PHILIPPINE ECONOMIC DECISION MAKING: THE SYSTEM AND THE PLAYERS

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• Collection: General CIA Records
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• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: February 3, 2011
• Sequence Number: 3
• Publication Date: March 1, 1983
• Content Type: REPORT

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Philippine Economic
Decision Making: The System
and the Players
EA 83-10037
March 1983
71
Copy ?y ,
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Directorate of Secret
Intelligence
Philippine Economic
Decision Making: The System
and the Players
This assessment was prepared by
the Southeast Asia Division, Office of East Asian
Analysis. Comments and queries are welcome and
may be addressed to the Chief, Malaysia, Singapore,
Islands Branch, OEA,
This paper was coordinated with the Directorate of
Operations and with the National Intelligence
Council.
Secret
EA 83-10037
March 1983
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Secret
Philippine Economic
Decision Making: The System
and the Players
Key Judgments The Philippine economy faces a difficult decade. The outlook for foreign-
lnformation available exchange-earning agricultural crops is poor, and the country faces a rapid
as of 18 February 1983 rise in the labor force at a time when increasing obligations on its foreign
was used in this report.
debt-which now exceeds $17 billion-will make it difficult to provide
investment funds to create jobs.
The ability of the Philippines to weather these economic challenges will
depend in large measure on the efficacy of the economic decision making
structure. The strengths of Manila's decisionmaking system include:
? President Marcos's willingness to consult an honest and generally
competent staff of technocrats when the economy is under stress.
? Marcos's strong political skills and relatively secure short-term political
position, which permit him considerable latitude in formulating economic
policy.
? Manila's recognition of its dependence on foreign capital and a good
long-term relationship with the international financial institutions.
At the same time, the system has weaknesses that could prove troublesome
in the years ahead. These include:
? The nonconfrontational style of Philippine policymaking, which permits
more assertive ministries undue influence in the design of policy and
produces a weak chain of command in long-term policy planning.
? Insufficient policy coordination, which produces internal inconsistencies
in balance-of-payments management.
? Nationalism among the technocrats, which compromises financial plan-
ning by limiting foreign investment.
? The prominence of business interests close to the President, which
compromises financial and industrial policy by undercutting the decisions
of the technocrats)
On balance, Manila's management is unlikely either to improve the
performance of the economy dramatically or to produce economic crisis.
This judgment could change, however, if Manila fails to follow up on plans
to curb the growth of public-sector equity capital contributions to the
private sector-thus expanding the government's portfolio of financially
troubled firms. Over the short term, the technocrats' approach to exchange
rate policy will be the key to avoiding financial crisis. Failure to allow
sufficient depreciation of the peso could produce even more severe balance-
of-payments strains than the country now faces.
Secret
EA 83-10037
March 1983
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Key Judgments
The Economic Decision Making Apparatus
How the Marcos System Works
The Decade Ahead: A Notional View of Economic Policy
7
The Necessity for Choosing Wisely
7
The Broad Objectives of Policy
8
A.
The "Gang of Four" Technocrats
B.
The Last Decade in Economic Decision Making: A Report Card
15
Tables
1.
The Philippines: Institutional Interests in Economic
Policy Formulation
2
2.
Assignment of Policy Responsibility to Leading Economic Problems
6
3.
The Philippines: Growth and Debt Performance in Perspective
16
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Philippine Economic
Decision Making: The System
and the Players'
The Economic Decision Making Apparatus
Question: "What three parties run the Philippines? "
Answer: "Ferdinand Marcos, Imelda Marcos,
and the International Monetary Fund. "
(Joke making the rounds in Manila)
Balance-of-payments strains and sluggish growth
since 1980 have rapidly shifted the process of econom-
ic policy formulation in the Philippines in favor of two
groups: the technocrats-led by Prime Minister (and
Finance Minister) Cesar Virata-who collectively run
the key government policymaking agencies, and inter-
national financial institutions-headed by the Inter-
national Monetary Fund and the World Bank-that
require changes in economic policy in exchange for
continuing balance-of-payments support.' The spon-
sorship of the Fund and the Bank and the advocacy of
the technocrats account almost exclusively for recent
trends in economic policy.
Three other institutional interests influence economic
policy. The most important are the politically well-
connected-especially business interests close to Pres-
ident Marcos-who collectively manage most process-
ing industries for primary commodities. Government
ministries and state enterprises outside the control of
key technocrats. also have numerous policy responsi-
bilities and comprise the rest of the government
decisionmaking patchwork. Outside of government,
several private think tanks and lobbying groups are
prominent advocates of various approaches to eco-
nomic strategy. Although they have been especially
active during the past few years stimulating a lively
public intellectual debate about policy, they hold
widely divergent views and do not present a united
front.
How the Marcos System Works
Manila's actual policymaking is the product of inter-
action among the individual players. US Embassy and
intelligence reporting since the early 1970s shows that
Marcos favors a collegial style of decisionmaking in
which he reads numerous position papers prepared by
his staff. Though it is often difficult to tell how
actively he is involved in the economic policy process,
we are certain that all major decisions require his
approval. Less critical decisions are determined by the
relative influence Marcos awards key coordinating
agencies in the decisionmaking system.
The current decisionmaking framework is the product
of constitutional amendments of Marcos's own design
that closely followed the dismantling of martial law in
January 1981. The executive branch was reorganized
along the lines of the French-style strong presidential
system. Marcos's choice of Virata as Prime Minister
was dictated, we believe, largely by economic events
at the time-especially the ongoing financial crisis.
