Asia Foundation on the Philippines, March 14, 2001

Political Economy in the Philippines: New Directions
by Dr. Florian Alburo
University of the Philippines, Diliman, Quezon City

Excerpts

I would like to highlight
what I see as the elusive nature of sustained economic growth in the
Philippines. I will address the country’s long term economic
performance and the cumulative nature of the economic problems
inherited by President Gloria Macapagal-Arroyo. Finally, I will turn
to our globalizing world and then, briefly, to the economic
relationship between the Philippines and the United States.

In the period right after World War II, the Philippines’ growth
rate was comparable to that of the so-called Asian Tigers. Back in
the 1950s, the Philippines even bested countries like Malaysia,
Singapore, and South Korea. But by the 1980s, the Philippine
growth rate had deteriorated to an annual 1.2 percent per capita.
Meanwhile, other countries in the
region were achieving growth rates of
nearly 10 percent.
The growth rate is only one part
of the story. The Philippines’ vast
natural resources and our educated
labor force are reflected in our
exports, and that’s another point of
comparison. Even as late as the
1970s, Philippine exports were
besting the Tigers’ exports. We
exported $1.1 billion in merchandise
compared to only $800 million in
exports each for South Korea and
Singapore.

Then the gap began to widen in favor of the Tigers. By 1980,
the Philippines was exporting $5.7 billion in goods, compared with
South Korean exports of $17.5 billion and Taiwanese exports of
$20 billion. The most recent figures show that in 1998, the
Philippines exported $29 billion in goods and services while South
Korean exports jumped to $132.3 billion and Singapore’s to $110
billion.

Again, during the Asian financial crisis in 1997, the Philippines
was actually poised to turn the corner sooner and faster. But again,
a sustained economic recovery proved elusive, and our recovery path
fell far short compared to our neighbors.

The circumstances we are seeing do not represent isolated
instances. To the contrary, they fit in with a 40- year trend of lower
than potential growth rates and an expanding population. It seems
we are never quite able to push ourselves into the next orbit, where
faster economic growth is possible. This is partly due to a habit of
new regimes reversing whatever economic policies are in place when
they take over. Another explanation is related to the Philippines’
inability to successfully withstand either external or internal shocks.
Take, for example, the government of Diosdado Macapagal, the
father of President Arroyo. Macapagal was the first Philippine
president to systematically carry out structural reform. By the way,
he held a PhD in economics. Unfortunately, after Macapagal,
Ferdinand Marcos refused to build on these reforms. In fact, slowly
but surely, he reversed them. Yes, the Marcos era did realize growth
spurts, but the growth was not the result of true structural reform.
It was the result of a debt-driven bubble, and eventually, the bubble
burst. When it burst, it spared only those who had already benefited
from the bubble.

Then, the government of Corazon Aquino had a rare
opportunity to again pursue reforms. Instead, President Aquino
focused on restoring democracy. That was an important choice, but
it meant that the next administration—that of Fidel Ramos—had to
start at virtually ground zero with the economy. The Aquino
administration had pursued economic reforms but in piecemeal
fashion. Ultimately time ran out.

When the Estrada regime took over in 1998, at first President
Estrada made sensible pronouncements and advocated very worthy
causes. The regime made a credible start. But then, when the
government started to pursue reforms in a collective fashion, Estrada
personally reversed the reforms!

It seems new presidents rarely, if ever, build on what has gone
before, particularly when we look back over the last 40 years in the
Philippines. Each administration seems to prefer to make highly
selective decisions about what it likes as opposed to what the
country actually needs. In almost every case, new administrations
that began with a bang, ended in despair and crisis. In the process,
the institutions of government also suffered.

Let me go back to the 40-year time span. Every president in the
Philippines, starting with Diosdado Macapagal, began his or her
administration at ground zero. Macapagal came into office
following a crisis in 1960. Marcos began his term at about the time
the economy was poised to reverse itself and climb out of the dip.
But what was the first thing he did in 1970 after his election in
1969? He raised the value of the peso.

When Aquino took over, she inherited an economy that was
again headed into the pits. Both Ramos and Estrada began their
tenures in office when the economy actually was in the pits. In each
and every case, the new administration started with a bang but
ended up in crisis.

The cumulative effect of this penchant to reverse whatever
policies preceded a president in office has held back the Philippine
economy.

A colleague at the University of the Philippines says that
the individuals who have dominated the Philippine economy have
been engaged in value extraction and not value creation. Saying
these people are all guilty of being rent seekers, or looking for a fast
buck, is another way to put it.


In the Philippines, the richest families represent 20 percent of
the population and account for more than 55 percent of the overall
income. That means that the remaining 80 percent of families
receives 45 percent of the overall income. This is a case of
deteriorating income distribution and was most noticeable from
1991 to 1997. This is not a recipe for alleviating poverty. To the
contrary! It is a recipe for accelerating poverty. It means that our
country is sitting on top of a social volcano.

Our unemployment rate is another cause for concern. The
overall picture shows unemployment increasing—not decreasing. It
also highlights a classic difference between the Philippines and other
countries in the region. When quarterly rates are compared, the
Tiger countries have actually reduced unemployment, and have
begun their climb out of poverty and away from a widening
inequality gap. The Philippines, on the other hand, is experiencing
rising unemployment and greater inequality.

The problems are inter-related. A country manages to lift itself
out of poverty if it is able to increase employment. In turn, social
inequality is reduced when employment opportunities grow. The
solution is painful reform, not economic palliatives.


It took the Asian Tigers a decade to build up their economies to
where they are now. The same is roughly true for Japan. If reforms
can take hold in the Philippines and be nurtured over a period of
time, they will go a long way toward positioning the country to
become a more effective and influential global player. We ignore the
globalizing world at our own peril. We need structural reforms to
get our economy into the shape it has to be in order to compete
internationally. The returns on that investment will facilitate our
recovery, boost employment growth, and help improve income
distribution.

To be sure, trade is the Philippines’ largest growth sector—and
has been ever since the Asian crisis. Currently, we are experiencing a
slowdown, but it’s possible the slowdown is in part a reflection of a
structural change resulting in the favored trade of services over
goods.

In the meantime, the United States continues to be an
important trading partner for us. Some 20 percent of our exports
are earmarked for the United States. In return, the United States
accounts for more than 20 percent of Philippine imports.
Americans also are a source of capital and know-how.