (NEDA), argued that economic recovery would be difficult, if not impossible, to achieve in a relatively short period if the country did not reduce the size of the resource outflows associated with its external debt. Large debt-service payments and moderate growth (on the order of 6.5 percent per year) were thought to be incompatible. A two-year moratorium on debt servicing and selective repudiation of loans where fraud or corruption could be shown were recommended. Business-oriented groups and their representatives in the president's cabinet vehemently objected to taking unilateral action on the debt, arguing that it was essential that the Philippines not break with its major creditors in the international community. Ultimately, the president rejected repudiation; the Philippines would honor all its debts.

Domestically, land reform was a highly contentious issue, involving economics as well as equity. NEDA economists argued that broad-based spending increases were necessary to get the economy going again; more purchasing power had to be put in the hands of the masses. Achieving this objective required a redistribution of wealth downward, primarily through land reform. Given Aquino's campaign promises, there were high expectations that a meaningful program would be implemented. Prior to the opening session of the first Congress under the country's 1987 constitution, the president had the power and the opportunity to proclaim a substantive land reform program. Waiting until the last moment before making an announcement, she chose to provide only a broad framework. Specifics were left to the new Congress, which she knew was heavily represented by landowning interests. The result--a foregone conclusion--was the enactment of a weak, loophole-ridden piece of legislation.

The most immediate task for Aquino's economic advisers was to get the economy moving, and a turn around was achieved in 1986. Economic growth was low (1.9 percent), but it was positive. For the next two years, growth was more respectable--5.9 and 6.7 percent, respectively. In 1986 and 1987, consumption led the growth process, but then investment began to increase. In 1985 industrial capacity utilization had been as low as 40 percent, but by mid-1988 industries were working at near full capacity. Investment in durable goods grew almost 30 percent in both 1988 and 1989, reflecting the buoyant atmosphere. The international community was supportive. Like domestic investment, foreign investment did not respond immediately after Aquino took office, but in 1987 it began to pick up. The economy also was helped by foreign aid. The 1989 and 1991 meetings of the aid plan called the Multilateral Aid Initiative, also known as the Philippine Assistance Plan, a multinational initiative to provide assistance to the Philippines, pledged a total of US$6.7 billion.

Economic successes, however, generated their own problems. The trade deficit rose rapidly, as both consumers and investors attempted to regain what had been lost in the depressed atmosphere of the 1983-85 period. Although debt-service payments on external debt were declining as a proportion of the country's exports, they remained above 25 percent. And the government budget deficit ballooned, hitting 5.2 percent of GNP in 1990.

The 1988 GNP grew 6.7 percent, slightly more than the government plan target. Growth fell off to 5.7 percent in 1989, then plummeted in 1990 to just over 3 percent. Many factors contributed to the 1990 decline. The country was subjected to a prolonged drought, which resulted in the increased need to import rice. In July a major earthquake hit Northern Luzon, causing extensive destruction, and in November a typhoon did considerable damage in the Visayas. There were other, more human, troubles also. The country was attempting to regain a semblance of order in the aftermath of the December 1989 coup attempt. Brownouts became a daily occurrence, as the government struggled to overcome the deficient power-generating capacity in the Luzon grid, a deficiency that in the worst period was below peak demand by more than 300 megawatts and resulted in outages of four hours and more. Residents of Manila suffered both from a lack of public transportation and clogged and overcrowded roadways; garbage removal was woefully inadequate; and, in general, the city's infrastructure was in decline. Industrial growth fell from 6.9 percent in 1989 to 1.9 percent in 1990; growth investment in 1990 in both fixed capital and durable equipment declined by half when compared with the previous year. Government construction, which grew at 10 percent in 1989, declined by 1 percent in 1990.

The Aquino administration appeared to be unable to work with the Congress to enact an economic package to overcome the country's economic difficulties. In July, as the government deficit soared Secretary of Finance Jesus Estanislao introduced a package of new tax measures. Then in October, stalemated with Congress, Aquino agreed to seek a reduction in the budget gap without new taxes. The agreement met with resistance from the Congress for being an onorous imposition on an economy in crisis, growth would be stifled and the poor would be impacted negatively. The willingness of the Congress to pass the tax package called for in the IMF agreement was in doubt. In 1990 Congress placed a 9 percent levy on all imports to provide revenues until an agreement could be reached with the administration on a tax package. In February 1991, however, it was learned that in its agreement with the IMF for new standby credits, the government had promised that it would indeed implement new taxes.

Accusations were widespread in Manila's press about the 1990-91 impasse. On the one hand, it was claimed that Aquino and her advisers had no economic plan; on the other hand, the Congress was said to be unwilling to work with the president. Traditional political patterns appeared to be reasserting themselves, and the technocrats had little ultimate influence. One study of the first Congress elected under the 1987 constitution showed that only 31 out of 200 members of the House of Representatives, were not previously elected officials or directly related to the leader of a traditional political clan. Business interests directly influenced the president to overrule already established policies, as in the 1990 program to simplify the tariff structure. Business and politics have always been deeply interwoven in the Philippines; crony capitalism was not a deviant model, but rather the logical extreme of a traditional pattern. As the Philippines entered the 1990s, the crucial question for the economy was whether the elite would limit its political activities to jockeying for economic advantage or would forge its economic and political interests in a fashion that would create a dynamic economy.




The Philippines has traditionally had a private enterprise economy both in policy and in practice. The government intervened primarily through fiscal and monetary policy and in the exercise of its regulatory authority. Although expansion of public sector enterprises occurred during the Marcos presidency, direct state participation in economic activity has generally been limited. The Aquino government set a major policy initiative of consolidating and privatizing government-owned and government-controlled firms. Economic planning was limited largely to establishing targets for economic growth and other macroeconomic goals, engaging in project planning and implementation, and advising the government in the use of capital funds for development projects.

Development Planning

The responsibility for economic planning was vested in the National Economic and Development Authority. Created in January 1973, the authority assumed the mandate both for macroeconomic planning that had been undertaken by its predecessor organization, the National Economic Council, and project planning and implementation, previously undertaken by the Presidential Economic Staff. National Economic and Development Authority plans calling for the expansion of employment, maximization of growth, attainment of fiscal responsibility and monetary stability, provision of social services, and equitable distribution of income were produced by the Marcos administration for 1974-77, 1978-82, and 1983-88, and by the Aquino administration for 1987-92. Growth was encouraged largely through the provision of infrastructure and incentives for investment by private capital. Equity, a derivative goal, was to be achieved as the result of a dynamic economic expansion within an appropriate policy environment that emphasized labor-intensive production.

The National Economic and Development Authority Medium-Term Development Plan, 1987-92 reflected Aquino's campaign themes: elimination of structures of privilege and monopolization of the economy; decentralization of power and decision making; and reduction of unemployment and mass poverty, particularly in rural areas. The private sector was described as both the "initiator" and "prime mover" of the country's development; hence, the government was "to encourage and support private initiative," and state participation in the economy was to be minimized and decentralized. Goals included alleviation of poverty, generation of more productive employment, promotion of equity and social justice, and attainment of sustainable economic growth. Goals were to be achieved through agrarian reforms; strengthening the collective bargaining process; undertaking rural, labor-intensive infrastructure projects; providing social services; and expanding education and skill training. Nevertheless, as with previous plans, the goals and objectives were to be realized, trickle-down fashion, as the consequence of achieving a sustainable economic growth, albeit a growth more focused on the agricultural sector.

The plan also involved implementing more appropriate, market-oriented fiscal and monetary polices, achieving a more liberal trade policy based on comparative advantage, and improving the efficiency and effectiveness of the civil service, as well as better enforcement of government laws and regulations. Proper management of the country's external debt to allow an acceptable rate of growth and the establishment of a "pragmatic," development-oriented foreign policy were extremely important.

Economic performance fell far short of plan targets. For example, the real GNP growth rate from 1987 to 1990 averaged 25 percent less than the targeted rate, the growth rate of real exports was one-third less, and the growth rate of real imports was well over double. The targets, however, did provide a basis for discussion of consistency of official statements and whether the plan growth rates were compatible with the maintenance of external debt-repayment obligations. The plan also set priorities. Both Aquino's campaign pronouncements and the policies embodied in the planning document emphasized policies that would favorably affect the poor and the rural sector. But, because of dissension within the cabinet, conflicts with Congress, and presidential indecisiveness, policies such as land and tax reform either were not implemented or were implemented in an impaired fashion. In addition, the Philippines curtailed resources available for development projects and the provision of government services in order to maintain good relations with international creditors.

The Philippine government has undertaken to provide incentives to firms, both domestic and foreign, to invest in priority areas of the economy since the early 1950s. In 1967 an Investment Incentives Act, administered by a Board of Investments (BOI), was passed to encourage and direct investment more systematically. Three years later, an Export Incentives Act was passed, furthering the effort to move the economy beyond importsubstitution manufacturing. The incentive structure in the late 1960s and 1970s was criticized for favoring capital-intensive investment as against investments in agriculture and export industries, as well as not being sufficiently large. Export incentives were insufficient to overcome other biases against exports embodied in the structure of tariff protection and the overvaluation of the peso.

The investment incentive system was revised in 1983, and again in 1987, with the goal of rewarding performance, particularly exporting and labor-intensive production. As a results of objections made by the United States and other industrial nations to export-subsidy provisions contained in the 1983 Investment Code, much of the specific assistance to exporters was removed in the 1987 version. The 1987 Investment Code delegates considerable discretionary power over foreign investment to the government Board of Investments when foreign participation in an enterprise exceeds 40 percent. Legislation under consideration by the Philippine Congress in early 1991 would limit this authority. Under the new proposal, foreign participation exceeding 40 percent would be allowed in any area not covered by a specified "negative list."