Assessing the Technocrats' Performance. Aside from
its managerial competence, the gang of four's chief
strength is its reputation for being apolitical and
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Table 1
The Philippines: Institutional Interests
in Economic Policy Formulation
Decisionmakers within government
Key ministries
Central Bank Most powerful institution in influencing
the direction of the economy. Generally
favors conservative monetary policies and
exchange rates that somewhat overvalue
the peso. Philippine equivalent to the US
Federal Reserve. Along with other minis-
tries, advocates free market policies with
selected price-distorting mechanisms that
favor domestic entrepreneurs.
Ministry of Has supported expansionary spending poli-
Finance cies. Equivalent to the US Treasury.
Ministry of
Energy
Among the most favored ministries in the
budget.
Ministry of Least influential ministry.
Agriculture
Ministry of Labor Manages overseas employment programs
and Employment and domestic industrial relations. Industri-
al relations policy debated by tripartite
government, business, and labor groups in
a highly publicized manner atypical of
other policy issues.
Ministry of Run by Imelda Marcos. The Philippine
Human equivalent to the US Department of Health
Settlements and Human Services.
Ministry of Trade Functions sharply expanded in recent
and Industry years.
Selected state enterprises
National Power Handicapped by artificially low electricity
Corp. rates.
Philippine Charged with refining and distributing
National petroleum, mostly imported.
Oil Company
Philippine Air Among the least sound financially of the
Lines state firms.
NASUTRA Responsible for export marketing.
(National Sugar
Trading Corp.)
PHILSUCOM Responsible for domestic management of
(Philippine Sugar sugar industry; among better run of state
Commission) firms. Administered by Roberto Benedicto,
a close associate of President Marcos.
UNICOM (United Semiprivate, controls processing of raw
Coconut Oil Mills) coconut. Run by Eduardo Cojuangco, a
close associate of Marcos, and Defense
Minister Juan Ponce Enrile.
PCA (Philippine Oversees enormous coconut industry, in-
Coconut Authority) cluding research, marketing, finance.
State financial organizations
United Coconut Finances coconut trade and price stabiliza-
Planters Bank tion scheme administered by the PCA.
Philippine Largest bank in the Philippines. Provides
National corporate finance and equity. Headed by
Bank Gerardo Sicat, formerly director of NEDA
and longtime advocate of economic policy
reform.
National Develop- Holds equity stakes in 40 private firms.
ment Company Expanding rapidly.
Development Bank Holds equity stakes in 122 private firms.
of the Philippines Recently referred to by one US banker as
the "financial junk heap of the Philip-
pines," as a result of the poor financial
condition of the firms it has acquired.
Coordinating bodies
The Monetary
Board
NEDA (National
Economic
Development
Authority)
Financial coordination: foreign and domes-
tic government borrowing, monetary and
exchange rate policy. Chaired by Virata.
Coordinates long-term planning. Weaker
institution than several years ago. Advo-
cate of high interest rates and small budget
deficits as a technique of balance-of-pay-
ments management. World Bank and IMF
restructuring program advocated for a
decade by NEDA before implemented as
policy in 1980.
Overall policy design
Office of the Decides all matters of consequence, chan-
President nels issues to other institutions via Execu-
tive Committee.
Office of the Has acquired much of palace's decision-
Prime Minister making machinery since 1981. Incumbent
an advocate of market-oriented economic
policies, but strongly nationalistic.
The Executive Considers largely technical matters ac-
Committee cording to agenda forwarded from Presi-
dent through Prime Minister.
The National Essentially a rubberstamp, completely
Assembly dominated by ruling party apparatus.
Nonetheless plays more active role in
discussion of policy than several years ago.
Influential interests outside government
International institutions
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Table I (continued)
The IMF Provides short-term balance-of-payments
support, requiring suitable monetary, fis-
cal, and exchange rate policy as precondi-
tion. Despite occasional criticism, the Fund
and other official lenders have few funda-
mental disagreements with Manila over
policy design. With other official creditors,
advocates market-oriented economic
policy.
The World Bank Provides long-run development finance
generally without preconditions on domes-
tic economic policy. An exception is the
$650 million balance-of-payments struc-
tural adjustment program.
The Consultative The Philippines' consortium of foreign aid
Group donors; examines the economy in detail at
annual meetings while coordinating aid
flows.
Domestic think tanks and lobbying groups
The Center for A privately funded policy analysis and
Research and forecasting group without formal ties to the
Communications government. Exercises some influence on
government through its ties to private
investors and informal links to the techno-
crats, but under political pressure has
reportedly tailored some of its judgments to
what the government wants to hear. Head-
ed by Harvard-trained economist Bernardo
Villegas.
SGV Accounting A financial consulting and accounting
(SyCip, Gorres, firm; trained Laya, Virata, Ongpin, and
and Verrano) other technocrats in the practicalities of
financial management. Not an active advo-
cate of a particular economic strategy, we
believe its alumni nonetheless are imbued
with a bias against multinational
corporations.
The Makati Busi- A loose conglomeration of business inter-
ness Club ests, including several opposed to Marcos.
