The Philippine economy · 2003-04-24 · controversy did affect its performance, the Philippine...

Vol. XIX No. 1 January - February 2001 ISSN 0115-9097

What's InsideWhat's Inside The Philippine economy:What lies ahead in 2001

Josef T. Yap*

The swift unfolding of events between October 2000 and January

2001, the heightened emotions, and ensuing euphoria may have

clouded the analyses of several pundits. In the aftermath of the

downfall of President Joseph Ejercito Estrada’s administration, a bleak picture

of the economy was generally painted. Moreover, the blame for the poor state

of the economy was laid squarely on the ineptitude and corruption surrounding

the Estrada government. An excerpt from an article in the International Herald

Tribune epitomizes this view:

Mr. Estrada, a hard-living former movie actor, was ruined by accusationsthat he had taken $11 million in bribes. He left behind a nation staggeringunder a greater burden: spiraling budget deficits, a battered stock market, a de-valued currency, and a new reputation for chicanery that sent even the most loyalinvestors packing…..What makes the collapse all the more painful is that thePhilippines had emerged from the Asian economic crisis in better shape than mostothers in the region. In part that was because it never experienced the vertiginousgrowth or asset inflation of countries like Thailand and South Korea. But it wasalso a result of Manila’s fiscal discipline, which produced budget surpluses from1994 to 1997.1

While the political crisis that developed out of the so-called “Juetenggate”controversy did affect its performance, the Philippine economy was far from aprostrate position when President Estrada stepped down. The gross domesticproduct (GDP) grew by 3.9 percent in 2000, narrowly missing the governmenttarget of 4 percent but still higher than the 3.3 percent recorded in 1999.Meanwhile, private consumption expanded by 3.9 percent in the fourth

It has been our tradition in the past years tocome out with an expert's forecast for the Phil-ippine economy for the year. It is no differentthis time.

As the country faces new challenges afterall the political hoopla which ended in Janu-ary 2001, the Institute once again contributesto the restructuring of the nation through thiseconomic forecast written by Dr. Josef T. Yap,PIDS senior research fellow.

This piece provides a balanced and inde-pendent analysis on what the country hadachieved in terms of economic (mis)manage-ment and how these had affected the overallperformance of the economy, taking into con-sideration the impact of other external factors.Dr. Yap also focuses on various issues whichneed to be addressed so as to facilitate growthin the economic sector.

In conclusion, Dr. Yap puts forward severalpossible scenarios for the Philippines this year.Are they positive? Are they attainable? If the

* Senior Research Fellow, Philippine Institute for Development Studies (PIDS). The author acknowl-edges the excellent research assistance provided by Merle G. Galvan. The usual disclaimer applies.1 M. Landler. 2001. Daunting Task for Manila’s New Finance Chief. International Herald Tribune. 10-11February.

Editor's NotesEditor's Notes

+20

page 8 Dr. Gloria MacapagalArroyo: The nextPhilippine presidentcould be an economist

page 20 China's economic boom:A boon to RP, otherASEAN nations

SPECIAL ARTICLE!!

+2

DEVELOPMENT RESEARCH NEWS January - February 20012

quarter of 2000, which was the highestamong the four quarters of that year,and even higher than the 2.9 percentgrowth in the last quarter of 1999. Thisis hardly the performance to be ex-pected from an economy paralyzed bya political crisis.

The scathing attacks on theEstrada administration also obfuscatethe less-than-sterling trackrecord of the Ramos govern-ment. Despite the loudpraises heaped upon theRamos administration’s eco-nomic programs by interna-tional and domestic inves-tors—and more by the eco-nomic managers them-selves—the highest GDPgrowth that was achieved was5.9 percent in 1996, which wasthe second lowest in South-east Asia that year. Incomedistribution deterioratedsharply between 1994 and1997 with the Gini ratio ap-proaching Latin American lev-els. The fiscal surpluses thatwere achieved during theRamos administration weremore a result of proceedsfrom privatiza-tion of state-owned assets rather than a significantimprovement in tax effort. And—atthe risk of sounding like a brokenrecord—it should be pointed out thatthe manufacturing sector deceleratedfor 15 consecutive quarters over theperiod 1995Q4 to 1999Q2. The slow-down after 1997Q2 could well be ex-plained by the East Asian financial cri-sis but the slide in manufacturing out-put prior to the crisis could be attrib-uted to shortcomings in economicpolicy.

This sobering view should not beinterpreted as a vindication of the pre-vious administration. Indeed, it was

obvious to any fairly rational personthat Mr. Estrada did not have the nec-essary qualifications to effectively per-form the role of President of the Phil-ippines. The intention is to remind thepresent team of economic managersthat any mess that has to be cleanedup was partly caused by gaps in policyinitiatives of both the Ramos andAquino administrations.2 Since manyof the present cabinet members playedprincipal roles in these two stages ofPhilippine politics, they should be wary

of committing the same mistakes. Inaddition, the higher-than-expectedGDP growth in 2000 serves as a re-minder that some policies followed bythe Estrada government provided astimulus to economic activity. Mean-while, the analysis emphasizes thatthere are deep-rooted institutional andstructural problems that have neverbeen addressed effectively by any of thepast governments, including Estrada’s.

nal factors. However, the peso slide wasbrought about by a combination ofexternal and domestic events. Mostcurrencies in the region had experi-enced a depreciation of their curren-cies last year (Table 1). The primaryreason, particularly for Australia andNew Zealand, was a hike in US interestrates. Indonesia, the Philippines, andThailand also experienced large netcapital outflows related to repaymentof external debt. Korea was a net re-cipient of capital flows and hence the

depreciation of the won wasmerely to contain changes inthe real exchange rate.

The variation in ex-change rate changes can beattributed to domestic fac-tors. A greater degree of po-litical uncertainty resulted ina higher depreciation rate inIndonesia and the Philip-pines compared to Thailand.The importance of the politi-cal risk factor was evidentwhen the peso appreciatedand stabilized after the peace-ful transition of power in thePhilippines in January 2001.

The higher exchangerate was partly responsible forthe low growth of imports in2000 (Table 2). Along with

higher fuel prices, the weak peso alsosparked an acceleration of inflation inthe second half of the year. Neverthe-less, inflation averaged only 4.3 per-cent, much lower than the original gov-ernment target of 6 to 7 percent. Apartfrom stable food prices, low inflationalso resulted from the continued slug-gishness of domestic demand. The lat-ter also contributed to the slowdownof imports.

The Philippine...from page 1

2 An assessment of the state of the economy andpolicy agenda is summarized in J. T. Yap. 1998.Beyond 2000: Assessment of Economic Perfor-mance and an Agenda for Sustainable Growth. PIDSDiscussion Paper 98-28.

Recent Economic PerformanceTwo prominent developments in

2000 were the sharp depreciation ofthe peso and the hike in fuel prices.The latter was clearly a result of exter-

The Philippine Star, 20 January 2001

DEVELOPMENT RESEARCH NEWS 3 January - February 2001

In anticipation of a less benigninternational environment, the prog-nosis last year centered on the role ofdomestic economic activity to prop upthe economy.3 Four factors were iden-tified that would work against the res-toration of consumer and investor con-fidence:

* the lack of resources for pump-priming;

* the slow progress of legislationneeded to implement eco-nomic reforms;

* the erratic performance of themanufacturing sector; and

* the proclivity of the Estrada ad-ministration for generatingcontroversy.

Indeed, notwithstanding the im-pact of higher fuel prices and a weakerpeso, these factors exerted a major in-fluence on the pace of economicgrowth in 2000.

By the second quarter of 2000,the Consensus forecast for the Philip-pines for that year had fallen to 3.4 per-cent (although it rose to 3.6 percent in

ics sector (electrical machinery) hadthe most significant contribution al-though it comprises only 12 percent ofthe manufacturing sector. Value addedin electronics has been expanding rap-idly due to the elevation of local firmsfrom the simple contract assembly pro-cess to elements of design. Their con-tribution to the electronic manufactur-ing service and semiconductor manu-facturing service has been increasing.

The service sector also registeredhigher growth in 2000, fueled by thetransport, communication and storagesector. The completion of the MetroRail Transit (MRT) may have contrib-uted to the performance of this sectorbut it was mainly the surge in the pur-chase of cellular telephones that led tothe 9.9 percent growth in 2000. As ex-pected, the agriculture sector deceler-ated in 2000 but its 3.4 growth rate wasstill higher than the historical trend of2-2.5 percent.

Despite improved economicperformance, the three sectors hard-est hit by the crisis—construction, fi-nancial services, and real estate—con-tinued to falter. The contraction in theconstruction sector was even more pro-nounced in 2000 as government con-struction declined by 8.7 percent com-pared to an increase of 14.9 percent in1999. This is clear evidence of the in-ability of the government to conductpump-priming activities. As a result,private construction continued its de-cline, which, in turn, contributed to anear-zero growth in the real estate sec-tor.

The financial sector continued toreel from the 1997 crisis. Thenonperforming loan (NPL) ratio ofcommercial banks even increased to16.2 as of November 2000. This is thehighest level since the onset of the cri-sis. Initially, the rise in the NPL ratiowas attributed to technicalities, namely,the reclassification of certainloans after the merger of two

September).4 Hence, while the GDPgrowth of 3.9 percent in 2000 was be-low the government target of 4 to 4.5percent, it represented an improve-ment over prevailing expectations.

