The 1983 Economic Crisis By Carlos Cabaero, Enzo Atanacio, Bianca Ranola, Annie Antonio, Alfonso Roces | February 25, 2016
As a middle-income developing country, the Philippines shares common characteristics with other countries in the category. Style of leadership alone, whether well-intentioned or reform-oriented, cannot take the economy to its peak. As with its level of technology, natural resources, labor, the level of growth of the population, etc., development comes gradually over a span of time.
One characteristic that the Philippines possessed was vulnerability to fluctuations in incomes and prices, as well as to changes in policy in more developed countries, due to the large role of trade between the said countries. The recessions in 1974-1975 and again in 1980-1982 in developed countries, accompanied by trade barriers and fluctuating oil prices contributed, to low prices and demand in notable Philippine exports such as sugar, coconut and copper concentrates. This was accompanied by an increase in oil-import bill since most of the country’s energy is dependent on oil. This meant that the Philippines need to export twice as much to obtain the same value of imports. Despite deterioration of trade, exports were still able to finance the increasing imports. Another characteristic of the country at the time was the persistent deficit of current accounts as import payments increased while export earnings remained low. These gave way to repeated recessions. Government responded to this by making policies targeted in substantially reducing income-growth targets, and by conducting policies involved largely in financing the deficit through foreign borrowing.Its public debt-GNP ration was lower than South Korea’s, Malaysia’s, Bangladesh’s, Sri Lanka’s and Burma’s in that decade, who did not have to ask for a debt-rescheduling unlike the Philippines.
The question is simple: Why has the Philippine Economic growth slowed relative to its neighbors? Taking into consideration the external factors, the Philippines also went through internal turmoil in its political system and economic structure.
The late 1960’s coincided with the acquisition of power of the Marcos government. After experiencing losses from the war, in 1956-1960, the country attempted to regain what it had lost through import-substitution that raised new enterprises, enabling the economy to become more stable. However, this method did not thrive for long. It became problematic In 1962; the foreign exchange controls and the devaluation of the peso under the Macapagal Administration were abandoned. In the Marcos Administration, the focus shifted towards export-promotion or an “outward-looking” economy.
The main characteristic distinguishing the Marcos Administration from the others is that the concentration of power is in the hands of the government. This disturbed many observers, mainly due to the expansionist fiscal and monetary policies, the increasing role of the government in markets and the trend towards a monopolistic structure in important sectors in the economy.
Since the power was more concentrated in the government, there were patterns of aggressive government spending via foreign loans constantly throughout 1971-1975, although the floating peso and the oil-price shock of 1973-1974 compelled the government to trim the deficits. It was the massive government deficits in the last years of the 1970s, alongside large capital outlays that set the stage for difficulties in the 1980s. Government deficits increased from 0.8 billion pesos to 2.3 billion pesos, which could not be covered by domestic savings, and also increasing debt, and the investment-savings gap.
The productivity of workers rose at a rate less than two percent, the slowest not only in the ASEAN but also in Nepal and India. Hence, the rapid growth of spending and private investment became reflected in wider current account deficits and increasing reliance on foreign financing. This type of “outward-looking” economy, was actually used for pursuing the use of government activity as a vehicle for private gain.
The 1970’s ended with the government finding it increasingly difficult to pay foreign debts, prodding them to resort to more short term borrowings, increasing total external debt from 29.8 percent to 36.1 percent in 1971-1975 and 1976-1980, respectively. In the early 1980’s the government tried to reduce deficits, rather counterintuitively, by borrowing heavily domestically and abroad.
As the Philippines was experiencing losses in its economy, one of the historical events that brought greater instability was the Aquino Assassination in August 21, 1983. With account deficits and international reserves being reduced while new borrowings required higher pay because of international credit markers tightening and the lowering of world-inflation, the government decided to declare a 90-day moratorium on payments on its foreign exchange liabilities and imposed foreign exchange restrictions. The immediate effect of foreign exchange controls was done to restrict the flow of imported material inputs to many industries, causing numerous firms to cut back production, lay off workers, and close shops.
The May 14, 1984 elections accompanied a sharp break in the trend towards adjustment as government borrowings from the Central Bank accelerated. This caused renewed inflationary pressure, and posed yet another obstacle to the debt negotiation process, which called for strict limits to monetary growth. To meet fiscal deficits and monetary levels for the rest of the year despite the election bulge, the government levied various taxes. In principle, the raising of revenues through specific rather than income or wealth taxes is objectionable because such taxes penalize the poor more than the rich as well as cause distortions in the economy.
Welfare and Distribution of Income
A country’s economic performance should not be judged solely by its economic records but also by what the government has done for the people. Though the Philippines had been experiencing low output growth, this did not mean that the majority of the Filipinos were not well off materially in terms of the income they earned from land, labor, capital, and entrepreneurial efforts.
It was widely known that the distribution of income in the Philippines was unequal. Majority of the nation’s people were categorized as “less-skilled,” which meant that they earned less and therefore cannot afford to develop their skills through education. In other words, the rich became richer and the poor became poorer. Distribution of income and wealth was influenced by government fiscal policy (e.g. spending and taxation).
