The Implications of the Stock Market Crash and the Philippine Economy

¢olume

VI No.

Januar/-February

1'988

ISSN

15-9097

The Implications of the Stock Market Crash and the Philippine Economy I

t is important to take a critical look at the po'tential consequences of the Octobe_ 19 stock market

crash on Philippine ance.

EDITOR_3 NOTE: The Wall Street Crash on October 19, 1987, also called the "Black Monday" in the financial world, drew varied global reactions. This is not surprising since stockmarkets, ingeneral, reflecttheover-allprospectofan economy_ By therise

economic perform-

and ebb in stock market prices and activities, employment, consumer spending and the general economic well-being of a country could be predicted.

Some market observers in New York believe that the 508-point decline in the

The big crash was led by the New York Stock exchange, as had occurred in the Great Crash of 1929. Last Octobet 19, 1987, a day that has come to be called "Meltdown Monday "_ the Dow Jones industrial average fell 508 points, and triggered off similar crashes in stock prices in all the major stock exchanges in the world•

Dow-Jones inclustna_rage was only a temporary retreat that could precede further gains in an unceasing five-year-old "bull market•" Other financial analysts argue that the crash was an ineviiable solution to the overpriced stocks bought and sold at the stock market. In Europe, the dramatic crash led European investors to doubt the stock markets, while investors in .Asian countries believe that the crash would reduce the inflow of foreign investments, thus leading to a slowdown of their economic growth.

In reviewing its general impact to the Philippine economy, Dr. Manuel Montes, our guest writer for this issue, notes that it is hardly surprising that local stock markets echo the crisis in Wall Street, though probably in a lesserdegree. Ira slowdown in economic growth in the United States and other major countries occur, there will be a dampening effect on revenues from Philippine exports to these countries. Another important factor is the fact that the value of the Philippine peso is affected by changes in the value of the U_S. dollar. Thus, the short-and long-run repercussions of the crash on the Philippine economy merit a careful study.

Dr. Montes is an Associate Professor of Money and Banking at the University of the Philippines' School of Economics. An Outstandii_g Young Scientist for 1987 awardee, he specializes it, rnacroeconomies, monetary theory and policy, fiscal policy and Third World debt problems. He is also a Central Bank of the Philippines'Diamond Jubilee associate_ In this issue, Dr. Montes analyzes the possible causes of the Wall Street crash and presents some implications on the Philippine economy,

Meltdown Monday wiped out $1 --"'_on worth of assets which had been -u-.,t up over five years of continually rising stock prices (the "bull market"), This was the longest "bull market" of the 20th century. The Dow Jones index, which stood at 1-895.95 at the start of 1987, peaked at 2722.42 on August 25, and began exhibiting a slight downward trend before precipitously falling on the ii

i

CONTENTS:

PAGE

THE IMPLICATIONS OF THE STOCK MARKET CRASH AND THE PHILIPPINE ECONOMY

.......................................

1

UPDATE: New Publications =_===_m, Jl=aeaa=la_e=a=g_o Seminars .....................................................................

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DEVELOPMENT

RESEARCH

•NEWS

JANUARY-FEBRUARY1988

day of the Crash. The end of 1987 saw the Dow see-sawing around the value of 1900.

An important exception to note is that wealth is created and destroyed in the operations of the stock market itself, and since future prospects are dif-

U.S. has been quite dynamic in its detense spendingl--/but at the expense of an unsustainable budget deficit.

The Dow Jones index, because it is based on the prices of blue chip stocks, actually underestimates the extent of the trash. The fall in the prices, overall, induced a "flight to quality" which reduced the fall in the prices of blue chip stocks,

ficult to measure, self-propelling expectations and speculation have often been behind overall advances in stock prices, In such a situation, the entry of new investors into the market, including small investors and foreign investors, is often unmatched by increases in the supply of stocks, representing either new enter-

A possible reason behind the stock market crash is that the prices of stocks had been bid up to levels which were inconsistent with the actual earnings prospects of the companies whose stocks are bought and sold in these markets.

The reason why these prices were bid up at unsustainable levels and have had

The events of October must be interpreted as a major change in the world economic scene, the end of a phase in

prises or expansion in existing enterprises, This tends to bid up prices of the available existing stocks, thus fuetling further

to fall drastically has been the fact that self-fulfilling speculative activity had sustained the rising market.

the world economy whict/1 began after the end of the deep recessions of 1978 and 1980. In order to understand the possible implications of this event on the Philippine economy, it is necessary to discuss the stock market and the possible causes of the stock market crash,

entry and speculation.

The Characteristics of the Stock Market.

The stock markets are a venue for the transformation of savings into capital for industrial enterprises in capitalist econok mies. The other important venues are the financial system and the fiscal operations of the government, The stock market has tire important characteristic that permits direct risktaking in capitalist enterprises, it also permits risk-takers to change the enterprises in which they undertake risk, subject only to delays imposed by the Thus, stock prices represent not only the actual, but also the potential condition of the companies whose stocks are traded in the markets. And 'these conditions are need to physically complete transactions. prices have the capability of immediately discounting or embodying events that represented on a current basis; stock On an overall basis, the average prices of stocks in stock markets can reflect, with important exceptions, the overall prospects of the oeonomy when the stocks of the most important enterprises in that economy are traded in the market.

An overall, rise in stock prices can be interpreted, with uncertain lag, as a judgement of improving prospects for the economy; and vice.versa.

"Earlier Monday, panic selling gripped stock exchanges in Tokyo, Hongkong, Lonldon, Frankfurt, Amsterdam and other financial centers, with records set for one4ay losses ....

The pace-setting Manila Stock Exchange reported its composite index fell 105.49 points to

To be more Jones average all the gains in of 1987 was market-2--/

789.54. " (The l_inancial Post and Philip pine Daily Inquirer, respectfvely, 21 October 1987, page 1) =: In fact, the recent record will probably reflect the fact that economic activities in the advanced countries have been concentrated irt mergers and acquisitions, which, while involving enormous amounts of resources, have created little

In a theoretical sense, such an eventuality would be a common, but unpredictable feature of the stock market. in the real world, it is recognized that many markets are imperfect; more than that, many markets,, especially the futures markets, actually do not exist, in such a situation, under a general equilibrium view, existing markets, particularly markets as orderly and as organized as stock markets, will have to reflect, in a

capital. The

hypersensitive

government

sector in the

precise, based on the Dow figures reported above,,, prices since the beginn] deemed "unreal" by the

manner,

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Deoal

Associated

Press

•

DEVELOPMENT conditions of the imperfect non-existent markets.

