What can the Philippine economic growth story tell us?

Posted: March 18, 2010 in GMA, Philippine politics, Political economy

(Author’s note: I wrote this essay in 2002 in response to GMA’s ‘strong republic’ speech. As she is on her way out of the Palace, a revisiting of this piece may be useful.)

Good institutions, it appears, can overcome geographical constraints and lousy initial conditions. Good institutions can be acquired, but doing so often requires experimentation, willingness to depart from orthodoxy, and attention to local conditions….[History constantly] reminds us not to be too deterministic about the source of high-quality institutions. Choices made by political leaders make a big difference.

–Dani Rodrik (2001)

For the Philippines, Rodrik’s epigraph at the beginning of this paper should be properly paraphrased in this manner: “Bad institutions, it appears, can overcome natural resource bounties, geographical advantages, and extremely favorable initial conditions. Our history supplies us with the stark reasons behind low-quality institutions. The choices made by our leaders obviously made a big difference.”

The World Bank (Vinod Thomas: 2000) noted that the Philippines are an example of a promise that turned into a dud. The 1950s was designated as the “development decade” following the spate of triumphalist developmental think pieces emanating from the West, exemplified by that poor parody of Marxist historiography that is W.W. Rostow’s Stages of Growth. At the time, the resource-rich Philippines were seen as the most likely economic success story. The business model looked something like this: parlay your export foreign exchange revenues into an industrialization fund that will finance the purchase of producer goods and technology from the West; set up industries that will cater to your home market so the forex will not be used to finance imported consumer goods; set up protective tariff walls to nurture infant industries, etc.—and voila, you will have transformed an agricultural economy into an industrial one in no time.

The promise of sustained growth and industrial growth for the Philippines was raised anew during the last half century: in the 1970s under the auspices of the Marcosian national security-developmental state; in the late 1980s under the auspices of the People Power state under President Corazon Aquino, and in the mid-1990s under the fighting banner “Philippines 2000” of President Fidel V. Ramos. As if the Asian financial crisis of the late 1990s was not enough, the Fates have decided to unleash the Estrada presidency on the archipelago. Hopes sprung anew in January 2001 as the hard-nosed, no-nonsense, and business-like administration of President Gloria Macapagal-Arroyo was ushered into office by a less-universally welcomed repeat of People Power 1986.

Nowadays, a most certain gloom has gripped the country as it struggles with the largest public deficit ever, puts up with an un-elected president hell-bent on winning the 2004 presidential elections, and ponders on a possible repeat of an Erap come 2004 with the electoral victory of Erap’s friend and movie box-office rival, the “King”—Fernando Poe, Jr., or FPJ, for short.

We argue that building a strong democratic republic in the Philippines was a sine qua non for sustained and high-quality economic growth. We highlight the lessons that we should learn from the Philippine growth experience since the republic’s establishment in July 1946 so one may have an inkling of what the future has in store for the country if the past keeps repeating itself.

The Philippine growth story is rather a sad but familiar one akin to the front-runner who lost steam and finished last in the race: a promising start followed by short bursts of growth followed by busts to produce an over-all inability to sustain growth and alleviate poverty. With this general story, the authors want to highlight the following arguments that illustrate the interplay of socially-irrational yet privately-beneficial policies and outcomes:

