Debt Relief in a Politicized Economy

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Vol.IX No. 1

January- February1991

ISSN0115-9097

DEBT RELIEFIN A POLITICIZED ECONOMY

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submit째urselvest째thec째nditi0nalities

of IMF and WB? What happens to fl_e poor? DO w ereally need external finance Lifting ofdebtburdenisvi.tal to Representatives from theCendevelopment.But given the required tral.Bank, Interbank, Philippine National capital and importedinputsofpowerful ]_nnk(PNB),CaaterforResearch andCornbusinessconglomerateswho influence munication(CRC),SanMiguelCorpora._yedeeisiollrnaking processintheeoun- tion(SMC),NationalStatistical Coorditr , would this be possible? nation Board (NSCB), Department of This concern surfaced during a Agriculture (DA), Department of Trade policy workshop on "External Fianance, and Industry (DTI) and the Netherlands StructuraiAdjustments and Development Embassy participated in the whole day in the Philippines, 1970-1990" held on 22 workshop, February 1991 at the Operations Room of the NEDA sa Maka ti Building. johatly The Ballyhoo That Is External Debt sponsored by the Institute of Social Studies (ISS) of the Netherlands and PIDS, the The external debt problem has workshop aimed to draw comments from been the core of macroeconomic policy representatives of various sectors on the decisionmaking in the Philipph_es for a interaction of internationM capital flows, decade now and is likely to remain a key and domestic adjustment and macroeconissue in the 1990s. At present, debt servomic policies in the Philippines. icing comprises almost 50 percent of the Thestudypresentedatthesemicountry's national budget which is quite nar is part of a larger research project on a chunk considering that the country has temationalCapitalFlows mad Economic to contend with both natural and manjustment in Developing Countries" made disturbances -- oil crisis, deficit in executed by the ISS in collaboration with the US, coup d'etat, insurgency, earthresearch institutions in various developquakes, typhoons, etc. Because of the defing countries-Tanzania, Thailand, erence given to the huge foreign debt, the Pakistm_, Mexico and the Philippines. cotmtry's policymaking lms been perceived The speakers were Dr. Marie B. attimesasaccommodatingthedictatesof Lamberte, Dr. Josef T. Yap mad Ms. Ma. the International Monetary Fund (IMF) Socorro V. Zingapan, Vice-President, and World Bank (WB). In this light, many Research Fellowand Research Associate, respectively, of PIDS; Dr. Rob Vos of the ISS; and Dr. Joseph Y. Lim of the University of the Philippines" School of Economics (UPSE). Dr. Gflberto M. Llanto, Executive Director of the Agricultural CreditPolicy Council (ACPC), was the moderator.

have raised

the questions:

"should

we

inthefirst place?"

Somewhere Wrong

Along $ome|hlng Went

The study traces the foreign debt crisis to the early 1970s when, together withaprotractedbalanceofpaymentdeterioration since 1968, it caused the peso to plunge by 50 percent and the izfflation rate to soar to a double digit. The crisis wltich resulted from Marcos' overspendhag in infrastructure and the 1969 presidential election forced thegovenamentto tuna to IMF for a standby loan.

Amidst the economic shake-up was the rise of political awareness that soon paved way for a military bureaucracy. The big business sector supported Marcos'moveifonlytorestoreorderand stability and quell the spread of a leftleaning nationalism.

Official assistance from overseas also increased substantially.

Despite unrestrained inflow of external finance which characterized the period, thegovernmentdidnoteffectany real structural transfornlation on the economy. h_stead, it undertook ambitious projects wifl_ long-gestation growth and pouredmoreresourcesonhighlyimport_

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One of the most controversial topics of our times is debt relief. While debates have been going around on whether or not to allocate such huge amount of resources to debt servicing, the country's foreign debt continues to pile up every tick of the clock.