Moreover, economic growth wasbroad-based. This is largely due to thehealthy performance of the manufac-turing sector, which defied earlier pre-dictions and expanded by 5.6 percent(Table 2). A weak peso provided pro-tection to domestic manufacturers anda low interest rate regime supportedboth local demand and access to work-ing capital. Meanwhile, a stronger-than-expected US economy provideda market for manufactured exports.

The manufacturing sector mir-rored the broad-based growth of theaggregate economy. The balanced out-put is evident in the food manufacturessector, which has the highest share inmanufacturing (35.6% in 2000) butgrew by only 1.9 percent. The electron-

Note: A [-] indicates a depreciation.Sources: Bloomberg for nominal exchange rate and JP Morgan

for real exchange rate

3 Development Research News, January-February2000.4 This is the forecast published by Consensus Eco-nomics, Inc. The consensus forecast is the me-dian of a survey of over 130 prominent financialand economic forecasters. +4

Table 1. Exchange Rate Movements in Selected Asia-Pacific Countries(In percent, end-1999 to end-2000)

Nominal Exchange Rate Real Exchange Rate

Indonesia -26.6 -13.9Korea -9.9 0.3Malaysia 0.0 7.9Philippines -19.5 -10.4Thailand -13.6 -2.1Australia -14.9 -7.6New Zealand -14.9 -6.3


large banks, and the fall in interbankloans, which caused total gross loans—the denominator—to decline. How-ever, with the resumption of growth incommercial bank loans, an increasingNPL ratio should be a source of con-cern. Meanwhile, the capital adequacyratio of the banks fell to 15.6 percentin October 2000, which is lower thanthe 17.2 percent achieved early last yearbut higher than the internationalnorm of 8 percent.5 The bank-ing sector was also affected by thepolitical crisis, as rumors on secretbank accounts triggered minorbank runs.

The general investment cli-mate was boosted with the enact-ment of two economic laws, theGeneral Banking Law of 2000 andthe Securities Regulation code.These laws are expected to raisethe regulatory standards of thebanking sector and securities mar-ket and bring them closer to in-ternationally acceptable norms.Other economic laws enacted lastyear include the Retail Trade Lib-eralization Act, which opens re-tail trade to foreign investment; the E-commerce law, which provides basis fortransactions conducted over theInternet; and the Regional Headquar-ters law, which grants additional incen-tives to multinational corporations es-tablishing regional headquarters in thePhilippines. The incentives providedby these laws may have contributed tothe turnaround in investment in du-rable equipment, which grew by 2.6percent last year after declining by 5

percent in 1999. However, gross do-mestic capital formation hardlychanged, with a 0.8 percent growth ratein 2000.

The positive developments in themanufacturing sector and the enact-ment of new laws indeed helped miti-gate the negative impact of higher fuelprices, an undervalued peso and theloss of investor confidence followingthe political crisis. The higher-than-expected growth of the US economy

eased the burden on domestic de-mand. Nevertheless, the higher eco-nomic growth rate did not lead to theexpected increase in revenues, whichwas 11 percent off-target. Meanwhile,expenditures exceeded programmedlevels by 2 percent. The net result wasan estimated P136 billion deficit,equivalent to 3.9 percent of GNP.

The last of the aforementionedfactors affecting consumer and inves-tor confidence was the proclivity of theEstrada government to generate con-troversy. Apart from the slide of thepeso and fall in stock market activity—part of which is attributable to exter-nal factors—there is apparently noother concrete evidence of the impactof the political crisis, especially in the

real sector. As mentioned earlier, con-sumption spending did not show signsof a slowdown, particularly in the lastquarter of 2000. Investment in durableequipment also posted its highestgrowth rate in the last quarter. Netinflows of foreign direct investmentactually had a modest gain—from $753million to $1.04 billion—in the first 10months of 2000 compared to the sameperiod in 1999.

However, private construction didcontract in the second half of2000 after eking out small positivegrowth rates in the first half. Theslowdown from 4.9 percent GDPgrowth in the fourth quarter of1999 to 3.6 percent in 2000 is alsoa possible indication of the ad-verse impact of the political prob-lems. But this could be largely at-tributed to the hike in interestrates and the rise in fuel prices.

On the whole, domestic de-mand, especially investment, wassluggish last year. Fixed invest-ment actually declined in 2000. Ithas been three years since theAsian financial crisis and privateinvestment has not recovered.The only remarkable category in

the expenditure sector was exports,which grew by 16.4 percent in real pesoterms. Hence, the political crisis in thelast quarter of 2000 was a manifestationof the general lack of domestic inves-tor confidence since the beginning ofthe Estrada administration.

Another indication of the im-passe between the government and thelocal business sector was the softer re-bound of the Philippine economy be-tween 1998 and 2000 compared toother economies in the region (Table3). In stark contrast to the Philippines,Indonesia, Korea, Malaysia and Thai-land experienced a surge in private in-vestment last year. Perhaps the differ-ence between 4.5 percent—the upperlimit of the government GDP target—


Sale, sale everywhere but not a drop of money to spare.

5The Philippines is not yet following the Bank forInternational Settlements (BIS) capital adequacystandards wherein the weights of different catego-ries of capital are risk-based. However, even ifthe capital adequacy ratio were adjusted for risk,it would remain above the international norm of 8percent.

BusinessWorld Top 1000, Vol. 14


Table 2. Selected Macroeconomic Indicators, Philippines, 1992-2000, Forecasts for 2001(Annual growth rates and share to GDP, with the latter in italics)

*Exports and Imports data (January to November 1999) comes from the Bangko Sentral ng Pilipinas (BSP) homepage.Sources: National Accounts of the Philippines, National Statistical Coordination Board; Selected Philippine Economic Indicators, BSP;

and forecasts of J.T. Yap.

1.7 2.8 4.6 4.9 7.3 5.2 0.1 3.7 4.2 3.80.4 2.1 4.4 4.7 5.9 5.2 -0.5 3.3 3.9 3.30.1 2.0 3.4 1.2 3.9 2.8 -6.6 6.0 3.4 1.5

22.75 22.75 22.36 21.55 21.13 20.71 19.50 19.99 19.890.4 2.5 3.8 1.9 3.9 3.3 -6.5 6.4 3.5

22.17 22.28 21.98 21.32 20.91 20.56 19.34 19.91 19.83-12.0 -15.7 -16.3 -37.1 7.7 -39.0 -21.0 -45.5 -16.8

0.58 0.48 0.39 0.22 0.22 0.15 0.15 0.08 0.07-0.3 1.6 5.8 6.8 6.4 6.2 -1.8 0.9 3.6 3.334.41 34.25 34.71 35.38 35.58 35.91 35.35 34.52 34.418.1 1.1 -7.2 -5.6 1.4 2.9 3.3 -8.4 8.7 0.01.60 1.58 1.40 1.25 1.20 1.16 1.20 1.06 1.11

-1.7 0.7 5.0 6.8 5.6 4.2 -1.0 1.6 5.6 3.025.03 24.69 24.84 25.34 25.27 25.04 24.91 24.49 24.886.1 5.7 9.4 6.6 10.9 16.4 -8.5 -1.6 -6.0 5.05.04 5.22 5.45 5.55 5.81 6.42 5.83 5.56 5.030.7 2.8 13.9 13.0 7.6 4.8 3.4 3.1 3.7 4.02.74 2.76 3.01 3.25 3.30 3.29 3.41 3.41 3.401.0 2.5 4.3 5.0 6.4 5.5 3.5 4.1 4.4 4.0

42.84 42.99 42.93 43.07 43.29 43.38 45.15 45.49 45.701.4 2.5 4.2 5.8 7.4 8.2 6.5 5.3 9.95.82 5.85 5.84 5.90 5.99 6.17 6.60 6.73 7.121.6 2.4 4.0 5.6 5.5 4.0 2.5 4.9 5.6

15.27 15.32 15.26 15.39 15.34 15.15 15.61 15.85 16.100.4 2.4 5.5 7.3 13.7 13.0 4.5 1.9 0.94.06 4.07 4.12 4.22 4.54 4.87 5.12 5.05 4.900.7 1.8 2.9 3.1 4.2 3.8 1.6 0.6 0.35.64 5.62 5.54 5.46 5.37 5.30 5.41 5.27 5.090.6 2.9 4.3 4.3 5.0 4.9 4.7 5.8 4.76.89 6.94 6.94 6.91 6.86 6.83 7.19 7.37 7.420.2 2.9 5.5 3.8 5.9 2.6 2.6 3.7 0.9

5.15 5.18 5.24 5.19 5.19 5.06 5.21 5.23 5.073.3 3.0 3.7 3.8 4.6 5.0 3.5 2.6 3.5 3.2

78.10 78.81 78.31 77.66 76.76 76.62 79.73 79.20 78.85-0.9 6.2 6.1 5.6 4.1 4.6 -2.1 5.3 0.2 0.07.70 8.00 8.13 8.20 8.07 8.03 7.92 8.07 7.788.5 7.9 9.0 3.7 13.3 11.6 -16.4 -1.7 0.8 5.0