RESEARCH and

the

NEWS

JANUARY-FEBRUARY1988

The tax cuts policy of the Reagan Administration accompanied by increases in defense spending, and the less-thanadequate social spending cuts inaugurated an economic regime of consistent and continuously increasing government budget deficits. In 1987, the budget delicit is estimated to be in the order of $160.0 billion, perhaps reaching $175.0 billion in 1988. On the other hand, the national debt doubled to $2.0 trillion,

change rates. Like the stock markets,, the factor of confidence and hope buoyed up the expectation that offsetting positive effects from the Reagan economic program would appear in the future to sustain the current exchange rates. The Reagan supply-side program was directed towards an increase in supply and output in response to the tax cuts, thus solving the budget deficit problem naturally with the induced increases in tax revenues.

that brought stock prices down. It will be impossible to get into the minds of

In a country where the savings rate has fallen to below 3:percent of income,

By September 1985, the Reagan administration was forced to come to

stock market players, many of whom even point to the apparent "irrationality"

these bu.dget deficits have to be vented as trade deficits in .an almost one-to-one

of the stock market,

manner. The trade deficit increased from $132.0 billion in 1985 to $156.0 billion

grips with the trade deficit problem, in an agreement called the "Plaza Accord", hammered out with Japan, West Germany, Britain and France, the United States began "talking" the dollar down.

For this reason , many stock market professionals after the crash have resurrected ideas that private individuals, unless they would personally specialize in the operations of the market, should not "play" in stocks.

The question remains as to what factors precipitated the wave of selling

in 1986, _Iowever, the immediate event that ,cipitated the crash provides a clue to the cause of the crafla. A statement by U.S. Treasury Secretary James Baker, castigating West Germany for its lack of cooperativeness in joint efforts to stabilize the value of the dollar, has been

and

will likely hit

$175.0

billion in 1987.

Like the stock markets, markets for foreign exchange are examples where the costs of imperfectly clearing markets elsewhere must be borne by the markets that happen to be operating, ....

There were no real foreign exchange operations, only pronouncements that the value of the dollar should be lowered.

The inconsistency of the price level before the crash, and the world economic situation affected, and continues to affect, the unsustainability of international economic relationships among

"The results of a violctttly depressed stock market may be felt over the next several months in the form of lower consumer spending; higher unemploymerit, reductions in business plans .and even a teeesrlott . ._" (Manila Times, 21 October, 1987) .... ' _ : 'ii:' .......

tic recession; as would have been the case if it had been subjected to an IMF adjustment progr_tm. Moreover, it would not have been in the interest of Japan, particularly, which was already suffering from losses due to the yen appreciation, for the U.S. to have followed such a course.

advanced countries. These relationDs are, in turn, heavily conditioned by budget and trade deficits of the United States and the particular constraints faced by the economic powers,

In the case of the U.S. dollar, its world market was quite willing to absorb the disequilibria embodied in the U.S. trade deficit without substantial changes in ex-

identified as the the crash,

immediate

trigger to

Despite the dollar slid in 1986, the trade deficit did not decline. The United States was unwilling to induce a domes-

Alternatively, Japan and Germany agreed on another course - to stimulate their economies. The U.S, threatened that it would unilaterally devalue the dollar should these countries fail to do so.

Beyond all these is a need to look into the economic reasons behind the stock market crash.

In the past two and a half years, the valueEconomie of the ReasonsBehind U.S. dollar hastheCrash fallen by more than 50 percent against the West German mark and the Japanese yen. This fall has been precipitated by a combination of factors such as the U.S. trade

_ DEC. 1979 _ I=짜

deficit and its policy actions, including that of the advanced capitalist economies.

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RISE AND FALL OFTHE

122,44

U.S. DOLLAR

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.....................

3

DEVELOPMENT RESEARCH NEWS In February

JANUARY-FEBRUARY

1988

1987, the parties ham-

"Louvre Agreement" which then attemp, ted to prevent the further fall of the dollar (which at that time stood at 150 yen).

However, the dollar continued to slide meted out a new agreement, calledthe and the Baker statement, delivered immediately before the crash, was interpreted as a breakdown of fhe difficult efforts at coordination, (and a very distinct possibility of the U.S. threat of unilateral devaluation) and no prospects of orderly adjustment. Foreign investors in New York withdrew their investment in the face of possible foreign exchange losses which then sparked the crash.

That the other markets around the world crashed in response indicates that the most likely economic adjustments for the rest of the 1980s will induce slower growth. The principal source of the current difficulties is the U_S.government b'udget deficit. Thus, any success in resolving this problem will also reduce the U.S. deficit. This will, however, reduce the exports of Japan, West Germany, Talwan, South Korea, and so on to the United States, which in turn, will

_

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_k_ _FIGURE 3_STOCKMARKET DEALERSIN AMSTERDAM DUBBED THEPLUNGE AS" MONDAY MASSACRE"

•policy would strike at the heart of the post-War Japanese social fibre. A reduction in the political power in Japan will have to occur someday. The Japanese_3/hopes that this will occur in a deliberate and orderly manner.

reduce their growth,

to such policies. Budget deficits are politically unacceptable in West Germany. The Japanese deficit and its national debt is already huge; it is only because of Japan's high savings rate that these deficits have been domestically financed so far. However, a very high and positive savings rate cannot be turned around overnight,

"Underlying the market's weakness were continued fears over inflation, rising interest rates and a weakening dollar..."

The U.S. has been attempting to convince Japan, South Korea and other such countries to remove their protectionist barriers. These countries counter that

sion but achieve. taxes on property,

these protectionist barriers have always existed and were never the cause of the U.S. trade deficit until U.S. macroeconomic policies changed .drastically with the Reagan administration.

The solution should therefore be in altering the macroeconomic policy of the United States.

duced in the Reagan administration, 2t possibly, reducing the deficit by cuts social security programs. This entails cutting back benefits to reasonable levels. However, the initial attempt to cut government spending by $30.0 billion in 1988, in response to the crash, solves less than one-fifth of the $175.0 billion problem.

(Philippine Daily Inquirer, 21 October 1987, p. 8.)

