ECONOMIC PLANNING AND POLICY

Philippines Table of Contents

The Philippines has traditionally had a private enterprise economy both in policy and in practice. The government intervened primarily through fiscal and monetary policy and in the exercise of its regulatory authority. Although expansion of public sector enterprises occurred during the Marcos presidency, direct state participation in economic activity has generally been limited. The Aquino government set a major policy initiative of consolidating and privatizing government-owned and government-controlled firms. Economic planning was limited largely to establishing targets for economic growth and other macroeconomic goals, engaging in project planning and implementation, and advising the government in the use of capital funds for development projects.

Development Planning

The responsibility for economic planning was vested in the National Economic and Development Authority. Created in January 1973, the authority assumed the mandate both for macroeconomic planning that had been undertaken by its predecessor organization, the National Economic Council, and project planning and implementation, previously undertaken by the Presidential Economic Staff. National Economic and Development Authority plans calling for the expansion of employment, maximization of growth, attainment of fiscal responsibility and monetary stability, provision of social services, and equitable distribution of income were produced by the Marcos administration for 1974-77, 1978-82, and 1983-88, and by the Aquino administration for 1987-92. Growth was encouraged largely through the provision of infrastructure and incentives for investment by private capital. Equity, a derivative goal, was to be achieved as the result of a dynamic economic expansion within an appropriate policy environment that emphasized labor-intensive production.

The National Economic and Development Authority Medium-Term Development Plan, 1987-92 reflected Aquino's campaign themes: elimination of structures of privilege and monopolization of the economy; decentralization of power and decision making; and reduction of unemployment and mass poverty, particularly in rural areas. The private sector was described as both the "initiator" and "prime mover" of the country's development; hence, the government was "to encourage and support private initiative," and state participation in the economy was to be minimized and decentralized. Goals included alleviation of poverty, generation of more productive employment, promotion of equity and social justice, and attainment of sustainable economic growth. Goals were to be achieved through agrarian reforms; strengthening the collective bargaining process; undertaking rural, labor-intensive infrastructure projects; providing social services; and expanding education and skill training. Nevertheless, as with previous plans, the goals and objectives were to be realized, trickle-down fashion, as the consequence of achieving a sustainable economic growth, albeit a growth more focused on the agricultural sector.

The plan also involved implementing more appropriate, market-oriented fiscal and monetary polices, achieving a more liberal trade policy based on comparative advantage, and improving the efficiency and effectiveness of the civil service, as well as better enforcement of government laws and regulations. Proper management of the country's external debt to allow an acceptable rate of growth and the establishment of a "pragmatic," development-oriented foreign policy were extremely important.

Economic performance fell far short of plan targets. For example, the real GNP growth rate from 1987 to 1990 averaged 25 percent less than the targeted rate, the growth rate of real exports was one-third less, and the growth rate of real imports was well over double. The targets, however, did provide a basis for discussion of consistency of official statements and whether the plan growth rates were compatible with the maintenance of external debt-repayment obligations. The plan also set priorities. Both Aquino's campaign pronouncements and the policies embodied in the planning document emphasized policies that would favorably affect the poor and the rural sector. But, because of dissension within the cabinet, conflicts with Congress, and presidential indecisiveness, policies such as land and tax reform either were not implemented or were implemented in an impaired fashion. In addition, the Philippines curtailed resources available for development projects and the provision of government services in order to maintain good relations with international creditors.

The Philippine government has undertaken to provide incentives to firms, both domestic and foreign, to invest in priority areas of the economy since the early 1950s. In 1967 an Investment Incentives Act, administered by a Board of Investments (BOI), was passed to encourage and direct investment more systematically. Three years later, an Export Incentives Act was passed, furthering the effort to move the economy beyond importsubstitution manufacturing. The incentive structure in the late 1960s and 1970s was criticized for favoring capital-intensive investment as against investments in agriculture and export industries, as well as not being sufficiently large. Export incentives were insufficient to overcome other biases against exports embodied in the structure of tariff protection and the overvaluation of the peso.

