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)• Agriculture 14%• 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 1950-80, 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 1970-90, 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