Should deficit

the U.S. fail to resolve the

problem,

the only alternative is

further precipitous drops in the value =of the U.S. dollar. As mentioned earlier, this will dislocate the economies of the socalled outward.oriented economies men-

In any case, Japan has a long-term and deliberate program (i.e. the "Maeka-

Hypothetically, a macroeconomic policy vector that the U.S, might implement could reduce the extent of receswould This upper which

be politically difficult to would involve raising income brackets and on had been drastically re-

It is hard to give a definitive answer

tioned. Their export enterprises will be unable to raise prices to offset the changes in the exchange rate.

wa plan") of removing protectionist barriers. Even if the program were accelerated, it would be unlikely that U.S. exports to Japan would drastically increase since U.S. manufacturers are

to the question, except to say that the elements that sparked off the 1930s depression do not appear to be present at this time. For a contrary view, which relies on the approach that history

The U.S. has been attempting to avoid the painful medicine by attempting to force other countries to carry out part of the adjustment. Japan and West Germany have made efforts to induce domestic demand but have faced limits

Unprepared to export to Japan. U.S. agricultural exports into Japan might increase dramatically and immediately with the removal of agricultural proteetion, but for the Japanese, such a

operates in cycles, it would be valuable to read the work of Ravi Batra (1986).

4

II

III

The

depression

of the

1930s

was

based on a financial crash that followed

DEVE LOPMENT

RESEARCH

NEWS

JANUARY-FEBRUARY1988

the stock market crash. 4/At the present time, there continues to be questions raised about the extent of overvaluation of stocks in the Japanese stock market, and whether further worldwide adjust. ments are forthcoming. Some analysts would project a future Dow Jones value

sion can occur. Kindleberger (1978) has a discussion on the nature' of manias and panics,

of about 1300, after adjustments in the Japanese stock exchange market,

Jevons, Menger, and Marshall.) the marginal and atomistie approach to explain the workings of an economy. Keynesian economics, based on the work of Keynes in 1936 was unknown, and at that time, it was believed that excess supplies in markets, particularly in labor markets, would be resolved quickly enough with the fall in prices,

varying effects on the performance of the Philippine economy. For instance, the expectation that the Organization for Economic Cooperation and Development (OECD) countries will have an average reduction of one percentage point in GDP growth in 1988, will in turn, reduce the volume of Philippine exports, but not drastically in terms of levels.

Keynesian economics, whose serious implementation was made possible by the onset of World War II, appeared to

A positive effect of the stock market crash has been the fall, or at least the

The governments of the world are frequently larger relative to their econornies, and a significant portion of these economies' investib.le funds arewithin

present a solution to that type of depression. It is entirely possible that Keyne. sian economics will be inappropriate to

non-occurrence of the expected rise, in world interest rates. This reduces the interest burden on the rescheduled debt.

the control

time.

When the t930s depression struck, the field of economics hadjust completely worked out (through the work of

The financial crash preceding the 1930s depression destroyed capital values which forms the basis for private investment. There was also a liquidity crisis, as banks which had overextended their lending in the asset markets, collapsed, The liquidity crisis caused the disappearance of financing for "all types of enterprises, A

of government.

,

enough

' ' ' "tt_'thin these overall eo,nstrgints, one Would" stlll expe_t:_O_rtunities in speeilic areas to exist; _ is.important is that the Philippir_e_ ;_nt itself to take advan_t_ of i_.iOPl_rtunities , In .the wake 0[. th_ii)gg_,_ek market crash." _ . _

.

in preventing

a depression.S-/

If the propositions arising from equilibrium theory and rational expectations have any power, it is also possible that governments will be powerless to inter-

The equilibrium theory and rational. expectations school, which rely heavily

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on atomistic or practically atomistic behavior, would in fact lay the blame on government intervention, should a deep

What is important is that economists pay serious attention to (and. exert effort to understand) the theoretical bases of

depression come about., The onset of a depression of the 1930s type will be characterized by a series of financial failures, it appears at this time that the large financial institutions do

their models of the real economy, Unfortunately, even the issue of what caused the economic depression of the 1930s is unresolved in the economics

not have inordinate exposures in equity markets as they did in the 1930s, where the practice of lending on the margin was widespread, although the world fmancial system does have a large exposure to poor developing countries,

profession. The principal bone ofcontention is whether the crash originated from monetary factors, or whether there were real (non-monetary) causes behind it.7_/ As we have attempted to convey earlier, the stock market crash has initiated a period of uncertainty in the ad-

It does not appear unlikely that a thoroughly, original path toward depres, ii i i

ii

i

i i

i

,

stock

market

crash will have

The slowing down of world trade can signal an accompanying overall decline in foreign investment inflows, which have

_,

......

_h_e when the crisis alises. 6/

The

any impending depression, at the present

The avoid-

ance of a depression will depend on the existence of governments that are astute to do their part

vanced capitalist economies. The removal of this uncertainty requires the overcoming not only of economic difficulties, but also of political obstacles.

always accompanied growth in foreign trade. It will encourage private international lenders to continue reducing their' exposure to countries such as the Philippines. This will make trade prospects and financing for projects more difficrdt than it already is.

Within these overall constraints, one would still expect opportunities in specific areas to exist. Philippine domestic incomes still have a long way to go to recover at levels already achieved before the balance-of-payments crisis of 1983.8-J As mentioned earlier, it is expected that the Japanese domestic market will be opening up steadily and deliberately.

Labor-intensive manufacturing operations have begun to move out of Japan, and will be expected to move out of Korea and Taiwan in the future. The continuation of these trends will depend on the strength of the world economy.

What is important is that the Philippines orient itself to take advantage of the opportunities that lie ahead, in the wake of the 1987 stock market crash.

...... llIlllllllllllll I

I I

NOTES

II I

for defense employs real resources, 1Taken in any view" the expenditures 2The unanswered questlon remains: "Were the gains previous to this also unreal?"

3This appears to be a worldwide as'piration.

_

5That governments have been ideologically "fanatic" and lacked astuteness to design a coordinated macroeconomic policy provides some grounds for doubt. braith (1955).

6The representative Work of economists from this school would include Barro

70n the controversy, see the work of Temin (1976J and Brunner (1981).

environmentalvadables have

varying

electricity. Also, estimates of the peakload coefficients of demand degreeselasticity of -effects on the demand for provide a measure of the relative contribution of residential, commercial and industrial consumers in the evolution of the system peakload.