  • The question of foreign exchange constraints and recurring balance-of-payments crises. The lack of sustainable growth is really due to persistent foreign exchange constraints. This is exemplified by the fact that foreign savings (represented by the gap between saving and investment rates) tend to be higher during boom periods. When foreign savings weaken, the economy usually enters into a bust period. The same pattern can be seen by a study of international reserve levels. The questions remain: why do these constraints continuously frustrate growth? Why and how did other neighboring economies managed to overcome these same constraints? The answer seems apparently clear: while other countries prudentially used foreign exchange earnings to finance foreign exchange-generating ventures, the Philippines practically squandered the same in unproductive (e.g., conspicuous consumption, monument building) and/or anti-social activities (e.g., electioneering, vote-buying, private army-building, capital flight). The country’s elites has irresponsibly violated the fundamental tenet of finance that even ordinary housewives understand: save while the sun shines for the rainy day.
  • Policies geared toward sustainability of growth rather than just high growth. The policies adopted were short-sighted, aimed primarily at stoking growth for a few years (in time for the next elections, perhaps?) rather than sustaining growth in the long-term. Prior to 1969, no chief executive has ever won his bid for re-election despite throwing everything (baby, bath water, bath tub, and all) into the electoral fray. For this reason, a concern for the medium-term has been lacking. But what compounds the problem is a stronger concern to protect and promote private interests even at the expense of social welfare, an affliction common to all regimes even to the present. When the dictatorship was established in 1972 by Ferdinand E. Marcos (who was prevented from assuming a third term at the presidential palace), the problem with short-term time horizons was apparently solved. But that proved to be insufficient and even made the situation worse. If the authoritarian leader, his relatives, and his cronies have placed greater value on their personal aggrandizement, then a longer but uncertain “term of office” will mean greater social costs. In contrast, the Yushin regime of Gen. Park Chung Hee established a few months after Marcos’ “New Society” started the process that will culminate in South Korea’s membership in the rich men’s club—the Organization of Economic Cooperation and Development (OECD)—as early as 1995. The economic policies adopted by both democratic and authoritarian regimes were singularly inconsistent with the sustainability of economic growth.
  • In the late 1940s, the elites went into an orgy of importing consumer products to satisfy a demand suppressed during the Japanese occupation of the country. The economy faced its first post-independence balance-of-payments crisis and the new Republic almost collapsed as the country leaders did a Nero—’fiddling’ as Moscow-supported Huk insurgents were practically knocking at the gates of the capital city and even unmindful that soldiers and public school teachers were without pay and therefore were vulnerable to Huk propaganda. The Americans’ concern for the newly acquired military bases (Clark Air Base and Subic Bay Naval Base; the largest outside continental USA) provided the wherewithal to save the day for their indolent and extravagant Filipino allies.
  • In the 1950s, for instance, the import controls targeted against finished products and the import substitution industrialization (ISI) program caused rapid economic growth (one of the highest in Asia at the time) and a change in the country’s industrial structure (manifested in the growth of industry’s and manufacturing’s share-of-GDP ratios). However, the bias against exports prevented the accumulation of international reserves to support the program. Consequently, the foreign exchange constraint re-emerged. The industrialization effort was ad hoc or haphazard as “rent-seeking entrepreneurs flooded the halls of the central bank in search of dollar allocations that enabled them to reap windfall profits in producing for a protected market” (de Dios and Hutchcroft: forthcoming). The unassailable economic logic: Given the overvaluation of the peso (fixed at P2 to $1), imports were relatively cheap. On the other hand, if the domestic market for industrial products were protected against external producers, a local monopolist-industrialist stands to capture enormous rents. However, since foreign exchange (to purchase capital and intermediate goods) was necessary to produce consumer products, these same monopolists had to rely on non-economic means (including bribery) to obtain their share of rationed foreign exchange. Furthermore, the failure to broaden and deepen the internal market for industrial consumer goods served to present objectives limits to inward-looking industrialization.