Fiscal Policy

Historically, the government has taken a rather conservative stance on fiscal activities. Until the 1970s, national government expenditures and taxation generally were each less than 10 percent of GNP. (Total expenditures of provincial, city, and municipal governments were small, between 5 and 10 percent of national government expenditures in the 1980s.) Under the Marcos regime, national government activity increased to between 15 and 17 percent of GNP, largely because of increased capital expenditures and, later, growing debt-service payments. In 1987 and 1988, the ratio of government expenditure to GNP rose above 20 percent. Tax revenue, however, remained relatively stable, seldom rising above 12 percent of GNP. Chronic government budget deficits were covered by international borrowing during the Marcos era and mainly by domestic borrowing during the Aquino administration. Both approaches contributed to the vicious circle of deficits generating the need for borrowing, and the debt service on those loans creating greater deficits and the need to borrow even more. At 5.2 percent of GNP, the 1990 government deficit was a major consideration in the 1991 standby agreement between Manila and the IMF.

Over time, the apportionment of government spending has changed considerably. In 1989 the largest portion of the national government budget (43.9 percent) went for debt servicing. Most of the rest covered economic services and social services, including education. Only 9.1 percent of the budget was allocated for defense. The Philippines devoted a smaller proportion of GNP to defense than did any other country in Southeast Asia.

The Aquino government formulated a tax reform program in 1986 that contained some thirty new measures. Most export taxes were eliminated; income taxes were simplified and made more progressive; the investment incentives system was revised; luxury taxes were imposed; and, beginning in 1988, a variety of sales taxes were replaced by a 10 percent value-added tax--the central feature of the administration's tax reform effort. Some administrative improvements also were made. The changes, however, did not effect an appreciable rise in the tax revenue as a proportion of GNP.

Problems with the Philippine tax system appear to have more to do with collections than with the rates. Estimates of individual income tax compliance in the late 1980s ranged between 13 and 27 percent. Assessments of the magnitude of tax evasion by corporate income tax payers in 1984 and 1985 varied from as low as P1.7 billion to as high as P13 billion. The latter figure was based on the fact that only 38 percent of registered firms in the country actually filed a tax return in 1985. Although collections in 1989 were P10.1 billion, a 70 percent increase over 1988, they remained P1.4 billion below expectations. Tax evasion was compounded by mismanagement and corruption. A 1987 government study determined that 25 percent of the national budget was lost to graft and corruption.

Low collection rates also reinforced the regressive structure of the tax system. The World Bank calculated that effective tax rates (taxes paid as a proportion of income) of low-income families were about 50 percent greater than those of high-income families in the mid-1980s. Middle-income families paid the largest percentage. This situation was caused in part by the government's heavy reliance on indirect taxes. Individual income taxes accounted for only 8.9 percent of tax collections in 1989, and corporate income taxes were only 18.5 percent. Taxes on goods and services and duties on international transactions made up 70 percent of tax revenue in 1989, about the same as in 1960.

The consolidated public sector deficit--the combined deficit of national government, local government, and public-sector enterprise budgets--which had been greatly reduced in the first two years of the Aquino administration, rose to 5.2 of GNP by the end of 1990. In June 1990, the government proposed a comprehensive new tax reform package in an attempt to control the public sector deficit. About that time, the IMF, World Bank, and Japanese government froze loan disbursements because the Philippines was not complying with targets in the standby agreement with the IMF. As a result of the 1990-91 Persian Gulf crisis, petroleum prices increased and the Oil Price Stabilization Fund put an additional strain on the budget. The sudden cessation of dollar remittances from contract workers in Kuwait and Iraq and increased interest rates on domestic debt of the government also contributed to the deficit.

Negotiations between the Aquino administration and Congress on the administration's tax proposals fell through in October 1990, with the two sides agreeing to focus on improved tax collections, faster privatization of government-owned and government-controlled corporations, and the imposition of a temporary import levy. A new standby agreement between the government and the IMF in early 1991 committed the government to raise taxes and energy prices. Although the provisions of the agreement were necessary in order to secure fresh loans, the action increased the administration's already fractious relations with Congress.

Monetary Policy

The Central Bank of the Philippines was established in June 1948 and began operation the following January. It was charged with maintaining monetary stability; preserving the value and covertibility of the peso; and fostering monetary, credit, and exchange conditions conducive to the economic growth of the country. In 1991 the policy-making body of the Central Bank was the Monetary Board, composed of the governor of the Central Bank as chairman, the secretary of finance, the director general of the National Economic and Development Authority, the chairman of the Board of Investment, and three members from the private sector. In carrying out its functions, the Central Bank supervised the commercial banking system and managed the country's foreign currency system.

From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25 percent of GNP, about 5 percentage points less than annual gross domestic capital formation. This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving as a proportion of GNP declined on the average by a third, initially because of the impact of the economic crisis on personal savings and later more because of negative government saving. Investment also declined, so that for three of these years, domestic savings actually exceeded gross investment.

From the time it began operations until the early 1980s, the Central Bank intervened extensively in the country's financial life. It set interest rates on both bank deposits and loans, often at rates that were, when adjusted for inflation, negative. Central Bank credit was extended to commercial banks through an extensive system of rediscounting. In the 1970s, the banking system resorted, with the Central Bank's assistance, to foreign credit on terms that generally ignored foreign-exchange risk. The combination of these factors mitigated against the development of financial intermediation in the economy, particularly the growth of long-term saving. The dependence of the banking system on funds from the Central Bank at low interest rates, in conjunction with the discretionary authority of the bank, has been cited as a contributing factor to the financial chaos that occurred in the 1980s. For example, the proportion of Central Bank loans and advances to government-owned financial institutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82. Borrowings of the government-owned Development Bank of the Philippines from the Central Bank increased almost 100-fold during this period. Access to resources of this sort, in conjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and the later bailouts that contributed to the financial chaos.

At the start of the 1980s, the government introduced a number of monetary measures built on 1972 reforms to enhance the banking industry's ability to provide adequate amounts of long-term finance. Efforts were made to broaden the capital base of banks through encouraging mergers and consolidations. A new class of banks, referred to as "expanded commercial banks" or "unibanks," was created to enhance competition and the efficiency of the banking industry and to increase the flow of long-term saving. Qualifying banks--those with a capital base in excess of P500 million--were allowed to expand their operations into a range of new activities, combining commercial banking with activities of investment houses. The functional division among other categories of banks was reduced, and that between rural banks and thrift banks eliminated.

Interest rates were deregulated during the same period, so that by January 1983 all interest rate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rates were set in relation to the cost of competing funds. Although the short-term response seemed favorable, there was little long-term change. The ratio of the country's money supply, broadly defined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in 1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowest in Southeast Asia.

Monetary and fiscal policies that were set by the government in the early 1980s, contributed to large intermediation margins, the difference between lending and borrowing rates. In 1988, for example, loan rates averaged 16.8 percent, whereas rates on savings deposits were only slightly more than 4 percent. The Central Bank traditionally maintained relatively high reserve requirements (the proportion of deposits that must remain in reserve), in excess of 20 percent. In 1990 the reserve requirement was revised upward twice, going from 21 percent to 25 percent. In addition, the government levied both a 5 percent gross tax on bank receipts and a 20 percent tax on deposit earnings, and borrowed extensively to cover budget deficits and to absorb excess growth in the money supply.

In addition to large intermediation margins, Philippine banks offered significantly different rates for deposits of different amounts. For instance, in 1988 interest rates on six-month time deposits of large depositors averaged almost 13 percent, whereas small savers earned only 4 percent on their savings. Rates offered on six-month and twelve-month time deposits differed by only 1 percentage point, and the rate differential for foreign currency deposits of all available maturities was within a single percentage point range. Because savings deposits accounted for approximately 60 percent of total bank deposits and alternatives for small savers were few, the probability of interest rate discrimination by the commercial banking industry between small, less-informed depositors and more affluent savers, was quite high. Interest rates of time deposits also were bid up to reduce capital flight. This discrimination coupled with the large intermediation margins, gave rise to charges by Philippine economists and the World Bank that the Philippine commercial banking industry was highly oligopolistic.

Money supply growth has been highly variable, expanding during economic and political turmoil and then contracting when the Philippines tried to meet IMF requirements. Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economy with money prior to the 1986 elections was one reason why the newly installed Aquino administration chose to scrap the existing standby arrangement with the IMF in early 1986 and negotiate a new agreement. The Central Bank released funds to stabilize the financial situation following a financial scandal in early 1981, after the onset of an economic crisis in late 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and the Central Bank--the so-called Jobo bills, named after then Central Bank Governor Jose Fernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater borrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, the growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, and the current account was in surplus. Success, however, was obtained at the expense of a steep fall in output and high unemployment.


When Aquino assumed the presidency in 1986, P31 billion, slightly more than 25 percent of the government's budget, was allocated to public sector enterprises--government-owned or government-controlled corporations--in the form of equity infusions, subsidies, and loans. Aquino also found it necessary to write off P130 billion in bad loans granted by the government's two major financial institutions, the Philippine National Bank and the Development Bank of the Philippines, "to those who held positions of power and conflicting interest under Marcos." The proliferation of inefficient and unprofitable public sector enterprises and bad loans held by the Philippine National Bank, the Development Bank of the Philippines, and other government entities, was a heavy legacy of the Marcos years.

Burdened with 296 public sector enterprises, plus 399 other nonperforming assets transferred to the government by the Philippine National Bank and the Development Bank of the Philippines, the Aquino administration established the Asset Privatization Trust in 1986 to dispose of government-owned and government-controlled properties. By early 1991, the Asset Privatization Trust had sold 230 assets with net proceeds of P14.3 billion. Another seventy-four public sector enterprises that were created with direct government investment were put up for sale; fifty-seven enterprises were sold wholly or in part for a total of about P6 billion. The government designated that about 30 percent of the original public sector enterprises be retained and expected to abolish another 20 percent. There was widespread controversy over the fairness of the divestment procedure and its potential to contribute to an even greater concentration of economic power in the hands of a few wealthy families.