In this issue of the DevelopmentRe,arch News, we include an update of fora

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Experts like Dr. Jeerasak Pong-

organized by the Institute in the first two months of 1991. In particular, we present the

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pisampidrit of Thailand Development Research institute (TDRI), Dr. Karel Jansen of file ISS, Dr. Ponciano In tal, Jr. of NEDA, Dr. Farrukh Iqbal of World Bank-Philippine Mission and Dr. Ma. Cecilia Soriano of fl_e Department of Finance were in-

The dizcussions that ensued after the presentation of the study offer practical measttres highlights of a forum which looked into the debt problem froma praglnatic point of view. for policy action. Equally interesting are the insights from the seminars on the impact of macroeconomic policies on households and that on leading indicators.

Supplementing this issue are two Research Folio Series: "The ASEAN-US Initiative: What the Philippines Stands to Gain" and "A Packaged Reform Program for the Philippine lndustrial Sector."

vited to comment

on the presentation.

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DEVELOPMENTRESEARCHNEWS

Januar - Februar 1991

LEADINGINDICATORS:ANALTERNATIVE FORECASTING TECHNIQUE Leading indicators are a set of data thatpredictwhatwiUhappen to the economy or certain parts of it. External forces-- both natural and man-made--could irreversibly shape the future course of the economy. These forces areroughly reflected in, and measured by, leading h_dicators.

Inaseminarheld on l5February 1991 at the Operations Room of the NEDA saMakati Building, Mr. Benvenuto Icamh_alfighlighted theresults ofhis studyon "Leading Indicators." According to him, leading indicators can beforecasting consideredtechas an alternative short-term nique due to their association with forecasting business cycle and recently, growth cycle.

Why Leading Indicators Lead Leading indicators provide a fairly clear explanation of the Gross Domestic Product (GDP) movement from both the production and demand sides up to four quarters ahead. These are derived econometrically by constructing composite equations using pre-selected variables. Butby and large, leading indicators are identified for the following GDP components: (1) agriculture, fishery and forestry; (2) industry; (3) services; (4) personal consumption expenditures; (5) private construction investments; (6) government consCuction investments; and (7) durable equipment investments, Out of almost 200 data series tested for this study, 35 indicators were identified, 18 of which are needed to estimate furore GDP movement. These indude, among others, area harvested, selected agricultural crOps, industry, services,loans granted by ruralbanks (industry), merchandise imports, consumer goods imports, petroleum products, net increase/decrease h_ paid-up, capital investments h_ agriculture, ferfdizer and urea imports, labor turnover rate, and amount of rainfall, The clearest signals are initially given by imports, labor situation and land usage. They lead as early as four quarters and their signals remain strong even up to two quarters before the actual

event takes place. Movements in bank loans and off products follow the three groups after a quarter. Changes in oil products and rainfall (weather conditions) seem to be the most influential signal within a quarter prior to the period when the GDP movement is monitored, Results of the study htrther show that sustained high rate of industrial growth, especially construction activities, is a key growth source in the third quarter, but it then weakens beyond this period.

Leading Indicators' Performance: Some Gray Areas Econometric.models, ingeneral, are designed to yield accurate results.

Whether one calls the results forecasts, estimates or projections, what matters is the accuracy of the values of the endogenous variables in predicting the course of the economy, In the case of leading indicators, the movements of the subsectors are not rigorously captured. Theymerely ascertain the timing of the rise and fall in the cycle and estimate relative strengths of recovery or severity of recession, For validation purposes, it was suggested that additional explanatory vailables be used in the study. Gross value addedin construction, for example, should indudeinterestratesandwholesaleprice index. For private and government construction investments, the cost of loan and the"AdviseofAllotmentandNature of Cash Allocation," which is available on a monthlybasis, maybeused asan explanatory variable, respectively. For dutable equipment, interest rates and the level of international reserves at the end of each quarter can be explored as possible explanatory variables. Other useful variables are stock prices, stocks inventory ratio, international commodity prices, inflat4on rate, loan uffiization ratio and sale to invento_:y ratio, among others, The time series analysis which was suggested by NF.DA as an alternativemethodol0gy could, in fact, be used simultaneously with econometric rood_'-

To page 4

(From Page 1) substitu dustries. ng The rather protectionist policies seemed to clash with the stated export-oriented policies, but they went along well with the grandiose industrialization plans of the government, mostlybenefiting conglomerates close to the power then.

