Friday, August 12, 2005

The Tragic Consequences of Doctrinaire Economic Liberalism

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" Fear history, for it respects no secrets" - Gregoria de Jesus (widow of Andres Bonifacio)

Of 533 previous posts, the following selected posts and the RECTO READER are essential about us native, Malay Filipinos and are therefore always presented in each new post. Click each to open/read

  2. WHAT IS NATIONALISM [Filipino Nationalism]?
  3. Our Colonial Mentality and Its Roots 
  4. The Miseducation of the Filipino (Formation of our Americanized Mind)
  5. Jose Rizal - Reformist or Revolutionary?
  6. The Purpose of Our Past, Why Study (Our) History?
  7. Studying and Rethinking Our Philippine History
  8. Our Filipino Kind of Religion
  9. Our Filipino Christianity and Our God-concept
  10. When Our Religion Becomes Evil
  11. Understanding Our Filipino Value System

NOTE: Recto's cited cases, examples or issues were of his time, of course; but realities in our homeland in the present and the foreseeable future are/expectedly much, much worse. Though I am tempted to update them with current issues, it's best to leave them as they are since Recto's paradigms about our much deepened national predicament still ring relevant, valid and true. In short, Recto saw the forest and never got lost in the trees.- Bert


Hi All,

Philippine economic policies before and after WW2 have been based on the “free trade” economic model and continue under the new mantle of the IMF/WB/WTO -driven “globalization”. 

Such policies had mainly resulted, for the past 65+years of our so-called independent Philippines, to the: 

  1. demise of our nascent, indigenous industrial and agricultural bases, 
  2. total foreign domination [mainly American, Chinese, Japanese and now growing Korean] in all aspects of our national economy. 
  3. almost complete disappearance of the minimal native Filipino middle class, 
  4. increased impoverishment

Most of our educated "elite" , our "best and brightest" technocrats, then and now, in the public sector: NEDA, Ministry of Finance, Budget and Central Bank since the time of the Marcos dictatorship have only accelerated the country's slide to national socio-economic/political depression and regression. 

Their failure to do good for the helpless majority is a validation that those who know best do not necessarily do well for the Filipino people since they do not identify themselves with "the masses" or common tao and are more concerned about their personal ambitions and careers; and therefore follow the dictates of their political patrons and foreign masters (IMF-WB-ADB-WTO). I do not imply that the ignoramuses or glib Bible-toting pretenders will do better.

I still believe that Filipino nationalism is the sine qua non for socio-economic and political progress in the Philippines. With the current onslaught of "globalization" it is an extremely difficult endeavor vis-a-vis in the past to work for a nationalist alternative to economic development. 

As historically and recently proven by our Asian neighbors, only a nationalistic populace will attain its objectives for the common good if it struggles to become one. And therefore the spread of Filipino nationalism, expressed in attitude and behavior, is the immediate goal. 

Here-under is a good and timely article by Prof. Walden Bello which explains more coherently and in detail the current economic predicament in the Philippines and also names two of the more recent Filipino technocrats who I think pay lip service to national economic development but acted in reality to further Philippine under-development with the consequent hardships for the impoverished majority.

Please see also

“Nations whose NATIONALISM is destroyed are subject to ruin.” - Colonel Muhammar Qaddafi, 1942-, Libyan Political and Military Leader

"We shall be better and braver and less helpless if we think that we ought to enquire, than we should have been if we indulged in the idle fancy that there was no knowing and no use in seeking to know what we do not know..." - SOCRATES

"Upang maitindig natin ang bantayog ng ating lipunan, kailangang radikal nating baguhin hindi lamang ang ating mga institusyon kundi maging ang ating pag-iisip at pamumuhay. Kailangan ang rebolusyon, hindi lamang sa panlabas, kundi lalo na sa panloob!" --Apolinario Mabini La Revolucion Filipina (1898)


The tragic consequences of doctrinaire economics
- Walden Bello
EXECUTIVE Order 241, which reversed the 12-year-old program of unilateral liberalization, has evoked much comment and controversy. One of those decrying the directive is Cielito Habito, who served as director of the National Economic Development Authority under Fidel Ramos. 

