Global Economic Crisis, Neoliberal Solutions, and the Philippines

By Kim Scipes, Monthly Review Vol.51 no.7, December 1999

The economic crisis that has been affecting the global economy for the last two and a half years started in East Asia. We've heard story after story about the problems in Thailand, South Korea, Indonesia, Malaysia, China, and even Japan—but we've heard almost nothing about the situation in the Philippines. Is there something that the U.S. government, the International Monetary Fund (IMF), and the World Bank don't want us to know about the situation there?

The IMF has acted as the mean cop for the global financial system for a long time, but its role in this crisis has brought it new notoriety. In every case in which it has gotten involved, its prescription has been the same: reduce or end any restrictions on global flow of capital; don't defend the domestic currency by purchasing it with foreign reserves—let it fall until it stabilizes in the market; and raise interest rates as high as necessary to keep capital in or attract capital to invest. (These prescriptions benefit multinational corporations and foreign investors, who are largely—but not exclusively—based in the United States.) And do not worry about the social consequences of adopting such an economic program.

In every case, the result has been the same: each economy that has followed IMF prescriptions has seen widespread social dislocation. Hundreds of thousands of jobs have been lost, and standards of living have plunged drastically, even for those who still have jobs. The cost of internationally traded goods and services has increased, due to local currency devaluation against the U.S. dollar (the denomination in which most goods are traded on global markets). Poverty and malnutrition have increased, as have the number of related deaths. However, foreign investors have been able to purchase goods and services, raw materials, and even entire corporations more cheaply since the onset of the crisis than before.

The crisis has spread beyond East Asia. It has hit Russia hard—and a bunch of hedge funds in the so-called developed countries—and its latest major victim has been Brazil. The shock to Brazil has already spread to Argentina. And while it appears that many of the worst economic effects have attenuated in the last few months, the global economy is still being rocked.

The global crisis has also hit the U.S. economy in some sectors, although the impact has been masked overall by strong stock markets, low inflation, and low unemployment rates. Tourism in Hawaii, on which the state is largely dependent, has been devastated; agriculture (particularly corn) and agricultural machinery manufacturing have been hit hard in the Midwest; and so much steel has been dumped in the United States that the United Steel Workers have joined the steel companies in demanding import protection. In addition, the U.S. balance of trade—which measures the difference between exports of goods and services and imports of goods and services—was -118.1 billion dollars between January and June 1999; this exceeds all of 1997 (-104.7 billion dollars—itself a record at the time), and will certainly exceed the 164.3 billion dollar deficit of 1998.

Yet, as bad as all of this has been—the United States and Western Europe have largely been sheltered because of the way their officials have set up the global system—the countries that have garnered the most attention have a considerable amount of industrial development. What about the economies that don't have this industrial development, but are trying to industrialize on the basis of their cheap labor? What has the crisis meant to them?

I want to address the situation of these countries, but instead of perhaps another litany of the horror of the crisis—by the summer of 1998, Business Week was already referring to the situation on the ground in Asia as a depression—I want to focus on the general solution as proposed by the IMF. To do this, it is necessary to look at the situation in the Philippines.

The Philippines is, in some ways, a special case: while its economic development program has been based on neoliberal principles promoted by the IMF and the World Bank, it did not begin as a response to the recent crisis; the Philippines has been carrying out a neoliberal development program since 1962. An examination of these experiences, therefore, should give some idea of the quality of advice being given to economically less-developed countries by the global watchdogs. And while I don't excuse the Philippine elite for their role in this, I want to focus on what a neoliberal program has meant to a country that has been following its prescriptions for the past thirty-seven years.

Philippine Economic Development from Independence to Deregulation, 1946-1962

Like any country that had been colonized, the Philippine social order was organized to benefit people in the colonizing country and not Filipinos. An extractive agricultural economy (sugar, tobacco, hemp, coconuts) and a political system dominated by members of the various regional elites were the product of 381 years of Spanish, and then U.S., colonization.