As the seventies drew to a dose, political dissent began to creep across all sectors of the society except the few Marcos' clique. Real wages nosedived, land reform flopped and malnutrition and poverty were unabated.

After the second oil shock in 1980, a structural adjustment program with a multilateral finmlcing from the IMF and WB was tried but to noWhen avail. the period of easy foreig credit ended, there burgeoned an acute foreign exchange problem and debt Overhang that did not happen with other ASEAN countries. A knee-jerk solution by the government was to pump-prime the economy thereby overshadowing the external debtproblem.

With Aquino at the helm of the new government in 1986, all financial obligations were assumed irrespective of who benefited from them. There were also attempts on debt restructuring, debt conversion schemes and the evolvement of a mini-Marshall Plan which called for additlonalloans and grants over a 5=year period. But in the final analysis, the eco_ nomic recovery from 1987 to 1989 whic_ was marked by a negative resource outflowmainly because the government was unable to wring significant concessions from its creditors, could not withstand pressures of any sort.

External

Finance: Boon or Ban ?

Based on pastperformance, two camps during the workshop took opposing views on the need for external finance. RePresentatives from the country's international creditors argue that h_stead of depending on more external finance, efforts should be focused on the efficient use of borrowed money and on the effectiveness of the public sector tax efforts.

The country's leading economic planners, on the other camp_ emphasize the need for adequate external finance It-

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DEVELOPMENTRESEARCHNEWS

January- February1991

MONITORINGIMPACTOFMACROPOLICIESON HOUSEHOLDS The governme_thas undertaken a number of structural adjustment pollcies to address certain biases, inequities and h_consistencies in the overall economie system. But while these are intended to benefit the majority of the population, some policies may have, in

and should include micro indicators in addition to theusualmacro aggregates as performance criteria-- an exercise which requires a longer timeframe for correctionsand interventions,

out from the economy-- thus, the economic growth rates in the initial years of the program proved difficult to sustain.

With regard to the exchange rate policy, thehighinterestratepursuedbytheCentral Bank to defend the peso has somehow slowed down domestic investment and

fact, adversely affected certain sectors.

This was a major consensus of theparticipantsin theconsultativeworkshop, "Micro Impacts of Macro Adjustmerit Policies," jointly sponsored by the International Development Research Centre (IDRC) and PIDS on 1.1-12February 1991 at the City of Springs Resort

Looking Back Now Pastadjustmentprogramsinthe Philippines weremainly concerned with general impact and not with the varied effects on the different groups of households. World Bank-supported programs, for example, which have vague impact on poverty and income distribution, were

hindered

iotel in Los Bafios, Laguna.

Theworkshop aimed to develop a conceptual framework and a mechanism for responding to themicro impacts of structural adjustment, review past research on said impacts and arrive at a commonprogramofpolicyresearchthat would respond to these changes,

still carried out using macro aggregates as indicators of success, The 1987-'92 adjustment program of the government drawn from the Medium-Term Philippine Development. _Plan-.

1987-1992 seeks to obtain a three-year extended arrangement with theIMF. Its objectives on growth, poverty alleviation, price stability and sustainable external payments position have been translated into quantitative economic indicators which raised so much criticisms. It was pointed out that the exceptionaUy high export target was too optimistic and that the projected economic growth was too idealistic for a reduced government spending, On the external debt management, the much-needed resources flowed

has likely remained subservient to fiscal policy due to high fiscal deficits.

The three major components that make uP the trade reform program-tariff duty reduction from 100 to 50 percent, import liberalization and indirect tax realignment to remove the protective element of local indirect taxes--have made some inroads. However, a coherent industrialization strategyis needed so that efforts to institutionalize hwestment incentives, aslaid outin the 1.987Omnibus InvestmentCodeand theInvestmentPriorities Plan, would be meaningful.

Policy reforms have also been instituted in the agriculture sector such as the elimination of trading monopolies--notably the fertilizer cartel-- and privatization of trading activities; but these

Stabillzcdlon Policies vis-a-vis Strutrural Adjustm nt Policies Adjustment policies consist of both stabilization and structural policies which describe all measures designed to address serious economic imbalances faced by a country. These imbalances, ch as that between aggregate demand d supply, are manifested in the persis-

economic growth.