Income distribution in the Philippines worsened between 1971 and 1979. The gap between incomes earned in industry and agriculture and services widened, and so did the income differentials within the three major sectors. The 1971 and 1978 NCSO-ISH data prove that there was a higher decline in the real cash earnings of blue-collar workers than those of white-collar workers. Earnings of the lower-paid also deteriorated faster than those of the better-paid. Additionally, the CB wage/salary series for 1972 to 1980 shows that real and nominal incomes declined more for wage earners and the unskilled than for the salaried earners and the skilled.
Unemployment and underemployment rates increased alarmingly in a span of five years, with there being 0.8 million in 1978 to 1.2 million in 1983 unemployed, and 1.6 million in 1978 to 5.6 million in 1983 underemployed. Agricultural employment declined in the 1970s, bringing excess labor to the services sector. These sectors yielded lower productivity and consequently lower income compared to the industry sector, whose employment rate increased, albeit very slowly. What’s disturbing is that it is the less-skilled and low-income workers that are affected greatly by low labor supply and ultimately, income inequality.
This idea is further supported by the fact that legislated minimum wages were not enforced everywhere, so there were many low-skilled workers earning wages and salaries below subsistence, and it is possible that even relatively skilled workers were paid close to the poverty threshold. In 1957 to 1969, real weekly cash earnings of wage and salary workers improved for both sexes in all occupations, but proceeded to decline in 1971 to 1978, save for some occupations. In turn, the fall of labor productivity led labor income to fall as well.
To excuse the country’s failing economy, policy supporters looked to improvements in people’s living conditions based on health, personal security, and dispensation of justice. Improvements in health had adopted an increasing trend from the 1950s to the 1970s because of improvements in the quality of drugs and medications, new knowledge, etc. Life expectancy had adopted the same increasing trend. Though these cannot be directly attributed to authoritarianism, some have questioned how the government could have afforded to put so much emphasis on health considering their decreased budget. On the other hand, infant mortality increased from 1975 to 1977, which is possible due to the economic difficulties of that period.
In terms of peace and order, crime rates declined the year Martial Law was declared, as expected, but this was temporary as they increased in the years after. Since crimes against property are an illegal form of redistributing wealth, increasing economic hardships brought on increased crime rates. In terms of justice, since the Martial Law era, there have been numerous reports of salvaging, a decreased disposal rate of court cases, and an increased backlog of pending cases.
Fiscal and Monetary Policies
The government under the Marcos-era had shifted from conservative fiscal and monetary policies to a bloated bureaucracy. As the previous eras, specifically the 50’s and 60’s, were about general fiscal and monetary responsibility, the tides had changed as the era of big government had emerged.
First, monetary growth had skyrocketed, more than three to four times it had been in the 60’s, in order to fund more, albeit not always productive, public and private spending programs. The problem with this was that this inflation could not have been justified because it had not been accompanied by any real economic growth. Because of this increase, fueled also by the world oil crisis, inflation reached double digits.
Second, government had pushed its spending even further. It spent a lot on infrastructure; however, instead of focusing on bridges, roads and schools, numerous government offices were built, making the problem of the proliferating bureaucracy more evident. To add, military spending also increased but the budget for education and health decreased in proportion to the previous sectors mentioned. Accompanied by the regressive taxes used to fund this spending, this had created a widening gap in income inequality for the country.
Finally, the government gained more control of industries through monopolies. Certain companies or governmental agencies were the given the exclusive licenses to import and export items from selected industries and many monopolies also proliferated through subsidies. Specifically, monopolization was most apparent in the sugar and coconut industry through entities such as PHILCOA and NASUTRA. This had a negative impact on the country’s economy as monopolies stifle competition and innovation needed for economic growth and development that would benefit.
Foreign Trade and Foreign Debt
The authors of the UP School of Economics' White Paper argue that it was not solely due to external shocks that the Philippines incurred unsustainable levels of debt. Rather, mismanagement of the debt sunk the country deeper into crisis.
External shocks were in the form of oil price hikes in 1973-1974 and in 1979-1980. The country’s fuel bill drastically rose from $187.6 million (1973) to $2.2 billion (1980). Falling export prices in 1980 could not keep up with rising import prices. However, rather than attempting to lower imports and raise exports, the government chose the policy of incurring more debt to pay for the import bill. The country sourced its foreign exchange from nontraditional exports such as electronics, garments and remittances that were based on cheap labor and which had little integration with the rest of the Philippine economy. The prices of traditional exports such as copra, sugar and copper did not rise as fast as import prices.
Furthermore, the share of imports in our Gross National Product actually increased. This was encouraged by high domestic inflation relative to the inflation experienced by other countries. Export sectors of the economy made use of imported inputs, and allowing duty-free importing further provided incentives to import.
Government debt was incurred in order to pay firms for projects whose returns had not materialized and would not materialize soon. As a result, net interest expense ballooned to $1.5 billion or 46.2 per cent of the current account deficit (1982) from $76 million or 8.2 per cent of the current account deficit (1975). Public funds were allocated to corporate equity investments and non-infrastructure related capital expenditures. The second oil price hike in 1979 resulted in a dearth of foreign loanable funds (due to monetary tightening) and rising real interest rates.