When the Philippines was granted independence by the United States in 1946, it had been devastated by the Second World War; the United States used this to set up a neocolonial relationship with the now-ruling elites. Economic relief was made dependent on political and economic concessions to U.S. investors, establishment of U.S. military bases across the country, and a currency whose value in relationship to the U.S. dollar could not be changed without the explicit permission of the U.S. President. These impositions, in addition to the extractive economy and corrupt political system, were all grants to the newly freed nation.

An economic crisis in the late 1940s, when luxury imports by the elites threatened to bankrupt the country (in addition to a peasant revolt in Central Luzon and a newly emerging radical labor movement), forced the ruling elites to try a new economic program, with U.S. permission. Unwilling to implement a genuine land reform program, the elites tried industrializing as a way of restoring the economy, pacifying the peasants and workers, and maintaining their land-based power. Although I don't want to ignore the repression directed against peasants and workers (or the direct involvement of the CIA), I'm going to limit my focus here to the economic policies implemented.

To implement their new industrialization program, the Philippine government initiated foreign exchange and import controls. The controls provided multiple economic benefits to the state: they limited both general imports (such as consumer goods for the rich) and repatriation of capital outside the country, and allowed the state to select imports to assist the industrialization process and to protect industry established in the country. This import substitution industrialization (ISI) program was a serious effort to industrialize.

While this program did not benefit the majority of the population at the time, it was a success as an industrialization program by 1960. A moderate industrial base had been established: the country had food, wood, pharmaceutical, cement, flour, textile, paint, pulp, paper, glass, chemical, fertilizer, telecommunications, appliance, electronic, plastic, refined fuel, intermediate steel, shipbuilding, motor vehicle, machine parts, engineering, and other industries. From 3 percent in 1949, almost 18 percent of the total national income was derived from manufacturing in 1960. And it was largely built by Filipinos: from 1949 to 1961, Filipinos had invested fourteen hundred million pesos in new activities, as compared to 425 million by the Chinese (mostly Chinese-Filipinos) and only thirty-one million by U.S. investors. The Philippines was then considered to be the next Japan of Asia.

But this industrial progress came at a cost: the state maintained the peso at the incredibly overvalued rate of two pesos to the U.S. dollar (established by the U.S. government before independence,) and this made it increasingly difficult for agricultural exporters to find markets for their products, though it aided the industrialization program. (To make it easier to follow below, one dollar would buy 2 pesos, or U.S. one dollar: P2). Since the agricultural elites were funding much of the industrialization program, they were in the driver's seat when they pressed the state to agree to end controls and effectively devalue the peso. Ultimately, in 1959, an agreement was made that the foreign exchange and export controls would be ended in 1964, and it was these controls that had kept the peso so strong. This five-year interval was intended to make the transition less painful than an immediate termination of controls.

Implementing Deregulation

However, Diosdado Macapagal was elected President of the country, and one of his first acts after assuming the presidency in January 1962 was to terminate all controls immediately. This was supported by U.S. President Kennedy, who arranged for the Philippines to receive an immediate three hundred million dollar loan from the IMF to cover the repatriation of three hundred million dollars of U.S. corporate profits. This was the beginning of the Philippines' debt dependence.

Ending these controls—deregulation in today's terminology, and a major component of the neoliberal program—devastated the Philippine economy. The peso began weakening immediately, and was formally devalued from U.S. one dollar: P2.00 to U.S. one dollar: P3.9 in 1965. (A simple example: if you borrowed one million dollars at the old rate, you had to repay it with two million pesos before devaluation, and 3.9 million pesos at the new rate.) This resulted in the bankruptcy and collapse of many businesses. The balance of payments situation worsened: imports increased 68 percent between 1963 and 1967, while exports only increased seven percent. The foreign debt doubled from 275 million dollars in 1962 to approximately six hundred million dollars in 1965. And the manufacturing share of Gross National Product (GNP) decreased from 17.9 percent in 1962 to 7.1 percent in 1965.