During the summer of 1982, conducted a
public reexamination of economic policy,
calling for far-reaching changes amid
charges of a "crisis of confidence" in
government. Headed by Enrique Ayala-
Zobel, an oligarch whose wealth predates
the Marcos era.
The Philippine Key lobbying group of local business inter-
Chamber of ests. Vigorously opposed to economic re-
Commerce and structuring program. Advocates discretion-
Industry ary assistance to the private sector. Headed
by Fred Elizalde, an industrial oligarch
with ties to the President.
honest. Several are extremely wealthy, but none has
vested interests that compromise policymaking. Mar-
cos has even claimed he is grooming Virata for a
possible role as successor, though most astute political
observers doubt the Prime Minister's political acu-
men.
Their record indicates that the technocrats bring to
policymaking a healthy pragmatism and the will to
resist tailoring their judgments to what the President
would like to hear. Virata and Ongpin, unlike many
other presidential advisers, are candid with Marcos,
They are also willing to confront entrenched economic
interests when they believe the integrity of policy is at
stake and are thus ideally suited to the role of
engineers of economic and social policy reform. They
have long been advocates of overhauling government
trade and industrial policy, for example.
The technocrats are adept at using their excellent
international reputations to bolster confidence in the
government's policies. Laya, for example, is credited
by international bankers with saving the country from
financial calamity with ad hoc measures in 1981. We
believe the lynchpin of his strategy was successfully
shifting blame for the crisis onto a financier who had
fled the country, while Manila defended the peso in
the face of an estimated $800 million in capital flight.
As a result, the government's international credit
rating remained unblemished, and Manila bought
valuable time in which to implement a financial
rescue operation.
Though their prominence has unquestionably im-
proved policymaking, in our judgment the gang of
four has weaknesses that prevent them from living up
to the image Manila has created in the eyes of private
foreign bankers. We believe the formulation and
execution of policy are slow, so the policy response
lags changes in international economic trends. In
addition, uneven administrative performances impair
policy coordination. Even though he heads the tech-
nocracy, Virata's record suggests that he is among the
least dynamic of its members. Meanwhile, Ongpin in
our judgment has developed into an empire builder,
reflecting his training as a manager rather than as an
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A Profile of Interest Groups
The Technocrats
Manila's present staff of technocrats rose to positions
of prominence during the financial crisis of 1981,
when the collapse of the domestic commercial paper
market left the private sector without short-term
financing and the existing government decisionmak-
ing apparatus with severely damaged credibility both
at home and abroad. Best known among them is a
group respectfully referred to within government as
"the gang offour'-Prime Minister and Minister of
Finance Virata, Central Bank Governor Jaime Laya,
Minister of Trade and Industry Roberto Ongpin, and
Planning Minister Placido Mapa (see appendix A for
personal profiles). Through their individual minis-
tries, they are jointly responsible for budget manage-
ment and fiscal policy, exchange rate and trade
policy, investment regulation and industrial policy,
money supply control and financial regulation, devel-
opment planning, and economic policy coordination.
Except for Virata, the technocrats are young and less
tradition bound than their predecessors.
A background of training in US graduate schools and
a strong inclination towards nationalism mark the
technocrats' intellectual makeup. We believe all rec-
ognize the strength of market forces in designing
policy, but all are essentially Keynesian in philosoph-
ical outlook. Thus, fiscal policy designed to boost
domestic spending is consistently an element in their
policy design along with a preference for prices set by
market forces. According to many Philippine govern-
ment officials, the technocrats see this approach as a
way of reducing the role of influence and corruption
in the daily running of the economy, thereby increas-
ing economic efficiency.
In our judgment, nationalism rather than laissez
faire, however, rules the technocrats' decisions on
financial planning. We believe Manila's current cor-
porate rescue program is designed largely to keep
management in Filipino hands while improving cor-
porate efficiency, because the technocrats regard for-
eign investment as competition for indigenous entre-
preneurs. When the investment treaty governing US
investments expired in 1974, for example, Virata as
Minister of Finance successfully lobbied for a foreign
borrowing program to fuel development rather than
to liberalize foreign investment regulations. The
country's foreign investment procedures remain
among the most complicated in Southeast Asia, as a
result, according to US Embassy officials.
The Official Creditors
Though executed by the technocrats, the most far-
reaching changes in domestic economic policy since
1979 have been undertaken at the insistence of the
International Monetary Fund and the World Bank,
the country's two leading creditors. The Philippines is
among several developing countries engaged in a
jointly sponsored IMF-World Bank industrial re-
structuring program requiring adjustments in tariffs,
interest rates, foreign exchange controls, and ex-
change rate policy-combined with limits on growth
of the money supply and on foreign borrowing. Pro-
fessional journal articles and academic treatises by
technocrats less influential than the current group
show that they advocated similar measures during
the early 1970s. In exchange for policy reform,
initially resisted by the government because of antici-
pated objections from the politically powerful private
sector, Manila is receiving credits from the Fund and
up to $850 million in World Bank loans covering
1981-85 to modernize key industries.
The Well Connected
Economic oligarchs have run key sectors of the
economy-ensuring operational control and policy
influence for the well connected. Through control of
state enterprises, personal associates of Marcos set
policy in two critical agricultural sectors, the sugar
and coconut industries, which provide income for an
estimated half the population. Sugar production,
processing, financing, and marketing are controlled
by former Ambassador to Japan Roberto Benedicto,
and similar activities in the enormous coconut indus-
try are controlled by National Assemblyman
Eduardo Cojuangco and Defense Minister Juan
Ponce-Enrile. The Ministry of Agriculture has no
role, even as a coordinating agency.
