Macroeconomic constraints and politics

The author is a professor of economics at the Department of Economics, College of Business and Economics and the executive director of the Angelo King Institute for Economic and Business Studies, De La Salle University.

Behind the failure of the Philippines to adjust more effectively to the
demands of a more open economy is a government that faced a severe
budget constraint especially in the latter 1980s and early 1990s as an
aftermath of the economic crisis of the early 1980s. The share of debt
service to total government expenditures during 1986-1992 averaged 39%,
although this dropped substantially to 19% during 1993-1999. The high
debt service burden in the latter 1980s and early 1990s has prevented
the country to be more aggressive in its infrastructure program in view
of the inadequacy of counterpart funds for the official
development-assisted projects. The share of government infrastructure
expenditures to GDP averaged 3.3% during 1986-1999. This share is lower
than a number of East Asian countries. For example, the average share
of infrastructure investments to GDP during 1990-1992 was 4.6% in
China, 4.3% in Indonesia, 5.8% in Malaysia, 4.3% in Thailand and 4.6%
in Korea (Kohli, 1994 ).

This perennial underinvestment in infrastructure meant a comparatively
poorer stock of infrastructure facilities in the country compared to
the other countries. Indeed, the perennial top complaint of foreign
investors in the Philippines in the 1990s is the poor state of
infrastructure. The Philippines ranks as one of the worst in
infrastructure in the annual World Competitiveness. The negative output
effect of lack of investments in infrastructure was clearly illustrated
by the power crisis of the early 1990s which contributed to the
recession at that time. The crisis also forced the government to
undertake expensive power projects under build-operate-transfer by the
private sector with performance guarantees from the National
Government; these guarantees are now putting additional pressure on the
already tight budget of the National Government.

Political economy considerations also dictated that a significant
amount of the budget was allocated in redistributive programs, best
exemplified by the Comprehensive Agrarian Reform Program (CARP). CARP
had to be pushed in the late 1980s and the 1990s because land tenure
problems were at the heart of agrarian unrest in the country since the
colonial period. The importance of CARP is indicated in that its goal
is enshrined in the 1987 Philippine Constitution. Thus, to some extent
CARP brought peace in the countryside. Recent studies do not show an
overwhelming productivity effect from CARP; thus, it is best to
consider the government expenditures in CARP as primarily for equity
and agrarian peace. Other redistributive programs are in some ways an
inefficient way to support some population groups. For example, the
government support to the National Food Authority, the government’s
rice and corn marketing and price stabilization agency, is greater than
the government’s expenditures for irrigation. Filipino economists have
criticized this as an inefficient way of supporting Filipino farmers.

The economic crisis of the early 1980s and the stop-go nature of
Philippine economic growth meant the significant decline in the
domestic saving rate from the late 1970s to the latter 1980s. The low
saving rate since the mid-1980s have barely recovered to the level of
the 1970s. Thus, the gross saving to GDP ratio averaged 26% during
1980-1982, dropped to an average of 20% during the crisis years of
1983-1986, stayed flat at 20% during 1987-1990, declined to 18% in the
recession years of 1991-1993 before reaching 24% during the “boom
years” of the mid-1990s. The sluggishness of Philippine domestic saving
rate during much of the period stands in sharp contrast to the
significant rise in the domestic saving rate in other Southeast Asian
and East Asian countries. These other countries, e.g., China, Malaysia,
Thailand, Korea and Singapore, had domestic saving rates in the low 30s
to low 40s as a percent share of GNP during the 1990s.

The comparatively low domestic saving rate is mirrored in the
comparatively low investment rate. Yet, an effective restructuring of
the economy consistent with the demands of a more open economy involves
investments. Firms need to invest in new machinery and training of
workers to increase productivity in the old or new areas of comparative
advantage. It can be argued that one major reason why the Philippine
textile industry was substantially hit by trade liberalization was
because a large number of the firms did not invest in upgrading their
plants and in retraining their workers. (For a number of them which had
inefficient integrated operations, the upgrading included the need to
specialize.) With relatively low investments, the country, especially
the manufacturing sector, failed to generate the productivity growth
needed to offset the reduction in trade protection and the appreciation
of the currency during much of the period.

With comparatively low saving rate, the Philippines needed to rely more
on foreign direct investments than other East Asian countries in order
to have a robust economic growth. However, the Philippines was also
largely a laggard in this area vis-a-vis other East Asian countries.
Disincentives such as poor infrastructure, peace and order problems,
and unsettled labor conditions may have dampened foreign investors
interest except in industries like semiconductors where the Philippines
has an emerging comparative advantage because of the abundance of
relatively low-priced semiskilled, educated and English-speaking
workers. (Even here, the MNCs started to flock to the Philippines only
when the private sector industrial estates with much better
infrastructure facilities were established, mainly in the 1990s.) It is
also likely that the foreign investment in the country was
comparatively low because the low domestic saving rate may have
constrained the establishment of more joint ventures between Filipino
firms and foreign firms.

In short, because the Philippines undertook its trade liberalization
after a major economic crisis, the country did not have the
macroeconomic and resource leeway to improve further the
infrastructural and technological foundation of its economic
restructuring concomitant to the further opening up of the economy
during the latter 1980s and the 1990s.

Poor employment creation and poverty. Apart from the higher returns to
agricultural production (because most of the poor are farmers), the
other best way of reducing poverty is to generate employment,
especially the more remunerative ones. However, because of the
country’s failure to adjust better to trade liberalization and
globalization, the country’s unemployment rate was high during the
period. The country’s unemployment rate averaged 8.7% during 1990-1993,
declined to 8.4% during 1994-1995 and dropped to its lowest in the
1990s at 7.4% in 1996 before rising again to reach an average of 9.5%
during 1998-1999. In addition, the underemployment rate is very high at
an average of 21.4% during 1990-1999 (reaching as high as 23.7% in
1998).

The sectoral composition of employment echoes the poor employment
creation during the 1990s. As noted earlier, manufacturing contributed
only 4.6% of the total number of new jobs during the 1990s. As a
result, the share of manufacturing declined from 10.65% in 1992 to
9.58% in 1999. What has increased significantly in share are wholesale
and retail trade as well as community, social and personal services.
Construction expanded employment during the mid-1990s but has started
to lose share in the late 1990s when the East Asian crisis hit the
construction industry. The significant rise in the shares to total
employment of wholesale and retail trade and of community, social and
personal services reflects the failure of the economy to generate more
remunerative jobs, especially in the manufacturing sector. This is
because the sales workers are primarily retail sales workers mainly on
perpetual temporary contracts if in the formal sector or are involved
in retailing in the informal sector. Similarly, the rise in service
workers may involve primarily the increase in domestic service.

In sum, the high unemployment and underemployment rates, the poor
employment creation especially in the more remunerative jobs, the high
food costs, and the low agricultural growth have all contributed
significantly to the persistence of poverty in the Philippines.

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