The government fiscal policy , meanwhile, resulted to bigger budget defidt. Increased domestic borrowing to finance this deficitadded pressure on domesticinterestrates, which subsequently put downward pressure on private investment and growth. Monetary policy

tentbalance-of-paymentsandfiscal deficits and high hfflation rate.

While stabilization pollcies can correct imbalances h_ the external accom_ts within a short period byreducingexpenditures, structural adjustment policies can change the structural parameters of the economy over the medium-

reforms have not completely eliminated the biases against exports and agriculture.

Moreover, the snail-pace execution of the Comprehensive Agrarian Reform Program has at_acted a growing public skepticism about the government's commitment to this task.

tem_ period through sufficient and efficient investments. A successful stabilization program, however, isnotnecessarilyconsistent with structural adjustment.

For instance, the abolition of food sub-

The negative effect of adjustment polities on education, healfll, nutrition, fertility and income distribution can be gleanedfrom thereducedhousehold income, increased labor force

sidles may be a key factor in correcting the budget deficit, but it would adversely affect the health and nutrition status at the house-

partidpation by the women, youth and other adult members, reduced schooling of children and reduced food consumption expenditureso

hold level, An adjustment

I._ _Rc_ s_' WOWIEn,YOUTH /U_ aO_c'_.I_.ouc,__c.140oi._ oFctl_e£N AND_P0CI_ Foo¢ _onc_nwl_r_ F-J(PENDITURE$

program

"should,therefore, be well-designed

To page 4 ufii

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DEVELOPMENTRESEARCHNEWS

DebtRelief... (FrorJzPage 2) for long-term, sustainable growth and development. Costs of reforms, they say, will occur in the short-run while benefits will only come later. Here, external finance becomes all the more important in mitigating these costs especially in a ravaged economy like the Philippines.

To stabilize and contract the economy in the process as indicated in the structural and stabilization programs of IMF and WB is, therefore, impossible,

Januar - February1991

the debtoverhangproblem.

And thebest way to solve it is tltrough debt relief.

There have been indications in both the Baker and Brady Plans in 1986 and 1989,respectively, regarding the debt relief. What remains to be done is to determine the extent or the magnitude_ a quantifiable amount--of the debt relief. How much is significant debt reduction? If this is carried out, the country would have resources to finance theshorttermcostsinthegovernment_sstructural adjustment program and institute the right policies for a conducive environment leading to genuine development. •

MonitoringImpact... (From Page 3) Policy Directions: What Are Locking?

Sin ce the primary condition for the IMF-WB-sponsored programs is the right environment for growth and development, the following policy measures were recommended by both camps: (1) cooperation of the government and the small and medium-scale businessmen in dismantlingbig business conglomerates; (2) more vigorous h_itiative from the private sector to lobby various issues which concern them; (3)establishment of a credible mid tu_iform policy stand among all thegovernmentplanners; (4) sequeneing of financial liberalization after trade liberalization; (5) mobilization of domestic resources and increase of the tax collection effort; (6) increase of income opportunities for redistribution to those

elling, the Central Bank suggested. With results more likely amenable to internationalstandar&% the government can adopt the system as part of its regular monitoring activity as this would help in analyzing transmission of business cycles in the Asian region, T_melinessandavallability of data were also to be considered for the model to yield accurate resttlts. Since the estimate of real GDP up to four quarters ahead would be difficult given the lag time in. reporting some of the variables used in the model, a computerized program with a wide network is required.

Sucha setupwouldfadlitatemonitoring, gathering and processing of data.

The impact of macroeconomic policies on the welfare of households could vary acrosstypes of households -hence, the challenge for the government to monitor changes for the household's welfare, improve the quality of the present monitoring system and enhance the availability of data and innovative interventions.

This will require prompt, adequate and disaggregated data on a regular basis.

The limited resources, on the other hand, should be fully utilized to protect the most vulnerable groups in the economy.