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Marcos has relied on other political allies to develop
the domestic construction, finance, and heavy indus-
tries, thereby constraining, in our judgment, the
latitude of important government ministries in setting
financial and industrial policy. This intensifies the
charges by political opponents of cronyism and cor-
ruption. Manila's decision to provide up to $650
million in financial assistance to failing private firms
in early 1981 was criticized by less influential busi-
nessmen who claimed that financial policy was com-
promised to bail out friends of the President. Most
businessmen, however, according to US Embassy
officials, believed Manila had little choice but to
intervene to prevent the economic dislocation that
would have resulted from a string of corporate bank-
ruptcies. Moreover, the government required stream-
lining and management reorganizations as precondi-
tions for financial assistance and injections of
public-sector equity capital. As a result, one promi-
nent US banker told US Embassy officials in July
1982 that cronyism had been reduced.
Key Players in the Public Debate
Over Economic Policy
Best known of the research groups is the privately
funded Center for Research and Communications
(CRC). Largely a consultant to investors, the CRC
nevertheless publishes widely on national policy mat-
ters and economic trends, providing the government
an informal indicator of the private sector's expecta-
tions and preferences on policy. The CRCs publica-
tions show that it has been supportive of the techno-
crats and their policies and has occasionally
criticized Marcos. It has advocated limiting the role
of government and avoiding the development of an
industrial policy it refers to as "lemon socialism-
keeping inefficient firms afloat with publicfunds. The
CRC has told US Embassy officials that the role of
cronyism in diluting policy formulation is on the
wane.
The CRCs only direct ties to the government are
informal contacts with presidential assistant Alejan-
dro Melchor. Some US Embassy officials believe,
moreover, that the CRC has succumbed to political
pressures recently by altering the conclusions of its
research to make them more acceptable to the gov-
ernment. For this reason, we believe the CRCs value
in the policy debate is declining.
A group of leading businessmen known as The Ma-
kati Business Club has tried to develop its own
dialogue with the government. Established in mid-
1982, the club's chief purpose is to persuade Manila
to improve the integration of the private sector in
national development as a way of defusing political
instability and halting the country's economic slide.
Its plan calls for the adoption of a labor-intensive
growth strategy, deregulation of key industries, accel-
erated land reform, and a halt to state capitalism.
The club, which includes businessmen with ties to
Marcos's political opposition, has been critical of
government corruption and inefficiency, cronyism,
limits to free expression in the media, and even the
technocrats because of the current trend toward
larger government. US Embassy reports and press
coverage reveal that the government has been toler-
ant-if not always receptive-to the club's views,
which have been repeated with increasing frequency
as the economy performs poorly and the rural Com-
munist insurgency expands.
Among several persuasive lobbying organizations is
the Philippine Chamber of Commerce and Industry
(PCCI), a group of manufacturing interests heavily
oriented toward the domestic market. The PCCI
takes positions reflecting its own interests on a wide
variety of issues, ranging from domestic energy prices
to interest rate policy. Most of its recent energies
have been focused on opposing the IMF- and World
Bank-sponsored economic liberalization program. It
has taken its case aggressively and persuasively to
the press, and we believe it is taken seriously by
government officials.
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Table 2
Assignment of Policy Responsibility
to Leading Economic Problems
economist. A "doer" rather than a designer of policy,
many government officials say that Ongpin's Ameri-
canized style is out of place in the traditionally
nonconfrontational environment of Filipino policy-
making
Policy planning and coordinating mechanisms headed
Short-run balance-of- Exchange rate Central Bank by the technocrats perform inconsistently, in our
payments instability judgment. The Monetary Board, chaired by Virata
Long-run balance-of- Exchange rate and Central Bank and with representation from most ministries, independent
payments instability industrial policy Ministry of Trade agencies, state enterprises, and financial organiza-
and Industry tions, meets weekly to plan financial policy. We
Foreign debt service Ceiling on new Central Bank via
loans, refinancing Monetary Board and believe its management of the foreign borrowing
Central government
dissaving
Spending and reve- Ministry of Finance
nue management
Short-run growth Short-term credit to Central Bank via
instability the private sector, state banks, Ministry
pump priming of Finance
Slow long-run growth
and lagging productivity
in:
Exchange rate
policy, land reform,
input subsidies,
credit to farmers
Exchange rate
policy, commercial
policy, investment
regulations
debt management program is well above Third World standards, but the
office expansion of foreign borrowing since 1980 has some-
Central Bank, Minis-
try of Agriculture,
Ministry of Human
Settlements
Central Bank, Minis-
try of Trade and
Industry
money supply growth
and capital controls
Low risk investment Capital market de- Central Bank, Minis-
bias velopment, public- try of Trade and
sector investment Industry via NDC
Capital-intensive invest- Exchange rate, Central Bank, Minis-
ment bias, unemploy- capital equipment try of Trade and
ment, and skewed in- subsidies Industry
come distribution
Inefficient land
utilization
Development
Authority
Land reform, infra- Ministry of
structure investment Agriculture
Energy import Investment in hydro, Ministry of Energy,
dependence geothermal, and nu- National Power
clear power. Pricing Corp.
of gasoline, electric-
ity. Promotion of oil
exploration.
times placed too many loans in the international
capital market at once, making potential lenders
nervous and occasionally aborting the borrowing plans
of state agencies. The board's efforts to develop local
capital markets by reforming financial regulations
have sometimes been at odds with growing govern-
ment deficits, which have soaked up an increasing
share of national savings even as reforms in financial
regulations were implemented to stimulate savings.