  • After 1962 and up through most of the Marcos era, entrepreneurs responded to (import and foreign exchange) decontrol and the peso devaluation (to about P3.25-3.90 per dollar) by over-exploiting the country’s natural resource base (timber and copper ore). In the process, the country’s natural capital base was run down at non-sustainable rates and proportions leading to severe environmental degradation. In a survey of the country’s forestry sector, Boyce (1993: 240-1) wrote: “Philippine forestry in the Marcos era provides a case study in the political economy of environmental degradation. A natural inheritance has been squandered, as future income opportunities are sacrificed for short-term gains. At the same time, the social costs of soil erosion, floods, droughts, and lost (sic) of biological diversity have been imposed on current and future generations. In a setting of marked political and economic inequalities, one can expect state policies with respect to the natural environment to favor the interests of the rich and powerful over those of the poor and powerless. If environmental degradation benefits the former at the expense of the latter, it will continue until such time as it is blocked by the mobilization of countervailing power.” A parallel story could be related for the country’s mining sector and is told by McAndrew (1983) and Briones (1987). Alongside decontrol and peso devaluation, the protectionist walls that fostered inefficiency in domestic manufacturing were retained. Thus, instead of boosting higher value-added manufactured exports, lower value-added and more-vulnerable-to-the-vagaries-of-the-world-market (i.e., demand-elastic) raw material exports were promoted.
  • During the seventies, the dictatorship’s easy access to foreign capital and US military aid encouraged an aggressive borrowing program to finance growth anchored on inefficient public enterprises and so-called strategic industries, and wasteful capital flight and empire building, only to end in a massive debt overhang in the 1980s. In this case, the foreign exchange constraint manifested itself in a very big way. Throughout the dictatorship, favored parties were given preferential access to state-provided funds in a supposed-replication of South Korean export-oriented industrialization that had as its core state financial support for the export-oriented chaebols. The logic was to provide adequate muscle for strategic industries that could eventually compete effectively in the world manufactured-exports markets. These strategic industries were likewise protected within the domestic market so their learning curves would be shorter and less steep. The South Koreans managed to succeed as the stronger national security-developmental state under Park Chung Hee was able to impose discipline on South Korean big business with the warning: export or lose state support! In this case, the arbiter for continued state support was an impartial world export market, an arena where even the most powerful national dictator is relatively powerless. In contrast, the authoritarian state under dictator Marcos was weaker and was unable to prevent crony firms from siphoning state funds to egg nests abroad or to concentrate production in an easier (because protected) internal market. The inefficiencies of the import-substituting industrialization period were carried over to a supposedly export-oriented regime engaged in a “half-hearted flirtation” with export-promotion policies (Montes: 1987, 2). Thus, no objective test existed to assess whether crony firms deserved continued state support such that public resources became the private resources of inefficient and criminally-wasteful crony firms. When the cronies left the proverbial sinking ship even before 1986, their failed firms (shored up by Marcos with public loans and equities) became the state’s charges during the Aquino administration. Social welfare was thus harmed twice: at first, public assets became privatized during the dictatorship; then private losses and liabilities were socialized by post-Marcos democracies—in a perverse Philippine version of socialism!
  • In the mid-1980s up to the 1990s, trade and foreign exchange liberalization was accompanied by an unofficial peg of the exchange rate, thereby negating the positive effects of the liberalization efforts. The peso remained over-valued and exports remained generally uncompetitive. The result was the curious phenomenon of ‘reverse mercantilism’ where liberal foreign trade regimes brought a flood of imports into the country while exports, while growing also, grew at a slower pace relative to imports. While the liberal importation of consumer and producer goods managed to tame inflation, the failure of exports to outpace imports carries the seeds of future BOP crises.
  • Growth in the Philippines is largely capital-driven even as capital growth has been restrained. While this is not unique to the Philippines, the relative slower pace of capital formation in the country is a major factor behind lower economic growth rates compared to its East Asian neighbors. The spasmodic character of the country’s economic growth record is one factor behind its poorer investment record. The propensity to use capital resources unproductively is another. Of course, the uncertainties behind electoral and unconventional regime changes (and attempts at regime change such as the coup attempts of the late 1980s) have similarly led to an investment boom and bust cycle. The inordinate power and influence that Philippine presidents enjoy over the economy and economic outcomes is a principal factor behind investment fluctuations. Every new occupant of the presidential palace (including the incumbent president, Gloria Macapagal Arroyo, 2001- ) since Manuel L. Quezon of (the American-sponsored toddler-state that is) the pre-war Philippine Commonwealth brings with him a new set of cronies that will gain first stab at stealing from the public treasury. Thus, a pattern has been observed where investors hold back during the year before and after the presidential elections. They do so in response to the uncertainty of the election’s outcome as well as uncertainty about the policies to be adopted by the incoming chief executive including the security of property rights and contracts entered into with the previous administration. The Marcos dictatorship (1972-86), even as it got rid of elections, failed to remedy investor uncertainty. Investors became wary towards the beginning of the 1980s as it was becoming clear that Marcos was veering to make wife Imelda Marcos and his armed force and intelligence chief, Gen. Fabian Ver, to be his successors and