Programs to develop thei capacities to respond positively to th_ emerging opportunities brought to the fore by a restored growth should, therefore, be developed.

Finally, the program should involve not only economists but also other experts and enthusiasts from the agencies of the government, specifically the Departments of Health (DOH), Education, Culture and Sports (DECS), and Social Welfare and Development (DSWD).

Representatives from the Senate, Departments of Agriculture (DA), Environment and Natural Resources (DENR), Health (DOH), and Labor and Employment (DOLE), National Statisti-

sectors with strong linkages with the rest of the economy; (7) making the industrial sector competitive by increasing job opportunities and labor productivity; and (8) implementation of a strong fiscal and monetaryregime.

Thesemeasures, however, may be impossible if resources are limited. Thus, the outflow of foreign exchange should be limited by addressing

The forum was attended by representatives from the Central Bank, Department of Fh_ance (DOF), Department of Agriculture (DA), National Statistical Coordination Board (NSCB), Interbank, Bank of the Philippine Islands (BPI), San Miguel Corporation (SMC) and Center for Research and Communication (CRC). •

ca[ Coordination Board (NSCB), Nationill Statistics Office (Nso),Agricultural CrecJ Policy Council (ACPC), University of the Philippines' School of Economics (UPSE), Asian Social institute (ASI), IBON Databank, Philippine Rural Reconstruction Movement (PRRM) and the Canadian International Development Assistance (CIDA) participated in the workshop. •

A Conv rg nce of Policy Recommendatlons

LeadingIndicators... (From Page 2)

DEVELOPMENT RESEARCH NEWs is a bi-monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT sTUDIES (PID_. It highlights findings and recommendations culled from PIDS-sponsored research or related studies done by other institutions. PIDS seminars, publications, al_d ongoing and forthcoming projects which are of interest to policymakers, planners, administrators, and researchers are also announced.

PIDS is a nonstock and nonprofit government institution engaged in long-term policy-oriented research. "l_hispublication is part of the insti_Ys disseminate information in order to promote the use of research findings.

program to

The vieWs and opinions published here are those of the authors and do not necesserily ret'lectthose of the Institute. Inquiries regarding any of the studies contained inthispublication _rany_fthePIDS_aPers_a_wellasanysuggest_ons_rc_mments_nthePub_icati_narewe_c_me` l_easeaddress allrelated correspozld_aceorinquiries t_ Research information Staff (RIs) Philippine Institute for Development Studies (PIDS) Room 307, NEDA sa Makatl Btdldlng 106 Amomolo Street, Legaspi Village Makat11200, Metro Manila Re-entered as second class marl at the Makati Central Post Office on April 27,1987. I rivate firms and individuals are charged at an annual rate of I_,00. Students, libraries, academic and research instituti6ns are char;red at an annual rate of PS0.00. For foreign subscribers, the annual rate is $I6.00. All rates ate incl_ve of mailing and handling costs, k .

A summary of a research

study conducted

by the Philippine Institute for Development

Studies

The ASEAN-US initiative: What the Philippines stands to gain ASEAN-US

Initiative

: The Philippine

__rspective, Working Paper Series No. -05 by Erlinda M. Medalla and Rosario G. Manasan

inputs to the Joint Study on ASEAN-US Economic he study provides Relations with reg_d country to identifying policy reforms that would lead to mutual benefits for the ASEAN and the U.S. in the areas of trade in goods, trade in services, and investments.

It enumerates possible benefits which the Philippines could gain from an ASEAN-US Agreement in terms of these three areas.

At

a first

glance,

the Philip-

nes would probably gain more from RP-US rather than ASEAN-US agreement with regard to trade in goodg because of the special ties between the Philippines and the United States and the willingness of the latter to assist the former through unilateral trade concessions. For the past four years, the Philippines has had a favorable merchandise trade balance with the U.S.

째o

and the latter already takes up a good share of the former's trade. But in terms of getting concessions in exchange for concessions, the Philippines seems to have more to offer and is probably at the losing end of a two-way bilateral agreement considering that it has already liberalized a number of items.

On the other hand, an ASEANUS agreement would be more advantageous.