I remember Habito -- an admirer of the radical tariff reforms under the dictator Augusto Pinochet -- arguing that if Chile could bring down tariffs to no more than 11 percent, surely the Philippines was capable of pushing them down to no more than five per cent. I also remember how he and his fellow economists used to dismiss the WTO-mandated liberalization in agriculture and industry as of minor consequence compared to the radical tariff overhaul they were espousing.

In his November 24 column in the Philippine Daily Inquirer, Habito claims that the unilateral liberalization program was necessary because prior to the 1991 tariff reform, “our average tariff rate…was well over 40 per cent,” which put us at a disadvantage with neighbors “who had pulled ahead of us in economic performance in the 1980’s” because they “had begun simplifying and lowering their trade barriers much earlier than we did….”

Mr. Habito is said to be a serious economist, but he simply has his facts and analysis wrong. Indeed, his remarks go a long way towards revealing why the program of tariff and trade reform that he and other neoliberal technocrats imposed on the Philippines went so badly awry -- why instead of bringing about prosperity, unilateral trade liberalization has resulted in the rapid erosion of this country’s industrial and agricultural base.

It is important to dwell on his remarks since they provide the rationale for fateful decisions on tariff reform made 12 years ago which had such a devastating impact on agriculture and industry in the coming years. His comments provide a case study of how doctrinaire economics can produce analytical errors that lead to tragic polices.

Habito makes three key points, that:

  1. the average tariff rate stood at over 40 per cent prior to the 1991 reforms; 
  2. our tariff liberalization was well behind that of our neighbors; and 
  3. it was their allegedly swifter and more thorough tariff liberalization that accounted for the superior performance of our ASEAN competitors.

On the first point, he is simply wrong. Way before EO 413 in 1991 initiated the unilateral liberalization program; the Philippine tariff structure had already been radically altered. Under the structural adjustment program (SAP) of the International Monetary Fund and World Bank, the average tariff rate was brought down from 43 per cent in 1980 to 28 per cent in 1986 while quantitative restrictions were removed on more than 900 items between 1981 and 1985.

The second point Habito makes -- that our neighbors outstripped us in trade liberalization in the 1980’s -- does not survive critical scrutiny. The average tariff rates in Indonesia and the Philippines were just about equal in 1989, at 28 per cent and 27 per cent respectively. However, the removal of quantitative restrictions in the Philippines proceeded at a pace faster than in Indonesia. I

n the Philippines, the percentage of goods under import restriction fell from around 34 per cent in 1985 to 17 per cent in 1986 and further to 8 per cent at the end of 1989. In Indonesia, the share of imports subject to non-tariff barriers declined from 43 per cent in mid-1986 to 21 per cent in 1988 to 13 per cent in 1991.

The average tariff rate of 28 per cent in the Philippines in 1986, after the IMF-World Bank structural adjustment reform, was actually lower than that in Thailand. And, in fact, in the mid-eighties, the effective rate of protection for manufacturing in Thailand was 52 per cent, compared to 23 per cent for the Philippines.

The third point Habito makes -- that it was trade liberalization that accounted for the high growth rates in our neighbors -- is very questionable. This assumption formed part of a broader perspective that many Filipino technocrats had when viewing our neighbors’ performance prior to the Asian financial crisis: that these economies were significantly more market-friendly and experienced much less state intervention than the Philippine economy.

Typical in this regard are the comments of Jesus Estanislao, Cory Aquino’s Finance Secretary: “Government takes very good care of macro-economic balances, takes care of a number of activities like, for example, infrastructure building, and leaves everything else to the private sector. And that is exactly what Singapore, Malaysia, Indonesia, and Thailand have done, and that is what the Philippines should be doing, and we are beginning to do it.”

