Chapter 2 - The Present in Perspective

Pre-Spanish Period | Spain Creates a Nation
A Change of Masters-The Amercian Period | Independent - at Last?

Independent - At Last?

The early years of post-war independence were dominated by U.S.-assisted postwar reconstruction program. A rebellion by the Huk people (1945-53) complicated early recovery efforts but was suppressed under the leadership of President Ramon Magsaysay. However, the failure to compensate the Huk people for service in fighting against the Japanese laid the foundation of the subsequent communist inspired actions. The succeeding administrations of Presidents Carlos P. Garcia (1957-61) and Diosdado Macapagal (1961-65) sought to expand Philippine ties to its Asian neighbors, implement domestic reform programs, and develop and diversify the economy.

At the end of the Second Word War, the Philippines enjoyed one of the most prosperous economies in Asia. It was proud of a per capita GDP that was second only to Japan within the Asian region.

Yet the economic miracle that swept through Asia during the 1960s and 70s, for the most part, swept past the Philippines leaving it untouched. The reasons for the failure of the Philippines to grasp the opportunity to transform economically are complex and beyond the scope of this volume. At risk of oversimplification, it could be argued that whereas elsewhere in Asia, political emancipation followed economic emancipation, the Philippines was already a "democracy" albeit one that had more in common with the political society of eighteenth century Europe than a modern post war democratic state. The political elite controlled the country and shared power and the spoils of power and largely still do so. In these circumstances, fundamental economic reform never really had a chance.

Marcos and his Legacy

In 1972, President Ferdinand E. Marcos (1965-86) declared martial law, citing growing lawlessness and open rebellion by the communist rebels as justification. Marcos governed from 1973 until mid-1981 in accordance with the transitory provisions of a new constitution that replaced the commonwealth constitution of 1935. He suppressed democratic institutions and restricted civil liberties during the martial law period, ruling largely by decree and popular referenda. The government began a process of political normalization during 1978-81, culminating in the reelection of President Marcos to a 6-year term that would have ended in 1987. The Marcos' government's respect for human rights remained low despite the end of martial law on January 17, 1981. His government retained its wide arrest and detention powers. Corruption and favoritism contributed to a serious decline in economic growth and development. It is a sad fact that many of the older generation now look back on the Marcos years with a measure of sympathy for no reason other than the fact that society was more "disciplined" and less chaotic in those times.

The assassination of opposition leader Benigno (Ninoy) Aquino upon his return to the Philippines in 1983, after a long period of exile, coalesced popular dissatisfaction with Marcos and set in motion a succession of events that culminated in a snap presidential election in February 1986. The opposition united under Aquino's widow, Corazon Aquino, and Salvador Laurel, head of the United Nationalist Democratic Organization (UNIDO). The election was marred by widespread electoral fraud on the part of Marcos and his supporters. International observers, including a U.S. delegation led by Senator Richard Lugar (R-Indiana), denounced the official results. Marcos was forced to flee the Philippines in the face of a peaceful civilian-military uprising now known as EDSA 1 that ousted him and installed Corazon Aquino as president on February 25, 1986.

Aquino restored democracy to the Philippines but did little to improve economic life. She came from a patrician background and, in many ways, was as much beholden to the power elite as was Marcos. But then again there was an enormous mess to clean up and resources were limited. She remains a popular figure.

Again, At the Crossroads

It was under the presidency of Fidel Ramos, the first Protestant to hold the office, who was elected as the 12th President of the Philippines in 1992 that the economy began to transform. During the early years of the last decade, the Philippines belatedly started to realize its potential and was spoken of by many as being Asia's next "tiger" economy.

Ramos declared "national reconciliation" the highest national priority. He legalized the communist party and created the National Unification Commission (NUC) to lay the groundwork for talks with communist insurgents, Muslim separatists, and military rebels. In June 1994, President Ramos signed into law a general conditional amnesty covering all rebel groups, as well as Philippine military and police personnel accused of crimes committed while fighting the insurgents. In October 1995, the government signed an agreement bringing the military insurgency to an end. Although the other peace talks have not fully resolved outstanding differences and many of the underlying social problems have yet to be addressed, the communist and Muslim insurgencies no longer pose a threat to the government. A peace agreement with one major Muslim insurgent group was signed in 1996.

While Ramos put the country on a path of economic growth, the results were uneven and many - indeed most - remained untouched by the success of government policies aimed at encouraging manufacturing investment. Ramos' vice-president was a former local film star and college dropout, one Joseph Estrada. Estrada had actually stood as part of the opposition ticket in the 1992 race but under the Philippines constitution, the President and Vice President are separately elected and not part of a joint ticket. Under Ramos, Estrada had served as Chairman of the PACC anti-crime commission.