First, the Philippines' plan to open its markets falls very neatly within an ASEAN-US economic Ill

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RESEARCHFOLIOSERIES: A SUPPLEMENTTO THE DEVELOPMENTRESEARCH NEWS cooperation. Second, to some so-called "nationalists," aligning with ASEAN, rather than with the U.S. maybe more politically acceptable. Third, an urnbrella type of ASEAN-US agreement is not necessarily contradictory to Philippine objectives in the context of an RP-US agreement. And finally, the Philippines, as a member of the ASEAN, would have more bargaining power to contract trade agreements with other countries, particularly the European Economic Community and Japan.

TRADE CONCESSIONS TRADE-OFFS

in exchange for concessions in the area of services, technology and investments, The services sector has a large share of both real output (40%) and emploYment (36.8%) in the Philippine economy.

This sector includes transportation, storage and communication, trade, finance, housing, government and private services,

financial exchange which would eventually lead to some loss of control in the money supply.

Construction and labor exports aretwo of the services sector where the Philippines has a comparative advantage. But even when the country finally liberalizes its trade in services, many in government as well as in the private sector feel that the country should seek special and differential treatment for services on infant industry grounds. National security and sovereignty concerns should likewise be considered.

With regard to investments, the long history thatbinds the Philippines

AND

in general, the U.S. market appears relatively free and open. U.S. tariffs are generally low with respect to Philippine products, although around 48 percent of these products are affected by non-tariff measures (NTMs) in the form of health and sanitary regulations and consular and customs formalities. There is also the impending threat of protectionist legislation in the U.S. Congress.

A number of concessions could

The United States is by far the most important trading partner of the Philippines in the services sector, accounting for around two-thirds to

and the U.S. makes the latter th_ single-most important source foreign direct investment (FDI) in the country. The U.S. share of FDI peaked in 1983 at 68 percent but declined to 22 percent in 1987. The official stance towardsFDIisbestdescribed as "open subject to certain limitations".

From the investors' side, meanwhile, aside from return on investment (ROI), the political and economic stability, size and growth

still be granted to the Philippines such as in the areas of garments and processed food products and nontraditional exports. A commitment to a standstill on all forms of nontariff

three-fourths of total trade in services, While the Philippines has achieved some diversification of markets in the trade in goods, its trade in services is still highly concentrated in the U.S.

potential of the market and the availability of raw materials are the primary considerations.

Moreover, empirical evidence shows that historically, more than half of foreign

measures (NTMs) could likewise be pledged by the U.S. to the Philippines.

In exchange, the Philippines could claim credits for the past unilateral tradeliberalization, particularly the 1981 to 1985 Tariff Reform Program and the liberalization of imports forover 2000items from 1981 to 1988. It should be noted, however, that the reforms have not been

market.

On the other hand, the Philippine share in the U.S. market is quite small. Tlus could be the reason why the U.S. has not demanded the removal of barriers of the highly regulated services trade - which is quitean advantageforthePhilippines, In general, grave apprehension, valid or not, exists in liberalizing trade in services, espedallyamong

equity flows to the Philippines hav_ been in areas which enable investors t_ avail themselves of tax incentives; hence, a need for a regional economic cooperation.

It should also be noted that the General Agreement on Tariffs and Trade (GATT) remains to be the most efficient vehicle for promoting and disciplining world trade.

Bilateral

completed. The commitment to liberalization could, therefore, be strengthened withthe help of an ASEANUS economic cooperation,

less developed countries (LDCs) because of the folowing reasons: (1) opening up trade in services wouldbedetrimentaltotheireconomic development since they will remain as

agreements often undermine the GATr mechanism by promoting trade diversion ratherthan expansion. AnASEANUS economic cooperation could, therefore, serve as a hedge against GAT1_

LIBERALIZING TRADE IN SERVICES AND INVESTMENTS: THERE'S MORE TO 1T THAN WHAT MEETS THE EYE

importers of high technology services and sources of cheap labor; (2) protection is necessary to nurture the infant service sector and shield it from "unfair" foreign competition; and

degeneration.