21.46 22.67 23.59 23.33 24.78 26.32 22.16 21.08 20.4411.1 15.8 18.5 29.4 17.7 22.8 16.9 18.8 8.7 6.220.5 21.2 21.2 23.7 20.8 14.0 -18.8 4.1 2.1 10.08.6 7.0 8.3 8.0 9.1 5.9 9.8 6.6 4.3 6.5

16.0 12.4 12.7 11.8 12.3 12.9 15.0 10.0 9.6 10.525.3 27.2 26.3 25.8 26.2 30.1 40.8 39.3 44.2 48.7

Gross national productGross domestic productAgriculture, fishery and forestry

Agriculture and fishery

Forestry

Industry sector

Mining and quarrying

Manufacturing

Construction

Electricity, gas and water

Service sector

Transport, communicationand storage

Trade

Finance

Ownership of dwellingsand real estate

Private services

Government services

Personal consumption expenditure

Government consumption

Capital formation

Exports (nominal $)*Imports (nominal $)*Inflation (average)91-Day Treasury bill rate (average)Nominal exchange rate (average)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Forecast


the need to catch up in terms of infra-structure, the continued stupor of pri-vate investment should be a priorityconsideration. Hopefully, the new ad-ministration, which has close ties withthe business sector, will be able to up-lift investor confidence. Nevertheless,the main focus should still be on ad-dressing the country’s low labor pro-ductivity. Apart from the usual recom-mendation to increase the investmentrate, measures at the microeconomiclevel—a well-defined technology policy,measures to improve social cohesion,and the need for better governance—have already been discussed and pre-sented at various fora.

ProspectsA general slowdown is projected

for world economic activity in 2001.The main reason for this is the decel-eration in the US economy (Table 3).In this context, the relevant questionis: To what extent will GDP growth fallin the Philippines? For reasons dis-cussed below, it is virtually impossiblefor the economy to improve its 3.9 per-cent performance in 2000. As can be

must be implemented effectively. Thiswould encompass the banking sector,particularly the amendment of the Se-crecy of Bank Deposits Law.

The privatization programs forboth the National Power Corporationand the National Food Authority arestill pending. However, these programsmust be carried out without putting thegovernment at a due disadvantage.Moreover, the competitive environ-ment that the government shouldmaintain to sustain private sectorinvestment must not be underminedby the process of privatizationespecially as there are concerns thatunder the present proposal,monopolies may emerge in the energysector. If successful, the privatizationprograms should promote efficiencyand boost revenues.

Finally, the issue of competitive-ness should be revisited since the en-try of China into the WTO and theemergence of India have reduced theattractiveness of Southeast Asia formany traditional industries. Apart from

and the 3.9 percent GDP growth in2000 could be attributed to the anti-Estrada sentiment of majority of thelocal businessmen.6

Key IssuesThe deterioration of the fiscal

deficit from 3.5 percent of GNP in 1999to 3.9 percent in 2000 should be a causefor utmost concern. As mentioned inlast year’s report, slower output growthand the sharp nominal depreciation ofthe peso constrain fiscal flexibility, asdoes the high initial level of debt. Nev-ertheless, for various reasons, cuttingexpenditures should not be consideredas the primary option. First, the defi-cit is more a result of shortfalls in rev-enue mobilization rather than expen-diture overruns. Second, the Philip-pines lags behind other East Asiancountries in terms of infrastructure de-velopment and any further reductionin spending for this purpose will havedire consequences in the medium-term. And third, scaling down govern-ment expenditures may reduce the nec-essary social spending and contributeto the already serious poverty problemin the country.

Hence, the only alternative thenew government has is to make a strongpush for a substantial improvement intax administration. This issue has be-come as important as ever before. Thepolitical crisis that engulfed the Philip-pines centered on the issue of corrup-tion. Together with the need to en-hance tax administration, these issuesemphasize the need to improve gover-nance in this country. The phenom-enon of a “weak state” has to be ana-lyzed carefully and reforms needed toimprove the institutional framework


6 It should be noted that the original target of 4.5to 5 percent was scaled down to 4 to 4.5 percentin the middle of the year primarily because of thepeso depreciation and the rise in fuel prices.

Table 3. GDP Growth Rates of Selected Countries and Regions (In percent)

aUS and CanadabGermany, France, UK, Italy, Austria, Belgium, Denmark, Finland, Greece, Ireland, the Nether-lands, Norway, Portugal, Spain, Sweden and Switzerland.Sources: Country sources (for 1999 and 2000 estimates), Asia Pacific Consensus

Forecasts (for 2001-2002 forecasts).

China 7.1 8.0 7.7 8.1Indonesia 0.3 4.8 3.6 4.3Korea, Rep. Of 10.7 8.0 4.4 5.3Malaysia 5.6 7.5 5.2 6.1Philippines 3.3 3.9 2.7 3.4Singapore 5.4 10.1 5.3 6.1Thailand 4.2 4.0 - 4.5 3.5 4.3Japan 0.8 1.8 1.4 1.8North Americaa 4.2 5.0 2.1 2.4Western Europeb 2.4 3.3 2.7 2.8

1999 2000 2001 2002


seen from Table 3, theConsensus forecast is for aGDP growth of 2.7 per-cent.

Two key determi-nants of the 2001 GDPgrowth would be the rateof deceleration in the USeconomy and the trend ininternational fuel prices.The Philippines is one ofthe more vulnerable, if notthe most vulnerable, coun-tries in East Asia to a USslowdown and persistenceof high fuel prices. A rela-tively large proportion ofits exports go the US.Meanwhile, the decliningenergy efficiency and in-creasing oil import depen-dence of the Philippinesmakes it very sensitive tothe behavior of oil prices.7

Fortunately, the general consen-sus is that the US will experience a“soft” landing, where growth will slowin a benign inflationary environment.The scenario where rapid capital out-flows and a depreciating dollar wouldnecessitate a sharp increase in interestrates is not probable. The Federal Re-serve Bank has actually trimmed key in-terest rates in an attempt to avoid arecession.

Meanwhile, the projections for in-ternational oil prices are not clear.There are indications for an upwardmovement but pronouncements by theOrganisation of Petroleum ExportingCountries (OPEC) that consensus hasbeen reached to cut supply imply stableoil prices. However, the internationaloil price is currently $24.83/bbl (Feb-ruary 15) but so long as it does not

break the $30 threshold, oil importersshould not be too adversely affected.

Among the domestic factors thataffect prospects, it is the fiscal deficitthat stands out. If it is perceived thatthere is no turnaround in the deterio-ration of fiscal balances, then interestrates would rise and hamper the recov-ery of investment. This would thenlead to the scenario where GDP growthwill fall below 3 percent this year. How-ever, it is likely that the new adminis-tration will have success in pushing forlegislation bills that would increase rev-enues, even if it is only a one-timesurge. This would then allow the con-tinuation of an accommodating mon-etary policy, a sufficient reason to ex-pect GDP to grow between 3 to 3.5 per-cent in 2001.

There should be a relativelystrong recovery in construction and in-vestment, something that did not ma-terialize last year. However, both vari-ables will be growing from a low base.

Agriculture will be af-fected anew by the ElNiño weather distur-bance and should growby only 1.5 percent.The manufacturing sec-tor would be adverselyaffected both by theslowdown in the USeconomy, which wouldlower demand formanufactured exports,and by the lower growthof agriculture, whichwould affect the foodmanufacturing sector.The manufacturing sec-tor is predicted to growby 3 percent in 2001.The services sectorwould also experience alower growth, whichwould likely be 4 per-cent this year.

Meanwhile, infla-tion would continue to accelerate inthe first few months of the year beforestabilizing toward June. This is becausethe bulk of the peso depreciation andthe rise in fuel prices happened in thesecond half of 2000. The whole yearaverage would be about 6.5 percent.Higher inflationary expectationsshould limit the impact of the cut ininterest rates of the Bangko Sentral ngPilipinas. The average of the 91-dayTreasury bill rate should be higher in2001 than the 9.6 percent average in2000.

Last year’s prediction of the ex-change rate was way off. However, fewanalysts—perhaps even none—pre-dicted that the peso would depreciatethat sharply. This year, the exchangerate should hover between P47 andP51. Net capital flows are predicted toturn positive for Indonesia, Korea, Ma-laysia, the Philippines and Thailand (inaggregate) in 2001 after turning nega-tive in 2000. The average exchangerate would thus be about P48.70.

7 For a more comprehensive analysis, refer to theAsia Recovery Report, October 2000 issue (http://aric.adb.org). DRN


find it hard to raise their motivationlevel. So much could be had for theasking and, therefore, their best effortsmay not be needed. The high achieve-ment of children of well-to-do parentswho work on their own efforts is a fa-vorable reflection on the parents whohad reared them.