In the 1998 election, Estrada, perhaps hoping to emulate another actor turned politician ran for the presidency on the slogan "Erap para sa mahirap" (Erap for the poor). His campaign style was unorthodox and he promised new programs for the poor and those who had been left behind during the years of growth. With the support of the masses he was voted into office. His backers however were many of the same families that had put Marcos into power a generation before and with a view to carving up the Philippines for their own benefit. At a time when privatization of government agencies and utilities was under way (as it was in much of the rest of Asia), the result was inevitable.

Joseph Estrada took office on June 30, 1998. Following his election, President Estrada formed the LAMP party out of a tri-partite alliance that had helped him get elected. Some members of former President Ramos's Lakas Party defected to LAMP. President Estrada publicly declared that the battles against poverty and corruption would be his highest priority. Unfortunately, things did not turn out as optimists had hoped and during the Estrada period the country again went into decline.

The Philippines was a country that had survived the Asian financial crisis of 1997~8 quite well. GDP Growth remained positive - slightly more than 2% in that year which was not bad considering that the economies of Korea, Indonesia and Thailand all contracted during this period. Having an economy that already was under the guidance of the IMF, conventional wisdom of the time placed the Philippines as a country at the top of the recovery list. The country should by now be enjoying boom years. It is not. Nobody (well, not many anyway) had counted on the Estrada factor.

Although by the time of the 1998 election the Philippines was showing signs of new growth, the Estrada years were marred by fresh claims of massive corruption, fraud and scandal at the highest levels. To many the president was best known for drinking bouts and his public womanizing.

Rumors of lax personal behavior, late night drinking sessions at which national policy was formulated and favoritism towards his inner circle in the awarding of government contracts had been about from the outset of his presidency. By mid 2000 - some two years into his term, the economy was clearly heading for troubled times. But it was the October 2000 revelations of a former drinking associate relating to pay-offs to the president from illegal gambling operations -dubbed "Jutengate" in the local media that proved to be the straw that broke the presidential back. This was followed by further revelations of irregularities in the collection of tobacco tax and purpose-built mansions for presidential mistresses.

Estrada was impeached by the Philippines Lower House and in December went on trial (by the Senate) on charges of corruption and abuse of presidential power. At the outset of the trial the outcome was uncertain even in the face of overwhelming evidence. Removal from office required a two-thirds majority of the 22 senators and the numbers were looking doubtful even in the face of new evidence presented at the trial by Clarissa Ocampo, a senior vice-president of the Equitable-PCI Bank who said she witnessed Estrada signing a US$10 million loan under a false name and in violation of Philippine law. Her testimony was backed up by other key bank officials that had come forward despite intimidatory threats. Matters came to a head on January 16, 2001 when 11 senator-judges voted by a slim majority against the opening a sealed envelope supposedly containing damning evidence of secret bank documents relating to the now infamous "Jose Velarde" account (believed to be Estrada's codename) and involving deposits of at least 1.2 billion pesos. The prosecutors walked out of the proceedings in protest and the impeachment trial in the Senate was adjourned.

Estrada thought he had won. But in a reprise of the People Power revolt of 1986, the people took to the streets. The 11-10 "NO" vote triggered a massive public process at the EDSA Shrine. For four days, EDSA was filled with angry, justice-seeking Filipinos determined to oust President Joseph Estrada.

At first it looked as though Estrada might set the scene for a re-imposition of martial law - especially after the December 30th bomb attacks in Manila which were officially blamed on Muslim separatists but widely believed at the time to have been set by Estrada supporters. The removal of support by top officials including Army chief General Angelo Reyes, on Friday 19th January sealed his fate.

This move left Estrada isolated. But he did not immediately resign. Instead, on the following day he asked for a five-day transition period but the EDSA rallyists who had gathered at Mendiola the same day seeking to throw out Estrada would have none of it. By 12 noon, Chief Justice Hilario Davide declared the Presidential office vacant and swore in Gloria Macapagal-Arroyo making her the 14th President of the Philippines. The country erupted in celebration.

Estrada left Malacañang Palace by a side door for a private villa in the suburbs while several of his friends fled the country including his main defense lawyer Eselito Mendoza, businessman Jaime Dichaves (who in the trial may have perjured himself by claiming to be the true owner of the secret bank account which Estrada had used under a false name) and gaming executive Charlie "Atong" Ang.