Last year, for example, the public-sector deficit
reached 4.2 percent of GNP, and the sector accounted
for over half the economy's net credit creation. In our
judgment, economic nationalism has also compro-
mised financial planning by limiting the role of
foreign investment in tapping new sources of capital.
We believe the budget process has become unwieldy
under Virata and Budget Minister Manuel Alba, who
have yet to adapt the process to the recent growth of
public-sector investment spending.' Last year imple-
menting ministries and state corporations prepared
individual capital budgets that exceeded available
resources by over 65 percent, according to reports
published by the World Bank. As for the long-term
planning process, we believe the National Economic
' In the early 1970s capital expenditures constituted only 10 percent
of the national budget and the role of the state enterprise sector was
relatively small; capital spending took 30 percent of total govern-
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Development Authority (NEDA), which resets devel-
opment priorities every five years, and Planning Min-
ister Mapa, who is the only formally trained econo-
mist among the technocrats, have lost influence
recently to the Ministry of Trade and Industry be-
cause of Ongpin's aggressiveness. NEDA's chief role
is that of coordinator between the Central Bank and
key ministries. The coordination process is described
by NEDA officials as "consensus seeking" and non-
confrontational, and, for this reason, we believe the
chain of planning authority is weak.
Recent Developments. Even at the height of Virata's
authority, economic policy has emerged only after
continued battles between the technocrats and well-
connected interests that control key sectors of the
policy battles, however, suggests to us that the techno-
crats are prevailing over crony interests more fre-
quently than they did during the 1970s.
The most widely reported and controversial contest
over the past several years has concerned the coconut
levy-a tax on processed coconut that finances a price
stabilization scheme for farmers. Several financial
institutions run by Eduardo Cojuangco administer the
program, and the scheme has financed industry con-
solidation under an umbrella organization controlled
by Cojuangco and Enrile. Worried by the rapid
growth of the Communist insurgency in the coconut-
growing regions in late 1981, Virata persuaded Mar-
cos to drop the levy in favor of higher prices for
farmers. Industry management prevailed several
months later to have the levy reinstated, however,
Virata
threatened to resign. In January 1982 he persuaded
Marcos to "float" the levy on a sliding scale dictated
by international prices, and later in the year succeed-
ed in suspending the levy completely when prices fell
further.'
to be rekindled when international prices again rise. In the
meantime Marcos has chosen to help the severely depressed
coconut industry with other policies, including a privately admin-
The President has also allowed the technocrats to
have their way recently on a variety of other matters.
The business empires of Marcos allies Herminio
Disini, Rodolfo Cuenca, and Ricardo Silverio have
been reorganized, despite their objections, under tech-
nocrat management to achieve economic efficiency.
Ongpin was also successful in 1981 in a bid to scale
back the controversial and publicly financed gasahol
program to be directed by Roberto Benedicto. There
remain limits to the technocrats' power, however. For
example, Virata's $2.4 billion ceiling on the country's 25X1
foreign borrowing for 1982 was breached by govern-
ment guaranteed foreign loans secured, by private
corporations receiving government financial assis-
tance.
On balance, we believe the strength of Virata's politi-
cal position-and perhaps eventually his ability to
make economic policy independently of political pres-
sure-has eroded since early 1982. His relationship to
Imelda Marcos a political ower in her own ri ht is
tenuous.
When Marcos appointed his
wife to the Executive Committee in August 1982,
against his pledge to Virata that he would not do so,
Virata's prestige suffered considerably,
The Executive Committee
under Virata's leadership, moreover, has yet to con-
sider its first sensitive political or economic issue.
The Decade Ahead: A Notional
View of Economic Policy
The Necessity for Choosing Wisely. In our judgment,
Manila's economic policy making during the coming
decade will depend critically on the degree of urgency
Marcos attaches to the economy's problems and the
potential political fallout they may produce. We
believe that the outlook for the economy over the next
several years is poor and that the most formidable
tests of Marcos's economic decision making system
are just beginning. As a result, the technocrats are
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likely to continue as prominent actors in the policy
arena during the next several years, and official
creditors such as the IMF are likely to continue
exercising substantial leverage on Manila's decisions.
Most pressing among the economy's problems are
those caused by a factor beyond Manila's control-
the global recession. Manila's rescue program for the
private sector has succeeded so far in sparing the
economy the worst of the slowdown in international
growth, although some sectors, especially the mining
industry, have been hit very hard. Two long-term
problems, in our judgment, may turn out to be more
serious than the recession: demographics assure ex-
tremely rapid labor force growth during the 1980s
while the maturity structure of the foreign debt
assures continuing balance-of-payments strains. Fur-
thermore, the outlook for several agricultural crops,
and thus rural incomes, is very dim, according to
commodity forecasts (see box).
The Broad Objectives of Policy. The World Bank
believes the economic policy strategy embodied in the
government's 1983-87 Development Plan is broadly
appropriate to face these challenges. The plan identi-
fies five key elements of economic policy for the
1980s:
? Effective exploitation of development potential in
agriculture, including food production, agro-energy
crops, and export crops.