That Gloria Macapagal took fur-ther intensive graduate study is also atribute to her own search for self-im-provement. She initially studied gradu-ate economics at the Ateneo Univer-sity where she also took a job as a fac-ulty member in its Economics Depart-

* Gloria Macapagal Arroyo became President of the Philippines two and a half weeks after this paper was first publicly released as a Discussion Paper of theUniversity of the Philippines School of Economics on January 2, 2001. After one try to change the subjunctive mood to reflect this reality, the author revertedto the original title, with minor revisions, and decided to retain the speculative nature of the paper.** Professor of Economics, School of Economics, University of the Philippines. In my own lexicon, this paper was designed as a topical comment on a veryimportant issue–the possibility that a Ph.D. in Economics and a graduate of the U.P. School of Economics could become President of the Philippines. GloriaMacapagal was never my student. I have talked to her only once, in a neighborhood Christmas party just before she became a candidate for Vice President(we happen to live in the same neighborhood). She was a graduate student at the School of Economics when I was still connected with the government. Whenshe finished her doctoral work, I was already working with the World Bank in Washington D.C. and I returned to my post at the School only in 1998. Mycolleagues at the School remember her as a serious student.

If the current impeachmentof President Joseph Estradasucceeds in his removalfrom office, then Vice-Presi-

dent Gloria Macapagal Arroyo wouldbecome President. Her rise as a politi-cian is one of the fastest in Philippinehistory. There is no doubt that herpedigree, as the daughter of a formerPresident whose name is still revereddespite the distant years, helped her alot.

But who is she, aside from thepolitical persona?

Toward the Ph.D.It is not as widely known that she

is Dr. Gloria Macapagal Arroyo by vir-tue of a Doctor of Philosophy Degreein Economics that she received fromthe University of the Philippines in1985. In her submission to the School,she downplayed her maiden surnameto an “M.” However, she connectedwith that surname by dedicating herthesis “to my parents, former Presidentof the Philippines and Mrs. DiosdadoMacapagal.”

Her academic preparation makesher one of the best-prepared politiciansin the country from the standpoint ofeducational attainment. Her knowl-edge of economics should be helpfulto a leader when presented with com-plex economic policy options. It wouldtherefore be useful to appreciate thispoint and discuss its implications.

As the daughter of prominentparents, it is a remarkable achievementthat she worked to obtain a Ph.D. de-gree. Generally, young people whocome from families with inherited eco-nomic stature or political power often

It is not as widely known that she is Dr. GloriaMacapagal Arroyo by virtue of a Doctor ofPhilosophy Degree in Economics that she re-ceived from the University of the Philippines in1985.

Gerardo P. Sicat **

Dr. Gloria Macapagal Arroyo:The next Philippine President

could be an economist*


ment. Later, she sought a faculty awardfrom the Ateneo faculty developmentprogram to enable her to enroll at theUniversity of the Philippines School ofEconomics (UPSE).

Ph.D. studies are for those whoseek a specialist training. The programat the UPSE is not a mediocre course.Economics has become a specialist sub-ject and at U.P., the work is up to cur-rent developments in the discipline.The faculty is varied, some haveobtained their degrees fromgraduate schools in the U.S. andelsewhere. The faculty engages inboth research and policy work, andhas a professional stature in theAsian region and internationally.

One aspect of Ph.D. studythat often defeats many a studentwho has passed the early hurdlesis the research effort that is put inthe thesis. The thesis has to be ofacceptable quality to the faculty.This means that the student hasto aspire to the status of her men-tors. The thesis is the final hurdleprior to acceptance within that se-lect group of professionals. Toqualify for that stage of researchwriting, it is important that the stu-dent passes comprehensive exami-nations for the Ph.D. candidacy.This requires written and oral ex-aminations with the faculty. A com-mittee of three faculty membersserves a Ph.D. thesis panel, and theresearch is defended in an oral exami-nation.

The Ph.D. degree is for the stu-dent with high intellectual aspirations.It is professional education of the high-est order. Aside from intellectual equip-ment, it also requires of the studentenormous personal discipline. Such adiscipline would be most exacting es-pecially in the preparation of the Ph.D.thesis. In that endeavor, the studentwould be essentially on his own. Manystudents who have already passed their

comprehensive examinations fail to fin-ish their degree for a number of rea-sons. Some lack the concentrationneeded to do the research and finishthe thesis. Some get lucrative jobs thatget in the way. Others have family obli-gations to fulfill, especially in the caseof married graduate students who areraising children. Still others might havea unique difficulty focusing the re-search topic as to foment frustrationand, later, disappointment.

This project involved a large teamof economists at the School of Econom-ics that was then headed by the laterenowned Dean José Encarnación, Jr.Her involvement in this project helpedto crystallize her research thesis relatedto government expenditure on tourismfor the doctorate, which was to analyzethe impact of tourism expenditures onthe economy. Her Ph.D. thesis acknowl-edges this point.

Gloria Macapagal did man-age to finish her Ph.D. course. Shetook undergraduate studies atGeorgetown University, the JesuitUniversity in Washington D.C. Thisperiod of her studies appeared tohave coincided with the years whenBill Clinton was also a co-student.She finished her undergraduateeducation in Assumption College.But her having finished a Ph.D. inEconomics at U.P. should be hercrowning achievement as a stu-dent.

In 1968, she got married to ascion of the Tuason clan andsettled in La Vista in Diliman,Quezon City, a community flankedby the campuses of UP and Ateneoand Maryknoll (now Miriam). Shewas married and with childrenwhen she began her graduate stud-ies. Here was how she justified get-ting a job outside and studying fur-ther:

“…When I got married, I livedwith my in-laws. I lived with myhusband’s family, so I didn’t re-ally have my own home to run.So in that kind of environment,it’s really conducive …to look forsomething to do outside.”1

It helps to be connected with aresearch project that provides a job aswell as stimulus for the intellectual ef-fort. This was what Gloria Macapagalhad at the U.P. School of Economics.At the stage when she was about towrite a doctoral thesis, she also becamea teaching fellow at the School. She alsogot recruited into a long-term researchproject. This was the multi-year Eco-nomic and Social Impact AnalysisProject that had for its objectives theevaluation of the impact of develop-ment projects in the government.

1 As I was finishing this paper, a timely interviewwith Gloria Macapagal Arroyo appeared in the De-cember 24, 2000 issue of the Philippine Daily In-quirer. This and the next paragraph are taken fromsaid interview (Anonymous 2000).

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Asiaweek, 3 November 2000


She wanted to become a teacher.She wanted to become a professional,and finally a technocrat in government.In her application for the Ph.D. courseat the UPSE, she said that she wantedto take up a doctorate in economics be-cause she wanted to be a technocrat.

The doctoral thesisThe doctoral thesis that Gloria

Macapagal submitted to the School ofEconomics provides a clue to her com-petence as an economist. The study wasentitled “An Investigation of the RealEffects of Government Expenditureswith an Application to Tourism Expen-ditures.” It dealt with issues in publicfinance and macroeconomics that werecurrent in the profession at the time.In turn, those issues—the real effectsof public expenditures on theeconomy, in particular on the privatesector—are at the center of currentdoctrinal controversy in macroeconom-ics. This doctrinal controversy flared inthe field of economics as a result of thechallenge waged against the dominanttheory of aggregate demand embodiedunder Keynesian economics.

The doctrinal debate is in thecontext of the effectiveness of fiscalpolicy, trade-offs between inflation andgrowth, and, in brief, the debate be-tween Keynesian economics, on theone hand, and the revival of the oldclassical economics through the ratio-nal expectations school, on the other.Her study sought to study fiscal expen-diture issues in the context of modelsoffered along the new classical lines incontrast to Keynesian.

At the heart of theissue is whether fiscal defi-cits lead to income expan-sion or provide competi-tion with private sector ac-tivities. The doctrinal is-sue critical to her ques-tion was the effect of gov-ernment expenditure onoutput. In particular, isgovernment expenditurelikely to lead to an expan-sion of output, and if so,by what mechanism, ifany? This was the topic oflively debate in recentyears, a debate in whichthe major tenets of main-stream Keynesian eco-nomics came under at-tack in doctrinal terms.There were differentmodes of thinking aboutthe role of government and output,some of them even emanating fromolder principles. The issue centered onold propositions with new and unex-pected twists.

One of these is known as theRicardian equivalence proposition, anold idea discussed by David Ricardo, aclassical economist of the 19th century.This proposition claimed that peoplereduce their income expectationsequivalent to the amount of the repay-ment of the debt at a future time. Insuch a world, when a government in-curs new debt, households anticipatethis by expecting that their future in-come would be affected by future taxes.In that event, households discount thebeneficial output effects of new deficitfinance by anticipating the taxes thatare due to finance the debt repayment.

The other proposition of eco-nomics is that government expenditurecompetes for the same resources sothat government expenditure couldcrowd out private activity. The conven-tional view at that time was that in thepresence of excess capacity and unem-ployment of labor, any new expendi-ture would lead to a multiplier impactthat raises output and employment.

The essence of these two propo-sitions—resuscitated by a stream ofmacroeconomic critics of Keynesianeconomics—was to put doubts on theeffectiveness of fiscal policy. The newschool of economists challenging theconventional results of Keynesian eco-nomics was called the rational expec-tations school.

By the 1970s and 1980s, alterna-tive explanations were being sought toaccount for the failure of fiscal deficitsto raise employment rates in industrialeconomies. This led to the formulationof alternative macroeconomic hypoth-eses. The debate centered on what wasthen called the “Philips curve contro-versy.” The Philips curve formulation

Gloria...from page 9

She wanted to become a teacher. She wantedto become a professional, and finally a tech-nocrat in government.


predicted a trade-off between growthpolicy (represented by fiscal andgrowth stimulus following Keynes) andemployment rates. Many observed thatthat trade-off was weak or did not ex-ist, and it was the major point raised bythe rational expectations school thatbegan to challenge the macroeco-nomic mainstream.