With an ASEAN-US cooperation, the Philippines could learn more from the experiences of other ASEAN countries in their liberalization and

(3) liberalizing the service sector involves mobilizing factorsofproduc-

tariffreformprogramsandenjointhem towards the harmonization of their

tion such

investment

should goods I

The exchange of concessions not be confined to trade in alone but

could Jl

also be made I IIII

as L

capital,

physical

and IIII

plans.Cl I II

A summary of a research study conducted

by the Philippine Institute for Development

Studies

A packaged reform program for the Philippine industrial sector The Philippine hldustrial Sector: Policies, Programs and Performance, Working rlinda M. Medalla

the ongoing program of industrial restructuring and he study aims to evaluate development in the Philippines. It reviews the main developmentsintheeconomyfromthel950s to the 1980s in order to determine the role of industry specifically the ---ff_i/iufaeturing sector in the overall economy.

Industry performance and changes in industrial structure in the context of trade and industrial policy reforms and programs are also ll_iscussed, -THE ECONOMY

country's generally incentive

IN RETROSPECT

The development pattern of the economy up to 1983 was characterized by a distorted structure, inefficient invest-

ments and heavy dependence on foreign borrowings.

The overvalued peso in the midst of a trade and current account ,deficit in 1983 worsened the ailing economy which subsequently led to the most severe economic and financial crisis in postwar history, Inflation rate swelled to an average of 50.3 percent in 1984. Open unemployment accelerated to 25 percent in Metro Manila and 12 percent nationwide.

Domestic investments were the hardest hit, with growth rate plummeting by as much as 43 III

IIIIII

Paper Series No. 90-18 by Filologo Pante, Jr. and

turing sectors likewise collapsed during the period, percent. The industrial and manufacWith the new government in 1986, a wide range of economic and politicalreforms were instituted.

As a result, the economy remarkably recovered mainly due to an improved domestic- demand. Real GNP grew by 6.0 percent in 1987, 6.8 percent in 1988 and 5.6 percent in 1989. The industrial sector sustained a growth of 7 to 8 percent per year in 1988 and 1989 while the manufacturing sector grew rapidly from one percent in 1986 to 6.7 percent and 9.0 percent, respectively, in 1987 and 1988. This growth was carried through in 1989 with a growth rate of 7.0 percent, INDUSTRIAL

SECTOR,19Nls-1980s:

POOR POLICIES, PERFORMANCE

POOR

Government industrial policies adopted since the 1950s haveled to an industrial structure characterized by poor productivity growth and failure to significantly alleviate unemployment, underemployment and poverty. Specifically, the manufacturing sector hardly absorbed the nation's labor force. While the share of manufacturing value added in GDP increased from 22.5 percent in 1960 to 25.0 percent in1988, theshare of manufacturIIIIII

III

declined from 12 percent to 10 percent over the same period. ing employment to total employment From mid-1950s to 1980s, total factor productivity in manufacturing has been declining by 0.15 percen t per year (Hooley, 1985).

The structure in production has not changed m_ch since -1970, with consumer goods accounting for the largest share or almost half of manufacturing value added on the average. Further, although the share of manufacturing to total number of firms in 1983 was 80 percent, it accounted, however, for only less than a fourth of total employment and a tenth of value added of such firms. This phenomenon proves that industrial policy has been biased against small and medium-scale industries (SMIs). There are also evidences that production structure in terms of the number of firms, employment, value added or fixed assets has been concentrated in Metro Manila and other core regions_ The share of nontraditional exports to total exports increased from 8.3 percent in 1970 to 77 percent in 1988. Almost two-thirds of exports consisted of only three manufactured products, namely, semi-conductors, garments and handicrafts.

Moreover, capital-labor ratios increased significantly between 1960 and1980. This may be explained by an IIII

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RESEARCHFOLIOSERIES: A SUPPLEMENTTO THE DEVELOPMENTRESEARCH NEWS incentive struct_ure, which was in favor of capital, in the manufacture of food, beverages, chemicals, cement, iron and steel, fabricated metals and transport equipment, INDUSTRIAL PROGRAMS:

POLICIES AND A NEED FOR ACTION

The government has been pursuing conservative fiscal and monetary policies since 1986. These policies have helped in containing inflation to a single digit level up to 1988when it increased to10.8 percent due to tile increase in oil prices and power rates, the legislated 39.1. percent increase in the minimum wage of workers in the private sector and salary standardization of those in the government, The exchange rate, meanwhile, has been relafivelymaintained.