Philippines - AGRICULTURE


Agricultural Geography

In the late 1980s, nearly 8 million hectares--over 25 percent of total land--were under cultivation, 4.5 million hectares in field crops, and 3.2 million hectares in tree crops. Population growth reduced the amount of arable land per person employed in agriculture from about one hectare during the 1950s to around 0.5 hectare in the early 1980s. Growth in agricultural output had to come largely from multicropping and increasing yields. In 1988 double-cropping and intercropping resulted in 13.4 million hectares of harvested area, a total that was considerably greater than the area under cultivation. Palay (unhusked rice) and corn, the two cereals widely grown in the Philippines, accounted for about half of total crop area. Another 25 percent of the production area was taken up by coconuts, a major export earner. Sugarcane, pineapples, and Cavendish bananas (a dwarf variety) were also important earners of foreign exchange, although they accounted for a relatively small portion of cultivated area.

Climatic conditions are a major determinant of crop production patterns. For example, coconut trees need a constant supply of water and do not do well in areas with a prolonged dry season. Sugarcane, on the other hand, needs moderate rainfall spread out over a long growing period and a dry season for ripening and harvesting. Soil type, topography, government policy, and regional conflict between Christians and Muslims were also determinants in the patterns of agricultural activity.

<> Agricultural Production and Government Policy
<> Rice and the Green Revolution
<> Coconut Industry
<> Sugar
<> Land Tenancy and Land Reform
<> Livestock
<> Forestry
<> Fishing


Philippines - Agricultural Production and Government Policy


The percentage of the population living in rural areas declined from 68 percent in 1970 to 57 percent in 1990, and the share of the labor force engaged in agriculture, forestry, and fishing also decreased to less than 50 percent by the late 1980s. Roughly two-thirds of agricultural households farmed their own land or were tenants; the others were landless agricultural workers. Some 75 percent of agricultural value added came from crops and livestock. The remaining 25 percent came from forestry and fishing. Value added in agricultural crops grew rapidly in the early 1970s, averaging growth rates of 7.7 percent. In the 1980s, however, with the exception of corn, which was in growing demand as an animal feed, the growth rate of agricultural production declined and was sometimes negative for bananas and sugarcane. Low world prices combined with the high cost of inputs such as fertilizers were two of the most important reasons.

The government pursued sometimes contradictory goals of maintaining cheap food and raw material prices, high farm income, food security, and stable prices, at times through direct intervention in agricultural markets. In 1981 the National Food Authority was created. It was empowered to regulate the marketing of all food and given monopoly privileges to import grains, soybeans, and other feedstuffs. The ability of the National Food Authority and its predecessor organizations to stabilize prices and keep them within the established price bands, at either the farm gate or the retail market, has been quite limited because of insufficient funds to affect the market, strict purchasing requirements, and corrupt practices among authority personnel. In 1985 the role of the National Food Authority was reduced, and price ceilings on rice were lifted. Beginning in the 1950s, government efforts to stimulate industrial development, such as tariffs on manufactured goods, overvaluation of the currency, export taxes on agricultural commodities, and price controls had a deleterious effect on the agricultural sector, making it relatively unprofitable. On the other hand, irrigation water was distributed at below-cost prices, and fertilizer manufacturing was subsidized.

Beginning in the latter half of the 1970s, the Marcos regime gave increased attention to agriculture and the rural sector in general, including agribusiness development. The Aquino government continued that emphasis, although its policy evolved from a commodity-specific orientation to a general, cropdiversification approach that relied more on market signals to guide crop selection. The rice-price stabilization program remained in effect, and a program was implemented to increase small-farmer access to postharvest facilities such as warehouses, rice mills, driers, and threshers.

Providing credit to the agricultural sector, particularly to small-sized and medium-sized farmers had been a government policy since the early 1950s, one that met with mixed success at best. By the early 1980s, there were approximately 900 privately owned, rural banks, which were the principal implementors of government-sponsored, supervised credit schemes. The Masagana 99 program was initiated in the early 1970s to encourage adoption of new, high-yielding rice varieties. No-collateral, low-interest loans were made available to small farmers, mainly by privately owned, rural banks, with the government guaranteeing 85 percent of any losses suffered by the banks. In general, however, regulated interest rates made rural banks unattractive to depositors.

In 1975 more than 500,000 farmers participated in the Masagana 99 program. By 1985, however, the program had expired because of high arrearage and the tight monetary policy instituted as part of an agreement with the IMF. The program was revived in the Aquino administration's Medium-Term Development Plan, 1987-92. According to a government report, however, as of 1988 the program had not yet reached most of the intended beneficiaries. Government efforts were also underway to rehabilitate rural banks, the majority of which had experienced severe difficulties during the economic crisis of the early 1980s and the subsequent monetary squeeze.


Philippines - Rice and the Green Revolution


Rice is the most important food crop, a staple food in most of the country. It is produced extensively in Luzon, the Western Visayas, Southern Mindanao, and Central Mindanao. In 1989 nearly 9.5 billion tons of palay were produced. In 1990 palay accounted for 27 percent of value added in agriculture and 3.5 percent of GNP. Per hectare yields have generally been low in comparison with other Asian countries. Since the mid-1960s, however, yields have increased substantially as a result of the cultivation of high-yielding varieties developed in the mid-1960s at the International Rice Research Institute located in the Philippines. The proportion of "miracle" rice in total output rose from zero in 1965-66 to 81 percent in 1981-82. Average productivity increased to 2.3 tons per hectare (2.8 tons on irrigated farms) by 1983. By the late 1970s, the country had changed from a net importer to a net exporter of rice, albeit on a small scale.

This "green revolution" was accompanied by an expanded use of chemical inputs. Total fertilizer consumption rose from 668 tons in 1976 to 1,222 tons in 1988, an increase of more than 80 percent. To stimulate productivity, the government also undertook a major expansion of the nation's irrigation system. The area under irrigation grew from under 500,000 hectares in the mid-1960s to 1.5 million hectares in 1988, almost half of the potentially irrigable land.

In the 1980s, however, rice production encountered problems. Average annual growth for 1980-85 declined to a mere 0.9 percent, as contrasted with 4.6 percent for the preceding fifteen years. Growth of value added in the rice industry also fell in the 1980s. Tropical storms and droughts, the general economic downturn of the 1980s, and the 1983-85 economic crisis all contributed to this decline. Crop loans dried up, prices of agricultural inputs increased, and palay prices declined. Fertilizer and plant nutrient consumption dropped 15 percent. Farmers were squeezed by rising debts and declining income. Hectarage devoted to rice production, level during the latter half of the 1970s, fell an average of 2.4 percent per annum during the first half of the 1980s, with the decline primarily in marginal, nonirrigated farms. As a result, in 1985, the last full year of the Marcos regime, the country imported 538,000 tons of rice. The situation improved somewhat in the late 1980s, and smaller amounts of rice were imported. However, in 1990 the country experienced a severe drought. Output fell by 1.5 percent, forcing the importation of an estimated 400,000 tons of rice.


Philippines - Coconut Industry


The Philippines is the world's second largest producer of coconut products, after Indonesia. In 1989 it produced 11.8 million tons. In 1989, coconut products, coconut oil, copra (dried coconut), and desiccated coconut accounted for approximately 6.7 percent of Philippine exports. About 25 percent of cultivated land was planted in coconut trees, and it is estimated that between 25 percent and 33 percent of the population was at least partly dependent on coconuts for their livelihood. Historically, the Southern Tagalog and Bicol regions of Luzon and the Eastern Visayas were the centers of coconut production. In the 1980s, Western Mindanao and Southern Mindanao also became important coconut-growing regions.

In the early 1990s, the average coconut farm was a medium-sized unit of less than four hectares. Owners, often absentee, customarily employed local peasants to collect coconuts rather than engage in tenancy relationships. The villagers were paid on a piece-rate basis. Those employed in the coconut industry tended to be less educated and older than the average person in the rural labor force and earned lower-than-average incomes.

Land devoted to cultivation of coconuts increased by about 6 percent per year during the 1960s and 1970s, a response to devaluations of the peso in 1962 and 1970 and increasing world demand. Responding to the world market, the Philippine government encouraged processing of copra domestically and provided investment incentives to increase the construction of coconut oil mills. The number of mills rose from twenty-eight in 1968 to sixty-two in 1979, creating substantial excess capacity. The situation was aggravated by declining yields because of the aging of coconut trees in some regions.

In 1973 the martial law regime merged all coconut-related, government operations within a single agency, the Philippine Coconut Authority (PCA). The PCA was empowered to collect a levy of P0.55 per 100 kilograms on the sale of copra to be used to stabilize the domestic price of coconut-based consumer goods, particularly cooking oil. In 1974 the government created the Coconut Industry Development Fund (CIDF) to finance the development of a hybrid coconut tree. To finance the project, the levy was increased to P20.

Also in 1974, coconut planters, led by the Coconut Producers Federation (Cocofed), an organization of large planters, took control of the PCA governing board. In 1975 the PCA acquired a bank, renamed the United Coconut Planters Bank, to service the needs of coconut farmers, and the PCA director, Eduardo Cojuangco, a business associate of Marcos, became its president. Levies collected by the PCA were placed in the bank, initially interest-free. In 1978 the United Coconut Planters Bank was given legal authority to purchase coconut mills, ostensibly as a measure to cope with excess capacity in the industry. At the same time, mills not owned by coconut farmers--that is, Cocofed members or entities it controlled through the PCA--were denied subsidy payments to compensate for the price controls on coconut-based consumer products. By early 1980, it was reported in the Philippine press that the United Coconut Oil Mills, a PCA-owned firm, and its president, Cojuangco, controlled 80 percent of the Philippine oil-milling capacity. Minister of Defense Juan Ponce Enrile also exercised strong influence over the industry as chairman of both the United Coconut Planters Bank and United Coconut Oil Mills and honorary chairman of Cocofed. An industry composed of some 0.5 million farmers and 14,000 traders was, by the early 1980s, highly monopolized.