The literature on public financeincludes a study of Robert Barro(1981), with insights from Martin Baily(1968, 1971), which led to the revivalof the Ricardian equivalence proposi-tion. The proposition stirred controver-sial waters. Empirical validation of thetheory became the main issue. The em-pirical literature tested the effective-ness of government expenditure as aninstrument of output change.

At the time of the writing of herthesis, prominent works along the lineincluded investigations of MartinFeldstein (1982) whose work provideda defense of accepted theory of themultiplier impact of governmentspending. The empirical work of RogerKormendi (1983), whose investigationsprovided the grist to the crowding-outeffect of government spending on pri-vate consumption, supported thepoints stressed by Baily and Barro.

Dr. Macapagal’s study took a partof this tradition to pose questions aboutpublic expenditure policy in the Phil-ippines. Using national income andgovernment spending data, she thenexplored alternative hypotheses withher own econometric investigations,following the lines individually pro-posed by Feldstein and Kormendi.

The effort meant estimatingequations that served as alternative hy-potheses for the behavior of privateconsumption in relation to differentstreams of output and other forms ofexpenditure. Her propositions exam-ined consumption expenditure as be-ing dependent on a number of factors

including output (GNP), tax revenues,real transfers, the public debt as proxyfor wealth, and corporate retainedearnings.

These econometric calculationsused statistical techniques of regres-sion, making sure that the accepted re-gressions met statistical standards ofgoodness of fit and that the equationsdefined by the time series data alsoused satisfied tests of statistical reliabil-ity. Her regression estimates found noevidence of the existence of theRicardian equivalence hypothesis inthe Philippine context. There was noevidence to indicate that incurring afiscal deficit implied a corresponding

The chapter that focused on theexpenditures on tourism examined themagnitudes of the public expenditureson tourism and analyzed their impacton output. The period under study cov-ered the 1970s and early 1980s. Shefound that tourism expenditure on theFolk Arts Theatre, the Miss Universecontest and the Ali-Frazier fight, amongothers, had some multiplier effect onoutput. But she examined such posi-tive findings against the alternative ofemploying the same amount of expen-diture on social services. She concludedthat the net difference in economic im-pact would have been higher if the re-sources were spent on social servicesrather than on tourism.

+12

anticipation that future taxation wouldbe expected.

The more important finding inher study, however, confirmed thatthere was strong evidence of crowd-ing out of private expenditure whengovernment expenditure was intro-duced. Her findings on this score wererobust. These findings, as discussedabove, formed the article that she pub-lished in the Philippine Review of Econom-ics and Business in 1987.

But her doctoral thesis coveredmore ground. The work was extendedto two other aspects of the problemthat were treated separately in twomore chapters. The latter part of thethesis was devoted in particular to pub-lic expenditures for the developmentof tourism.

The last part of her study was farremoved from the empirical investiga-tions described above. She followed adifferent research tradition by using in-put-output analysis. She verified thedirect and indirect inter-industrial im-pact of expenditures on tourism on therest of the economy and compared thesame with similar expenditures on so-cial services. Using the 1978 input-out-put model of the Philippine economy,she applied a given final demand pro-jection on the input-output structure.She came out with strong conclusionsthat social expenditures had a muchstronger impact on the economy thanthe same volume of expenditure ontourism.

Gloria Macapagal’s doctoral the-sis demonstrates a state-of-the-art effort dealing with an em-

She came out with strong conclusions [in herthesis] that social expenditures had a muchstronger impact on the economy than the samevolume of expenditure on tourism.


The post-Estrada scenario andlessons from the past

The most likely scenario of anEstrada conviction, or resignation evenif acquitted, is the Constitutional route.This means that Gloria Macapagal Ar-royo becomes president. If this specificscenario becomes the flow of history,what economic issues of performancewould await the new president?2

Estrada factor is mainly a perceptionarising from poor management, erraticstyle, and lack of credibility of the lead-ership. That perception discouragesany favorable decisions that are ben-eficial to growth and developmentfrom being made. It is a factor that addsto the gloomy forecast of future eventsand makes decisionmakers postponetheir decisions. When the Estrada fac-

tor is taken off, a leapin confidence by busi-ness and investorswould be easier to re-alize until a new lead-ership proves itsworth through hardwork and wise deci-sions.

Based on theway the economy im-mediately respondedto the accusations of

corruption against the President, to-gether with the other reasons that be-came apparent as he continued in of-fice, the negative Estrada factor couldat least be around 20 percent of cur-rent indicators.4 The impeachmenttrial of Estrada in the Senate took awaypart of the volatility of that negative fac-tor. It helped to produce a temporarybut relative calmness in expectations.However, that calm presages a bigstorm, especially if the judgment on theimpeachment should fail to become

2 There are, of course, countless other scenarios. So long as the new leader faced the economic challenges of the nation squarely, the economic issues wouldpresent themselves in whatever scenario. From among the competing scenarios, the Constitutional route appears to hold sway, because it is what thecountry’s political institutions would demand (Fabella 2000).3 In a moment of candor, perhaps a slip of the tongue, Executive Secretary Ronaldo Zamora was reported to have said in a radio interview that Estrada hadthe practice of sleeping during what should be his working hours. This “damaged” not only the presidency but also his ability to lead effectively. Zamora saidthat the economic crisis and the impeachment trial made Estrada realize that he “had to be awake at the right hour… In the morning, there is need for papersto be signed and processed.” Secretary Zamora ought to know because as cabinet officer, he manages the office of the President, the center of the cabinetofficialdom (Nocum 2000).4 This negative factor can be measured by using standard indicators. One approach would be to project the performance of the economy if a different leaderwere in charge of the country by way of some counterfactual hypothesis. Some of the problems related to the stock market scandal and the high level of thefiscal deficit need not have happened. The loss of confidence arising from these events led to the decline of overall economic performance. A more easilycalculated alternative approach would be to use the exchange rate as some measure of the negative factor. At year-end (refer to Manila newspaper accountsof December 28, 2000), Governor Buenaventura of the Bangko Sentral ng Pilipinas (BSP) said that the peso should be at around P46 to P47 to the dollar ratherthan the current rate of P50 to P51 range if there were no political crisis. The impeachment proceeding had actually helped to stabilize the exchange rate andreduced uncertainty. Otherwise, the peso exchange rate could have risen far above the P51 to the dollar rate by now if the impeachment process had notabsorbed the shock of uncertain events. It is to be recalled that prior to the Asian crisis, the peso was slightly higher in value than the Thai baht. Today,despite the problems in Thailand, the peso is about 17 percent cheaper than the Thai baht in terms of the US dollar. The current baht is around P41 to P42to the dollar. It would therefore be justifiable to use the base of P40 to the dollar as the basis of the negative Erap factor.

Gloria....from page 11

pirical topic. Correctly, she focused onresearch issues dealing with thecountry’s problems. Her treatment ofthe subject contained a reasonablybrief summary of the relevant theoreti-cal literature to her research agenda.Her research covered three differentapproaches to the study of the impactof government spending. First, therewas an econometric estimation of thedeterminants of aggregate consump-tion expenditure when thegovernment’s activities are taken intoaccount. Second, she undertook aquantitative assessment of fiscal expen-ditures in the tourism sector. Finally,she employed input-output analysis toexamine the comparative impact oftourism as against social expenditures.

The doctoral thesis showedGloria Macapagal as an accomplishedeconomist with a good command of thecurrent debates in economic theory.She also knew how to employ up-to-date empirical methods used in eco-nomic analysis. She was at home in dif-ferent modes of economic analysis.

Had she decided to become a re-searcher rather than a public officialand a politician, she would have beenproperly equipped to contribute to theprofession more than adequately.

The removal of Estrada does notguarantee better growth and develop-ment. The economy, however, stands amuch better chance of improving thanunder Estrada, given his failure to at-tend to the work of the presidency dur-ing the almost three years that he hasbeen in office.3 The easy part is pull-ing off from the nation’s back the nega-tive Estrada factor. In its place, it wouldbe possible to put in place a new startand a restoration of business and in-vestment confidence. The negative

Had she decided to become a researcherrather than a public official and a politi-cian, she would have been properly equippedto contribute to the profession more than ad-equately.


implementation not only fortheir experience but also forthe institutional memorythat they embodied. The re-sult was that some importantprograms suffered disrup-tions for an unduly long pe-riod.

A result of these mis-takes was the neglect ofsome critical sectors by Mrs.Aquino’s government. To-ward the second half of herterm, the neglect of the en-ergy sector caused regular

power shortages to the detriment ofboth households and business institu-tions. The energy development pro-gram was a major casualty of politicalwrangling. The nuclear power projectitself symbolized the corruption of theMarcos leadership and discontinuingit in turn gave the succeeding leader-ship problems in searching for energyreplacement sources that could meetthe growing energy needs of the coun-try.5

Faced with the consequences ofthis neglect toward the end of her term,Mrs. Aquino’s presidency was perceivedto be weak and she became the targetof a constant threat of challenge fromthe military. (Of course, Mrs. Aquinohad a major share of two catastrophicnatural disasters that shifted the atten-tion of the national leadership: theearthquake of 1990 and the MountPinatubo eruption of 1991, both ofwhich had negative effects on eco-nomic performance.)