To the Rescue: An Export-Industrialization Strategy

So, by the mid-1960s, the economy that had looked so promising going into the decade was a shambles. Different forces with a belief in neoliberal economics—including Filipino economists like Gerardo Sicat, and the IMF and World Bank—encouraged the government to launch an export-oriented industrialization program to solve the crisis, which was caused by neoliberal deregulation in the first place. Their argument was that by using low Filipino wage rates to attract foreign capital, and then basing manufacturing operations on cheap and controlled labor, the Philippines could export enough manufactured products (such as garments and electronic components) into the world economy to improve its balance of payments and employment opportunities. Consequently, poverty and income inequality would be reduced, ultimately enabling the state to modernize Philippine society.

Ferdinand Marcos, who was elected to the presidency as a reformer in 1965, decided to begin focusing the economy along such lines. Marcos was able to lay some important groundwork in that direction in the late 1960s but because of substantial opposition—both within Congress and larger society—he was unable to operationalize it at that time.

Martial Law

It was only when Marcos declared martial law on September 21, 1972, that the export-oriented industrialization strategy (EOI) could be implemented. Key to the EOI strategy was the establishment of the export processing zone at Mariveles, Bataan. Two months after the implementation of martial law, Marcos issued Presidential Decree 66 (PD 66) to facilitate the development of the Bataan Export Processing Zone (BEPZ), providing incentives specifically for export production. According to Walden Bello, David Kinley, and Elaine Elinson, PD 66 gave firms that exported at least 70 percent of their products permission for 100 percent foreign ownership; permission to impose a lower minimum wage than in Manila; tax exemption privileges, including tax credits on domestic capital equipment, tax exemptions on imported raw materials and equipment, exemption from the export tax and from municipal and provincial taxes; priority to Central Bank foreign exchange allocations for exports; low rents for land and water; government financing of infrastructure and factory buildings, which could then be rented out or purchased by companies at a low price; and accelerated depreciation of fixed assets. The incentives worked: By 1980, the Bataan EPZ had attracted 57 enterprises, the great majority foreign owned, employing some 28,000 workers.

By the early 1970s, the World Bank's role in the industrialization strategy had become crucial. While it had provided the Philippines with only 326 million dollars in loans between 1950 and 1972, it gave the Philippines more than 2.6 billion dollars between 1973 and 1981. In addition to the money provided, the Bank legitimized the country's economic plan to international financial institutions. Not coincidentally, the Marcos government decided to follow Bank strategy for development, focusing on industrializing efforts emphasizing the manufacture of labor-intensive exports with the strong participation of foreign capital, again according to Bello, Kinley, and Elinson.

Export production in BEPZ grew steadily for the first ten years, but then significantly declined throughout the rest of the dictatorship. Researcher Peter Warr presents data that shows huge increases in non-traditional exports: from .4 million dollars in 1972 to 73.1 million dollars in 1978 to 159.6 million dollars in 1982. However, exports from BEPZ decreased after 1982, falling to a low point of 57.6 million dollars in 1986, according to a 1994 report from the International Labor Organization.

But are there other indicators of the EOI program's success or failure? James Boyce provides considerable data that covers the years 1962 to 1986—the period after controls were ended until the end of the Marcos dictatorship. During this period, Philippine external debt grew from 275 million dollars in 1962 to 27.2 billion dollars in 1986. At the end of 1986, the country had a debt-to-GNP ratio of .90, and a debt per capita of 485 dollars.

The impact on wages for urban workers for the period 1962 to 1986 was disastrous. Boyce computed the impact of changes in wages in metropolitan Manila over this period: In real (1986) U.S. dollars, the daily wage of an unskilled worker fell from $4.37 in 1962 to $1.12 in 1986, while that of a skilled worker fell from $6.18 to $1.72. In other words, daily wage rates for a unskilled worker in 1986 were 74.3 percent less than in 1962, while daily wages rates for a skilled worker in 1986 were 72.2 percent less! In fact, in 1986, the daily wage of an unskilled urban worker was substantially below that of an agricultural worker. Boyce concludes: wage laborers in Metro Manila experienced a collapse in real wages in the 1970s and 1980s on a magnitude with few precedents in modern economic history.