regents that will prepare his son, Ferdinand Jr., and daughter Imelda (a.k.a. Imee), for eventual dynastic succession. Businessmen were worried about the power struggle that would ensue when Imelda and Ver assume power and move against putative rivals, defense minister Juan Ponce Enrile and Armed Forces of the Philippines (AFP) vice chief of staff Fidel V. Ramos, two people who will figure in the failed-military-coup-turned-People-Power-Revolution on 1986 that toppled Marcos from power. Even before the Marcos dictatorship went into a deep crisis after the 1983 assassination of oppositionist leader, former Senator Benigno Aquino, Jr., his cronies abandoned him and engaged in massive capital flight in 1981-82 (Boyce 1993) after a financial scandal revealed the internal weakness of many crony conglomerates. In another illustration of the moral hazard problem, Marcos was forced to use public funds to shore up the crony firms instead of courting political problems if these same firms were allowed to go bankrupt. The restoration of presidential elections after 1986 also restored pre-martial law patterns. The preference of President Estrada for businessmen and other shady characters of Chinese-descent will largely explain why the same coterie of business groups (that was largely based on the old Spanish families such as the Ayalas) that helped topple Marcos would again figure prominently in the anti-Estrada effort of the late 2000-early 2001 period and are again complaining of the new cronies of the First Gentleman, Miguel “Mike” Arroyo.
  • One clear weakness of capital formation in the Philippines that impacts adversely on economic growth is the obvious shortfall in public infrastructure, which any comparison with neighboring countries will make obvious. In this issue area, one has also to factor in the almost-incalculable destruction wrought by typhoons and tropical depressions, of which an average of 25 buffet the archipelago annually, several earthquakes, including one in 1990 that registered 7.3 on the Richter scale, followed by a once-every-six-centuries-explosion of Mt. Pinatubo in 1991, among many other volcanic eruptions in various parts of the country—all of which transpired during the historical period under consideration. We must also calculate the damage to physical infrastructure caused by the many internal armed conflicts across the decades. And finally, we need to consider the additional transactions costs attendant to infrastructure construction due to natural and man-made calamities. In the same manner that inclement weather can delay or prevent construction, so too can armed conflict. The glaring shortage of high quality roads and bridges, the inaccessibility of rural areas, and the high costs of inter-island transport are all important constraints to limiting the scope of internal markets as well as access to foreign ones. This in turn is related to the government’s perennial inability to raise taxes and other internal revenues. All post-Marcos administrations have struggled with a fiscal dilemma: on the one hand, they recognize that long-term growth and poverty-alleviating employment requires the provision of critical infrastructure and therefore greater government spending. On the other hand, with a poor tax collection record and an annual budget that is saddled (almost 90%) with employee payrolls and operating expenses, there is little room to expand public capital spending without risking a growing budget shortfall. With the latter, meanwhile, comes the disapproving ire of multilateral financial institutions like the International Monetary Fund and private commercial banks, who then threaten to raise the premia on additional loans. Recent Philippine administrations have taken the modest option of limiting spending rather than incur the IMF’s ire over yawning public deficits. While this may make our macroeconomic indicators look healthy to foreign institutional investors and fund managers, the continued expenditure of only 2-3 percent of GNP every year on public infrastructure will continue to hamper growth. While everybody knows the obvious solution—drastic improvement of tax collection by cleaning up the internal revenue agencies and running after wealthy and powerful tax evaders (who would rather contribute to political campaigns for a bigger and faster bang for the buck)—nobody has tried this difficult and dangerous course of action. The recent resignation of the internal revenue chief, which was graciously accepted by President GMA, serves as the latest warning. But the more relevant warning is: unless the government’s coffers are healthy enough to engage in public capital formation in a more massive scale, there can be no strong basis for sustained growth and employment.
  • A major long-term obstacle to sustainable and high-quality growth in the Philippines has been the unresolved issue of rapid population growth. In here, the failure of the Philippine state to face up to the strong influence and interference of the Roman Catholic Church is at the issue’s core. The final results of the 2000 census indicate that instead of the occurrence of a much-awaited slowdown in population growth, it actually accelerated slightly over the past two decades, from 2.35 percent annually in the 1980s to 2.36 percent in the 1995-2000 period. The effects of a large population on employment and economic growth are quite evident. It immediately means a higher dependency ratio and heavier burdens for working people who must feed more on meager incomes. Nonetheless, the dependency ratio is actually an underestimate of its adverse impact on overall productivity since not all people of working age actually find employment. For one, women of working age, especially from the poor sectors of society, have difficulty finding employment because of the large number of their