UPDATE

4See Jbr example, the account of Gal-

(1984J, and Lucas and Sargent(1981).

I

_ A

GENERAL

ASSESSMENT

FOREIGN TRADE BARRIERS PHILIPPINE EXPORTS Working Paper Series No. 88-01 '....... _ _ _ ,_ __

_

OF TO

NEWPt.BI.ICATIONS ERLINDA M. MEDALLA i_,,

Research Fellow, Philippine for Development Studies

Institute

I DEMAND FOR ELECTRICITY IN THE PHILIPPINES: 1MPLICATIONS FOR ALTERNATIVE ELECTRICITY PRICING POLICIES

The study, co-sponsored by the Philippine Institute for Development Studies (PIDS) and the Asian Development Bank (ADB), was conducted jointly by Erlinda Medalla and Gwendolyn Tecson of the University of the Philippines' School of Economics.

8One is reminded Of the Latin American countries' experience where import substitution in the 1930s were successfully carried out w_ten markets for their'agricultural exports disappeared.

'REFERENCES t, , Barro, Robert J Macroeconomics, New York: John Wiley and Sons, [1984] Batra, Ravi The Great Depression of the 1990s. New York: Simon and Shuster, [1986] Brunner, Karl The Great Depression Revisited. New Yock: Martinus Nijhoff, [198l ] Galbraith, Jolm Kenneth The Great Crash, ].929. London: Hamish Hamilton, [1955] Keynes, John Maynard The General Theory of Employment, Interest, and Money. London: Macmillan Co, [1936] Kindleberger, Charles Manias, Panics and Crashes. New York: Basic Books, [1978] Lucas, Robert E. and Thomas J. Sargent (eds.) Rational Expectations and Econometric Practice. London: George Allen and Unwin, [ 1981 ] Temin, Peter Did Monetary Forces Cause the Great DepressionL New York: W.W. Norton, [1976] 6

II III

,

,,

12LODUALDO R. FRANCISCO Research Fellow, Philippine for Development Studies

Institute

The study estimates the demand elasticities of electricity in the Philippines focusing on the Manila Electric .Company (MERALCO) frandaise area. Results of this analysis are usedto derive implications for alternative electricity pricing policies, The study describes the features of electricity as a commodity and specifies the demand model, taking into account developments in the energy economics literature. Demand for electricity by residential, commercial and industrial consumers is postulated to be a function of the prices of electricity, substitutes, electricity-consuming equipment, and income and environmental variables. Moreover, long-run price and income elasticities are found to be generally larger in magnitude than short-run elasticities, and IIIII

IIII

The study analyzes the over-all impact of non-tariff measures (NTMs) to Philippine exports, and attempts,to make an inventory of NTMs imposed by the United States, Japan and European countriesaffecting most, if not all, of Philippn_ exports. The study is undertaken in order to shed light on the difficulties in tackling the problem of protectionism.

These difficulties can be attributed to recent developments in trade policy and legislation which shows an intensification, rather than a reversal of past protectionist trends. For instance, tariffs are no longer the main instrument of protection.

Instead, NTMs have increasingly become the most pronounced barrier to Philippine exports. Moreover, ' since the application of NTMs can be discretionary, it is quite hard to grasp the real nature and restrictiveness of NTMs. Estimates of the over.all index of NTM coverage show that 48 percent of Philippine exports to the U:S. are covered by IIII

NTMs. The most common of these is health and sanitary regulations, accounthag for 26 percent of total exports to the U.S.; and 47 percent for Japan. The most common NTM applied to Pttilippine exports to Japan is phytosanitary regulations, affecting 18 percent of total exports. For European countries, 52 percent of exports is subject to quotas (both global and bilateral). The European countries also seemed to have the biggest and the most varied types of NTMs. ,,ECONOMICS OF UPLAND RESOURCE DEPLETION: SHIFTING CULTIVATION IN THE PHILIPPINES rking Paper Series No. 88-02

duction through slash-and-bum farming, is likewise investigated. The study explains swidden fainting in the context of a standard resource economic model on open access exploitation, the discounting g]as, and zero valuation of the extemalities involved, as well as constraints which are specific to upland resource use ...........

......

An in-house staff seminar on "The Effect of an Exchange Rate Devaluation on a Small Open Economy with an External Debt Overhang" was held on February 5, 1988 at the NEDA sa Makati Building.

The seminar, which highlighted the paper written by Dr. Josef T. Yap, focuses on the aggregate demand approach in addressing the effects of an exchange rate devaluation on a developing country with an external debt overhang. The seminar dealt only with the small economy case where the external debt is owed by the government, or is governmentguaranteed. Dr. Yap showed that a devaluation amidst an external debt will

SEMINARS

heavy decline in real output and alead risetoin aprices.

The paper presents the varying degree of completeness of markets for the effects of upland resource use. Morevo_r, the resulting time paths of resource stocks, •scarcity rent, agricultural production and prices aie discussed under varying decision rules followed by different resource-users. This is followed by insights on shifting cultivation in various parts of the country,

=m _ MARIAN S. DE LOS ANGELES Research Fellow,Studies Philippine for Development

Institute

The paper provides a systematic investigation of agricultural systems practiced in the uplands by starting with a foruaal treatment of the shifting cultivation . problem. The optimum rate of use of forested land from society's viewpoint, and from the individual uplander's view-

'..........

IN-HOUSE SEMINAR ON THE EFFECT OF AN EXCHANGE RATE DEVALUA]'ION ON A SMALL OPEN ECONOMY WITH AN EXTERNAL DEBT OVERHANG

Florian A. Alburo, Deputy Director-General of the National Economic and The seminar was participated in byDeveDr. lopment Authority (NEDA), along with representatives from the Agricultural Credit Policy Council (ACPC), De La Salle University (DLSU), University of the Philippines' School of Economics

I_

)at, given traditional choices between _ber production or agricultural pro-

(UPSE) and the Philippine Institute Development Studies (PIDS).

for

m

[

,',

• FOURTH COMPILATION OF THE CLEARINGHOUSE PROJECT ON STUDIES RELATED TO ECONOMICDEVELOPMENT AND POLICY-MAKING IN THE PHILIPPINES The "DRN Cleannghouse Project aims to gather, condense and disseminate the highlights of completed, ongoing and pipeline res0arch p_ojects on areas related to economic development and policymaking in the Philippines. l_ike _ previous listings, this fourth batch of studies covers researches conducted by various private and government institutions engaged in research, develop_nt planning and policymaking. In particular, this batch includes all studies submitted to PIDS.DRN from November 1986 to the pratt, The flrlt:batch of studies covered 86 projects mad appeared in the September-October 19815issue, o=i "Policies and Research Issues on P,ner_0¢in the Philippines: The 1980's'. The second listing appeared in the MayJune 1986 issue which focused on "The ESIA, _ o _ ....