A key to this deterioration of workers' salaries was the drastic cheapening of the Philippine peso. In January 1962, before foreign exchange and import controls were lifted, one U.S. dollar bought two pesos; in February 1986, just before Marcos was driven out of the country, one dollar could buy 19 pesos. Thus, imported goods—especially oil, which is sold internationally in dollars, and which is used for everything from powering automobiles to transporting rice, the staple food—became much more expensive to Filipino consumers.

There is another indicator that can be used to evaluate Philippine development: GNP per capita, one of the World Bank's favorite comparative statistics. In 1962, the Philippines GNP per capita (measured in 1986 U.S. dollars) was 495 dollars, and the only country with a higher GNP per capita in Southeast Asia that year was Malaysia (820 dollars). By 1986, Philippine GNP per capita was 540 dollars—barely above Indonesia (490 dollars), and falling increasingly behind the other economically significant countries in the region. The gap in GNP per capita between the Philippines and Japan had widened from 1510 dollars in 1962 to 15,660 dollars in 1986. In fact, between 1962 and 1986, the annual average growth rate of Philippine GNP (of 3.1 percent) and the GNP per capita (.4 percent) were each behind those of China, Indonesia, Japan, South Korea, Malaysia, Singapore, Taiwan, and Thailand.

To give one more specific example: South Korea had a GNP per capita of 330 dollars in 1962, which was 165 dollars per person behind the Philippines; by 1986, South Korea had a GNP per capita of 2345 dollars, or 1805 dollars per person ahead of the Philippines! The neoliberal program of the Philippines compared poorly to state-led industrial development of South Korea (and both countries were ruled by dictators over most of this period).

Post-Marcos

But what has happened since the overthrow of the dictator? Marcos' successors—Corazon Aquino (1986-1992), Fidel Ramos (1992-1998), and Joseph Estrada (1998-2004)—have continued to follow an EOI strategy. Aquino committed her government to repaying all foreign debts, including the ones that only benefited Marcos and/or his cronies, and Ramos and Estrada have followed suit.

One Filipino researcher, Pedro Salgado, put the debt into perspective early in Aquino's administration. He pointed out that the 28.2 billion dollar debt in 1987 was equal to about P564 billion, 4.4 times the national budget (or 81 percent of the projected GNP for the entire year). He then goes on to say, If a person were to drop a P100 bill into a pit every second, it will take 179 years to drop P564 billion worth of bills into the pit!

Researchers have detailed how recent presidents have gone along with the World Bank and the IMF machinations in exchange for loans. This was true under Marcos, and it has remained true since. Why? I think Temario Rivera is correct when he suggests that there is a larger reason: the ability to obtain foreign loans, no matter how bad for the country, allows political leaders to ignore the key issue in the country—political power based on land ownership. And, courtesy of the World Bank and the IMF, foreign loans have been available. Philippine national debt (which was 275 million dollars in 1962 and was approximately 27.2 billion dollars in 1986), was 35.5 billion dollars in 1993, and 45.5 billion dollars in 1997, according to data from the Central Bank of the Philippines.

At the same time, the shift from traditional agricultural exports to nontraditional, labor-intensive manufacturing exports, particularly in garments and electronics, has continued. By the early 1990s, over 70 percent of total exports were in these nontraditional manufacturers. However, despite this shift (supposedly the key to Philippine economic development), the balance of trade worsened between 1987 and 1996. The trade balance in goods was -1.017 billion dollars in 1987, -8.160 billion dollars in November 1995, and -11.342 billion dollars at the end of 1996. Note that these figures are all from before the crisis.