The post-Estrada transitionGloria Macapagal’s transition into

a prospective post-Estrada period isseen to be less filled with problems thatMrs. Aquino had in her time. Althoughin political terms, it is as sensational be-cause of the impeachment process andthe public disemboweling of the ac-cused, the post-Estrada succes-sion does not provide the dra-

Lessons from the post-Marcos transition

The circumstances ofthe succession are in sharpcontrast to the succession ofCorazon Aquino to Marcosin 1986. The economic cri-sis of the Marcos period wasprolonged. It was an ever-deepening crisis for almostthree years. The crisis dated back to Au-gust 1983 when Ninoy Aquino was as-sassinated and it worsened until theEDSA revolt in February 1986. The pro-longed economic crisis led to a largeexternal debt, a legacy of economic de-pression and severe shortages in theeconomy. The resulting crisis set thecountry back for almost a decade.

The problems that Mrs. Aquinofaced when she took office in 1986 werefar more difficult and more frustratingthan those that Gloria Macapagalwould face in a post-Estrada world, as-suming that Estrada’s disappearancefrom the scene would be accomplishedby January 2001. The economic disrup-tions that Mrs. Aquino endured duringthe transition from the Marcos rulewere deep and very challenging. Someof them were psychological. The deepresentments felt by the members of thenew government and their zealousness

to correct the mistakes of the Marcosrule made them commit mistakes thatcould have been avoided.

On the other hand, the disconti-nuity in some government programswere not necessarily caused by the dras-tic fall of fiscal resources inherited bythe Aquino government during the im-mediate post-Marcos transition. In fact,there were economic projects and pro-grams during the Marcos rule that wereneutral from the contentious politicalissues that divided the nation at thetime. A discontinuity occurred becausethe turnover at the top of the govern-ment echelon encouraged turnover atthe senior level of the government ser-vice. Although such was not the offi-cial policy, there were terminations andforced resignations of critical person-nel at the middle and senior levels ofthe bureaucracy. These personnel wereimportant to project management and

5 The nuclear project was a flagship economic project of the Marcos government. It was conceivedduring the energy crisis of the 1970s when the objective was to diversify the dependence of the countryon energy sources, including nuclear fuel. The plant was designed to represent a major capacity boosttoward meeting the country’s energy needs. Even as the project selection was about to be made in favorof General Electric, there was a reversal of the award to Westinghouse Electric, with a change in tech-nical specifications. In later investigations of the project, it became clear that the change in the awardwas a classic case of corruption through commissions paid indirectly to a crony who was tied to theleadership. The project was almost finished by the time of the EDSA revolt. The alliance between thosewho criticized the project as an environmental disaster and those who wanted to leave the project as anexample of the corruption of the Marcos leadership led to the project being abandoned. But the projecthad cost the country billions of pesos. It was as if the country, poor in resources, decided to build anaircraft carrier and, during a typhoon while at sea, the aircraft carrier sank. Billions of pesos of businessdebt therefore sunk with the project, with the country paying for it as part of the external debt. +14

credible. That appears to bethe way in which Estrada hascreated divisiveness in thesocial fabric in so short atime.


matic backdrop on the state of theeconomy compared to that of the post-Marcos succession. Up to the present,the economy is still holding up. Themain problem today is how to preventthe economy from further deteriorat-ing, and to restore the momentumthat was available to the leadershipwhen political power was transferredfrom Ramos to Estrada. The Asian cri-sis provided a new dimension to theeconomic issues facing the Estradapresidency, but there were enormousopportunities available which he failedto take advantage of. Provided that thetrial is relatively quick and Constitu-tional succession is not delayed, itwould be possible to restore theeconomy back to relative health. Thelonger the succession is postponed(that is, if Estrada digs in and decidesto continue in office if an acquittal inthe Senate would take place), then themore the prospects of an economictailspin and crisis of grave costs to thenation become almost certain.

The major political issue thatMacapagal faces is how to bring abouta cohesion among disparate groupsthat had helped to remove Estradafrom government because of its corrup-tion and inefficiency. Assurance of themain constituency of Estrada—thepoor—will require not only a majoreffort in public information campaignon the reasons for his removal fromoffice but also genuine efforts to showthat the government is not turning itsback on pro-poor and social justice pro-grams. Despite the widespread public-ity of the trial on television, some atti-tude surveys indicated that Estrada’shold on mass opinion remains strong,even though his fall from power willassure that the graft and corruptioncases that he was accused of would be-come public knowledge and thereforeweaken that charismatic hold. Themain message therefore that the con-

ditions of the poor will improve with achange in focus of the leadership is veryimportant.

For the short-term, the problemof Arroyo is how to reverse Estrada’serratic management of the economyand replace it with an economicallyfocused leadership. Estrada’s legacy isa compounding of the country’s eco-nomic problems. Some of the misstepsof Estrada have damaged the future ofthe economy because of mixed signals.6

Such thoughtless changes in policywere short of catastrophic but were cer-tainly in a ruinous direction. Estradasimply missed good opportunities andaggravated problems where thereought to have been none. The prob-lem of Arroyo is how to get a stallingengine to perform toward a smootherrun.

This can only be done effectivelyby improving the conditions for rais-ing both domestic and foreign invest-ments. This requires a continuation ofthe liberalization program of theeconomy to raise its competitive leveland improve efficiency. Most econo-mists understand that the reason whyother Asian countries have progressedfar ahead of us is that their policies had

the effect of expandingthe demand for laborfaster than the supply. Theobjectives of their overalldevelopment policy wereto increase the growth ofefficient and competitiveinvestments and indus-tries, relying on the mar-ket demand that they wereable to command and noton the basis of the statesubsidies that they re-ceived. Structural reformsin the industrial and tradesectors which previous ad-ministrations imple-mented through majoreconomic liberalization ofpolicies led to an increase

in foreign investments and exports. Asthese reforms took root, the countrybegan to reap the harvest of rising in-dustrial exports throughout the 1990s,especially in the second half of that de-cade.

The expansion of labor-intensivetypes of export industries is an impor-tant sign in that should this continueand the export sector become more di-versified, the domestic industrial basewould be more integrated not only in-ternally but also with the worldeconomy. This would make the de-mand for labor grow much faster. It willonly be then that the country will ex-perience a strong rise in real wages.Thus, focusing on the expansion ofinvestments for industries that utilizeour inexpensive labor for products

6 An example was the unexpected decision to ab-rogate the Philippine-Taiwan air agreement, whichsent the wrong message to Taiwanese investors.Of course, the policy was to give support to acrony’s case of strengthening the position of thePhilippine Airlines in a dispute on market sharing.In the end, Estrada retreated from this positionafter causing harm to the economy’s investmentpromotion prospects and disruption of transporta-tion routes for thousands of Filipino industrial con-tract workers in Taiwan’s factories and establish-ments.



needed in foreign markets is a goodpolicy focus.

Estrada’s poor fiscal managementis a major concern. The result of this isfiscal deficit. It has deteriorated eachyear since Estrada has been president.From close to zero as a percent of theGDP, the fiscal deficit has been risingeach year. It is inching towards 3 per-cent of GDP whereas it was almost zeropercent when he took office. (In nomi-nal terms, a fiscal deficit of about P120billion is expected by the end of 2000.)This fiscal deficit was not only causedby a growing demand for expenditure:it was a failure on the revenue side.

While the deficit was partly dueto the Asian economic crisis, the otherpart dealt with the government’s slowreaction to critical issues and develop-ments. Foremost among these prob-lems, of course, is fiscal restraint on theexpenditure side followed byinadequate revenue efforts.

In fact, the increase ofthe fiscal deficit was also thehandiwork of sloppy revenuework. First, tax administrationweakened. The collapse in thepursuit of the Lucio Tan taxevasion case ruined incentivesand morale in the tax collec-tion agency front. The rise ofcustoms smuggling has beenassociated with duty free im-ports by those with duty-freeshop privileges. This was aproblem of implementationthat has been exacerbated bythe perception that certaincronies of the President were behindthe smuggling problem.

Second, the government did notpursue the privatization program as vig-orously as required by the expectedbudget gap. The privatization programwas supposed to yield significantsupplemental revenues for the govern-ment to meet part of the expected fis-

cal gap. By falling into a relaxed pos-ture in implementing the privatizationprogram, it fell further into the trap ofallowing major public corporations todepend on budget subsidies becausethey were not allowed to pursue priceincreases to meet the costs in sellingtheir economic services to the generalpublic. The contingent liabilities ofthese corporations became actual li-abilities of the fiscal sector. Amongthese corporations were the Metrotransit authorities, the National FoodCorporation (NFA) and the NationalPower Corporation (NPC).

The privatization of the NFA wasdesigned, from a fiscal standpoint, tobring in new and extraordinary rev-enues, and improve the distribution offood staples as well as reduce the lossesdraining the budget. But Estrada couldnot make up his mind to pursue a com-mitment made with the Asian Develop-

ment. These included the sale of thecopper smelter plant and the phospatefertilizer plants.