• .

WID MaCro Component Project , and included 53 studies. The third listing appeared in the November-December 1986 Issue on _Ssvltlgs iMobillzation in the Philippines: Focus on the Rural Sector" and covered 66 research projects. In this issue, 42 research _tudies are included,' ,_Tlth18 studies on resource mobilization, and 14 on industry. Scholars doing research on the areas mentioned will find this compilation helpful. There are seven studies on Agriculture and Food; and three on International Trade and Einance_ nange.

DEVE LOPMENT

RESEARCH

NEWS

JANUARY-FEBRUARY

1988

COMPILATIONOF RESEARCHSTUDIES AREA OF STUDY

1.

Agriculture

Agricultural

Programs

Credit/Extension Services

PROJECT COORDINATOR (PC) OR PRINCIPAL INVESTIGATOR (PI)'

SPONSORING AGENCY OR INSTITUTIONAL AFFILIATION OF RESEARCHER(S) a

Implications of Falling Primary Commodity Prices for Agricultural Strategy in the Philippines

Philippines

Ifzal All (PI)

ADB

Rural Credit Policy: Do We Need to Target?

Philippines

Gilbert

ACPC

Women and Men in Two Farming Systems in the Philippines

Philippines

Jeanne Frances

A Study of Village -Level Effects of NIA's Participatory Communal Irrigation Program

Philippines

Romana

The Philippine Participatory Communal Development Iriigation Program and Women's Work and Family Strategies: The Case of the Aslong Irrigation Project

Philippines

Jeanne Frances

Rural Savings Mobilization Action Research P_og_am

Philippines

V. Bruce J. Tolentino

M. Llanto (PI)

I. Illo (PI)

U.S.A,I.D.

P. delos Reyes (PI)

I. Illo (PI)

(PI)

Staff (PI)

Ford Foundation/ NIA/IPC-Ateneo

Ford Foundation/ The Population Council

ACPC

Study on Government Assistance to Lowdncome Groups with Inadequate Access to Institutional Credit

Phihppines

NEDA/TBAC

World Bank

A Review of Literature on the Bataan Export Processing Zone Experience: Major Development Themes and Controversies

Mariveles, Bataan

Ramon C. Sevilla (PC)

DLSU Research

The Relevance of the Industrial Decentralization Policies of Japan to the Philippines

Philippines

Cesar Polvorosa,

Central

Industry

Industrial

81

GEOGRAPHICAL COVERAGE

and Food

Agriculture and Food Policies

II.

TITLE OF RESEARCH PROJECT (S)/STUDY

Policies

II

IIII II I

I

IIIII II

IIIII I 111

Jr. (PI)

im iiii

Center

Bank

limll

..

'

DEVELOPMENT

RESEAR(;H

NEWS

1988

JANUARY-FEBRUARY

ON PHILIPPINE ECONOMIC DEVELOPMENT S]'ATUS b

Completed (September

ABSTRACT

1987)

Completed (October 1987)

Completed 111_87)

This paper contests the popular view that credit targetting It argues that loan/credit targetting does not work, and that environment conducive for bank lending activities to the approach to the problem of raising rural output and farmer's

sector. It analyzes the role of agriculture in the mediumfor the possible role of multilateral development banks

will bring about higher levels of productivity in the rural sector. the government should instead make the economic and financial rural economy.

The paper includes, among others, a systems income.

The project evaluates the impact of the participatory communal irrigation program of the National litigation Administration (NIA). The evaluation is done by comparing two types of NIA-assisted projects; those which NIA developed through its participatory intervention method, and those which NIA assisted through :its traditional approach (i.e. non-participatory projects). Analysis of the effects of NIA's participatory and non-paxticipatory intervention methods focuses on three dimensions of irrigation - the physical irrigation system, the irrigator's association, and.farmer-government relationship.

Completed (December

1987)

On-going (June 1989)

The study examines the household-level and gender-differentiated effects of the participatory communal irrigation project which the National Irrigation Administration (NIA) implemented in the Aslong system beginning March 1979. Four impact areas are investigated: participation of women and men in project activities, food production, household income, and employment.

The study utilizes four data-collection strategies; namely, interviews conducted in the community, census households, collection of life=history cases of subjects drawn from the census and social survey of 90 randomly selected households. Tile selection is based on whether they are dilect/indireet beneficiaries of the system.

The study aims to examine the microdevel aspects of rural savings mobilization, the demand (bank) aspects, with special emphasis on the latter.

1987)

The

(1986)

start of operations.

The study organizes ment and social and political aspects.

Completed

The 1987)

covering both the supply

(household)

and

The study evaluates the impact of government policies, programs and projects on low-income families in agriculture; examines existing credit programs in the agricultural sector; and identifies ways and means to more effectively assist the poor who engages in agriculture.

Completed

(January

setting of the agricultural issues. Recommendations

The project investigates the mobilization of resources by "cooperator" and "non-cooperator" households in the Bicol Farming Systems Project; the involvement of male and female members of these households in different project activities; and the effects of the project on the male-femaie balance of authority and responsibility wjtlfin the households.

Completed (1987)

-'2"mpleted ptember

The paper examines the macro-economic term development plan and some related in the agricultural sector are given.

study

study

identifies

discusses

Japanese policies prospects.

the major

findings

of various

studies

the findings

the experience

of the Philippines

for local application.

