Kim Scipes :
(©Monthly Review, December 1999)
Global Economic Crisis, Neoliberal Solutions, and the Philippines
by Kim Scipes
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.
(*)KIM SCIPES is the author of KMU: Building Genuine Trade Unionism in the Philippines, 1980-1984 (Quezon City, Metro Manila: New Day Publishers, 1996; also available from Sulu Arts and Books in San Francisco), and a PhD. student in Sociology at the University of Illinois at Chicago.