To this day, Estrada who is now in detention on charges of plunder (a charge which in theory could carry the death sentence) claims that he is still the legitimate president of the Philippines and that President Arroyo is only an "Acting President." Beyond his core support group nobody supports this claim. With the case still being heard in the anti-graft court of the Philippines (the Sandiganbayan), the final chapter of this episode is still to be written.

Just How Bad Had it Got?

The Estrada Administration had gotten off to a slow start but inherited an economy that had the potential for rapid growth. Having run a current account deficit for much of the last decade, the Philippines had enjoyed a surplus on its current account for the three years prior to Estrada taking office. The financial system - with a Central Bank free from political interference - was in relatively good shape. Inflation was at an all time low.

The Philippines had a good external account and export led growth driven by the emerging high tech industries of electronics and semiconductors. During the Estrada watch the situation clearly deteriorated as a consequence of clumsy economic management. In the halcyon years between 1994-97 the government enjoyed a slight surplus on spending while under Estrada the deficit increased rapidly to approach 4% of GDP. The deficit under Estrada was at its worst since the Marcos years and much of government spending appears to have been directed at pork-barrel projects of his political cronies.

Corporate earnings were - and remain at a historic low level and the peso fell dramatically in value and to levels well below those during the Asian financial crisis. Export growth has been slowing. Inflation is on the rise.

Even remittances from overseas foreign declined. OFW remittances - which were running at some US$7 billion per year in 1998, provide the Philippines with an important source of foreign exchange as well as providing a safety valve to domestic unemployment pressures.

Interest rates were already at historically high levels and the impact of a downgrade by major ratings agencies added further to the cost of borrowing by both government and local corporations alike. With the cost of money approaching 20% per annum on the local organized market, the funds available to support investment and future economic growth was dwindling.

Many large corporations continue to face a liquidity crisis with consequent downstream effects. The non-performing loans of the banking sector have risen to around 15% of the total. The official employment rate has also risen. Officially it stands at around 12% of the labor force (June 2002) although the ratio of heads of families gainfully employed has fallen from 86% to 66%. School enrolments are also decreasing, as families are, increasingly, unable to pay even modest fees.

Tax revenues as a percentage of GDP had been falling for some time leading to a systemic deficit problem. The high growth export sectors of the economy were also often - too often - the lowest taxpayers. In line with the policy of political devolution, the power to raise revenue has been increasingly transferred to local governments. The net result has been a failure by the government to meet its deficit targets by an ever-widening margin. The impact of this fiscal failure has led to the inability of government to deliver on its programs and modernize and extend necessary infrastructure. Everyone (outside of the presidential cabal) loses.

Foreign direct investment (FDI) has fallen away to virtually zero in recent times. Foreign companies operating in the Philippines cite the inter-related problems of inadequate infrastructure, corruption and the uneven application of laws as the most significant factors discouraging investment into the Philippines. When political uncertainty and the prospect of collapse into chaos are added into the mix, it is not hard to see why the corporate sector has shied away in droves.

True, not all of the current problems were of Estrada's making. Rather it was his failure to address these critical issues with a set of coherent and consistent policy decisions that caused at first disquiet and finally necessitated decisive political action.

New Beginnings - New Attitudes

The current president is a 54 years old, US trained economist and a devout Christian. She is also the daughter of former president Diosdado Macapagal, who led the Liberal Party to victory in 1961 to the tune of "Happy Days are Here Again". Arroyo faces a number of immediate problems not least of which are the reigning in of the public deficit and dealing with the separatism in Mindanao. These issues need to be dealt with before she can (if she has the mind) tackle the more fundamental structural problems facing society. Her philosophy is said to be center-left embracing the ideals of both the social and Christian democrats of other countries. However her role model is also said to be Mrs. Thatcher. Right at the start of her tenure she announced that she would promote policies of inclusion by encouraging dissident groups to join the political mainstream.

Her promises are the elimination of poverty within a decade (a tall order), improved moral standards in government and a replacement of the politics of patronage and personality with genuine party programs aimed at achieving results. She appears to believe in the philosophy of transparency, free enterprise and teamwork. She holds a firm belief that political and economic reform must go had in hand. Not unexpectedly among her early decisions was the elevation of the information technology and tourism industries into the status of national priorities.

The Honeymoon is Over

After the chaos of the Estrada years, Arroyo enjoyed a prolonged honeymoon period with the electorate despite continued rumblings from the diehard Estrada camp that appeared intent on opposition for opposition's sake rather than on the basis of a coherent alternative platform.