In principle, the coconut farmers were to be the beneficiaries of the levy, which between March 1977 and September 1981 stabilized at P76 per 100 kilograms. Contingent benefits included life insurance, educational scholarships, and a cooking oil subsidy, but few actually benefited. The aim of the replanting program, controlled by Cojuangco, was to replace aging coconut trees with a hybrid of a Malaysian dwarf and West African tall varieties. The new palms were to produce five times the weight per year of existing trees. The target of replanting 60,000 trees a year was not met. In 1983, 25 to 30 percent of coconut trees were estimated to be at least sixty years old; by 1988, the proportion had increased to between 35 and 40 percent.

When coconut prices began to fall in the early 1980s, pressure mounted to alter the structure of the industry. In 1985 the Philippine government agreed to dismantle the United Coconut Oil Mills as part of an agreement with the IMF to bail out the Philippine economy. Later a 1988 United States law requiring foods using tropical oils to be labeled indicating the saturated fat content had a negative impact on an already ailing industry and gave rise to protests from coconut growers that similar requirements were not levied on oils produced in temperate climates.


Philippines - Sugar


From the mid-nineteenth century to the mid-1970s, sugar was the most important agricultural export of the Philippines, not only because of the foreign exchange earned, but also because sugar was the basis for the accumulation of wealth of a significant segment of the Filipino elite. The principal sugarcane-growing region is the Western Visayas, particularly the island of Negros. In 1980 the region accounted for half the area planted in cane and two-thirds of the production of sugar. Unlike the cultivation of rice, corn, and coconuts, sugarcane is typically grown on large farms or haciendas. In the mid-1980s, more than 60 percent of total production and about 80 percent of Negros's output came from farms twenty-five hectares or larger. Countrywide, tenancy arrangements existed for approximately half the sugarcane farms; however, they were generally the smaller ones, averaging 2.5 hectares in size and accounting for only slightly more than 20 percent of land planted in the crop. Elsewhere, laborers were employed, generally at very low wages. A survey undertaken in 1990 by the governor of Negros Occidental found that only one-third of the island's sugar planters were paying the then-mandated minimum wage of P72.50 per day. The contrast between the sumptuous lifestyles of Negros hacenderos and the poverty of their workers, particularly migrant laborers known as sacadas, epitomized the vast social and economic gulf separating the elite in the Philippines from the great mass of the population.

In the 1950s and 1960s, sugar accounted for more than 20 percent of Philippine exports. Its share declined somewhat in the 1970s and plummeted in the first half of the 1980s to around 7 percent. The sugar industry was in a crisis. Part of the problem was a depressed market for sugar. A dramatic increase in the world price of sugar had occurred in 1974, peaking at US$0.67 per pound in December of that year. The following two years, however, saw prices fall to less than US$0.10 a pound and remain there for a few years before moving upward again toward the end of the decade. Sugar prices fell again in the early 1980s, bottoming in May 1985 at less than US$0.03 per pound and averaging US$0.04 per pound for the year as a whole. In early 1990, prices had recovered to US$0.14 cents per pound then declined to approximately US$0.08 to US$0.09 per pound.

Historically, the Philippines was protected to a certain degree from vicissitudes of the world price of sugar by the country's access to a protected and subsidized United States market. In 1913 the United States Congress established free trade with its Philippine colony, providing Filipino sugar producers unlimited access to the American market. Later, in 1934, a quota system on sugar was enacted and remained in force until 1974. Although Philippine sugar exports to the United States were restricted during this period, the country continued to enjoy a relatively privileged position. Philippine quotas for the United States market in the early 1970s accounted for between 25 and 30 percent of the total, double that of other significant suppliers such as the Dominican Republic, Mexico, and Brazil. After the quota law expired in 1974, Philippine sugar was sold on the open market, generally to unrestricted destinations. As a consequence, shipments to the United States declined.

On May 5, 1982, the United States reestablished a quota system for the importation of sugar. Allocations were based on a country's share in sugar trade with the United States during the 1975-81 period, the period during which Philippine sugar exports to the United States had dwindled. The Philippine allotment was 13.5 percent. Efforts by the Philippine government to have it raised to 25 percent, the country's approximate share during the previous quota period, were unsuccessful. The loss of sales imposed by the reduced quota share was compounded by a dramatic 40 percent drop in total United States imports of sugar in the mid-1980s as compared with the early 1970s. Philippine sugar exports to the United States that had averaged just under 1.3 million tons per year in the 1968-71 period averaged only 284,000 tons from 1983 to 1988, falling to approximately 161,000 tons in 1988. In 1988 only 273 thousand hectares were planted in sugar, about half that of the early 1970s.

During the earlier quota period, Philippine producers enjoyed high profits, but operations were inefficient and lacking in mechanization. Sugar yields in the Philippines were among the lowest in the world. Increases in production occurred through expansion of land area devoted to sugarcane. With falling prices and the end of the United States quota, attempts to improve productivity through mechanization increased yields, but caused a dramatic fall in labor requirements, initially by 50 percent and, over a longer period, by an estimated 90 percent. In an island economy such as that of Negros, where sugar has accounted directly for 25 percent of employment, the consequent actual and potential lost livelihood was disastrous.

The decline of the sugar industry was complicated by the monopolization that took place during the martial law period, a process not dissimilar to what occurred in the coconut industry. In 1976, as a reaction to the precipitous decline in sugar prices, Marcos established the Philippine Sugar Commission (Philsucom), placing at the head his close associate Roberto Benedicto. Philsucom was given sole authority to buy and sell sugar, to set prices paid to planters and millers, and to purchase companies connected to the sugar industry. A bank was set up in 1978, and the construction of seven new sugar mills was authorized at a cost of US$40 million per mill.

By the 1980s, considerable resistance to Philsucom and its trading subsidiary, the National Sugar Trading Corporation (Nasutra) had been generated. As with the monopoly in the coconut industry, the government acquiesced in its 1985 agreement with the IMF to dismantle Nasutra. But the damage had been done. In a study undertaken by a group of University of the Philippines economists, losses to sugar producers between 1974 and 1983 were estimated to be between P11 billion and P14 billion. Aquino established the Sugar Regulatory Authority in 1986 to take over the institutions set up by Benedicto.


Philippines - Land Tenancy and Land Reform


An important legacy of the Spanish colonial period was the high concentration of land ownership, and the consequent widespread poverty and agrarian unrest. United States administrators and several Philippine presidential administrations launched land reform programs to maintain social stability in the countryside. Lack of sustained political will, however, as well as landlord resistance, severely limited the impact of the various initiatives.

Farm size is a significant indicator of concentration of ownership. Although nationwide approximately 50 percent of farms in 1980 were less than two hectares, these small farms made up only 16 percent of total farm area. On the other hand, only about 3 percent of farms were over ten hectares, yet they covered approximately 25 percent of farm area. Farms also varied in size based on crops cultivated. Rice farms tended to be smaller; only 9 percent of rice land was on farms as large as ten hectares. Coconut farms tended to be somewhat larger; approximately 28 percent of the land planted in coconuts was on farms larger than ten hectares. Sugarcane, however, generally was planted on large farms. Nearly 80 percent of land planted in sugarcane was on farms larger than ten hectares. Pineapple plantations were a special case. Because the two largest producers were subsidiaries of transnational firms--Del Monte and Castle and Cooke--they were not permitted to directly own land. The transnationals circumvented this restriction, however, by leasing land. In 1987 subsidiaries of these two companies leased 21,400 hectares, 40 percent of the total hectarage devoted to pineapple production.

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

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

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

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

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

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

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

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


Philippines - Livestock


In 1990 the livestock industry, consisting primarily of cattle, carabao (water buffalo), hogs, and chickens, accounted for almost 20 percent of value added in the agricultural sector, up from 12 percent in 1980. Much of the growth came from the rapid expansion of poultry raising, which had begun to develop as a commercial industry in the 1960s. Chicken raising accounted for half of livestock value added in 1990 as compared with a quarter in 1970. Beginning in the late 1980s, commercial hog raisers also attempted to enter the international market by exporting live hogs to Hong Kong. Although carabao production increased as a result of an intensified livestock dispersal program run by the government, the carabao and cattle industries remained primarily backyard ventures.

In the late 1980s, hogs provided 60 percent of total domestic meat production; chickens provided 15 percent; and cattle and carabao, about 20 percent. The country was relatively selfsufficient in hog and chicken production but imported approximately 4,500 tons of beef annually. The economic difficulties of the 1980s made the lower-priced chicken and carabao attractive substitutes for higher-priced pork and beef, but carabao raising remained oriented primarily toward providing work animals. The dairy industry in the Philippines also was quite small. Liquid milk generally was not available in the market, and virtually all canned and dry milk was imported.


Philippines - Forestry


Logging was a profitable business at the end of the 1980s. Actual forested land was estimated to be about 6.5 million hectares--more than 21.5 percent of Philippine territory--and much of that was in higher elevations and on steep slopes. The government facilitated the exploitation of the country's forest resources for the first three decades after independence by allocating the bulk of unclassified land as public forest land eligible to be licensed for logging, and by implementing policies of low forest charges and export taxes. Logs were a major foreign-exchange earner. By 1977, 8.3 million hectares of forest area were licensed for logging. In the late 1970s, the government became aware of the dangers of deforestation and began to impose restrictions. The amount of forested land and the volume of forest exports declined. By 1988, 120 licensed loggers, operating on a total area of 4.74 million hectares, cut an estimated 4.2 millon cubic meters of logs and exported 644 million board feet. The contribution of logs and lumber to total Philippine exports declined from 25 percent in 1969 to 2 percent in 1988.