children. In addition, a high dependency ratio may also help explain the country’s low saving and investment record. Furthermore, a rapidly growing population eventually creates a large industrial army of the unemployed (ala Marx) that exerts further downward pressure on real wages and incomes. A large population also strains government resources for both physical infrastructure and human development (i.e., health, education, etc.) to the limit. Quality education and training are not likely to be attained when public budgets are engulfed with the ever-increasing annual streams of schoolchildren. Physical infrastructure will prove to be inadequate in the face of burgeoning urban settlements, especially those of the urban poor. Quite apart from poor tax collection, the existence of a very young population—many of whom are unemployed or mired in low-paying and insecure informal sector jobs—implies a narrow tax base from which to finance public infrastructure and social services. Finally, a larger population does greater harm to the natural environment that in turn causes a worsening in the quality of life in both urban and rural settings, especially among the poor. Poor people, especially in the rural areas, because of their greater reliance on natural resources for their livelihood, will suffer disproportionately from environmental degradation (Thomas et
    al: 2000). In sum, the result of runaway population growth is a weak foundation for growth in terms of human, physical and natural capital. While this truth is known to all, population growth in the Philippines has yet to be curbed.
  • One cannot ignore, as a major reason for non-sustainability and low level of Philippine economic growth, the historical instability of the political process itself. Objectively speaking, formal political processes in the Philippines have been periodically challenged and subverted, for good and bad reasons. Since 1946, the Republic has run the gamut of the Marcosian dictatorship, fraudulent, violent, and costly elections (1949, 1969 and 1986 especially), armed rebellions (of the Huks during the 1950s, the re-established communist party since the late 60s to the present, the various Muslim secessionist movements since the 1970s to the present) and failed coups (of the rightist military rebels during the second half of the 1980s), and the three People Power uprisings (February 1986, January 2001, and April-May 2001), two of which have resulted in regime changes. In recent decades since Marcos’ ouster, the challenge posed by organized crime both to political stability as well as the integrity of the democratic electoral process has to be fully recognized. The impunity with which criminal syndicates can operate undermines government’s credibility and people’s trust. The extent to which criminally-sourced funds helped influence electoral outcomes at all levels will likewise diminish faith in governmental authority and legitimacy. Of course, all of these phenomena are bound to be a potent disincentive to investors, domestic and foreign, and will adversely affect economic growth. The failure of ‘normal’ political institutions to accommodate and address what are deemed by significant sectors of society to be fundamental inequities and injustices is at the base of the many and continued attempts at redress that are extra-institutional and even violent at times. That much of our politics since 1946 is of the headline-grabbing dramatic and extra-ordinary kind rather the bland, ho-hum, ordinary kind is an important factor behind our poor economic performance.
  • The failure to provide adequate physical infrastructure, to curb runaway population growth, and to ensure compliance with institutional arrangements and normal political processes—some of the major reasons behind weak economic growth in the Philippines—can be traced to the weakness of the Philippine state relative to private interests. The failure to tax, the failure to penetrate and extract resources from society is clear indication of state weakness vis-à-vis powerful interests that should normally be part of any society’s tax base. The failure to curb runaway population growth is largely a function of the state’s failure to confront the (imagined and often exaggerated) power and influence of the Roman Catholic Church (that frowns on all population control methods save so-called natural, and largely unreliable, methods such as abstinence, coitus interruptus, and rhythm). And the failure to implement the law or to a lesser extent, to enact sound law) is at the heart of our political instability problems. It is for this reason that we argue (a fuller argument is made in Appendix 5) that strengthening the Philippine state vis-à-vis private interests is necessary to improve our economic performance. A strengthened Philippine state must not be misconstrued as a prescription for another authoritarian experiment for the country. On the contrary, the only strong state is a democratic state. Even the most powerful states cannot preside over sustainable economic growth without social support. While authoritarian states can coerce society for some period of time, a stronger basis for growth is negotiated state power wherein states govern societies with society’s approval and support. The truly strong state is the limited state. When the state makes a credible commitment to limit its power, the security of property rights and contract enforcement so dear to the new institutionalists like Douglass C. North and Mancur Olson will help spur and sustain economic growth. It is true that one can surely collect taxes when people are confronted with the naked power of gun barrels. Nonetheless, recent history shows that democratic states have better internal revenue raising records than authoritarian ones. People will contribute more taxes not when they are coerced to do so. They will contribute more when they see that their taxes are used responsibly by an accountable regime, when these same taxes are collected by a regime whose spending patterns will reflect social preferences.