Certainly, the economy performed reasonably well in 2001 although whether this can be taken as a litmus test of good times ahead remains to be seen. It is an unfortunate but oft repeated joke in Manila that good times will certainly come - but they will come "tomorrow."

For the most part the people - and the business elite especially - have given her and her team the benefit of the doubt and the necessary time to introduce needed austerity measures. But if growth is not restored quickly and measures taken to introduce fundamental structural reforms (left hanging in many instances since the colonial period), popular support will eventually erode.

A priority for the incoming government has been the restoration of a "stable" outlook rating by the international rating agencies. Not only will this provide improved access to foreign credit and on better terms, it will also improve the outlook for new foreign direct investment (FDI) although with a caveat: - attracting new FDI may prove a major challenge unless accompanied by new incentives and a clean up of the corruption and inefficient bureaucratic practices that have often accompanied foreign companies operations in the Philippines. It is already late in the day in terms of economic globalization and many established companies have already consolidated their regional operations elsewhere. As a favored regional headquarters, Manila falls well behind Singapore as a regional operations center in South East Asia and for manufacturing Malaysia and Thailand appear to be taking the lead.

The government is actively targeting the information technology sector for FDI with tourism promoted as a leading domestic growth industry, especially if the insurgency problem in the south can be solved.

Both industries can benefit from the low-cost, well-educated and English-speaking Filipino workforce. Both can earn much needed hard currency. With government coffers strained to the limit there may also be a new willingness to look at involving the private sector in major BOT projects as a means of developing quickly much needed infrastructure.

In a country the size of the Philippines, transportation costs are a major factor for many businesses and increasing oil prices have a major flow-on effect throughout the economy. The inflationary effects of higher oil prices are seen to hit the urban and rural poor especially hard. More than 30% of all Philippine exports are destined for the USA and the figure is higher if indirect exports - such as those semi-finished goods that are sent to other Asian destination for final processing are taken into account. A slowdown in demand from the USA market will be a major hindrance to further growth of the Philippines manufacturing export sector.

About all that can be said at this time is that even the worst-case scenario under Arroyo is better than the best-case scenario under Estrada. Longer-term predictions remain elusive but clearly the new administration, if it is to make its mark has to address the problem of inequality through fundamental change.

Reality Bites

In many respects, the Philippines is a nation divided: a small power elite coexists with a massive urban and rural poor. The middle class is small and too weak to have much impact on the political process. Many of today's problems are a hangover from the colonial past.

The Spanish ruled the country for more than 300 years in imperious style through a system of patronage under which the ruling class and the Church established their position in society and commanded its resources to the exclusion of everyone else.

The Americans during their tenure as colonial masters introduced the concept of democracy but did little to change the patronage system. If anything the Americans encouraged a mendicant attitude among a significant segment of society which existed in one form or another until the closure of the U.S. bases in the early nineties. And so it persists to this day. Politics in the Philippines more often than not has meant a rotational shuffling of government between a self-serving power elite with little left to be shared with the bulk of the populace.

One commentator recently described the problem of the Philippines aptly in the following terms

"The Philippines faces a political crisis that goes beyond the need to replace the person at the top. The challenge is to correct a situation in which society is divided into those who can outsmart the system and those who cannot ."

The key to the problem, addressed successfully in other Asian countries but never properly tackled in the Philippines is that of property rights. An estimated 57% of city dwellers and 67% of the rural population live in extra-legal dwellings. Land laws make ownership of land difficult to validate. The land registration procedure requires no less than 168 steps among 53 public and private agencies and can take up to 25 years to complete.

Difficulty in proving land ownership leads to a second and more fundamental problem, namely the inability of many people to use property as collateral security for loans. The availability of entrepreneurial capital in the Philippines is lower than in any society in Asia except Pakistan.

As President Arroyo ponders the future direction of her presidency she would do well to recall that it was her father that took the first step towards land reform with enactment of the Agricultural Land Reform Code of 1963 and which provided for the purchase and distribution of land to land-less tenant farmers on extended credit terms. It was a wise policy that elsewhere in Asia, such as in Taiwan, laid the basis for capital formation and an entrepreneurial class. Unfortunately for Macapagal, opposition from the establishment prevented full implementation of the scheme, which has lain stagnant to the present day. If his daughter, President Arroyo, can complete the work of her late father it will be a victory indeed and will lay the basis for the Philippines to assume its rightful place at the table of the tigers.



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