? Industrial development to exploit industries in
which the country enjoys a competitive advantage,
particularly labor-intensive enterprises, accompa-
nied by the development of capital-intensive inter-
mediate-good industries, such as steel and machin-
ery, with investment risk born by the public sector.
? Continued development of supporting infrastructure
for both agriculture and industry. NEDA is firmly
committed to what its director refers to as "human
infrastructure development," meaning the develop-
ment of labor force skills and public health systems.
? Import substitution coupled with conservation mea-
sures in the energy sector to release foreign ex-
change for use elsewhere.
Long-Term Constraints on Economic Policy
Roughly half the population of 51 million is under 16
years of age, and this group will provide the bulk of
labor force entrants during the next 10 years. On the
basis of likely trends in labor force participation
rates, the World Bank projects that labor force
growth will reach 3.7 percent annually-Asia's high-
est. The economy will thus have to create at least
700,000 jobs annually to prevent growing unemploy-
ment and further deterioration in real wages. This
would require that the rate of job creation be nearly
doubled
At the same time, our calculations show that interest
payments on the foreign debt will consume about 5
percent of GNP over the next several years without a
dramatic drop in global interest rates. Furthermore,
without a sharp and immediate decrease in the trade
deficit, we estimate that annual debt service is likely
to almost, triple to about $6 billion by the end of
Marcos's current term in 1987. Thus foreign re-
sources for job creation will be available only to the
extent that new loans exceed these levels, and the new
loans will produce a further debt service burden later
in the decade.
In agriculture, the price outlook for sugar and coco-
nut is dim. Sugar faces new competition from high
fructose corn sweeteners, and commodity specialists
believe that international tropical cane sugar prices
have seen their peak. Coconut oil faces competition
from LDC suppliers of other edible oils that entered
the market in the late 1970s. In our judgment, weak
prices for both commodities are promoting the steady
growth of the Communist insurgency which has oc-
curred during the last several years-a trend Manila
will eventually have to reverse.
? Greater mobilization of domestic savings through
financial reform and more efficient use of funds
available for investment.
The Plan has drawn three basic criticisms. Official
creditors, and even the Philippine National Assembly,
have criticized it for ignoring the need for population
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planning. This, however, is unlikely to change while
Planning Minister Mapa-a staunch Roman Catholic
opposed to birth control-runs NEDA.' The Plan also
contains few specifics regarding the use of individual
policy instruments, according to the World Bank. The
Bank has also suggested that the Plan does not
adequately consider the costs of the expanding role of
the public sector, as investment in state enterprises
consumes a growing share of scarce investable re-
sources
Key Philosophical Choices. With the specifics of
policy yet to be laid out, the fundamental decisions
facing Philippine policymakers over the next decade
will concern the choice between "crony capitalism,"
"lemon socialism," and a more realistic approach to
economic policy. No one, we believe, including high
officials of the Philippine Government, knows how
The technocrats' suggestions have yet to slow the
momentum to larger government, however. Govern-
ment investment in state enterprises, according to
government data, reached 5 percent of GNP last year,
up from 3 percent in 1978. At the same time, the
public sector has significantly expanded its holdings
of equity in the private sector because of the techno-
crats' rescue program. Manila thus faces the task in
the 1980s of divesting itself of inefficient enterprises if
expertise provided by government financial organiza-
tions proves insufficient to sort out their problems.
A more awkward choice financially, in our judg-
ment-and one more fundamental philosophically-
may turn out to be whether to divest the public
portfolio of sound enterprises, thus resisting the trend
' Marcos is also believed by US Embassy officials to use the threat
of family planning as a trump card in his efforts to neutralize the
to state capitalism. We believe the technocrats' na-
tionalism and professional expertise as managers rath-
er than economists may work against divestiture.
Foreign investors are unlikely to be given.a prominent
role providing capital and expertise in sectors in which
Manila holds substantial equity, according to US.
Embassy officials. At the same time, Ongpin's minis-
terial track record suggests he believes that turning
the financial corner for these firms will award the
government a mandate to run them permanently.
This, we believe, would virtually assure continuing
economic problems by stifling private-sector invest-
ment.
In our judgment, Marcos's decisionmaking system
must also find ways to revitalize the deteriorating
rural economy, which will not be able to capitalize on
the full effects of recovery in industrialized countries
without substantial restructuring.' The shift out of
sugar and coconut production-a stated objective of
government agricultural experts-promises to be re-
tarded by vested interests close to the President.
Moreover, the Ministry of Agriculture is not suffi-
ciently influential to force the adjustment over en-
trenched interests. A rural investment program begun
in 1981, the $125 million National Livelihood Move-
ment sponsored by Imelda Marcos, appears to be the
decisionmaking system's primary response, and we
believe it is not sufficient to offset the effects of
otherwise weak agricultural policy.
We believe the key indicator of the decisionmaking
system's ability to deal with economic and financial
strains during the next several years will be manage-
ment of its most powerful policy instrument-the
foreign exchange rate. We believe rising debt service
obligations and a weak balance of trade, however, will
demand more rapid depreciation of the peso than
Manila has permitted in the past. The country's
estimated $1.1 billion balance-of-payments deficit for
1982 and the simultaneous failure of the peso to
depreciate rapidly against currencies other than the
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US dollar are evidence of vigorous Central Bank
defense of. the exchange rate. We believe failure to
allow sufficient depreciation for any reason could
produce serious foreign debt management problems
by expanding the trade deficit and thus the demand
for new foreign loans beyond a sustainable level of
financing. This would also delay the development of
labor-intensive export manufacturing at a time when
political stability requires rapid creation of jobs.