In addition to the officially sanctioned logging industry, there has been considerable illegal logging. The full extent of this activity was difficult to determine, but the discrepancy between Philippine and Japanese statistics on log exports from the Philippines to Japan provided one source of information. From 1955 through 1986, log imports from the Philippines, according to Japanese statistics, averaged about 50 percent more than log exports to Japan according to Philippines statistics. In 1987 and 1988, the discrepancy was considerably reduced, perhaps an indication of the Aquino government's stricter enforcement policy.

Another cause of deforestation was swidden agriculture, called kaingin in the Philippines. The method involves burning a portion of forest area to produce a fertilizing effect, planting a series of crops for two or three years, and then, after the soil has become depleted of nutrients, moving on to another location to allow the burned out area to rejuvenate. Often referred to as slash-and-burn agriculture, swidden as practiced by upland Filipino groups was ecologically sound as long as land was relatively plentiful. But since the 1960s, increased use of land for logging and migration of landless peasants from lowland areas has caused a scarcity of land. Burned-over areas were not allowed to lay fallow for a sufficient period, and the new migrants often had no knowledge of sound swidden practice. As a result, new growth was not allowed to mature before being burned over again; extensive erosion occurred, and once-forested areas were transformed into grasslands.

The widespread deforestation caused massive ecological destruction. Beginning in the early 1980s, the government instituted reforestation programs to stem the destruction. In 1981 Marcos made the granting of timber concessions conditional on the concessionaire's reforesting. After his ouster, however, the new secretary of the Department of Environment and Natural Resources reported that 90 percent of the 170 logging companies with concessions had failed to implement reforestation activities. The Aquino administration also launched a reforestation program to replant 100,000 hectares per year, but it too met with limited success. In 1988, two years into the program, the government reforested 32,000 hectares and awarded reforestation contracts for another 4,500 hectares. Other initiatives included a program to employ upland dwellers in reforestation, limiting the extent of timber concessions, and controlling exports of forest products. Nongovernment, environmental organizations also became involved in forest preservation efforts. One official noted that with more than 5 million hectares of forests already denuded, and with a deforestation rate of 119,000 hectares per year, the country would be facing a timber famine within a decade. Second-growth forests were too young to cut, so timber requirements for the near term would have to be met from the remaining old-forest stands, leaving inadequate reserves for the medium term.


Philippines - Fishing


The Philippines is surrounded by a vast aquatic resource base. In 1976 the government adopted a 200-nautical-mile exclusive economic zone covering some 2.2 million square kilometers. However, the country's traditional fishing grounds constituted a relatively small 126,500-squarekilometer area. Fish and other seafood provided more than half the protein consumed by the average Filipino household. Total fish production in 1989 was 2.3 million tons. Of this, 46 percent was caught by some 574,000 municipal and subsistence fishermen, who operated small boats in shallow water, customarily no more than three kilometers offshore. These fishermen were among the poorest of the poor, with incomes averaging only 25 percent of the national average. Another 27 percent of the catch came from the approximately 45,000 commercial fishermen. An equal proportion of the total catch was provided by the fast-growing aquaculture industry. Prawn production, mostly aquaculture, developed rapidly in the 1980s, averaging 31,000 tons during the 1984-87 period. In 1988 exports of fishery products amounted to US$407 million, approximately 6 percent of total exports.

During much of the 1980s, the livelihood of small municipal and subsistence fishermen was undermined by low production, stagnating at approximately 1 million tons per year. A number of factors contributed to the low production: encroachment of commercial fishermen into shallow waters, destruction of the marine environment, over-fishing, and an increasing number of fish ponds. A large proportion of the mangrove forests was cleared to construct fishponds, seriously damaging the coastal ecological system. Coral reefs sustained serious damage from illegal fishing with dynamite and cyanide, and from the muro-ami fishing technique by which young swimmers pound the coral with rocks attached to ropes to drive the fish into nets. Coral also was damaged by silting from erosion caused by deforestation, and inland freshwater lakes were polluted from industrial and agricultural wastes.


Philippines - INDUSTRY



Immediately after independence, the government concentrated its efforts on reconstructing and rehabilitating the war-damaged economy. In 1949 import and foreign exchange controls were imposed to alleviate a balance of payments problem. Imports fell dramatically, providing a stimulus for the development of light industry oriented toward the domestic market. Manufacturing growth was rapid, averaging 9.9 percent per year during the 1950s. Initially, textiles, food manufactures, tobacco, plastics, and light fabrication of metals dominated. There also was some assembly of automobiles and trucks and construction of truck and bus bodies. By the early 1960s, however, manufacturing growth declined to slightly less than the growth of GNP. The share of the labor force in manufacturing in 1988 was 10.4 percent, less than it was in 1956, although the share had grown to 12 percent in 1990.

By the late 1980s, and in part the consequence of local content laws that were intended to enhance linkage among various manufacturing industries and increase self-sufficiency, the industrial structure had become more complex, with intermediate and capital goods industries relatively large for a country at the Philippines' stage of development. By the mid-1980s, an ambitious US$6 billion industrial development program originally undertaken by the Marcos regime in 1979 had resulted in operational copper smelter-refinery, cocochemical manufacturing, and phosphatic fertilizer projects. A cement-industry rehabilitation and expansion program and an integrated iron and steel mill project were still underway. A petrochemical complex appeared about to be undertaken in 1990, but was bogged down in a dispute over location and financing.

Manufacturing output fell in the political and economic crisis of 1983, and industry in 1985 was working at as low as 40 percent of capacity. By the middle of 1988, after economic pump priming by the Aquino regime, industries were again working at full capacity. In 1990 the Board of Investments approved investment projects valued at US$3.75 billion, including US$1.48 billion targeted to the manufacturing sector.

Manufacturing production is geographically concentrated. In 1990, 50 percent of industrial output came from Metro Manila and another 20 percent from the adjoining regions of Southern Tagalog and Central Luzon. Prior to 1986, government efforts to distribute industry more evenly were largely ineffective. In the post-Marcos economic recovery, however, investment grew in small and medium-sized firms producing handicrafts, furniture, electronics, garments, footwear, and canned goods in areas outside of Metro Manila, particularly in Cebu City and Davao City.

In 1990 the industrial sector was inefficient and oligopolistic. Although small- and medium-sized firms accounted for 80 percent of manufacturing employment, they accounted for only 25 percent of the value added in manufacturing. Most industrial output was concentrated in a few, large establishments. For example, a six-month Senate inquiry determined in 1990 that eight of the country's seventeen cementmanufacturing companies were under control of a single firm.

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Philippines - Mining


The 1980s were difficult for mining in the Philippines. In 1990 the mining and quarrying sector contributed 1.5 percent of GNP, approximately half the percentage it had accounted for ten years earlier. Mineral exports were 5.4 percent of merchandise trade in 1988, whereas in 1980 they constituted 17.8 percent. Rising operational costs and a depressed market severely affected the industry. In 1990 mining operations suffered from labor disputes, higher mandated wages, higher interest rates, typhoons, an earthquake, and power shortages.

In the early 1990s, the Philippines had large deposits of copper, chromium, gold, and nickel, plus smaller deposits of cadmium, iron, lead, manganese, mercury, molybdenum, and silver. Industrial minerals included asbestos, gypsum, limestone, marble, phosphate, salt, and sulfur. Mineral fuels included coal and petroleum.

In 1988 the Philippines was the sixth largest producer of chromium in the world and ranked ninth in gold production and tenth in copper production. The country's nickel-mining company, Nonoc Mining and Industrial Corporation, ceased operation in March 1986 because of financial and labor difficulties. The Asset Privatization Trust, a government entity in charge of selling firms acquired by the government through foreclosure proceedings, sold Nonoc in late 1990. The new owners expected to resume operations in the middle of 1991 and produce some 28,700 tons a year, which would again make nickel a major export earner for the Philippines.


Philippines - Energy


During the 1970s and 1980s, the Philippines sought growth and self-sufficiency in energy production. In 1972 the government altered the legal arrangements for oil exploration from concessions to a service contracts, and serious oil exploration began in the mid- and late 1970s. As a result of exploration in the Palawan-Sulu seabed, oil was discovered in the Nido oil field in 1976. Commercial production began in 1979 and yielded 8.8 million barrels. Successful wells also were drilled in the Cadlao and Matinloc fields off Palawan in 1981 and 1982, but the fields were relatively small. The level of production varied during the 1980s but never exceeded 5 million barrels in any one year. In 1988 local production--2.2 million barrels--accounted for only 3 percent of domestic oil use. A study released in early 1990, indicating that the geology of the Philippines was a favorable indicator of possible additional petroleum deposits, was used by the government to encourage oil exploration firms. Production-sharing arrangements allowed a firm first to recover the cost of its investment, after which 60 percent of profits would go to the government. In December 1990, there were new discoveries of oil and natural gas off the northwest coast of Palawan Island. Tests showed that the oil well could have a flow rate of 6,000 barrels per day, with potential reserves of about 1 billion barrels.

Between 1973 and 1983, power generation increased at an annual rate of 7.0 percent, two percentage points above the growth rate of real gross domestic product (GDP). In 1988 the National Power Corporation, which produced approximately 90 percent of the country's electricity, had a generating capacity of 5,772 megawatts. Of that, 42 percent was from oil-burning plants and 7 percent from dual oil-coal facilities. An additional 37 percent was from hydroelectric plants, and just under 15 percent was from geothermal plants.

The Philippines had a wealth of potential energy resources. It ranked second behind the United States in production of electricity from geothermal sources. Installed capacity in 1988 was 828 megawatts; estimated potential was 35,000 megawatts. Undeveloped hydroelectric potential of 3,771 megawatts also was identified. Coal resources, estimated to be 1.2 billion tons, also were plentiful, although of a rather poor grade for electrical generation. In addition to these sources, solar, animal waste, agriwaste, and other nonconventional sources were utilized for generating small amounts of electricity and other energy needs in rural areas. Together they accounted for about 15 percent of energy consumption.