The investment incentive system was revised in 1983, and again in 1987, with the goal of rewarding performance, particularly exporting and labor-intensive production. As a results of objections made by the United States and other industrial nations to export-subsidy provisions contained in the 1983 Investment Code, much of the specific assistance to exporters was removed in the 1987 version. The 1987 Investment Code delegates considerable discretionary power over foreign investment to the government Board of Investments when foreign participation in an enterprise exceeds 40 percent. Legislation under consideration by the Philippine Congress in early 1991 would limit this authority. Under the new proposal, foreign participation exceeding 40 percent would be allowed in any area not covered by a specified "negative list."

Fiscal Policy

Historically, the government has taken a rather conservative stance on fiscal activities. Until the 1970s, national government expenditures and taxation generally were each less than 10 percent of GNP. (Total expenditures of provincial, city, and municipal governments were small, between 5 and 10 percent of national government expenditures in the 1980s.) Under the Marcos regime, national government activity increased to between 15 and 17 percent of GNP, largely because of increased capital expenditures and, later, growing debt-service payments. In 1987 and 1988, the ratio of government expenditure to GNP rose above 20 percent. Tax revenue, however, remained relatively stable, seldom rising above 12 percent of GNP. Chronic government budget deficits were covered by international borrowing during the Marcos era and mainly by domestic borrowing during the Aquino administration. Both approaches contributed to the vicious circle of deficits generating the need for borrowing, and the debt service on those loans creating greater deficits and the need to borrow even more. At 5.2 percent of GNP, the 1990 government deficit was a major consideration in the 1991 standby agreement between Manila and the IMF.

Over time, the apportionment of government spending has changed considerably. In 1989 the largest portion of the national government budget (43.9 percent) went for debt servicing. Most of the rest covered economic services and social services, including education. Only 9.1 percent of the budget was allocated for defense. The Philippines devoted a smaller proportion of GNP to defense than did any other country in Southeast Asia.

The Aquino government formulated a tax reform program in 1986 that contained some thirty new measures. Most export taxes were eliminated; income taxes were simplified and made more progressive; the investment incentives system was revised; luxury taxes were imposed; and, beginning in 1988, a variety of sales taxes were replaced by a 10 percent value-added tax--the central feature of the administration's tax reform effort. Some administrative improvements also were made. The changes, however, did not effect an appreciable rise in the tax revenue as a proportion of GNP.

Problems with the Philippine tax system appear to have more to do with collections than with the rates. Estimates of individual income tax compliance in the late 1980s ranged between 13 and 27 percent. Assessments of the magnitude of tax evasion by corporate income tax payers in 1984 and 1985 varied from as low as P1.7 billion to as high as P13 billion. The latter figure was based on the fact that only 38 percent of registered firms in the country actually filed a tax return in 1985. Although collections in 1989 were P10.1 billion, a 70 percent increase over 1988, they remained P1.4 billion below expectations. Tax evasion was compounded by mismanagement and corruption. A 1987 government study determined that 25 percent of the national budget was lost to graft and corruption.

Low collection rates also reinforced the regressive structure of the tax system. The World Bank calculated that effective tax rates (taxes paid as a proportion of income) of low-income families were about 50 percent greater than those of high-income families in the mid-1980s. Middle-income families paid the largest percentage. This situation was caused in part by the government's heavy reliance on indirect taxes. Individual income taxes accounted for only 8.9 percent of tax collections in 1989, and corporate income taxes were only 18.5 percent. Taxes on goods and services and duties on international transactions made up 70 percent of tax revenue in 1989, about the same as in 1960.

The consolidated public sector deficit--the combined deficit of national government, local government, and public-sector enterprise budgets--which had been greatly reduced in the first two years of the Aquino administration, rose to 5.2 of GNP by the end of 1990. In June 1990, the government proposed a comprehensive new tax reform package in an attempt to control the public sector deficit. About that time, the IMF, World Bank, and Japanese government froze loan disbursements because the Philippines was not complying with targets in the standby agreement with the IMF. As a result of the 1990-91 Persian Gulf crisis, petroleum prices increased and the Oil Price Stabilization Fund put an additional strain on the budget. The sudden cessation of dollar remittances from contract workers in Kuwait and Iraq and increased interest rates on domestic debt of the government also contributed to the deficit.