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Appendix A
The "Gang of Four" Technocrats
Prince Minister,
Minister of hinane'e
Cesar Virata earned a Masters' degree in Business at
the Wharton School at the University of Pennsylvania
in 19;3. f le has championed the view, with limited
success, that the Philippine economy should be subject
to less political manipulation than it has been in the
past. Ile is still learning the art of politics and has
ssuuetinles supported politically untenable, but other-
s ise proper and logical, economic positions. An advo-
catc of conventional fiscal and monetary policies, he
believes that the counts must expand local control
over its natural resources. Virata subscribes to a free
market approach to problems of resource allocation,
;Ind lie opposes subsidies for inefficient domestic
Iirlns.
According to a senior official of the US Embassy in
Manila, Virata is dogged in his pursuit of Philippine
national interests. Ile supports a policy of nondiscrim-
ination toward all foreign investors, and he has been
instrumental in establishing tax advantages for large
foreign (including t1S) concerns. Virata is one of the
principal architects of the 1983-87 Development Plan,
Mhich includes as priorities increased food and energy
production and improving telecommunications
Virata concurrently heads the Executive Committee,
which is composed of top administration officials and
handles many governing details that formerly de-
volved on the President. The committee is also consti-
tutionally authorized to manage the transition period
Governor, ( entral
Bank of the Philippines
Jaime Lava is regarded by US Embassy officials and
many foreign businessmen as one of the most compe-
tent, motivated, and honest technocrats in the Philip-
pine Government. US officials have also commented
that he is very perceptive politically and works very
effectively within the constraints of the Philippine
system. A member of President Ferdinand Marcos's
inner circle of economic advisers, he assumed the
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governorship of the Central Bank during the 1981
financial crisis when many of the country's largest
firms were suffering from liquidity problems. He
acted promptly to rebuild public and international
confidence in the Philippine financial system by initi-
ating reforms in both the credit system and the money
market, two problems that had contributed to the
Laya's
decisive and courageous actions added to his already
solid reputation as a skilled and resourceful techno-
crat. I. S bankers regard the Central Bank, under him,
as a well-managed institution, but Lava has been less
forthcoming with Central Bank foreign debt data
than his predecessor.
Lava is a magna cum laude graduate of the Universi-
tv of the Philippines. lie also has an M.S. degree from
the Georgia Institute of Technology and earned a
Ph.l). in finance from Stanford 1, niversity in 1965.
During the late 1960s and early I970s, lie was dean of
the College of Business Administration at his alma
neater in Manila, as well as a consultant to various
government agencies and private companies. Lava
joined the government in 1974 as deputy governor of
the Central Bank and then served as Budget :Minister
from 1978 to .lanuar 1981 .
Roberto V.
Ongpin
ihmi O r at lndu,ctrt
and I rude
Roberto Ongpin (M.B.A. Harvard, 19611 has an
outstanding reputation in the international banking
community, and he is respected by professionals both
within and outside the Philippine Government. He is
well known for his integrity and for his strong opposi-
tion to government corruption. According to US
Embassy officials and a US businessman who has
known him for many years, Ongpin is loyal to Presi-
dent Marcos and is one of his closest and most trusted
advisers. US Embassy officers state that Ongpin has
been an effective supporter of Marcus's development
programs since he joined the Cabinet in 1979 as
.Minister of Industry. Ongpin believes that the Philip-
pines missed the chance to develop export manufac-
turing in the early 1960s and, unlike Virata, advo-
cates public-sector development of heavy industry in
the style of Korean development. E.xtremcl~ national-
istic, he nevertheless generally supports US goals that
are aimed at continued liberalisation of world trade.
Ongpin is not afraid to disagree with the President or
challenge the politicians if he believes a proposal or
policy is misguided. the
.Minister is a determined, opinionated, yct extraordi-
narily capable manager who "steps on ;r lot of toes_
US Embass} officials agree that Ongpin is aggressive,
often abrasive, and lacks patience with those less well
informed and astute than himself. Thee also state that
Ongpin may be involved in too mane activities to be
completely effective at all times.
Placido L.
Napa, Jr.
l)irerfur General,
1 utrunal 1 ?unnniir
and lieieluprnenr
4utharih
A competent and energetic economist and banker
whose 20-year career has included positions both
inside and outside the government, Placido Mapa is
serving in his first cabinet post. In addition to direct-
ing the operations of the country's top economic
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planning organization, he also serves as Minister of
State for Finance, a position he has held since 1965.
According to a senior official of the US Embassy in
Manila, Mapa lacks administrative ability and would
probably be more effective in a financial, rather than
a planning, position; he has, however, surrounded
himself with some very capable deputies. US Embassy
officers emphasize that Mapa's cooperation is crucial
in the implementation of many bilateral aid programs.
Mapa advocates that foreign aid should build on a
developing country's socioeconomic base rather than
to try to change or eliminate that base. A staunch
Roman Catholic and active member of the conserva-
tive religious group Opus Dei, Mapa is well known for
his rabid opposition to family planning programs. In
May 1982 he and the Archbishop of Manila were
successful in getting a contraceptive-oriented family
planning program deleted from the country's draft
economic plan for 1983-87. He earned a Ph.D. in
Economics with specialties in development and inter-
national finance at Harvard in 1962. He believes
government budget policy is the key to balance-of-
payments management.