In 1990 the Philippines was confronted with a crisis of insufficient electrical generating capacity. Metro Manila and the thirty-three provinces in the Luzon power grid experienced brownouts of up to four hours per day, with the grid averaging a daily deficiency of 262 megawatts. At the root of the problem was the decision by the Marcos regime to build a 620 megawatt nuclear-power plant on the Bataan Peninsula. The Aquino government decided not to use the facility because it was located on a seismic fault. As a result, a badly needed expansion of generating capacity in Luzon, which accounted for 75 percent of national electric consumption, did not come on line. The problem was compounded by inadequate planning and bureaucratic delays. There were delays in the building of a facility capable of generating 110 megawatts of geothermal power in Albay Province and a 300 megawatt coal-fired plant in Batangas Province. The short-term solution was to put up a series of gas-turbine plants with a combined rating of 500 megawatts. Only 245 megawatts came on stream between 1987 and 1989. Economists estimated that to achieve a 5.6 percent growth rate in real GNP, the country would need an additional 300 megawatts of generating capacity yearly.

Efforts also were being made to expand the country's rural electrification program. In 1985 it covered the franchise area of some 120 electrical cooperatives, reaching around 2.7 million households. The government planned to expand the coverage to some 4 million households by 1992.


Philippines - Tourism


Tourism developed rapidly in the 1970s, with visitors numbering 1 million in 1980. Thereafter, the industry went into a slump, reaching the 1 million visitor mark again only in 1988. In that year, the average length of stay was 12.6 days, up from 8.9 days in 1987. Many of the visitors, however, were emigrant Filipinos returning for periodic visits with families and friends. In 1988 an average of 73 percent of Manila's 8,500 hotel rooms were occupied.

Estimates of tourist revenue varied considerably. In 1988 the Central Bank estimated it at US$405 million, 11 percent of the country's nonmerchandise exports. Using a different formula, the Department of Tourism estimated tourism earnings at US$1.45 billion. Most tourists entered the country through Manila, but the city had relatively few amenities and suffered from congestion, pollution, and crime. Intramuros, the colonial Spanish walled city, had not been fully restored since its destruction at the end of World War II. Political instability in the country during the 1980s also was a deterrent to tourism. The Medium-Term Development Plan called for promotion of both domestic and international tourism.

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A high rate of population growth, lack of access to land, insufficient job creation in industry, and a history of inappropriate economic policies contributed to high unemployment and underemployment and a relatively high proportion of the labor force being in low-productivity, service sector jobs in the late 1980s. Real wages were low, having declined at about 3 percent per year since 1960, and relatively weak labor unions were unable to substantially affect the deterioration of workers' earning power.

Labor Force and Employment

Population growth averaged 2.9 percent from 1965 to 1980 and 2.5 percent in the late 1980s. While more than 40 percent of the population was below fifteen years of age, the growth of the working-age population--those fifteen years of age and older--was even more rapid than total population growth. In the 1980s, the working-age population grew by 2.7 percent annually. In addition, the labor force participation rate--the proportion of working-age people who were in the labor force--rose approximately 5 percentage points during the 1980s, largely because of the increase in the proportion of women entering the work force. So the actual labor force grew by 750,000 people or approximately 4 percent each year during the 1980s.

Agriculture, which had provided most employment, employed only approximately 45 percent of the work force in 1990, down from 60 percent in 1960. Manufacturing industry was not able to make up the difference. Manufacturing's share of employed people remained stable at about 12 percent in 1990.

The service sector (commerce, finance, transportation, and a host of private and public services), perforce, became the residual employer, accounting for almost 40 percent of the work force in 1988 as contrasted with 25 percent in 1960. Much of this growth was in small-scale enterprises or self-employment activities such as hawking and vending, repair work, transportation, and personal services. Such endeavors are often referred to as the "informal sector," because of the lack of record keeping by its enterprises and a relative freedom from government regulation, monitoring, or reporting. Informal sector occupations were characterized by low productivity, modest fixed assets, long hours of work, and low wages. According to a 1988 study of urban poor in Metro Manila, Cebu, and Davao cities published in the Philippine Economic Journal, more than half of the respondents engaged in informal sector work as their primary income-generating activity.

Unemployment, which had averaged about 4.5 percent during the 1970s, increased drastically following the economic crises of the early 1980s, peaking in early 1989 at 11.4 percent. Urban areas fared worse; unemployment in mid-1990, for example, remained above 15 percent in Metro Manila.

Beyond the unemployment generated from economic mismanagement and crises was a more long-term, structural employment problem, a consequence of the highly concentrated control of productive assets and the inadequate number of work places created by investment in the industrial economy. The size and growth of the service sector was one indicator. Underemployment was another.

Underemployment has been predominantly a problem for poor, less educated, and older people. The unemployed have tended to be young, inexperienced entrants into the labor force, who were relatively well educated and not heads of households. In the first half of the 1980s, approximately 20 percent of male household heads and 35 percent of female household heads were unable to find more than forty days of work a quarter.

Overseas migration absorbed a significant amount of Philippine labor. From the late 1940s through the 1970s, migrants were largely Filipino members of the United States armed services, professionals, and relatives of those who had previously migrated. After liberalization of the United States Immigration and Nationality Act in October 1965, the number of United States immigrant visas issued to Filipinos increased dramatically from approximately 2,500 in 1965 to more than 25,000 in 1970. Most of those emigrating were professionals and their families. By 1990 Filipino-Americans numbered 1.4 million, making them the largest Asian community in the United States.

In the 1970s and 1980s, quite a different flow of migration developed: most emigrants were workers engaged in contract work in the Middle East and, to a lesser extent, elsewhere. Although some were professionals, the majority were production, construction, and transport and equipment workers or operators, as well as service workers. An increasing number also were merchant seamen. Inasmuch as wages paid for overseas contract work have been a multiple of what Filipinos could earn at home, such employment opportunities have been in great demand. Government statistics show that overseas placements of land-based workers increased from 12,500 in 1975 to 385,000 in 1988, a growth rate of about 30 percent per annum. The number of seamen also increased, from 23,500 in 1975, to almost 86,000 in 1988. The average stay abroad was 3.1 years for land-based workers and 6.3 years for seamen.

In 1982 the Philippine Overseas Employment Administration was established in the Ministry of Labor and Employment. The Philippine Overseas Employment Administration consolidated responsibility for regulating overseas land-based workers and seamen, supervising recruitment, as well as adjudicating complaints and conflicts. The agency also was tasked with promoting employment opportunities abroad for Filipinos. Overseas employment created two benefits for the economy: jobs and foreign exchange. The total number of placements abroad from 1980 through 1988, 3.2 million, was about one-half the growth in the country's labor supply during that period. Remittances through the banking system for the period 1983 to 1988 totaled approximately US$4.6 billion, an amount equal to 14 percent of merchandise exports during the same period. The Central Bank estimated that remittances passing through "informal channels" might be as much as twice the documented figure. If so, export of labor would be the largest single earner of foreign exchange.

Labor Relations

From independence in 1946 until martial law was declared in 1972, the government encouraged collective bargaining and, except for setting up a commission in 1970 to supervise the fixing of minimum wages, involved itself minimally in labor relations. For most of the martial law period (1972-81), strikes were forbidden or severely limited. The Marcos labor code of 1974 made arbitration compulsory. The right to strike was partially restored in 1976, but with considerable restrictions. The Aquino government took a somewhat more liberal approach to labor, but some of the structures of the Marcos period remained.

Organized labor in the Philippines has been relatively weak. In 1986 it was estimated that about 2.2 million Filipinos were part of the union movement, accounting for approximately 20 percent of the wage-and-salary work force or 10 percent of the total labor force. These workers were organized into some 2,000 unions, half of which were not connected to a national union or federation. In 1987 only 350,000 workers were covered by collective bargaining agreements.

The largest union body was the Trade Union Congress of the Philippines (TUCP). Formed in December 1974, it was designated the official labor center of the Philippines by the Marcos government. Another labor organization, the Kilusang Mayo Uno (KMU), or the May First Movement, was formed in July 1980, bringing together nine broadly based, more ideologically oriented unions. The two major union centers represented sharply different visions of the role of unions in society. Although TUCP supported Marcos, it represented itself as a proponent of nonpolitical unionism, concerned primarily with the collective bargaining process. The KMU was more openly political, projecting itself as a proponent of "genuine, militant, and nationalist unionism." Going beyond collective bargaining, the KMU called for the formation of worker solidarity movements and advocated a nationalist-oriented alternative to the prevailing economic and social policies of the government. The Labor Advisory and Consultative Council (LACC), formed at the onset of the Aquino administration in 1986 by then Labor Minister Agusto Sanchez, drew the various factions of the labor movement together to advise the Ministry of Labor and Employment. Membership in LACC included the KMU, the Federation of Free Workers, Lakas Ng Manggagawa Labor Center, and, for a short while, the TUCP.

When Aquino came into office in 1986, she had the backing of a wide spectrum of the population, including those affiliated with labor unions. In her May 1 speech that year, before a large and enthusiastic gathering of labor groups, Aquino presented a package of labor-law reforms, including extension of the right to strike, making it easier to petition for a union certification election, and abrogation of repressive labor legislation decreed by the Marcos government. Soon, however, the president began to shift ground as she received vigorous protests by both Filipino and foreign businessmen against her May Day promises. The pledges were rethought, modified in some cases, and not promulgated in others. This willingness to respond to the interests of the boardroom rather than the shop floor also extended to official appointments. In particular, her first minister of labor, Agusto Sanchez, was considered to be too prolabor and eased out within a year of his appointment.

The TUCP was generally supportive of the Aquino government, but the KMU and other progressive unions resisted the conservative drift of her administration through strikes, demonstrations, and antigovernment rallies. The KMU gained influence through its leadership of the national strike, or Welga ng Bayan, in 1987, 1989, and 1990. From September to December 1990, the KMU led a series of general strikes in response to dramatic increases in the prices of petroleum products. These labor actions were noteworthy both because of a heightened level of conflict between strikers and the authorities and because of the participation of professionals and other middle-class groups.