The GNP of the country has generally grown, albeit unevenly: it grew 5.9 percent in 1987, 6.6 percent in 1988, 5.7 percent in 1989, and 3.0 percent in 1990. It declined .05 percent in 1991. The GNP increased 1.56 percent in 1992, 2.02 percent in 1993, 5.1 percent in 1994, 5.7 percent in 1995, 5.8 percent in 1996, and 5.2 percent in 1997.

The neoliberal economic program has made things worse for the large majority of Filipinos. By November 1992, while evaluating President Ramos' first one hundred days in office, IBON Databank, a Non-Governmental Organization (NGO) that focuses on the economy, estimated that the number of Filipinos living under the Filipino poverty line had increased from 70 percent to 75 percent, and noted that a peso in 1992 could only buy 60 centavos of what it could have bought in 1988. The numbers in poverty are likely to have been somewhat reduced between 1994 and 1997, when the GNP of the country grew over 5 percent each year.

Roger Daenekindt, using Department of Labor and Employment figures from September 1995, reported that 62 percent of the 29.2-million-member labor force was either unemployed or underemployed. Furthermore, only 10 percent of the labor force received at least the minimum wage, but even this was insufficient, as the minimum wage itself resulted in income below the poverty line. In 1994, according to the government, the daily cost of living was P237.57 (approximately 9.50 U.S. dollars), while the mandated daily minimum wage was only P145 (approximately 5.80 U.S. dollars). Additionally, while nominal wages increased by more than two hundred percent between 1983 and 1993, real wages for all workers (based on 1978 prices) actually decreased by 14 percent, and despite nominal wages increasing 32 percent between 1990 and 1993, real wages fell 4 percent.

Daenekindt further noted definite changes in the workplace, toward a more flexible labor regime. And flexibility of the labor market means that workers have even fewer chances for regular employment, as workers are forced to compete at an even greater rate than before for the relatively small number of available jobs. This also makes it much more difficult to organize and maintain unions, which means that workers will have even less power in workplaces where they do obtain employment, and that their working conditions will get worse. And that is for those lucky enough to have regular jobs!

At the same time that the economy is not providing a sufficient number of jobs for people, and their wages are already horribly insufficient, inflation is eating at the value of the money they do earn. As mentioned above, the real value of wages for urban workers decreased by about 75 percent between 1962 and 1986. But between 1988 and 1994, the purchasing power of the peso declined another 49 percent. The inflation rate was 7.6 percent in 1993, and 9.0 percent in 1994.

But the Philippine State has never failed to keep coming up with grand plans designed to solve all of the country's problems in one fell swoop: the latest, initiated under President Fidel Ramos, was Philippines 2000. Key to Ramos' vision was the Medium Term Development Plan for 1993 to 1998. Ramos stated his goals for the end of his presidency in June 1998: to raise per capita income to 1000 U.S. dollars; for the economy to grow by at least 6 to 8 percent, and for the poverty rate to decline to at least 50 percent. He missed all three.

Ramos' larger goal was to make the Philippines a Newly Industrializing Country (NIC) by the year 2000. And was this to be accomplished? In January 1995, at President Ramos' urging, the Philippines joined the World Trade Organization (WTO), which meant it had to open its borders to even more international trade. Roger Daenekindt commented: We are ... told to be outward-looking and accept liberalization. But ... in the case of textile and garments, we enter in a stiff world of competition of cheap labor. Chinese labor is at 25 cents an hour, Vietnamese at 15 cents an hour, Philippines [at] 90 cents an hour, and there are still the countries like India, Bangladesh, Pakistan, etc. Additionally, according to former president Ramos, Export orientation shall `enlarge the pie.'

And then the global economic crisis hit.

Crisis

The Philippines was hit by the global crisis, becoming one of the Asian Development Bank's Crisis-Affected Countries. Philippine GDP, which grew 5.2 percent in 1997, fell 0.5 percent in 1998, according to the IMF. The peso, which had been trading at approximately U.S. 1.00 dollar: P25 throughout most of the 1990s, lost over 40 percent of its value, falling to a rate of 1.00 dollar: P45, although by the spring of 1999, had recovered somewhat to trade around 1.00 dollar: P40.