Negotiations between the Aquino administration and Congress on the administration's tax proposals fell through in October 1990, with the two sides agreeing to focus on improved tax collections, faster privatization of government-owned and government-controlled corporations, and the imposition of a temporary import levy. A new standby agreement between the government and the IMF in early 1991 committed the government to raise taxes and energy prices. Although the provisions of the agreement were necessary in order to secure fresh loans, the action increased the administration's already fractious relations with Congress.

Monetary Policy

The Central Bank of the Philippines was established in June 1948 and began operation the following January. It was charged with maintaining monetary stability; preserving the value and covertibility of the peso; and fostering monetary, credit, and exchange conditions conducive to the economic growth of the country. In 1991 the policy-making body of the Central Bank was the Monetary Board, composed of the governor of the Central Bank as chairman, the secretary of finance, the director general of the National Economic and Development Authority, the chairman of the Board of Investment, and three members from the private sector. In carrying out its functions, the Central Bank supervised the commercial banking system and managed the country's foreign currency system.

From 1975 to 1982, domestic saving (including capital consumption allowance) averaged 25 percent of GNP, about 5 percentage points less than annual gross domestic capital formation. This resource gap was filled with foreign capital. Between 1983 and 1989, domestic saving as a proportion of GNP declined on the average by a third, initially because of the impact of the economic crisis on personal savings and later more because of negative government saving. Investment also declined, so that for three of these years, domestic savings actually exceeded gross investment.

From the time it began operations until the early 1980s, the Central Bank intervened extensively in the country's financial life. It set interest rates on both bank deposits and loans, often at rates that were, when adjusted for inflation, negative. Central Bank credit was extended to commercial banks through an extensive system of rediscounting. In the 1970s, the banking system resorted, with the Central Bank's assistance, to foreign credit on terms that generally ignored foreign-exchange risk. The combination of these factors mitigated against the development of financial intermediation in the economy, particularly the growth of long-term saving. The dependence of the banking system on funds from the Central Bank at low interest rates, in conjunction with the discretionary authority of the bank, has been cited as a contributing factor to the financial chaos that occurred in the 1980s. For example, the proportion of Central Bank loans and advances to government-owned financial institutions increased from about 25 percent of the total in 1970 to 45 percent in 1981-82. Borrowings of the government-owned Development Bank of the Philippines from the Central Bank increased almost 100-fold during this period. Access to resources of this sort, in conjunction with subsidized interest rates, enabled Marcos cronies to obtain loans and the later bailouts that contributed to the financial chaos.

At the start of the 1980s, the government introduced a number of monetary measures built on 1972 reforms to enhance the banking industry's ability to provide adequate amounts of long-term finance. Efforts were made to broaden the capital base of banks through encouraging mergers and consolidations. A new class of banks, referred to as "expanded commercial banks" or "unibanks," was created to enhance competition and the efficiency of the banking industry and to increase the flow of long-term saving. Qualifying banks--those with a capital base in excess of P500 million--were allowed to expand their operations into a range of new activities, combining commercial banking with activities of investment houses. The functional division among other categories of banks was reduced, and that between rural banks and thrift banks eliminated.

Interest rates were deregulated during the same period, so that by January 1983 all interest rate ceilings had been abolished. Rediscounting privileges were reduced, and rediscount rates were set in relation to the cost of competing funds. Although the short-term response seemed favorable, there was little long-term change. The ratio of the country's money supply, broadly defined to include savings and time deposits, to GNP, around 0.2 in the 1970s, rose to 0.3 in 1983, but then fell again to just above 0.2 in the late 1980s. This ratio was among the lowest in Southeast Asia.