Repression of labor activists, widespread during the Marcos era, resurfaced early in the Aquino administration. In November 1986, the chairman of the KMU was murdered. The following January, the army opened fire on a march of the Peasant Movement of the Philippines (Kilusang Magbubukid ng Pilipinas--KMP) and their supporters who were protesting the lack of government action on land reform. Eighteen were killed and nearly 100 wounded. In 1990 the government charged two KMU labor leaders with sedition: Medardo Roda, the head of PISTON, a federation of drivers, and Crispin Beltran, the chairman of KMU. Old charges of slander and fraud dating back to 1967 and 1971 were revived against Beltran. The government also imprisoned the leader of the KMP, Jaime Tadeo, on ten-year-old fraud charges initiated against him by the Marcos government. After a 1990 violent strike, during which an estimated 500 participants were arrested, both the military and government officials suggested banning the KMU as a communist-front organization.




In 1990 the Philippines had not yet recovered from the economic and political crisis of the first half of the 1980s. At P18,419, or US$668, per capita GNP in 1990 remained, in real terms, below the level of 1978. A major thrust of Aquino's 1986 People Power Revolution was to address the needs of impoverished Filipinos. One of the four principles of her "Policy Agenda for People-Powered Development," was promotion of social justice and poverty alleviation. Government programs launched in 1986 and 1987 to generate employment met with some success, reversing the decline of the first half of the decade, but these efforts did little to alleviate the more chronic aspects of Philippine poverty.

Extent of Poverty

Individuals are said to be in absolute poverty when they are unable to obtain at least a specified minimum of the food, clothing, and shelter that are considered necessary for continued survival. In the Philippines, two such minimums have been established. The poverty line is defined in terms of a least-cost consumption basket of food that provides 2,016 calories and 50 grams of protein per day and of nonfood items consumed by families in the lowest quintile of the population. In 1988 the poverty line for a family of six was estimated to be P2,709 per month. The subsistence level is defined as the income level that allows purchase of the minimum food requirements only.

In 1985 slightly more than half the population lived below the poverty line, about the same proportion as in 1971. The proportion of the population below the subsistence level, however, declined from approximately 35 percent in 1971 to 28 percent in 1985. The economic turndown in the early 1980s and the economic and political crisis of 1983 had a devastating impact on living standards.

The countryside contained a disproportionate share of the poor. For example, more than 80 percent of the poorest 30 percent of families in the Philippines lived in rural areas in the mid-1980s. The majority were tenant farmers or landless agricultural workers. The landless, fishermen, and forestry workers were found to be the poorest of the poor. In some rural regions--the sugar-growing region on the island of Negros being the most egregious example--there was a period in which malnutrition and famine had been widespread.

Urban areas also were hard hit, with the incidence of urban poverty increasing between 1971 and 1985 by 13 percentage points to include half the urban population. The urban poor generally lived in crowded slum areas, often on land or in buildings without permission of the owner; hence, they were referred to as squatters. These settlements often lacked basic necessities such as running water, sewerage, and electricity. According to a 1984 government study, 44 percent of all occupied dwellings in Metro Manila had less than thirty square meters of living area, and the average monthly expenditure of an urban poor family was P1,315. Of this, 62 percent was spent on food and another 9 percent on transportation, whereas only P57 was spent on rent or mortgage payments, no doubt because of the extent of squatting by poor families. About 55 percent of the poor surveyed who were in the labor force worked in the informal sector, generally as vendors or street hawkers. Other activities included service and repair work, construction, transport services, or petty production. Women and children under fifteen years of age constituted almost 60 percent of those employed. The majority of the individuals surveyed possessed a high school education, and 30 percent had a skill such as dressmaking, electrical repair, plumbing, or carpentry. Nevertheless, they were unable to secure permanent, full-time positions.

Causes of Poverty

From one perspective, poverty is a function of total output of an economy relative to its population--GNP per capita--and the distribution of that income among families. In the World Bank's World Development Report, 1990, the Philippines was ranked at the lower end of the grouping of lower middle-income economies. Given its relative position, the country should be able to limit the extent of poverty with a reasonably equitable sharing of the nation's income. In fact, the actual distribution of income was highly skewed. Although considerable underreporting was thought to occur among upper-income families, and incorrect reporting from lack of information was common, particularly with respect to noncash income, the data were adequate to provide a broad overview.

In 1988 the most affluent 20 percent of families in the Philippines received more than 50 percent of total personal income, with most going to the top 10 percent. Below the richest 10 percent of the population, the share accruing to each decile diminished rather gradually. A 1988 World Bank poverty report suggested that there had been a small shift toward a more equal distribution of income since 1961. The beneficiaries appear to have been middle-income earners, however, rather than the poor.

The World Bank report concluded, and many economists associated with the Philippines concurred, that the country's high population growth rate was a major cause of the widespread poverty, particularly in the rural areas. Implementation of a government-sponsored family-planning program, however, was thwarted by stiff opposition from the hierarchy of the Roman Catholic Church. Church pronouncements in the late 1980s and early 1990s focused on injustice, graft and corruption, and mismanagement of resources as the fundamental causes of Philippine underdevelopment. These issues were in turn linked to the concentration of control of economic resources and the structure of the economy. Land ownership was highly unequal, but land reform initiatives had made little progress.

In urban areas also, the extent of poverty was related to the concentrated control of wealth. Considerable portions of both industry and finance were highly monopolized. Access to finance was severely limited to those who already possessed resources. The most profitable investment opportunities were often in areas in which tariff or other forms of government protection ensured high profits but did not necessarily result in rapidly expanding employment opportunities. In her election campaign President Aquino pledged to destroy the monopolies and structures of privilege aggravated by the Marcos regime. She looked to the private sector to revitalize the economy, create jobs for the masses of Filipinos, and lead the society to a higher standard of living. The state-protected monopolies were dismantled, but not the monopoly structure of the Philippine economy that existed long before Marcos assumed power. In their privileged positions, the business elite did not live up to the President's expectations. As a consequence, unemployment and, more importantly for the issue of poverty, underemployment remained widespread.




International Trade

At independence in 1946, the Philippines was an agricultural nation tied closely to its erstwhile colonizer, the United States. This was most clearly observed in trade relations between the two countries. In 1950 the value of the Philippines' ten principal exports--all but one being agricultural or mineral products in raw or minimally processed form--added up to 85 percent of the country's exports. For the first twenty-five years of independence, the structure of export trade remained relatively constant.

The direction of trade, however, did not remain constant. In 1949, 80 percent of total Philippine trade was with the United States. Thereafter, the United States portion declined as that of Japan rose. In 1970 the two countries' share was approximately 40 percent each, the United States slightly more, and Japan slightly less. The pattern of import trade was similar, if not as concentrated. The United States share of Philippine imports declined more rapidly than Japan's share rose, so that by 1970 the two countries accounted for about 60 percent of total Philippine imports. After 1970 Philippine exporters began to find new markets, and on the import side the dramatic increases in petroleum prices shifted shares in value terms, if not in volume. In 1988 the United States accounted for 27 percent of total Philippine trade, Japan for 19 percent.

At the time of independence and as a requirement for receiving war reconstruction assistance from the United States, the Philippine government agreed to a number of items that, in effect, kept the Philippines closely linked to the United States economy and protected American business interests in the Philippines. Manila promised not to change its (overvalued) exchange rate from the prewar parity of P2 to the dollar, or to impose tariffs on imports from the United States without the consent of the president of the United States. By 1949 the situation had become untenable. Imports greatly surpassed the sum of exports and the inflow of dollar aid, and a regime of import and foreign-exchange controls was initiated, which remained in place until the early 1960s.

The controls initially reduced the inflow of goods dramatically. Between 1949 and 1950, imports fell by almost 40 percent to US$342 million and surpassed the 1949 level in only one year during the 1950s. Being constrained, imports of goods and nonfactor services as a proportion of GNP declined during the 1950s, ending the decade at 10.6 percent, about the same percentage as that of exports. By the late 1950s, however, exchange controls had begun to lose their effectiveness as most available foreign exchange was committed for required imports. A tariff law was passed in 1957, and, from 1960 to early 1962, import and exchange controls were phased out. Exports and imports increased rapidly. By 1965 the import to GNP ratio was more than 17 percent. Another acceleration of imports occurred in the early 1970s, this time raising the import to GNP ratio to around 25 percent, the level at which it remained into the 1990s. Imports in the 1970s were increasingly being financed by external debt rather than by exports.

The composition of imports evolved after independence as industrial development occurred and commercial policy was modified. In 1949, about 37 percent of imports were consumer goods. This proportion declined to around 20 percent during the exchange-and-import control period of the 1950s. By the late 1960s, consumer imports had been largely replaced by domestic production. Imports of machinery and equipment increased, however, as the country engaged in industrialization, from around 10 percent in the early 1950s to double that by the mid-1960s. As a result of the surge in petroleum prices in the 1970s, the import share of both consumer and capital goods fell somewhat, but their relative magnitudes remained the same.

No matter the trade regime, the Philippines had difficulty in generating sufficient exports to pay for its imports. In the forty years from 1950 through 1990, the trade balance was positive in only two years: 1963 and 1973. For a few years after major devaluations in 1962 and 1970, the current account was in surplus, but then it too turned negative. Excessive imports remained a problem in the late 1980s. Between 1986 and 1989, the negative trade balance increased tenfold from US$202 million to US$2.6 billion.

In 1990 weaker world prices for Philippine exports, higher production costs, and a slowdown in the economies of the Philippines' major trading partners restrained export growth to only slightly more than 4 percent. Increasing petroleum prices and heavy importation of capital goods, including power-generating equipment, helped push imports up almost 17 percent, resulting in a 50 percent jump in the trade deficit to more than US$4 billion. Reducing the drain on foreign exchange has became a major government priority.