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Appendix B
The Last Decade in Economic
Decision Making: A Report Card
Manila's Most Astute Decisions
The Decision To Monitor the Foreign Debt. Manila
began to track the maturity profile of the country's
foreign debt soon after rescheduling of the public-
sector foreign debt was required in 1969. As a result,
Manila has been able to avoid abrupt increases in the
country's repayment obligations, and thus the need
for sudden fluctuations in the exchange value of the
peso. We believe it is precisely the recognition of
Manila's competence in debt management on the part
of private foreign bankers that has enabled the coun-
try to continue commercial borrowing on relatively
data, currently limits the domestic income generated
by each dollar of foreign exchange earned to about 25
favorable terms even as the debt grew rapidly.
The Energy Program. Manila's domestic energy pro-
gram, a response to the OPEC oil price hikes of 1973-
74 and 1978-80, has two objectives: to reduce domes-
tic oil consumption through conservation measures
and to develop domestic supplies of nonoil energy-
chiefly hydroelectric, geothermal, and nuclear power.
We believe the government is unlikely to reach its
goal of reducing the Philippines' energy dependence
on imported oil from 84 percent currently to 44
percent in 1987, and outlays on imported capital
equipment will probably exceed savings in the oil
import bill during the next three or four years.
Nonetheless, we believe the program is likely to
provide large foreign exchange savings by the end of
this decade. It has already succeeded in making the
Philippines the world's second-largest producer of
geothermal power, behind the United States.
The Decision To Begin Diversifying Exports. Export
earnings are still vulnerable to sharp fluctations in
international primary commodity prices, but less so
than in the early 1970s. Manufactured exports consti-
tuted 23 percent of merchandise export earnings in
1982, up substantially from 16 percent in 1975. The
government's structural adjustment program is de-
signed to remove the remaining weakness in the
manufactured export sector, such as heavy reliance on
imported inputs, which, according to World Bank
Manila's Mistakes
The Decision To Borrow at the Expense of Foreign
Investment. When the bilateral treaty giving preferen-
tial treatment to US investments expired in 1974,
Manila chose to develop industry through foreign
borrowing rather than to open the economy to foreign
investors, as many other LDCs-such as Brazil, Tai-
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dling the Philippines with a foreign debt that exceed-
ed $17 billion by the end of 1982. In our judgment,
Manila still regards foreign investors as a threat to
indigenous entrepreneurs, despite lipservice to the
contrary. We believe protection of indigenous entre-
preneurs at the expense of wage earners, moreover,
has contributed substantially to the country's skewed
income distribution.
The Decision To Prolong Import Substitution. Ma-
nila pursued exchange rate and trade policies that
subsidized importers of capital goods and manufac-
turing for the domestic market beginning after World
War II. This strategy produced rapid postwar growth,
but the manufacturing sector never became interna-
tionally competitive and began to stagnate in the early
1970s. Rather than reform domestic manufacturing,
Manila confined support for manufactured exports to
export processing industries, and local manufacturing
interests required further protection to remain finan-
cially viable. Under pressure from official creditors,
this strategy has started to change gradually, but the
balance of payments remains weak, and the domestic
economy is under great stress from the adjustment.
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Table 3
The Philippines: Growth and Debt
Performance in Perspective
Growth Rate, 1970-80
Public Foreign Debt, Share of GNP
GDP
Manufactures
1970
1980
Increase
Philippines
6.3
7.2
9.0
18.2
9.2
Oil exporters
5.5
Oil importers
5.6
Asian LDCs
Thailand
7.2
10.6
5.0
12.4
7.4
Indonesia
7.6
12.8
27.1
22.5
-4.6
Singapore
8.5
9.6
7.9
12.8
2.9
Malaysia
7.8
11.8
10.0 .
13.7
3.7
South Korea
9.5
16.6
20.9
28.8
7.8
Hong Kong
9.3
0.1
1.9
1.8
The Decision To Rely on the Well Connected To
Develop Industry and Finance. President Marcos
relied on personal associates to develop certain heavy
industries, food processing activities, and financial
services beginning in the early 1970s. Philippine
economists say his strategy was to develop key sectors
of the economy by building Philippine versions of the.
"zaibatsu," the Japanese pattern of vertical industrial
integration. Several associates proved inept business-
men, however, leading to near financial collapse in
early 1981, when the international economic slow-
down first hit the Philippines and short-term local
financing dried up. Government rescue operations
have saved several large firms, but saddled the public
sector with ultimate financial responsibility should the
firms. still prove unsalvageable.
The Economic Track Record
Grading Philippine economic performance depends
critically on a choice of criteria. The country has done
better than most of Africa and much of Latin Ameri-
ca, but has almost entirely missed East Asia's eco-
nomic success. Real wages in manufacturing are no
higher than they were in 1970, and, on a per capita
basis, exports are among the lowest in East Asia.
Real economic growth is slightly above average by
middle-income, oil-importing LDC standards. Philip-
pine financial performance has been weak, however,
with a doubling of the foreign debt as a share of GNP
since 1970-worse by half than the middle-income,
oil-importing LDC average.
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