In general, work on remainingprivatization projects were stalled. Oneof these are the reforms in the electric-ity generation sector which includedthe law designed to unbundle the hugegenerating assets of the NPC by priva-tizing the electric generation and dis-tribution sectors. If said law was passed,new investments in the power sectorwould certainly follow. Another benefitwould be to have a part of the publicexternal debt reduced since, by virtueof privatization, some of that debtwould be acquired by the private sec-tor. But the major legislation on thepower generation sector reform lan-guished in the Congress because of lackof presidential leadership on this mat-ter. This resulted in a major loss interms of new investments because prior

to the 1998 presidential elec-tion, the legislation was al-ready close to passage by Con-gress.

Admittedly, major eco-nomic policy problems re-main unresolved. But thesewere the problems thatEstrada, with his huge man-date and popularity, failed topursue because his attentionapparently was on otherthings—the things thatcaused his impeachment. Theimpeachment trial has takenvaluable time away from criti-cal economic development is-sues. Thus, Estrada’s succes-

sor will inherit a legacy of unresolvedand difficult problems. Hard decisionsare required and important steps haveto be made in lifting the confidence ofthe investment sector and reintroduc-ing foreign investments into the coun-try.

The rising fiscal deficit al-ways poses a threat of inflation. +16

ment Bank (ADB) in line with a publicpolicy reform program designed to im-prove food distribution. This broughtdown Estrada’s international credibil-ity as a leader in the eyes of multilat-eral institutions. And while a numberof privatization transactions of state as-sets took place, these were the sales thatwere near that stage before formerPresident Fidel Ramos left the govern-


A growing fiscal deficit could weakenthe rest of the economy by transmit-ting higher borrowing costs on the restof the economy. The increase in thefiscal deficit could also mean crowdingout meaningful private sector activity.

Moreover and significantly, thesize of the fiscal deficit has put thecountry out of compliance with themacroeconomic program with the In-ternational Monetary Fund (IMF). Thismeans that the government could notturn to the IMF and other multilateralfinancial institutions to provide supportfor the financing of the fiscal deficit.This is the reason why the governmenthas turned towards more expensivefunds (offshore dollar funds and exter-nal capital) to finance the deficit. Ini-tially, this financing method does notpose an inflationary threat, but it raisesthe external debt burden and thecountry’s foreign exchange rate expo-sure.

rises at least by the additional cost ofthe downgrades. They themselvescould suffer downgrades if they are in-ternationally rated by the credit agen-cies, as indeed the major Philippinebanks such as the Metropolitan Bankand the Bank of Philippine Islands are.

The obvious cost of the rising fis-cal deficit and the downgrade of sover-eign debt rating is for the banks to passon the rising cost of credit to Philip-pine borrowers. This means that com-panies and institutions in need ofcredit, including those that are alreadyin debt and/or have credit to refi-nance, will have to face an increase ininterest cost. This is the lurking dan-ger, for if borrowing costs went up withthe deteriorating posture of the over-all macroeconomic picture—the nega-tive Estrada factor—many companiesthat are highly leveraged are in dan-ger of financial collapse. This couldonly lead to rising nonperformingloans (NPLs) in the banking system,the average of which had risen in 2000.Thus, a prolonged crisis will aggravate,

revenues and efficiency gains in pub-lic corporations. The first gains wouldtherefore be felt in the improvementof the fiscal deficit. (But the popularmind does not digest the implicationsand benefits of reducing the fiscal defi-cit. It is only when its effects hit thepeople that people become aware ofits bad consequences.) The other ben-efits would be improved efficiencies inthe whole economy because the energyreform bill, if done right, could leadnot only to cheaper energy prices inthe longer term for the consumingpublic but also toward a large increasein infrastructure investments in theeconomy.

But a new, highly motivated andforceful president who does the neces-sary homework (unlike Estrada whowas essentially sluggish in these mat-ters) could articulate these benefits andcould force the solution to the issuesand get the work done.

All of these will put to the test thepolitical skills of Gloria Macapagal Ar-royo. This is, however, an area whereshe has not been sufficiently tested.Her background is largely in academicand technocratic work like in the in-dustry department of government. Herstint in the Senate was relatively brief,and her management of the Depart-ment of Social Welfare and Develop-ment (DSWD), the assignment that sheaccepted as Vice President, was largelyas head of a relatively safe sinecureuninvolved in the economic issues fac-ing the Estrada government.

The political calendar has a presi-dential election in 2004. For any newpresident, introducing difficult eco-nomic reforms during the second halfof an unexpired term could pose someserious calculations because the gainsfrom those policies could only be real-ized later. But if these succeed, enor-mous potentials for future expansionof the economy would be in the off-ing. Policies are best put in place dur-


But a new, highly motivated and forceful presi-dent who does the necessary homework...could ar-ticulate these benefits and could force the solu-tion to the issues and get the work done.

not help, the financial position of Phil-ippine companies.

The succeeding president istherefore faced with difficult policy is-sues. These issues are not popular is-sues that could be easily understood.Some of the measures might requirepain before the gains from their adop-tion become obvious. The improve-ment would help reduce the opera-tional deficits of state corporations thatkeep rising because the governmentfails to take needed actions to improve

The fiscal deficit already causedthe downgrade of the Philippinegovernment’s sovereign debt ratingsmade independently by Standard andPoor’s and by Moody’s during thefourth quarter of 2000 by one notch inthe rating levels, with a warning of areview for future reduction. This sim-ply translates into higher cost of bor-rowing for the national governmentwhen it accesses the international mar-ket. With the downgrade, the obvioussecondary impact is on Philippine com-panies and banks. Their borrowing cost


ing the first half of the presidency sothat the benefits from them could beharvested during the second half. Dur-ing the second half of the unexpiredterm of Estrada, potential candidatesfor president would attempt to maketheir presence felt to challenge her.Therefore, the last three years couldpose difficult challenges regarding thepassage of the most difficult economicreforms.

The Estrada gov-ernment is remarkablein that it has failed toundertake any major re-forms because of the in-nate deficiencies of thepresident as an eco-nomic leader. Everytime he proposed re-forms, he retreatedquickly when the criti-cisms got tougher. 7

Lacking the patience orthe ability to articulatethese programs, hefailed to make the in-vestment climate ac-tive.8

Estrada’s accomplishment in theeconomy was one of providing the con-ditions for relative standstill. Theeconomy grew at a level of growth per-mitted by an economy already beset inpart by the Asian economic crisis. Theperiod of rising growth rate that wasthe result of the economic reformswere stalled because of a multiplicityof factors, including the Asian crisis,but more because of Estrada’s poormanagement style and inadequateleadership. The economic liberaliza-tion program stalled in some direc-tions, notably in tariff reforms.9 Therewere some gains in policy—even in thetariff reforms—but overall, the actionsof the government were to stall hereand there.

Among the main problems re-lated to poverty in the country—the

directions of reforms that a programfor the poor could have made a majordent under the Estrada presidency—ishow to raise the number of jobs in thecountry. This is far more importantthan the preoccupation with protectivelabor legislation, which has been thehallmark of Philippine policymakers’concern for decades. Key solutionscould have been focused on raising in-

mand for labor and the employmentrate is to pattern the economy’s growthtoward the maintenance of industriesthat are competitive and whose exist-ence are justified by commerce ratherthan protected markets. The momen-tum for growth was established by thestrong efforts undertaken by theRamos government to bring the coun-try toward the international level. But

there were major short-comings because therewas not enough time topursue the next stage ofreforms. Those reformswere part of the man-date of Estrada thatwere conveniently for-gotten as soon as hestepped into office.

The coming yearsare critical for the coun-try because it is a periodof rapid international-ization. First, theASEAN market will bemoving toward the real-ity of a common group-ing of countries with re-gional commerce as a

major aim. The net result is the expan-sion of the domestic market of theeconomy. Second, the world’s tradingrules have been redefined by treaty ob-ligations agreed upon in the WorldTrade Organization (WTO). The inter-national trading system opens up enor-mous opportunities for countries toreap major rewards if they play theircards right. When China—thelast of the socialist countries—

7 The following are instances of these retreats. He backtracked from the pork barrel issue that he hadpromised to do away with without substantial legislative concessions. The retail trade liberalization waspassed with much watered-down provisions. The power reform bill had not yet passed; the constitutionalrevisions that he proposed were shelved. The tariff reform program was not fully revised as planned.8 Refer to G. Sicat (2000) on the issue of Erap’s weak economic leadership.9 Refer to G. Tecson (2000). Her study cautiously noticed the progress in tariff reforms. However, thestudy noted the setbacks from planned tariff reforms in the manufacturing sector where some reversalsin tariff changes had been put into effect to favor some industries. The issuance of Executive Order No.63 singles out a number of manufacturing industries in which the action to raise tariffs reversed thegeneral trend that the government has adopted since the 1980s.

+18

vestments, both domestic and foreign.Ultimately, such preoccupation couldraise the demand for labor and domes-tic wage rate in the country.

A sustained program that leads tohigh employment growth results froma robust economy in which industriesthrive because they operate at a com-petitive level with other countries. Thebest medicine for increasing the de-

AsiaWeek, 3 November 2000


trading.

