Country Study: Philippines

An Overview Philippines is known as the ‘poor man of Asia’ Even though it could reach the level of South Korea or Singapore, actual economic performance has remained poor Unequal distribution of income and corruption are major problem In 1898, Philippines was ceded to the U.S. following Spanish-American war and attained independence in 1946

An Overview (cont.) President Marcos ruled Philippines for 20 years. People power movement forced him in exile in 1986 Ramos’s administration brought more political stability Current President – Gloria Arroyos faces many challenges

An Overview (cont.) Population – 98 million Working age population 61% High population growth rate 1.98% GDP per capita $3,300 (compare with Thailand $8,500) Agriculture14% Industry 32% Services 53%

An Overview (cont.) High unemployment rate 7.4% Gini coefficient 0.46 and inflation rate 9.3%, 40% of population below poverty line External debt $54 million, FDI $20.78 million Filipinos working abroad

Development Model Import-substitution policy and overvalued peso during , diverted resources away from agriculture to import-substituting manufacturing Heavy regulation – in 1970 Price controls on rice and other agriculture products Reliance on agriculture as engine for economic growth Centrally planned economy with heavy involvement of government Overregulated economy

Development Model (cont.) During 1990’s, role of state was reduced, Privatization Program, Mixed-economy model 11 million Filipinos work abroad (11% of population) Heavy reliance on remittance as a source of foreign currency, surpassing FDI

Development Model (cont.) The remittances stand at $15.9 billion in 2008, representing 15% of GDP Government is taking steps to protect overseas workers (from illegal recruitment, mysterious deaths) They have been working in Japan, Hong Kong, China, U.K., Spain, New Zealand

Development Model and Outcomes Tax Reforms – Philippines has a very high level of corporate business taxes. Recently, the debate over Value Added Tax Slow growth rates – In 1960’s Taiwan and Philippines were at the same level of economic development. But today, Philippines is way behind the Asian Tigers Philippines’ economic policies have not fared well in terms of poverty reduction In 2007, the growth rate of 7.3% was the best the country has had in 30 years

Outcomes High cost economy plagued by inflation, bureaucracy, corruption and inefficiency During , inflation rates averaged at 13% Philippines has lowest saving rates in ASEAN nations (22% in 1992, 15% in 1994) As a result, high Philippines depends heavily on remittance & foreign debt ($59 billion)

Outcomes (cont.) Philippines business environment is not conducive to attract foreign direct investment The performance in poverty reduction is very disappointing. It has lagged behind East Asia and South East Asia In 2006, 32 percent of the population lived below the poverty line. The number of poor people (27 million) rose to its highest in 2006 Kuznets Curve – Even during good economic times, poverty levels increased

Outcomes (cont.) Vietnam & China started with higher poverty incidence in 1985 but their absolute poverty levels are lower than in Philippines (2000) Regional disparities in Poverty. Western Mindanao and East Visayas had four times more poverty than metropolitan Manila. Poorest regions account for 33% of the total number of poor Philippines has a high population growth rate (2.3%). To overcome poverty high and sustained level of economic growth are required Pro-poor program such as credit to poor, food subsidies benefited non-poor and politicians. The character of growth and quality of institutions is important.

Government Policies Poor government policies – international trade, fiscal and monetary policies Tax evasion is an important issue, compounded by corruption and mismanagement Public sector fiscal deficit has remained around 5 to 6% of GDP. Government relies heavily on direct and indirect taxes (VAT) Government expenditure account for 20% of GDP Debt-servicing burden is very high – about 45 to 50 percent of national budget went for debt-servicing

Government Policies (cont.) In 1990, Japan and IMF froze loan disbursements to Philippines as the targets for public deficits were not met Resource gap due to low saving rate Monetary policy – High inflation rates resulting in negative real interest rates, deregulation of financial sector in 1980’s Monetary and fiscal policies resulted in high intermediary margins in 1988 (loan rate 16%, deposit 4%) Reserve requirements were also very high (20%) raised in 1990’s to 25%

Government Policies (cont.) Government levied a tax on bank! (5% on gross receipts and 20% of deposit earnings) Supply shocks, dependence on agriculture, high levels of tariffs, protection of sugar industry (and others) Overruled Philippine peso in early years, and major devaluations in 1962 and 1970

Reason for dismal trade performance Overvalued Peso, a series of devolutions did not stimulate exports and curtailed exports (in pre- independence era P2=$1, in 1990 P28 = $1) Higher production cost Protection to encourage import-substitution Electric equipment and garments had a high import content

Current Development and Problems Philippines faces problems on almost-all the fronts IMF and World Bank loans for restructuring Super regions Second largest economy for outsourcing in Asia (after India) Cut in corporate tax reform from 35 to 30% Privatization for electricity and energy sector, underdeveloped regions of Luzon and Visayas receiving benefits