Some initial

III IIIIII

II

and researches

on the

Bataan Export

along the lines or areas of economic

in .industrial

proposals

decentralization,

are made,

with

with

Processing

development,

Zone since the regional

develop-

the aim of recalling

relevant

due consideration

given to problems

and

DEVELOPMENT

AREA

STUDY

OF

Industry

RESEARCH

TITLE OF RESEARCH PROJECT (S)/STUDY

Micro-level

PROJECT COOR DINATOR (PC), OR PRINCIPAL INVESTIGATOR (PI)

SPONSORING AGENCY OR INSTITUTIONAL AFFILIATION OF RESEARCHER(S) a

Thailand, Malaysia, Brunei and the Philippines

Corazon Cabungeal et aL

(PD,

United

Changes in the Industrial Structure and the Role of Small and Medium Industries in Asian Countries

Malaysia, Indonesia, Thailand, Singapore, Philippines (NCR, Bulacan, Batangas, Rizal, Cebu, Zamboanga City, Laguna, Isabela, Cagayan, Pampanga)

Corazon et al.

(PI),

IDE-Japan

Profile: Philippine Coconut Industry

Philippines

Lexlio Reyes (PI)

Central

Bank

Philippines

Lexlio Reyes (PI)

Central

Bank

Profile: philippine Electronics Industry

Philippines

Jesus P. Sale (PI)

Central

Bank

Profile: Philippine Forest Products Industry

Philippines

Fe S. Mirasol (PD

Central Bank

Profile:, Philippin e Shrimp Industry

Philippines

Fe S. Mirasol (PI)

Central

The Garlic Industry in the Philippines ;

Philippines

Myrna P. Putong

A Survey. of Small-scale' Operations in the Rural Areas of'the Philippines and their Potential for Non-Farm Employment Generation

Philippines: Regions 3, 4, 5, 6, 7, 8.9 and 11

Corazon et al.

Costs and Returns

Coffee

of

Cabungcal

Cabungcal

Selected Provinces

C.T. Perez and

Irish Potato Production, Selected Provinces, 1983

in the Philippines

J.P. Almeda

Production Costs and Returns of Turnip Production in Selected Provinces

Selected Provinces Central Luzon

The Role of Technology Transfer in the Electrical

Philippines

Appliance Industry Philippines

II

GEOGRAPHICAL COVERAGE

A Study on the Growth of Small-scale ForestBased Processing Enterprises in Four Developing Countries in the ASEAN Region

Profile: Philippine Industry

IIIII

J., ,NUARY-FEBRU,kRY 19S

Studies

Macro-Level

10

NEWS

_

(PI)

(PI),

Nations/FAO

Bank

Central Bank

NEDA/SERDEF

BAS

(PIs)

A.P. Abaya and J.R. Realiza (PIs)

BAS

Melito Salazar, Jr. (PI), et al.

IDE-Japan

in the

........

DEVELOPMENT

STATU Sb

RESEARCH

NEWS

.i ,NUARY-FEBRUARY19S8

ABSTRACT

Completed (April 1987)

The study specificaUy deals with changes in structure and performance of the folest-based plocessing enterprise sector; major policies and programs affecting the sector; key factors affectifig its growth or decline; main sectoral linkages, and key issues and problems.

On-going (February

The study focuses on a number of critical problems medium firms in the industrialization process.

1988)

npleted :tober 1986)

Completed (April 1987)

and issues at the macro and miclo levels relating to the role of small and

The coconut industry has been found to be a major and reliable source of foreign exchange earnings for the country. Because of this and in order to offset the negative impact of copra importation, the goveinment has encouraged the development of other coconut products.

One of the findings of the study is that coffee has, in recent years, become an increasingly important export of the Philippines. However, technical and marketing constraints presently confront the domestic coffee industry. One of these is access to credit and training services.

•

Completed (April 1987)

The study concludes that assembly-line consumer and industrial electronic goods, and components utilizing borrowed technology is now one of the leading nominal foreign exchange earners in the country. With this recent development, the semiconductor and micro-component manufacturing industry is now setting the trend in terms of foreign exchange earnings.

Completed (April 1987)

The study looks at the developments in the Philippine forest products industry and concludes that a significant portion of the industry's production has been absorbed by the export market. Given the current depressed markets and the adverse effects of this, there is a need to rationalize the industry.

Completed

Tlie government's

(April 1987)

proving the quality

of export

The article features price trends.

a profile

_mpleted ,mary 1987)

development

program products

for the shrimp

to enhance

of the Plfilippine

indus'_y

the country's garlic

industry

is geared

competitive

towards

the expansion

position

in the world market.

in terms of production,

export

of production,

prospects,

and im-

importation

and

i

On-going (June 1988)

The study focuses terms of capacity are also discussed.

on the rural non-agricultural and potential for increasing

sector of the economy mad evaluates the small-scale operations covered, in rural employment and productivity.

Problems and difficulties encountered

Completed (October 1986)

The study provides necessary support to the potato research program of the government.

It presents statistical production costs and returns of white potato, and describes input-outputrelationships.

Factors affecting production and income of kish potato farmers are also described.

Completed (November

Good yielding turnip indicates profitability

1986)

Completed (February 1987)

in Tarlac is attributed for turnip production,

to favorable climate and suitable sandy loom soil. In addition, while Pangasinan and Pampanga show poor yields.

tables of patterns

Nueva Ecija also

The paper describes the role of technology transfer in the electrical appliance industry in the Philippines by looking into the eomplementation between a large company and its subcontractors.

The study also analyzes the local content of finished. electrical appliances and the support given by the large company to the small l'n'ms to ensure adherence to standards and norms.

..............

11 I

DEVELOPMENT

AREA

STUDY

OF

I11. International

Trade

International Policy

Resouzce

JANUARY-FEBRUARY 1988

GEOGRAPHICAL COVERAGE

PROJECT COORDINATOR (PC)OR PRINCIPAL INVESTIGATOR (PI)

SPONSORING AGENCY OR INSTITUTIONAL AFFILIATION OF RESEARCHER(S) a

and Finance

Trade

Structure and Direction of Plfilippine External Trade

Philippines

Diwa C. Guinigundo

(Pi)

Exchange Rate Changes in Key Currencies and'the Balance-of-Payments

Plfilippines

Antonieta

Exchange Rates and Export Prices

Plailippines/ International

Benjamin

A. Usigan (PI)

Central

Bank'

Changes in the Rediscount Policy and Strnetum, 1949-1986

Philippines

Feruando

Y. Silvoza (PI)

Central

Batak

Movements in the Manila Reference Rates (MRRs) and Lending_ Rates of Commercial Banks

Philippines

Vivien R. Buhat (PI)

Central

Bank

Trends and Directions Bank Lending During 1979-1986

Philippines

Cesar Polvorosa,

Cen_al

Bank

L.H. Laqui (PI)

Central

Bank

Central Bank

Mobilization

Money, Banking

and Finance

Commercial and Rural Banking

12

NEWS

TITLE OF RESEARCH PROJECT (S)/STUDY

Balance-of-Payments

IV.