This picture did not correspond to reality. True, in Indonesia, Malaysia, and Thailand, the state may have played a less aggressive role than in Korea and Taiwan, but an activist state posture -- manifested in industrial policy, protectionism, mercantilism, and intrusive regulation -- was central in the drive to industrialize.

For instance, Thailand began to register the 8-10 per cent growth rates that dazzled the world in the late 1980’s, when it was moving to a “second stage of import substitution” -- the use of trade policy to create the space for the emergence of an intermediate goods sector -- during the second half of the 1980’s. In the case of Malaysia, while it is true that some privatization and deregulation favoring private interests took place in the late 1980’s, it would be a mistake to overestimate the impact of these policies.

Two examples suffice to underline the central -- and positive -- role of state intervention. Petronas, the state oil company, was consistently rated as one of East Asia’s best-run firms. And certainly one of the most innovative -- and successful -- enterprises in the whole region was a state-directed joint venture between a state-owned firm and a foreign automobile transnational corporation, Mitsubishi, which produced the so-called Malaysian car, the Proton Saga. 

The Proton Saga now controls two thirds of the domestic market and turns a profit for its producers. Yet its development exemplified all the so-called “sins” of industrial policy that neoclassical economists such as Habito and Estanislao have warned about: discriminatory tax treatment of competitors, strategic industrial targeting or a systematic plan to manipulate market incentives to create a local car industry, and forced local sourcing of components to encourage the growth of local supplier industries.

As for Indonesia, some change along market-oriented lines did take place in the 1980’s and 1990’s, but up to the end of the Suharto period in May 1998, the state continued to be the most important actor in the economy. Hardly any of the big state enterprises passed to the private sector. 

State enterprises contributed about 30 percent of total GDP and close to 40 per cent of non-agricultural GDP. Government production accounted for 50 per cent of the mining sector, 24 per cent of manufacturing GDP, 65 per cent of banking and finance, and 50 per cent of transport and communications.

Indeed, in the last decade of the Suharto regime, there was a resurgence of statist policy in the form of trade policy, subsidies, and other mechanisms directed at the creation of a heavy industry nucleus around which to center the economy, including the development of an automobile industry, an integrated steel complex, a shipbuilding complex, and an aircraft industry.

In sum, some liberalization was going on in our neighbors’ economies, but it was selective liberalization pursued in the context of strategic protectionism driven by the state, the objective of which was to deepen the industrial structure

In contrast, driven by technocrats who were locked into a paradigm that misinterpreted and distorted the experience of our neighbors, the Philippines passed from a regime of opportunistic protectionism to a free-trade regime that was strategically directionless, one that was simply guided by the faith that the invisible hand of the market would somehow bring about growth.

After the interlude that was the Asian financial crisis, the clear superiority of the strategic protectionist model followed by Malaysia and Thailand is once more asserting itself over the indiscriminate liberalization model followed by the Philippines.

Let us restate the argument so far. Contrary to Habito’s contention, the pace of trade liberalization in the Philippines in the 1980’s did not differ from that of its neighbors, so that it is difficult to attribute the difference in economic performance in this factor. Nor is it possible to argue, as does Estanislao, that it was the presence of a non-interventionist state that accounted for our neighbors’ superior economic performance, for, if anything, government was more intrusively interventionist among our neighbors than in the Philippines.

So what spelled the difference between the Philippines and its neighbors? The short answer is Japanese capital. In the period 1985-93, some 51 billion dollars worth of Japanese investment swirled through the Asia Pacific in one of the most rapid and massive outflows of foreign capital towards the developing world in recent history. The cause of the massive outflow was the Plaza Accord of 1985. 

By sharply raising the value of the yen relative to the dollar and other major hard currencies, this agreement made production in Japan prohibitive in terms of labor costs, forcing the Japanese to move the more labor-intensive processes of their manufacturing operations to low wage areas, in particular to China and Southeast Asia.