From 1986 to 1989, the peso depreciated by only 6.6 percent vis-a-vis the U.S. dollar. High interest rates were employed to strengthen the peso in 1988 and 198_9L. but the--use of this monetary -policy cannot be sustained because the real and nominal interest rates are already high. Also, the country's trade and current account deficits in 1989 have been increasing rapidly.

If unchecked,

to an overvalued major realignment

this would

lead

currency to rrmin_in requiring file peso'sa

competitiveness mad arrest tile unabated large increases in the country's imports, As a whole, the trade reform program has been successful in bringing down nominal and effective rates of protection (ERPs) and in reducing variation in tile latter across sectors. Unfortunately, these reforms are not enough to alter the biases against exports and agriculture.

Tile government should push for an import liberalization program to reduce these biases and balance the incentive structure, On the investment incentives reform, the changes adopted by the government have shown a bias for capital and a reduction of incentives for exporters vis-a-vis non-exporters, If only to improve the country's balance of payments, the government I

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should encourage more investments in the export sector. Simplifying the administrative requirements in incenfives availment could be a substantial step towards this end.

On export promotion, one of the most important measures which could be implemented is to speed up the availment of tax and duty exemptions on the imported inputs of exporters.

Also, export financing should be further strengthened by developing a domestic letters-of-credit system and by providing equal access to indirect exporters on the Central Bank's refinancing facility, With regard to regional

Of the country's technological manpower; (3) strengthening of the technological infrastructure (information system, linkages, product standards, testing services, etc.); and (4) promotion of technology-enhancingactivities (greater private sector spending for research and development and more emphasis on the dissemination of existing technology, particularly to SMIs).

The privatizationprogramhas been proceedingat a slower pace than anticipated when it was launched in 1986. This is dangerous because parties with vested interests could mobilize a strong opposition to derail

dispersal ofindustries, thegovernment should provide basic infrastructure like power, telecommunications and roads and facilitate access to longterm credit. Programs supportive of regional dispersal such as rural development, trade reform, export promotion, SMI promotion and decentralization should be simultaneously implemented,

...,,.,,':" ............._! "_'" _ ...... ........ _'_'*_V_: ."';.....

the program. The government shouldAiI therefore, be more decisive an_ unequivocal about the disposition of properties which have been identified for privatization like the Manila Hotel and Philippine Airlines.

Towards this end, the .bidding--and-approval process fi-a the disposition of government assets should be simplified.

Overall, the financial sector program is progressing well despite .-"_'_..... ' some problems.

Tile key areas which

"Piecemeal reforms will only achieve little.., what is needed is to implement: reform

programs

_,

aS one

package."

,:

Two main weaknesses in the development of SMIs have been identified: the concentration of credit in the National Capital Region and the tendency to cater to thelarger segment of the SMI sector.

To remedy the situation, there should be lesser dependence on commercial banks as fund conduits and a more extensive information dissemination of the SMI lending programs.

Cha tecluaology upgrading and development, the following measures have beenproposed:(1)integration of a technology policy into the national development strategy; (2) development llll II

II

should be addressed are: abolition of agri-agra requirement and the gross receipts tax, and the strengthening of the securities

market.

It is also high

time that tile considerof tltllI rationaliza tiongovernment of the operations Government Service Insurance System and the Social Security System.

By and large, the policy environment for industrial growth and development in the Philippines has improved since 1986. However, closer coordination of economic policies is needed.

Several separate reform programs have been instituted since the early 1980s but the full benefits from these are yet to be felt, largely because the reforms were not accompanied by necessary macroeconomic policies and other complementary measures.

What is needed is to implement the reform programs as one package because piecemeal reforms will only achieve little to improve the contribution of the industrial sector to the country's development.O I

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III