A number of factors contributed to the rather dismal trade history of the Philippines. The country's terms of trade have fallen for most of the period since 1950, so that in the late 1980s, a given quantity of exports could buy only 55 percent of the volume of imports that it could buy in the early 1950s. A second factor was the persistent overvaluation of the exchange rate. The peso was devalued a number of times falling from a pre-independence value of P2 to the dollar to P28 in May 1990. The adjustments, however, had not stimulated exports or curtailed imports sufficiently to bring the two in line with one another.

A third consideration was the country's trade and industrial policies, including tariff protection and investment incentives. Many economists have argued that these policies favorably affected import-substitution industries to the detriment of export industries. In the 1970s, the implementation of an export- incentives program and the opening of an export-processing zone at Mariveles on the Bataan Peninsula reduced the biases somewhat. The export of manufactures (e.g., electronic components, garments, handicrafts, chemicals, furniture, and footwear) increased rapidly. Additional export-processing zones were constructed in Baguio City and on Mactan Island near Cebu City. During the 1970s and early 1980s, nontraditional exports (i.e., commodities not among the ten largest traditional exports) grew at a rate twice that of total exports. Their share of total exports increased from 8.3 percent in 1970 to 61.7 percent in 1985. At the same time that nontraditional exports were booming, falling raw material prices adversely affected the value of traditional exports.

In 1988 the value of nontraditional exports was US$5.4 billion, 75 percent of the total. The most important, electrical and electronic equipment and garments, earned US$1.5 billion and US$1.3 billion, respectively. Both of these product groups, however, had high import content. Domestic value added was no more than 20 percent of the export value of electronic components and probably no more than twice that in the garment industry. Another rapidly growing export item was seafood, particularly shrimps and prawns, which earned US$307 million in 1988.

The World Bank and the IMF as well as many Philippine economists had long advocated reduction of the level of tariff protection and elimination of import controls. Those in the business community who were engaged in import-substitution manufacturing activities, however, opposed reductions. They feared that they could not successfully compete if tariff barriers were lowered.

In the early 1980s, the Philippine government reached agreement with the World Bank to reduce tariffs by about one-third and to lift import restrictions on some 3,000 items over a five- to six-year period. The bank, in turn, provided the Philippines with a financial sector loan of US$150 million and a structural adjustment loan for US$200 million, to provide balance-of-payments relief while the tariff wall was reduced. Approximately two-thirds of the changes had been enacted when the program ground to a halt in the wake of the economic and political crisis that followed the August 1983 assassination of former Senator Benigno Aquino.

In an October 1986 accord with the IMF, the Aquino government agreed to liberalize import controls and to eliminate quantitative barriers on 1,232 products by the end of 1986. The target was accomplished for all but 303 products, of which 180 were intermediate and capital goods. Agreement was reached to extend the deadline until May 1988 on those products. The liberalizing impact was reduced in some cases, however, by tariffs being erected as quantitative controls came down.

A tariff revision scheme was put forth again in June 1990 by Secretary of Finance Jesus Estanislao. After an intracabinet struggle, Aquino signed Executive Order 413 on July 19, 1990, implementing the policy. The tariff structure was to be simplified by reducing the number of rates to four, ranging from 3 percent to 30 percent. However, in August 1990, business groups successfully persuaded Aquino to delay the tariff reform package for six months.

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<> Political Economy of United States Military Bases


Philippines - Foreign Investment


Foreign participation in the Philippine economy was a controversial issue throughout much of the twentieth century. The 1935 Commonwealth Constitution contained several provisions limiting the areas of economic activity in which non-Filipinos could participate. Operation of public utilities, exploitation of natural resources, and ownership of public lands were limited to Filipinos or corporations controlled by Filipinos. Control of banking and credit was limited to Filipinos with the passage of the General Banking Act in 1948, and the Retail Nationalization Act of 1954 restricted ownership in retail trade to Filipinos. Except in specifically designated areas, foreigners could invest only through joint ventures with Filipino capitalists. Legal decisions altered the interpretation of various restrictive measures, as did Marcos decrees during the martial law era, but the basic restrictions remained and were reaffirmed in the 1987 constitution. Constraints on foreigners also were aimed at non-Filipino residents in the Philippines. The 1987 constitution, for example, includes a provision similar to one in the 1935 constitution defining as natural-born citizens only those individuals whose mother or father was a citizen. The Securities and Exchange Commission ruled in September 1990 that firms engaging in business in areas of the economy that had been at least partially nationalized could not employ non-Filipinos in management positions. Liberalization of rules limiting areas of foreign investment was being considered in the Philippine Congress in early 1991.

Despite legal restrictions, foreign investment has played a prominent role in Philippine economic development. In 1948 approximately 50 percent of the assets in manufacturing, commerce, and mining were foreign owned, as were 80 percent of electricity assets. By 1970, however, foreign ownership in manufacturing, commerce, and mining had declined to around 40 percent, and very little foreign investment remained in utilities. Incomplete data for the early 1980s indicated that foreigners controlled about 30 percent of the assets of the 1,000 largest corporations operating in the Philippines at that time. Central Bank statistics, reporting inflows without taking divestments into account, showed foreign investment inflows between 1970 and 1988 totaling US$2.9 billion. Half went to manufacturing, of which chemicals and food were the most important industries; 24 percent was invested in petroleum refining; and 12 percent was in banking and other financial institutions.

United States corporations have been the largest foreign investors in the Philippines. Because of the colonial relationship between the United States and the Philippines, as well as a postindependence agreement protecting United States business interests, United States citizens were not bound by Philippine citizenship restrictions with respect to foreign investment until 1974. A government survey showed that 80 percent of foreign investment in 900 of the 1,000 largest firms in 1970 was American. In the late 1980s, the United States remained the largest foreign investor, but its dominant position had been eroded. According to Central Bank statistics, United States investment between 1970 and 1988 totaled US$1.6 billion, more than one-half the total of foreign-owned equity in the country. Japan was second with US$396 million, almost 14 percent. The Central Bank reports for 1989 showed registration of US$310 million in foreign investment. The United States had the largest investment with US$68.8 million, followed by Japan with US$51.9 million. Also important were Hong Kong with US$16.9 million, the Netherlands with US$15.8 million, and Taiwan with US$14.7 million.

Although foreign investors were forbidden by the Philippine constitution to either own or lease public agricultural lands, there were 124 transnational agribusiness firms operating in the Philippines in 1985, of which 58 were directly engaged in the cultivation of cash crops on the southern island of Mindanao. As early as the 1920s, Del Monte Corporation had established a pineapple plantation in Bukidnon in northern Mindanao. B.F. Goodrich and Goodyear Tire Corporation came in the 1950s, and Castle and Cooke entered in the 1960s, setting up a pineapple plantation in South Cotabato Province. The Philippine government facilitated investment of foreign enterprises in plantations through the government-owned National Development Corporation, which acquired land and leased it to the investors. Foreign-owned firms also were able to get around leasing prohibitions by entering into growers' agreements with landowners and subsequently changing the agreement to allow direct cultivation of the land. Such arrangements have generated considerable controversy.

In the late 1980s, pineapples were cultivated directly by Del Monte and the Castle and Cooke subsidiary, Dole Philippines. Together their plantations comprised 21,400 hectares in 1987. These two transnational corporations, along with a third, United Brands, also produced bananas, almost exclusively for sale in Japan. Production arrangements in the banana industry were more complicated than those in the pineapple industry, involving contract production-marketing arrangements with domestic agribusinesses and small growers, as well as direct cultivation. The three transnational corporations each controlled directly or through contract arrangements about 5,000 hectares of land planted in bananas in the late 1980s. In 1988 exports of bananas totaled US$146 million, and those of canned pineapples US$83 million.


Philippines - Political Economy of United States Military Bases


In early 1991, the Philippine government was in ongoing negotiations with the United States on the future status of United States naval and air facilities at Subic Bay and Clark Air Base. What would normally be an issue of foreign policy and national security became a major domestic political issue and took on an economic dimension of considerable importance. At the domestic level, the conflict was between those who argued that the continuing presence of the United States bases was an infringement on Philippine sovereignty and a continuation of a neocolonial relationship and those who, for a combination of internal security, foreign relations, and economic reasons, saw the need for maintaining the presence of the bases. President Aquino, through 1990, refused to publicly commit herself to a position; however, it was clear that her government was working to reach accommodation with the United States. As negotiations progressed, the economic issue became prominent.

There were three economic considerations from the point of view of the Philippine government. First, the proportion of the Philippine budget allocated for its armed forces was the smallest in the region, a fact linked to the presence of United States air and naval forces in the Philippines, as well as direct military assistance. Second, in the latter half of the 1980s, the bases directly employed between 42,000 and 68,000 Filipinos and contracted for goods and services from Filipino businesses. During this period, yearly base purchases of goods and services in the Philippine economy (when corrected for the estimated import content of the goods purchased) was in the range of P6.0 billion to P8.3 billion.

A third and politically very important consideration, was the sum given to the Philippines by the United States in connection with the presence of the bases, referred to as aid by United States officials and as rent by the Filipinos. Base-related payments were first agreed to in 1979 when United States president Jimmy Carter made a "best effort" pledge to secure US$500 million for the Philippines from the United States Congress over a five-year period. In 1983 another five-year commitment was made, this time for US$900 million. In October 1988, the Philippines' Secretary of Foreign Affairs Raul Manglapus and United States' Secretary of State George Schultz signed a two-year agreement for US$962 million, an amount double the previous compensation but substantially less than the US$2.4 billion that the Philippines initially demanded. In 1991 talks over the future of the bases and the size and terms of the aid or rent that would be given in consideration for continued United States access to military facilities in the Philippines was the most important unresolved issue. The decision of the Philippine administration to bring Secretary of Finance Jesus Estanislao into the negotiations in March 1991 was a further indication of the economic importance of the bases to the Philippine government.


CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.

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