The government, however, continued to incur debt and used most of the money for corporate equity investments and other capital outlays. The unimpressive returns to these projects (some of which were expected to come from failed or failing corporations in government financial institutions’ portfolios) led to the increase in the debt burden of the entire country’s citizens.
As a result, the country resorted to short-term, high-interest loans amidst a low growth, low employment and high inflation environment. The tremendous amount of waste of the country’s resources was a significant setback to the country’s progress. The institutions that brought about these outcomes needed radical change.
Political and Institutional Framework
One of the perceived causes of the 1983 economic causes is attributed to the lack of checks and balances in the Martial Law era, as well as the lack of liability that state actors and bureaucrats had for their actions.
The declaration of Martial Law was a turning point in Philippine political history: instead of the power of the government being divided into three branches, Ferdinand Marcos, through Martial Law and later a constitutional amendment, took all the power for himself; he complemented by giving more influence to the military and by getting rid of his political opponents, further crippling an already ailing democracy.
The rhetoric that supported the bid for authoritarianism was the elimination of inefficiency and inflexibility that was usually an issue with a tedious checks and balance democratic approach. In short, the move to authoritarianism was a trading off of political rights for economic growth, peace and security, a notion that at the time was being contested by failed case studies around the world.
What authoritarianism actually did was to lessen liability and accountability of the government to its mandate with the people. The neglect of a democratic process and its features: an election and a competent opposition, meant that members of the government need not worry about not being reelected; as such, they were free to attend to their own affairs with the state as their instrument.
This monopoly of political power caused economic inefficiency, as evidence by the high cost-overruns in government projects and exorbitant foreign borrowing. Furthermore, this lack of a mandate allowed for corruption, where the officials used public resources to advance their private well-being. This was evident in the increasing intervention of the government in economic activity, which was seen as the cause of sectoral monopolies and lower productivity.
Another issue that lay with authoritarianism is the lack of high-quality, reliable information, both for the public and the government itself. The suppression of the media consequently left the majority clueless of the true status of the state, whereas lack of credible information forced the Marcos government to engage in questionable economic policies like foreign borrowing and imposition of stabilization taxes; the lack of checks and balances provided no hurdle for critical engagement. This shortened economic planning horizons, increased risk premiums and discouraged long-term investments. Monopolies were also created, eating up unfavored companies, resulting to capital flight and disinvestment.
An Alternative Agenda for Recovery
Proposals were recommended to halt the downward spiral of the economy and set the foundation of the future.
The first proposal was to decentralize political and economic decision making in the government, calling for more transparency and accountability by providing accessible and high-quality information to the public as well as encouraging their participation in political and economic affairs. The call was to establish a liberal democratic regime that “…engenders greater economic competition, encourages entrepreneurship, and promotes greater equity.” It was encouraged to reject the prospect of an “enlightened” authoritarianism forwarding this agenda, as there is both no guarantee that it will engage in such a drastic ideological shift, and more importantly, that there needs not be a trade-off with economic well-being and human rights.
The second proposal was a realignment of government priorities; this included the reduction of expenditures and departure from raising new taxes. The call was to reduce government spending by prioritizing sectors that focused on social services, like health, education and labor; recommendations were made to remove consumption taxes that and encouraged income taxation so that the rich may bear more tax burden.
The third proposal involved the lessening of government intervention in the economy and the breaking down of monopolies. Reforms that focused on agriculture and manufacturing were also encouraged. With monopolies in the government, banking and corporations, resources were allocated to the privileged few, leaving less income for the rest of country, alongside diminishing entrepreneurial innovation. Calls were made to break the monopolies on agricultural products like sugar and coconut. Aside from the dismantling of agricultural monopolies, a more effective land reform was also recommended.
Next was for the government to stop commercial foreign borrowing and to negotiate a moratorium on the current debt’s principal and interest. This is so that the country’s resources may be attuned towards development and economic recovery, instead of foreign debt servicing. Further foreign borrowing must also be limited to prevent the further saddling of the government to debt; only the private sector should be allowed to engage in foreign debt, not the government.
There was a need for stabilization measures that would give the poor the least burden. Exchange and price rate flexibility, reducing balance of payment deficits and contractionary monetary policy, as suggested by the IMF then, was seen as a plan made so that a borrowing country may pay its debt. The stabilization program of the Marcos regime, however, with its introduction of new taxes, burdened the middle class and wage workers, as well as the poor. The call was to instead gain funds by ceasing funding for less socially productive departments in the government, and the removal of excessive taxes. Finally, after the implementation of reforms, a flexible exchange rate must be adopted. The exchange rate system at the time was multi-tiered, meaning different parties effectively had different exchange rates due to some foreign imports given more leeway, discouraging exporting industries. As such, the call was to allow a floating exchange rate without the hierarchical prioritization of goods providers.
For a full copy of the UP School of Economics' White Paper, go here.
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