Some 15 billion dollars worth of Japanese direct investment flowed into Southeast Asia between 1985 and 1990, with Indonesia receiving 3.1 billion dollars, Thailand 3.7 billion dollars, and Malaysia 2.2 billion dollars. The inflow of Japanese capital allowed these countries to have access to foreign capital at a time that US and international banks were tightening up on lending owing to the Third World debt crisis

Even more important, Japanese investment allowed the Philippines’ neighbors to surmount recession and move onto a path of high speed growth as they not only received Japanese capital but were transformed into essential parts of regional industrial economy that was being forged around a Japanese center.

As one Japanese diplomat candidly put it, “Japan is creating an exclusive Japanese market in which Asia-Pacific nations are incorporated in the so-called keiretsu [financial/industrial bloc] system.” 

Thai technocrats, for instance, had no doubts about the source of their country’s dynamism. As one of them wrote, “The current explanation of Thailand’s accelerated growth was the 1985 appreciation of the value of the yen, rendering Japanese production more costly. Japanese multinational companies were forced to look for new lower cost production locations. In 1987, Japanese investment approvals by Thailand’s Board of Investments exceeded the cumulative Japanese investment for the preceding 20 years.” In five years alone, 1987 –1991, Thailand received 12 billion dollars worth of foreign investment from Japan. 

The truth is that whatever might have been the Thai government’s policy preference—protectionist, mercantilist, or market-oriented—the vast amounts of Japanese capital coming into Thailand could not but trigger rapid growth. The same was true in the two other favored recipients of Japanese investment, Malaysia and Indonesia.

Now the Philippines were bypassed by this massive flow of Japanese investment. Between 1987 and 1991, a paltry 797 million dollars entered the Philippines, while Thailand received 12 billion dollars. Including investment from Taiwan and Hong Kong that followed in the Japanese wake, the difference was even more marked: Thailand received 24 billion dollars in investment during the same period, or 15 times the amount invested in the Philippines, which came to 1.6 billion dollars. “This difference in the flow of foreign investment from the three countries,” Japanese expert Kunio Yoshihara rightly noted,” produced a significant disparity in growth performance of the two countries [Philippines and Thailand] during the period.” Moreover, in contrast to Thailand, the Philippines was barely integrated into the dynamic regional industrial economy being constructed around the Japanese center.

A Depressed Market

This brings up a more fundamental issue: Why did the Japanese avoid the Philippines? Some say it had to do with political instability—these were, after all, the years when the Philippines was wracked by six attempts at a military coup. But Japanese investors have not been known to shun conflict situations where there is a prospect of making a profit, so this was probably not decisive. Was it because of foreign investment legislation? 

Again, this is unlikely since Thailand, for instance, had the same discriminatory provisions against foreign investors as the Philippines: foreigners, as in the Philippines, were not allowed to own land; they were preventing from entering certain industries by Alien Business Law; they were not allowed to own majority of equity in retail trade enterprises; and there were restrictions on the number of foreign technicians allowed to work in Thailand.

Perhaps far more important in explaining the relative absence of Japanese capital were simple profit calculations. Japanese investors are strategic investors—that is, they invest if there is the prospect of a growing market. They are not just interested in cheap labor or using a country as an export-production platform; they are keen to exploit local markets. In the late 1980’s, the Philippines was simply not attractive since development, expansion of the market, reducing poverty to create more purchasing power were all being sacrificed to the national priority of repaying the foreign debt—a goal forced on the country by the IMF and the World Bank acting on behalf of the country’s foreign lenders.

The dismal story of how the government dealt with the foreign debt must be retold since it is all too often forgotten how the escalating debt became the millstone that foreclosed growth. By the time Corazon Aquino became president, the Philippines’ foreign debt had risen to over 26 billion dollars from 21 billion dollars in 1981. 

Fairly quickly, foreign creditors faced the fledgling democratic administration with an unpalatable choice: either limit debt service payments or fully comply with debt obligations in order to preserve creditworthiness even at the risk of throttling growth. The so-called “model debtor” option won the debate in administration circles. A financial hemorrhage marked the succeeding years, with the net transfer of financial resources to external creditors coming to a negative 1.3 billion dollars a year on average between 1986 and 1991. In 1986-88, foreign debt servicing came to 3.3 billion dollars a year. A decade later, in 1999, the level of outflow of financial resources was still at the same level. 