Probing what an Economistas President would do

If one’s early professional workcould serve as a gauge of a nation-builder’s approach to problems, couldwe predict what President GloriaMacapagal Arroyo would do?

Here, I am reminded of a quotefrom a sage economist when he wasposed the ultimate question: “As aneconomist, what would you do if youwere President?” The answer was, “Butif I were President, then I would be apolitician!” Of course, this is an exag-geration designed to avoid the ques-tion.

The political skills of a leader aredefinitely important. But an economistseeking the ultimate improvement inthe country’s plight would attempt toposition the country toward greater ef-ficiency and to direct the country’s re-sources toward comparative advantageas a principle of gaining world marketattention. To do this, the country’s fac-tors of production have to be competi-tive. This means taking advantage ofthe competitive edge of labor as themagnet for attracting foreign invest-ments. An economist can read betterthe myths and fallacies ofpolicymaking10 and can understand theneed to avoid their worst conse-quences.

If her doctoral thesis in Econom-ics could serve as a rough guide, whatcan we predict about her economicinclinations if she becomes Presidentof the Philippines? As President, shewould have to make decisions based on

a broader set of factors, including, ofcourse, economic ones.

It is fortunate that she chose tostudy government expenditure and itsimpact on the economy. That is an im-portant area where it is possible to havea good reading of her views on manag-ing fiscal issues. If her study provides aclue to what she would do if she werein the shoes of a President, I ventureto make a few comments on how she

out” private sector activity. She will havea healthy skepticism about the so-calledcountercyclical policies.

Second, she will pay attention tothe composition of public expenditure.She will make efforts to improve theshare of social expenditure – educa-tion, health, and other social services.This means that specific budget com-ponents will have to be prioritized, pay-ing greater attention to the need to im-

10 Some of the glaring myths and fallacies that haveafflicted Philippine policymaking are discussed inone piece in a recent article (Sicat 1999).


endorses active engagement within theWTO to promote her economicgrowth, it is time for a country, such asours, to buckle up and work at how bestwe could gain from the international

would approach them if she weremainly dealing with these issues froman economic context.

First, I think she might become afiscal conservative if she does not getafflicted with the common disease thathits all political leaders: to spend more.All political leaders tend to regard pub-lic spending as a way to demonstrateability to serve the constituents. Buteconomists understand better that ex-cessive spending not matched by agrowth in tax resources could lead toinflation and to other economic dislo-cations. She will have reservationsabout having large budget deficits tofinance operational deficits of the gov-ernment. For this reason, she will putthe budget deficit under a much tighterrein. This follows from her finding thatexcessive fiscal deficits could “crowd

prove social development services. Thisfollows from the fact that, following herown investigations, she finds that ex-penditures on social services have ahigher impact than expenditures ontourism.

Third, she will likely strengthenpublic investment financing so thatpublic infrastructure investment neednot hinder the growth of private invest-ment. She will follow new techniquesof financing public investment fromprivate sector sources. But she willmake an effort to make these financ-ing arrangements productive so thatthey are not burdensome on the bud-get.

Fourth, although the responsibil-ity of the Presidency will take on manydemands, she will pay greater attentionto economic issues. Her professionaltraining as an economist will provideher with appropriate equipment indealing with intricate issues.

... An economist seeking the ultimate im-provement in the country’s plight would at-tempt to position the country toward greaterefficiency and to direct the country’s resourcestoward comparative advantage as a principleof gaining world market attention.


References

Anonymous. 2000. Gloria in excelsis. In PDIStaff Interview. Philippine Daily Inquirer.24 December 2000.

Arroyo, Gloria M. 1985. An Investigation of theReal Effects of Government Expenditureswith an Application to Tourism Expendi-tures. Ph.D. dissertation, University of thePhilippines School of Economics.

Arroyo, Gloria M. 1987. An Investigation of theReal Effects of Government Expenditures.Philippine Review of Economics and Busi-ness 24:55-78.

Bailey, Martin J. 1962. National Income andthe Price Level. New York; McGraw-Hill.

Barro, Robert. 1981. Output Effects of Gov-ernment Purchases. Journal of PoliticalEconomy 89(12):1086-1121.

Fabella, Raul. 2000. The J2K Crisis and theEconomy. University of the PhilippinesSchool of Economics Discussion Paper No.0012. Quezon City: UPSE.

Feldstein, Martin. 1982. Government Deficitsand Aggregate Demand. Journal of Mon-etary Economics (1):1-20.

Kormendi, Roger. 1983. Government Debt,Government Spending, and Private Sec-

tor Behavior. American Economic Review73(12):994-1010.

Nocum, Armand. 2000. Post Mortem: Estradaslept on the job – Zamora. Philippine DailyInquirer. 26 December 2000.

Sicat, Gerardo P. 1999. Myths and Fallacies inEconomic Policy Debates. Public Policy3(3):17-34. July-September.

Sicat, Gerardo P. 2000. Estrada’s Ruinous Eco-nomic Leadership. BusinessWorld. 4 De-cember 2000.

Tecson, Gwendolyn R. 1999. Where Are We inTariff Reform? Public Policy 3(3). July-September.

The full texts of recent

Development Research News

(DRN) issues and other

PIDS publications (Discussion

Paper Series, Policy Notes and

Economic Issue of the Day)

may be accessed at:

http://www.pids.gov.ph/http://www.pids.gov.ph/

publications/index/htmlpublications/index/html

Fifth, she will likely encourage thegrowth of the domestic economy in linewith improving the Philippine competi-tive position abroad. In doing this, shewill have a greater appreciation of theimportance of a sound exchange ratepolicy as a means of pricing Philippinefactors of production more competi-tively for international markets. Sinceshe has a more thorough understand-ing of many economic policy questionsthan most Philippine leaders, she willsurely show a quicker absorption ofeconomic issues than her immediatepredecessor.

The country therefore faces theprospects of having good luck on theleadership front after almost threeyears of a rudderless presidency. DRN

DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINEINSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings andrecommendations of PIDS research projects and important policy issues discussed during PIDSseminars.

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Development Research NewsVol. XIX No. 1

January - February 2001ISSN 0115-9097


The Philippines, togetherwith its neighboring coun-tries in Southeast Asia, hasa lot to gain from China’s

rapid economic growth, particularly itsincreasing foreign trade and invest-ment activities.

This was the conclusion of a studyentitled “China’s Changing Trade Pat-terns: Implications for ASEAN-ChinaTrade”by Dr. Ellen H. Palanca, a pro-fessor of economics and the directorof the Chinese Studies Program at theAteneo de Manila University. The re-search paper is part of a bigger projecton China undertaken by the PhilippineAPEC Study Center Network (PASCN),the lead convenor of which is the Phil-ippine Institute for Development Stud-ies (PIDS).

This finding is contrary to thecommon belief that some SoutheastAsian countries are going to lose theircompetitive advantages in many sectorsbecause of China’s economic rise.Palanca argued that based on the dataavailable, the rapid economic growthof China, specifically its foreign trade,has not been at the expense of thegrowth of its neighbors’ trade activities.

Palanca’s paper explained thatbusiness opportunities are expected tomultiply following China’s accession tothe World Trade Organization (WTO).Demand for imports will increase, par-ticularly consumer products and ser-vices, as the standard of living ofChina’s huge population goes up

swiftly. Likewise, China’s focus on ru-ral industrialization will force it to in-crease its imports for food and primaryinputs. In this case, she suggested thatthe Philippines can explore the gapsin agricultural and mineral resourcesupplies in China and fill up said insuf-ficiencies by exporting agricultural andother primary inputs to China.

However, she stressed that beforethe Philippines could tap the growingtrade opportunities in China, it has toimprove first the efficiency of its indus-tries, particularly the export industries,to make them more globally competi-tive. This includes improvement in thecountry’s labor productivity as well asthe efficiency of the government bu-

reaucracy and infrastructure such aspower, telecommunication and trans-portation. The government shouldalso be on guard that the peso is notovervalued.

Palanca also recommended thatthe Philippines should coordinate withChina in the conduct of joint researchto identify trade opportunities andniches based on comparative advantageas well as on intra-industry division oflabor. She added that the Philippinesshould explore investment possibilitiesin China to facilitate the expansion andgrowth of the country’s export of in-puts and services.

Finally, Palanca explained thatgreater liberalization in China wouldalso result in an increase in China’s for-eign investments. Thus, she concludedthat special attention should be givento attract Chinese direct investments tothe Philippines. According to her,these investments will not only providecapital but also technology that may bemore appropriate than those from ad-vanced countries. GFG

economic managers "do not commit the samemistakes," there is no doubt that a better 2001is possible.

The other special article in this issue is amiddle-of-the-road profile of the new president,Gloria Macapagal-Arroyo, and how she mayaddress the economic woes of the nation, be-ing an economist. The piece was written a littlemore than two weeks before the historic fourdays culminating on January 20, 2001. It waswritten by Dr. Gerardo P. Sicat, former socio-economic planning secretary of the Philippinesand professor at the University of the Philip-pines School of Economics (UPSE) wherePresident Arroyo obtained her Doctor of Phi-losophy Degree in Economics in 1985.

Editor's NotesEditor's Notes

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DRN

China’s economic boom:A boon to RP and other

ASEAN nations

Forthcoming

PASCN book!!

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