IBON Databank reports that official unemployment jumped from 10.4 percent in April 1997 to 13.3 percent in April 1998—and yet these figures severely undercount real unemployment and don't mention underemployment. However, a 1995 government report from the Department of Labor and Employment said that unemployment and underemployment affected 62 percent of the workforce, and this was when the economy was growing strongly. But IBON also reports that there was 128 percent increase in firms closing between January and May 1998, as compared to a year earlier, and an 88 percent increase in the number of workers being affected by these difficulties.

And yet, the Philippines has been hurt much less than Indonesia, Malaysia, South Korea, or Thailand. Stanley Fischer, first Deputy Director of the IMF, claimed in a June 1999 speech that, of the countries at the heart of the crisis, the Philippines' economy performed exceptionally. He suggested that this was because the country was in an IMF program at the beginning of the crisis, and that the IMF increased financing for the country once trouble hit, enabling it to avoid the worst of the crisis.

However, if we consider that the country has been in a crisis since it began following a neoliberal program in 1962, it's clear that the global crisis has, for the Philippines, been simply a continuation of business as usual. Since 1962, the Philippines has never achieved the advances won by these other countries, and so it was spared the intensity of the drastic fall that the others suffered. And yet, it still suffered more than a 40 percent fall in its currency exchange rates.

But while Fischer suggests that Philippine performance was not as bad as the rest because of IMF advice and money, he inadvertently let the cat out of the bag, especially in light of the overall performance of the U.S. economy during this time: The country benefited from the composition of its trade, which is more heavily weighted towards the United States than of the more severely affected countries. The Philippines has done as well as it has not because of the IMF, but because its major trading partner has kept the door open to its further-devalued products despite a drastic reduction in the Philippine market for U.S. exports.

No Real Solution

An EOI program was begun in the late 1960s, designed to save a financial deregulation program that had devastated the economy. The EOI strategy was operationalized in 1972 after the declaration of martial law by Ferdinand Marcos; it continues today.

Because billions of dollars of economic and military aid have been provided to the Philippines by the U.S. government, the World Bank, the IMF, and commercial banks from around the world, the agrarian system and its accompanying political system has survived. In return, the Philippines has had its industry incorporated into global capitalist political-economic networks.

The neoliberal program has been a failure on its own terms, even before the onset of the global economic crisis. The peso's value fell from 1.00 dollar: P2 in 1962 to approximately 1.00 dollar: P25 in the mid-1990s. Although exports shifted from traditional ones to nontraditional manufacturers, the balance of trade had deteriorated to -11.3 billion dollars at the end of 1996. GNP has generally increased, albeit very erratically. However, foreign debt has exploded: from a national debt of 275 million dollars in 1962, it ballooned to 45.5 billion dollars in 1997. In short, this program has failed to provide any type of sustainable economic development for the country.

The cost to the people of the Philippines has been astronomical. Fourteen years of dictatorship was only the beginning. Neoliberalism has led to a social situation where approximately 75 percent of the population lived below the poverty line in the early 1990s and, while somewhat reduced since then, it is not known by how much. Urban workers had lost almost 75 percent of their 1962 wages by 1986, and things have only gotten worse since then. Conditions among the peasantry and agricultural workers have also deteriorated, to the extent that they have joined and maintained a revolutionary army for over thirty years (albeit considerably weakened since 1986—and particularly since 1993—by internal problems). Accordingly, this type of development, when viewed from the perspective of the large majority of the population, deserves to be called detrimental development.

It is within this larger context of detrimental development—maintained at all times by armed force and a determination to use it to defeat any challenges—that Philippine economic development since 1962 has been evaluated.

A neoliberal approach to development, as advocated by the World Bank and the IMF, has only benefited the global capitalist political-economic networks (including certain Filipino partners), and the Philippine state; and these benefits all come at the direct cost of the large majority of Filipinos. This program has failed on its own terms and been a social disaster as well.