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Macroeconomic constraints and politics

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 ).

Agriculture: protection and underdevelopment

In contrast to manufacturing, the Philippine agricultural sector
received increased protection during the latter 1980s and the 1990s.
Thus, the nominal rate of protection (NRP) for rice increased from an
average of -4% during 1970-79 to 19% during 1990-94 and 68% during 1995-1998. Similarly, the NRP for corn increased from 24% during 1970-79 to 78% during 1990-1998. The NRP for sugar increased from 5% during the 1970s to 84% during the 1990s. The NRPs for pork and chicken increased from 6% and 34%, respectively, during the 1970s to 44% and 84%, respectively, in 1995. (See David 1999, p. 11). The rise in the nominal rate of protection is also reflected in the effective rates of protection estimates. Specifically, agriculture overtook the erstwhile leader in effective rates of protection by late 1990s (Medalla 1999).

Liberalization, currency appreciation and industrial adjustment

One of the major policy developments in the Philippines during the
latter 1980s and early 1990s was the dismantling of trade barriers and reduction of tariffs. The percentage of total import commodity lines that were regulated dropped from 32% in 1980 and 1985 to 14.7% in 1986, 8.2% in 1990 and 2.9% in 1999 (De Dios 1997). The book tariff rates, which had 17.5% and 9.1% of all HS (harmonized system) tariff lines in tariff levels of 100% and 70%, respectively, in the late 1970s, narrowed down significantly towards the 0%-50% range by the late 1980s. Most of the tariff lines converged within the 3%-30% range by 1995 and within the 3%-10% range by 2000.

The effective rate of protection in manufacturing using book tariff rates and inclusive of the impact of duty drawback declined from 64.7% in 1983 to 45.5% in 1990 and 37.3% in 1995 (Medalla, 1998). The weighted effective rate of protection in manufacturing declined from 24.3% in 1988 to 18.2% in 1995 and 15.7% in 2000; the decline for the import substituting manufacturing industries was more drastic, from 38.4% in 1988 to 23.9% in 2000 (Medalla 1998).

The sharp drop in the incidence of non-tariff barriers and the tariff rates especially in manufacturing has transformed the Philippines from one of the more protectionist countries in the 1970s to one of the more open economies by the mid-1990s among all the East Asian countries.

Competitiveness and the Filipino worker

It may be a surprise to some of you, but the Philippines ever since had been engaged in a competitive strategy. Protectionism – the policy of protecting domestic industries in order to create a capital-intensive industrial base – was a plan implemented by the country aimed at generating continued growth, and ultimately spurring progress and development. Unfortunately, the outcome of such a policy was the opposite of what we were hoping. Trade protection (or the whole gamut of policies from import substitution to “competitive clustering” and “picking out winners”) is not based on an economics of national interest, but really formulated within a politics of special interest. Politics can sometimes produce economic policies that are in fact irrational but made to look brilliant. To see why one must go beyond the abstract concepts of gains and benefits from free trade and competition toward a specific listing of the costs and benefits of trade protection and competitiveness.

The long and winding road of the Anti-Money Laundering Act

After months of hard and frenzied work of concerned legislative
committees and technical working groups, it now seems like the
Anti-Money Laundering Act is up for amendments. The Financial Action Task Force (FATF) on Money Laundering, an international watchdog that monitors efforts in fighting money laundering, has pointed out serious flaws in the law that render it ineffective to fight the said crime.

The story of how the Anti-Money Laundering Act came to be and what has happened since its enactment is irrefutable proof of how compromised and ineffective a government that is captive to particularistic interests can be.

The politics of trade policy

At a personal level, we intuitively know that trading our labor (then
using the money wages as the means of transactions) gives us a higher standard of living than if we tried to produce everything ourselves. As individuals, we know and act on the knowledge that specialization enhances our individual incomes and wealth.

But this knowledge does not seem to hold in our perceptions of the
national economy. We know that a country will be wealthier and have a better life if the country specializes in producing those products that it is good at producing, exporting the surplus, and using the proceeds to buy imports. Yet the notion that the gains from trade should be measured by what we import, not by what we export, is difficult for many.