  • Even as we make the above statements, we must answer the objection that the Philippines is not the only weak state in the region (or even in the world) and that other weak states have turned in better economic performance. The relative superiority of states in more prosperous jurisdictions such as the South Korean or the Taiwanese state or even the Hong Kong city state or the Singaporean city-state vis-à-vis the Philippine state is beyond question. But how about the states in relatively less prosperous jurisdictions such as Indonesia and Thailand? Our first response is to assert that the Philippine state is among the weakest in the region, even the weakest amongst the weak. Our crude measure of state strength is the quality of two basic agencies, the barest minimum that states must have in order to be states. These are the armed forces and the tax collectors. One needs an army to be able to collect taxes. If a state is democratic, the armed force need not be actually used to collect taxes. The credibility of state’s authority, which ultimately rests on the monopoly of power and armed violence within its territorial jurisdiction, is enough to ensure acquiescence to tax laws. On the other hand, one needs to collect taxes to be able to maintain an armed force. Of course, taxes can finance the provision of public goods other than national defense and internal peace and order through an armed force. As this happens, the institutional and organization “thickness’ of the state increases. But this increase in state “thickness” and strength is both dependent and will impinge upon the tax collection effort. More tax revenues will, all other things being equal, produce a stronger state. A stronger state meanwhile can collect more taxes than a weaker one.
  • If one agrees to use this crude measure, then we must recognize that the Philippine state is among the weakest within the region. It has the smallest and weakest army. It has likewise the weakest tax collection effort in the neighborhood. Since 1946, the Philippines was an American protectorate with the US 7th Fleet (HQ-ed in Subic Bay and the 13th Air Force (HQ-ed in Clark Air Base) guarding her waters and airspace. What passed as the Armed Forces of the Philippines (AFP) got tasked with internal pacification rather than defense against external (read as international) threats. The poor quality of its governmental agencies relative to Singapore may make the Indonesian state look like a weak one. For instance, its tax collection record may not be a very impressive one. However, its oil revenues have provided the Indonesian state with the wherewithal to create a credible army, finance military-related industrial ventures (such as domestic air and sea patrol craft) as well as corruption within Suharto’s familial circles and the ruling party’s circuits. Path dependence plays a role here. The Philippine Army has never won an international war, suffering defeats at the hands of the Spaniards, the Americans and the Japanese since the 1898 Philippine Revolution that first introduced the idea of Philippine nation-state-hood. As to the internal wars fought since the 1920s, no decisive victories can be claimed. Or even if there were (e.g., against the Huks in the 1950s and 1960s), the victory is to be shared with our American big brother who armed, supplied, equipped, and trained our officers and troops. The authors believe that we are the only jurisdiction in the world that celebrates military defeats. We celebrate annually the fall of Bataan and Corregidor consoling ourselves with an exaggerated notion of the value of the resistance we put up against the Japanese. The emergence of the nominally independent Philippine state in 1946 was at the behest of the U.S., the world’s true superpower net of the Soviet Union. In contrast, the Indonesian army that formed the core of the Indonesian state was a victorious army that fought and won independence from the Dutch colonizers. It thus enjoyed the prestige of an army of independence. The Indonesian political system was therefore dominated by a “military elite” that presided over a relatively acquiescent civil society.
  • If we use Thailand as our comparator, it is also clear that the Thai state is stronger relative to the Philippine state. Again, history is implicated here. Thailand was never a formal colony of any external power unlike the Philippines. Akin to Indonesia, the Thai political system was dominated by a bureaucratic elite or “political aristocracy” and countervailing social forces were strikingly weak. In Thailand, government service offered the greatest opportunities for wealth, security, prestige and power. Because businesspeople lacked political access, they were sometimes called ‘pariah entrepreneurs’ and had to contribute financially to the private incomes of protectors and patrons within government. In effect, business did not have sources of power and wealth independent of or outside the Thai state’s control. In contrast, the Philippine political system is dominated by a social force that has an economic base independent of the state apparatus even as the state plays a central role on the process of wealth accumulation. In the Philippines, a powerful private business class extracts resources and privileges from a largely incoherent bureaucracy. For long, the Philippine bureaucracy was staffed by elements employed at the behest of powerful politicians and vested interests and had never developed autonomous power relative to private interests. During the 1970s, the Thai state was confronted by a more powerful communist insurgency compared to that mounted by the