Monetary and fiscal policies that were set by the government in the early 1980s, contributed to large intermediation margins, the difference between lending and borrowing rates. In 1988, for example, loan rates averaged 16.8 percent, whereas rates on savings deposits were only slightly more than 4 percent. The Central Bank traditionally maintained relatively high reserve requirements (the proportion of deposits that must remain in reserve), in excess of 20 percent. In 1990 the reserve requirement was revised upward twice, going from 21 percent to 25 percent. In addition, the government levied both a 5 percent gross tax on bank receipts and a 20 percent tax on deposit earnings, and borrowed extensively to cover budget deficits and to absorb excess growth in the money supply.

In addition to large intermediation margins, Philippine banks offered significantly different rates for deposits of different amounts. For instance, in 1988 interest rates on six-month time deposits of large depositors averaged almost 13 percent, whereas small savers earned only 4 percent on their savings. Rates offered on six-month and twelve-month time deposits differed by only 1 percentage point, and the rate differential for foreign currency deposits of all available maturities was within a single percentage point range. Because savings deposits accounted for approximately 60 percent of total bank deposits and alternatives for small savers were few, the probability of interest rate discrimination by the commercial banking industry between small, less-informed depositors and more affluent savers, was quite high. Interest rates of time deposits also were bid up to reduce capital flight. This discrimination coupled with the large intermediation margins, gave rise to charges by Philippine economists and the World Bank that the Philippine commercial banking industry was highly oligopolistic.

Money supply growth has been highly variable, expanding during economic and political turmoil and then contracting when the Philippines tried to meet IMF requirements. Before the 1969, 1984, and 1986 elections, the money supply grew rapidly. The flooding of the economy with money prior to the 1986 elections was one reason why the newly installed Aquino administration chose to scrap the existing standby arrangement with the IMF in early 1986 and negotiate a new agreement. The Central Bank released funds to stabilize the financial situation following a financial scandal in early 1981, after the onset of an economic crisis in late 1983, and after a coup attempt in 1989. The money was then repurchased by the Treasury and the Central Bank--the so-called Jobo bills, named after then Central Bank Governor Jose Fernandez--at high interest rates, rates that peaked in October 1984 at 43 percent and were approaching 35 percent in late 1990. The interest paid on this debt necessitated even greater borrowing. By contrast, in 1984 and 1985, in order to regain access to external capital, the growth rate of the money supply was very tight. IMF dictates were met, very high inflation abated, and the current account was in surplus. Success, however, was obtained at the expense of a steep fall in output and high unemployment.

Privatization

When Aquino assumed the presidency in 1986, P31 billion, slightly more than 25 percent of the government's budget, was allocated to public sector enterprises--government-owned or government-controlled corporations--in the form of equity infusions, subsidies, and loans. Aquino also found it necessary to write off P130 billion in bad loans granted by the government's two major financial institutions, the Philippine National Bank and the Development Bank of the Philippines, "to those who held positions of power and conflicting interest under Marcos." The proliferation of inefficient and unprofitable public sector enterprises and bad loans held by the Philippine National Bank, the Development Bank of the Philippines, and other government entities, was a heavy legacy of the Marcos years.

Burdened with 296 public sector enterprises, plus 399 other nonperforming assets transferred to the government by the Philippine National Bank and the Development Bank of the Philippines, the Aquino administration established the Asset Privatization Trust in 1986 to dispose of government-owned and government-controlled properties. By early 1991, the Asset Privatization Trust had sold 230 assets with net proceeds of P14.3 billion. Another seventy-four public sector enterprises that were created with direct government investment were put up for sale; fifty-seven enterprises were sold wholly or in part for a total of about P6 billion. The government designated that about 30 percent of the original public sector enterprises be retained and expected to abolish another 20 percent. There was widespread controversy over the fairness of the divestment procedure and its potential to contribute to an even greater concentration of economic power in the hands of a few wealthy families.

More about the Economy of the Philippines.

Posted in: EnP Economic Planning,Environmental Planner,Environmental Planning