RESEARCH

of

Credit Experiments and Schemes for Rural Women in Southeast Asia and the Pacific: Issues and Policy Directions

Southeast

Investment/ Infrastructure

Road Transportation Industry Study

Philippines

NEDA/DOTC

Money SupplY/ General Monetary Policy

The Thrust of Monetary Policy Under the Economic Recovery Program

Plfilippines

Armida

Interest

Lifting of Interest Rate Ceilings: Effects on the Flow of Funds in the Houschold and Financial Sectors

Philippines

Ma. Eloma

Financial Markets and Institutions

Development of Capital Markets in the Philippines

Philippines

Catalina

Foreign Markets

The Relationship B¢tween Exchange Rates and Price Movements

Philippines

Emma L. Bonoan

Rates

Exchange

IIIIII

III II

IIIIIJ J l

Asia

Gilbert

Llant0

Jr. (PI)

(PI)

IFAD

Staff (PD

NEDA/DOTC

San Jose (PI)

C. Filart (PI)

T. Robledo

(PI)

(PI)

II1_1_ [ I

Central

Bank

Central

Bank

Centlal

Bank

Central Bank•

DEVELOPM -'NT RESEARCH NEWS

STATUS b

ABSTRACT

Completed

The study looks at tile components

(January

1987)

products.

As pointed

of Philippine

out in the study,

1988

JANUARY-FEBRUARY

external

trade protectionism

tlade" which has become has adversely

affected

more diversified

the growth

in terms of markets

of Philippine

and

exports.

Completed (October 1987)

Results "show that the various BOP components are adversely affected by the recent decline of the U.S. dollar. The impact is considered significant given the level of Central Bank liabilities and the country's outstanding debt.

Completed (June 1987)

The

mpleted (March 1987)

The study discusses the role of the rediscount the 1950s up to the present are discussed.

Completed (February 1987)

The paper reviews the movement in MRRs and lending rates in the past four (4) years, and attempts ship between the two interest rate indicators.

Completed (May 1987)

The paper shows how the amount and direction of loans gianted by the Central Bank to banks during 1986 are affected by monetary policies/priorities, and the existing economic situation.

Completed (November

1987)

study

uses reg;ressions

to estimate

parameters

of hypothesized

policy

equations

in the economy.

regarding

Policy structures

•exchange

rates and export

and changes through

prices.

the decades of

to establish

the relation-

the period

1979-

This paper attempts to provide a compendium of available materials on rural women's access to credit in Southeast Asia and 'the Pacific Region. The information is analyzed to provide some basis for policy decisions and project levels specifically addressed to the role of women.

Completed _tober 1987)

The study l_views road transportation also examines freight and passenger te_n_als.

Completed (January 1987)

The paper

Completed (August 1987)

The paper measures the effects of t-mancial liberalization in the Philippines, partieuhrly the deregulation of interest rates in 1981, on the flow of funds in the household and financial sectors. The relationship between the responsiveness of real and financial savings and avaih-nent of loans, to movements in deposit rates and secured loan rates during 1974-1985, is discussed in detail

•Completed (December

The study discusses the development of the Philippine lems hampering the growth of the market.

capital market,

Utilizing •monthly data from 1973-1985, the empirical based on Sim's cdterinn is presented and analyzed.

results

1987)

Completed (October 1986)

I

reviews

III II

the

changes

in terms of the industry's structure, intermodal linkages, and the cost of operations.

It movements throughout the country to determine economic mobility of consolidated

in monetary

policy

in

that has had implications

Illll

the factors

in economic

affecting

adjustment

its development,

of a simple test of causality between

exchange

and recovery.

and the prob-

rate and prices

13

DEVELOPMENT

AREA OF STUDY

RESEARCH NEWS

JANUARY-FEBRUARY 1988

TITLE OF RESEARCH PROJECT (S)]STUDY

GEOGRAPHICAL COVERAGE

PROJECT COOR_DINATOR (PC) OR PRINCIPAL IN _ VESTIGATOR (Pl)

SPONSORING AGENCY OR INSTITUTIONAL AFFILIATION OF RESEARCHER(S) a

Structural Reforms on Local Government Finance

Philippines

Angel Q. Yoingco (PI)

NTRC

A Study on Tax Administlatiou and Compliance in the Philippines

Philippines

NTRC Staff (PI)

NEDA-TDI

Elasticity of the Philippine Tax System

Philippines

Angel Q. Yoingco (PI)

NTRC

Prescription of Ceilings on Certain Business Deductions and Application of Standard Deduction Ratios

Manila, Quezon City, Cebu, Antique, Mindoxo, Cavite, Bulacan and Rizal

Angel Q. Yoingco (NTRC) and Rizalina S. Magalona (BIR) (PCs)

PIDS

Study on Tax Administration and Compliance

Philippines

Angel Q. Yoingco (PI)

USAID/NEDA/NTRC

Personal Income Tax: Inflation Adjustment of Capital Gains

Region IV-A, Philippines

Angel Q. Yoingco (PD

NTRC

Pelsonal Income Tax: Inflation Adjustment of Personal Exemptions

Philippines

Angel Q. Yoingco (PI)

NTRC

Public Debt

Debt-to-Equity Conversion Program: The Philippine Experience

Philippines

Nolman C. Dytianquin and linminadaT. Sicat (PIs)

Central Bank

Fiscal Incentives

Rationalization of Fiscal Incentives other than those administered by the Board of Investments

Philippines

Angel G. Yoingco (PI)

NTRC

Public Finance National Budget Revenues and Expenditures

Tax Policies

_,

Hi|m

.

_

ii i

i

i t

,

The. fifth listing of the ClearinghouseProject will be featured in the May-June 1988 issue of the DRN. The studies that will' appear are on the areas of Human Resources, Labor and Employment, Population, Regional, Rural and Urban Deve. lopment, and Development Planning Methods and Approaches.

[41.