re-established Communist Party of the Philippines (CPP). Yet in the early 1980s, the Thai army managed to decisively defeat the Thai insurgents such that rural insurgency is now a thing of the past in Thailand while it still is a going concern in the Philippines. Of course, the changes in the alliances entered into by a People’s Republic of China worried by resurgent Vietnamese nationalism after 1975 also shifted the fortunes of the Thai insurgents. China now wanted Thailand as an anti-Vietnam ally; accordingly, it withdrew support for the Thai insurgents. For this reason, Thailand was able to benefit from peripatetic Japanese capital after the 1985 Plaza Accord revalued the Japanese yen vis-à-vis the US dollar and forced Japanese industry to relocate to Southeast Asia to make their exports still competitive in the US market. Path dependence again plays its influence. While the mid-1980s saw the Philippines struggling with dying months of the Marcos dictatorship and the pains of re-democratization, Japanese capital was attracted to a more stable Thailand, Malaysia and Indonesia. That we did not suffer as much from the hemorrhage of portfolio capital during the Asian financial crisis of the late 1990s as these countries (because of our failure to attract massive amounts mobile capital during the late 1980s and early 1990s) gives Filipino small consolation.
  • Poverty in the Philippine can be alleviated as long as stable and productive employment for the poor can be provided. The poor in the Philippines are poor not because they are unemployed; because they are poor, they cannot afford to be unemployed and income-less. Nonetheless, most of them are employed in low-paying, low-value added, unstable jobs in the informal sector. The effort to provide stable and productive employment can succeed only if the economy can succeed only if the economy can be put on a solid footing for rapid growth over a longer period—say a per capita growth of 5 percent or more over a period lasting at least a decade. According to the Philippine Human Development Report 2002, if the country grows at this rate, per capita income would be 63 percent more in a decade and would double in about 14 years. By contrast, the historical growth rate of 1.14 percent would raise per capita income by only a third in a decade and would require 23 years for it double. Thus any other solution will be merely supplemental or palliative.
  • Given the challenges confronting the Philippines, what positive lessons from its growth history must we emphasize? For one, openness will help growth. The thrust toward more economic openness will benefit growth in several ways. First, it helps draw the needed foreign saving to finance growth. Second, our estimates show that economic openness helps improve total factor productivity (TFP). A caveat, though, would be the need to safeguard against increased vulnerability to external shocks due to openness. This calls for the strengthening of domestic institutions without necessarily reverting back to protectionism. For this reason, it is rational that financial liberalization should precede trade and capital account liberalization.
  • Unfortunately, the negative lessons outnumber and outweigh the positive ones. For one, the Philippine government must adopt internally-consistent to be socially-beneficial macroeconomic and sectoral policies that will place the economy on the high road of income and employment (and consequently poverty alleviation). It must be able to resolve its perennial financial and fiscal dilemma so it could encourage a high level of investment through the provision of adequate and high-quality infrastructure. It must be able to curb runaway population growth. And through more thoroughgoing and inclusive democratization, it must be able to resolve and avert the destabilization caused by political upheavals and extra-ordinary politics. All the above will be accomplished only if the power and influence of private vested interests can be tamed and state strength can be enhanced.
  • How will the strong democratic republic in the Philippines be built? The prospects apparently are bleak what with the seeming possibility that history might repeat itself in the Philippines: the first issue cast as a tragedy (Estrada elected as president in 1998) and the repetition will rightfully be considered a farce (FPJ elected as president in 2004). If this scenario will come to pass, the country and the Filipino people will rightfully deserve the world’s scorn and laughter for failing to learn and profit from repeated lessons from our rich history. A significant number of Filipinos will most likely join the 19 percent who have earlier signified (in various opinion polls conducted in mid-2002) intentions to surrender their Philippine passports for those of other countries, We have alluded to (in Appendix 5) the existence of an implicit coalition for growth and state strength that could serve as the source of change. The possibility of an FPJ victory in 2004 may decisively end the Philippine state project. However, we believe that the despair and outrage generated by this strong possibility will activate the implicit coalition for change. While we all are vulnerable to fortuna‘s embrace, while we are thrall to the iron law of surprise, we nonetheless feel the need to explicate our hopes and dreams for our country’s future. Probably because whistling in the dark is definitely more comforting than swearing and cursing at dire futures.


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DE DIOS, E. and P. HUTCHCROFT (2003). “Political Economy: Examining Current Challenges in Historical Perspective.” In The Philippine Economy: On the Way to Sustained Growth?. Edited by A. Balisacan and H. Hill, Oxford University Press, pp. 45-73.

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