The fundamental irrationality of the process was underlined by the fact that as overseas workers were remitting hard earned dollars into the country, an equal if not greater amount was leaving it. The GDP registered zero average growth between 1983 and 1993, and the reason is not hard to find. Government is by far the biggest investor in the Philippines, and during the Aquino administration debt repayment ate up funds that would otherwise have gone into capital expenditures. The situation did not appreciably improve in the coming years

As new debt was piled on to past debt, partly to pay for past debt coming due, the public debt to both local and foreign borrowers shot up to stratospheric levels by the turn of the century. From 625.6 billion pesos in 1986, public debt rose to 945.2 billion pesos in 1991. Obliged to cover the payments coming due by the automatic appropriations law, the government allocated 50 per cent of the national budget to debt service in 1987, with the figure not going below 40 per cent in the next four years.

The resulting social impact sent the wrong signal to prospective Japanese investors interested in profitably exploiting the domestic market: Filipino families living below the poverty line in 1991 came to 46.5 percent—a marginal reduction from the 1985 figure of 49.3 per cent. Income distribution actually worsened with the share of income going to the lowest 20 per cent of families falling from 5.2 per cent to 4.7 per cent, while that going to the top 10 per cent rose from 36.4 per cent to 38.6 per cent.True, income inequality was also growing in our neighbors, but, unlike in the Philippines, rapid growth was pushing down poverty levels and bringing more people into the market.

From the perspective of Japanese investors, the Philippines appeared to be a strategically depressed market—one not worth sinking a lot of investment in. And so they bypassed the country and deprived it of the same externally induced boom experienced by our neighbors. This sensitive methodology of analyzing the difference between the experience of the Philippines and our neighbors is one that is foreign to Habito and his band of neoliberal economists.

The tragedy of the Philippines is that instead of being guided by realities on the ground, the neoliberals allowed doctrine—the dictum that the unfettered market would bring about the best of all possible worlds—to guide their analysis and subsequent policies. Not only did they err in discerning the causes of economic stagnation in the Philippines, but they misinterpreted the factors that led to rapid growth among our neighbors. 

And it was this doctrinal distortion of our neighbors’ experience that served as the justification for the policy of unilateral liberalization. Instead of carefully calibrating trade policy and industrial policy, as our neighbors did, they brought about an indiscriminate liberalization of trade that has destroyed many local industries, destabilized agriculture, and threw hundreds of thousands of people out of work.

Instead of taking steps to stop the hemorrhaging of financial resources that was the main drag on development and repelled foreign investors seeking healthy investment prospects, they allowed the bleeding to go on and on, until by 2002, the public debt was 870 billion pesos more than the Philippine GNP. 

Instead of confronting head on the roots of Philippine underdevelopment in the complex interplay of internal and external forces, structural and conjectural factors, these academics and consultants came to power armed with a much uncomplicated approach to policy-making: radically reduce the role of the state, radically expand the play of market forces

It was a seductive doctrine that avoided having to learn from the complicated interaction of market and state that had produced the so-called Asian economic miracles. Important policy differences, such as those between selective liberalization and indiscriminate liberalization, and between opportunistic protectionism and strategic protectionism, were conveniently ignored.

For a time, neoliberalism was able to seduce some sectors of the population, for with its simple formula that doing nothing was government’s best contribution to growth, it seemed to offer a relatively cost-less path to growth. No more. 

Doctrinaire and still unable to accept the evidence of a decade of disaster, Habito and his neoliberal friends have played a key role in bringing us to the current economic impasse. The country has very good reason to repudiate their pleas to resurrect a discredited program and an obsolete economics.

Walden Bello is professor of sociology at the University of the Philippines and executive director of the Bangkok-based research institute Focus on the Global South.[Dec. 24, 2003]

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