DEVELOPMENT

RESEARCH

NEWS

JANUARY-FEBRUARY 1988

STATUSb

ABSTRACT•

On-going (September 1988)

The study aims to amend the basic laws in local Finance, namely; P.D. 231 (Local Tax Code), P.D. 464 (Real Property Tax Code), P.D. 144 and P.D_ 436 (National Allotments and Aid to Local Governments), so as to make them more effective and responsive to the needs of the local governments. Despite their various revenue sources, local governments still are very dependent on supplementary revenues plovided by the national government. This situation is partly attributed to limitations on the taxing powers of local governments units and the lack of tax bases in their julisdictions. The references considered in the proposed amendments include the provisions pertaining to local governments, as plovided for under Article X of the constitution and the Local Government Code (B.P. 337).

Completed (November 1986)

The study measures and analyzes the tax evasion behavior of Filipinos. It also provides a structural analysis of the income tax law and looks into the efficiency of tax enforcement.

ff,_mpleted !ober 1987)

The paper estimates the 'tax to income elasticity of the Philippines' over-aLltax structure and its component for the period 1976 to 1985.

Completed (March 1987)

The study looks into a sizeable number of corporate and individual income tax returns to determine the average magnitude, on an industry basis, of business deduction items. The three items which were perceived most susceptible to manipulation were entertainment, tlavelling and advertising expenses.

Completed (November 1986)

"l%e study identifies the problems in tax administration and tax compliance. It also empirically analyzes the extent, forms and causes of tax evasion, and identifies opportunities for tax evasion through an examination of tax laws.

On-going (January 1988)

The study aims to construct an indexation scheme so that only real gains from real estate or land holdings of people are taxed. It uses data from the revaluation of properties by the assessors, zonal values, and land values set by realtors.

On-going (February 1988)

The paper examines thlee indexing methods; namely-, 1) full-indexation; 2) partial indexation; and 3) elasticity approach.

Which adjustment scheme is to be employed depends on how much tax relief the government is willing to grant, taking into account the consequent revenue diminnition.

Completed z-L'_uary 1988)

The paper describes the Philippine debt-to-equity convelsion program and examines its overall impact on the economy. The difficulties and problems encountered in its execution is also brought up. Some possible areas for improvement are suggested, borrowing from the experiences of other countries adopting similar schemes, and based on an undellying theoretical framework that describes the nature and market of debt conversion. The framework also allows discussion of benefits and costs to host countries and the conditions for successful implementation of the program.

Completed (1988) (First and second batch of studies)

The study aims to assess the incentive's effectiveness in contributing to the attainment of national development goals.

IIIll

Abbreviations

Illlllll

Used:

A CPC

-

Agricultural

Credit and Policy Council

ADB

-

Asian Development

ACPC

-

ASEAN

Bank

Agn'eultural

Devel°pment

ACPC

-

U.N. Asian Pacific Development

BAEcon

-

Bureau of Agricultural _lull

...........

i

Planning Center

Economies

UP-CPA

-

U.P. College of Public Administration

BAS

-

Bureau of Agricultural

DAP

-

Development

DLSU

-

De La Salle University

DOTC

-

Department

Statistics

Center Academy

o_' the PhtTippines

of Transportation

and Communication

mll

I

I

IIIIIIIII IIII

15

DEVELOPMENT

RESEARCH

NEWS

JANUARY-FEBRUARY1988

EPRS*

-

Economic Planning and Research Staff (NEDA)

PDPRP

- Population

ESCAP

UP-SARDFi

FAO

- Economic and Social Commission for Asia and the Pacific (UNJ - Food and Agriculture Organization

1DE

- lnstitute for Developing Economies (Japan)

SERDEF

- Small Enterprises Research Development

IDRC

.- International Development

SRSP

- Special Research and Study Project (NEDA)

Research Center (Cana-

da)

Development

Project (NEDA) - U.P. Social Action Foundation, inc.

Planning and Research _"

Research and Development Founda-

tion

1FAD

- International Fund for Agricultural Development

UP-SURP -

U.P. School o¢"Urban and Regional Planning

1PC

- Institute of Philipp&e Odture (Ateneo de Manila)

TBAC

-

Technical Board on Agricultural Credit

NCSO + NEDA NIA.

- National Census and Statistics Office - National Economic and Development Authorzty - National Irrigation Administration

TDI

-

Training and Development

UNDP

-

United Nations Development Programme

NTRC

- National Tax Research Center

USAID

-

United States Agency for International Development

Issues (NEDA )

*Now referred to as the National Planning and Policy Staff (NIPS). +Now referred to as the National Statistics Office (NSO}.

Notes: aln cases where there appearstwo (2) or more institutions involved in the researchproject, this has been indicated. The first institution cited is normally the funding or sponsoringagency. bstatus indicators are "'completed", "on-going",or "_ipeline'" Hence, the date that appears after the "status" indicator states the date of completion (if completed);or the expected date of completion (if on-going);or date of launching (if pipeline).

ii

i

i

DEVELOPMENT RESEARCH NEWS is a bi.monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES 0PlDS). It highlights findings and recommendations culled from PIDS-sponsored research or related studies done by other institutions. PIDS seminars, publications, and ongoing and forthcoming projects which are of interest to policy-makers, planners, administrators, and researchers are also announceo.

PIDS is a nonstock and nonprofit government research institution engaged in long-term policy.oriented research. This publication is part of the lnstitute's program to disseminate information in order to promote the utilization of research findings.

The views and opinions published iaere are those of the authors and do not necessarily reflect those of the Inlttitute.

Inquiries regarding any of the studies contained in this publication, or any of the PID S papers, as well as any _8gesttions or comments on the publications are welcome. Please address all related correpondenee or inquiries to: RESEARCH INFORMATION STAFF (RIS) PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PlDS) ROOM 515, NEDA SA MAKATI BUILDING 106 AMORSOLO STREET, LEGASPI VILLAGE, MAKATI 1200, METRO MANILA

,.

Re.entered as second class mail at the Makati Central Post Office on April 27, 1987. Private firms and ind_duals are charged at an annual rate of-P60.00. Students, libraries, academic and research institutions are charged at an annual rate of P50.O0. For foreign subscribers, the annual rate is $16.130. All rates are inclusive of marling and handling costs. i

16 __

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ii

II

•

I

I

I I IILlIII

iii

illlll

iii ii iiiii

_L

i