Message-ID: <v03007804b0e85c1e05a6@[]>
Date: Mon, 19 Jan 1998 02:34:12 -0600
Sender: Forum on Labor in the Global Economy <LABOR-L@YORKU.CA>
From: Kim Scipes <sscipe1@ICARUS.CC.UIC.EDU>
Subject: World Bank and Philippines

Beware World Bank advice: Reality is different than claims

By Kim Scipes, opinion, The New York Times, 1 November 1997

Joseph Stiglitz' letter (Oct. 31) shows, once again, the incredible arrogance of the World Bank officialdom. After watching the financial turmoil in Southeast Asia—the effects on the rest of the world's economies yet unknown to their full extent—Stiglitz tells us that inadequate oversight, not overregulation was the problem. He basically assures us that East Asia's economies are sound, but just needing more oversight; i.e., they need to follow World Bank prescriptions.

The World Bank, along with the International Monetary Fund (IMF), has long been promoting the East Asian countries as successes, and suggesting that their approaches to development should be the model for countries throughout the world. Recent events certainly question this World Bank analysis.

However, the World Bank analysis itself—before the recent financial turmoil—has been faulty. The Bank has claimed that developmental successes have been based on accepting neoliberal economic principles. A true neoliberal program removes the state from all economic activity, and requires that state-based regulations (read limitations) be ended, so that the only regulator to the economy is the marketplace. However, not only has that not been true throughout East Asia—every state in the region has been intimately involved in economic development—but every country in the region has had some form of dictatorship, either formal or informal. In fact, three of the four Asian tigers developed under formal dictatorships, while Hong Kong was a colony. This World Bank nonsense was so ludicrous that the Japanese pressured the Bank to quit state-bashing, a change reflected in recent WB publications.

Interestingly, the Bank almost never mentions the country in East Asia in which it has long had the strongest presence: the Philippines. Neoliberal economic policies have been in effect longer than the Bank has been such a dominant force, but these gained additional legitimacy when the Bank began imposing a series of structural adjustment programs (SAPs) on the country in exchange for loans to help keep its economy afloat.

In the 1960s, after several years of an import substitution industrialization (ISI) program, the Philippines was often seen as the next Japan. Key to this ISI program was foreign exchange controls: the government regulated what could be imported. Although there was corruption and related problems, the program was generally quite successful: by 1960, the country could boast of a moderate industrial base, and manufacturing contributed almost 18% of the total national production. In the most detailed economic analysis of the period, neoliberal analyst Frank Golay concluded, There can be little question of sustained economic growth well in excess of population growth.

But the foreign exchange controls limited importation of luxury goods for the rich—which had almost bankrupted the country in the late 1940s—and the maintenance of the artificially high, US-set (prior to political independence in 1946) but Filipino government-maintained exchange rate of two pesos to the dollar ($1: P2), hurt the politically powerful agricultural exporters: their products were priced out of international markets. They lobbied and eventually won a governmental agreement that the exchange controls would be abolished by 1964.

Upon taking office in January 1962, however, President Diosdado Macapagal immediately ended these foreign exchange controls. The economy went into the tank. When examined by industrial sector, economic growth between 1962-66 was far below that of 1950-60 in almost every sector. The country had to borrow $300 million from the IMF to prevent a currency crisis as foreign profits were repatriated. The peso floated and had to be officially devalued to $1:P3.9 in 1965. And manufacturing share of GDP decreased from 17.9% in 1962 to 7.1% in 1965.

To solve the problems caused by the ending of the exchange controls, the World Bank and IMF pushed the Philippines to adopt an export-oriented industrialization (EOI) strategy. Upon assuming office in 1966, Ferdinand Marcos began initiating such a project; however, nationalist resistance was so strong that it was only when Marcos declared Martial Law in 1972 that the EOI program was initiated. The World Bank was crucial in this process: where the Bank had provided the Philippines with only $326 million between 1950 and 1972, it provided over $2.6 billion between 1973 and 1981.

Philippine growth—and there has been growth—has been debt dependent. Philippine foreign debt grew from $599.5 million in 1965, to $2.2 billion in 1972, to $12.7 billion in 1980, to $24.6 billion by October 1983. This was 41 times its debt in 1965, 11 times its debt in 1972, 91% of the 1983 GNP, and 509% of its total export earnings. Debt per capita grew from $18.90 in 1965 to $474.10 in 1983! (Using data from October 1983 excludes much of the turmoil that developed in response to the assassination of Senator Benigno Aquino in August 1983.)

Economic growth was uneven. While GNP growth rate increased throughout the 1970s, it fell from 6.8% in 1979 to 4.4% in 1980, 3.7% in 1981, 2.7% in 1982, and was 1.4% in 1983. The balance of trade had run a deficit from 1950, but the deficit reached -$1.2 million in 1975, and was over -$2.6 billion by 1982. Balance of payments fluctuated from $164 million in 1977 to -$1.6 billion. In other words, by neoliberal criteria themselves, the World Bank-inspired program was a major failure by 1983.

But let's look at the situation at the end of 1986, after Marcos had been deposed. External debt was $27.2 billion, with a debt to GNP ratio of 90%, and debt per capita of $485. Interest payments on the debt were greater than new loans in each of the years 1983, 1984, 1985 and 1986. GDP/capita is another indicator that is illustrative: in 1962, Philippine GDP/capita had been ahead of every other SE Asian economy except Malaysia, was ahead of South Korea, and barely behind Taiwan; by 1986, not only was it behind South Korea and Taiwan, but it was behind Thailand and only barely ahead of Indonesia.

The impact of a neoliberal program can be seen by comparing wage rates. After adjusting for inflation, economist James Boyce reported that in 1986, skilled and unskilled workers in Manila were making approximately 25% of what they made in 1962 (when the foreign exchange controls were ended)! By 1986, the daily wage of an unskilled urban worker was below that of an agricultural worker. Boyce concludes: Wage laborers in metropolitan Manila experienced a collapse in real wages in the 1970s and 1980s on a magnitude with few precedents in modern economic history.

But the successors to Marcos—Corazon Aquino and Fidel Ramos—have continued to follow this World Bank-inspired neoliberal economic program. The results have been as could be predicted from the earlier data: GDP growth has been erratic, but especially under Ramos, growth has been debt dependent: debt is over $45 billion (end of 1996), after being under $30 billion when Aquino left office in 1992. There has been considerable foreign investment in the country (at least until recently), but the large majority of it has been portfolio investment, not direct investment in productive activities—in 1995, 73% of investments were portfolio. The balance of trade has continued to worsen, going from -$1 billion in 1987 to -$8.2 billion in November 1995.

For the broad masses of Filipinos, only disaster. The leading economic NGO in the country, IBON Databank, now estimates that 76% of the population lives below the Philippine poverty line. Sixty-two percent of the labor force is unemployed or underemployed, while only 10% get the minimum wage—and according to the government itself, the minimum wage in 1994 only provided 61% of the daily cost of living. And while the real value of wages for Manila's workers declined 75% between 1962-1986, the purchasing power of the peso declined another 49% between 1988 and August 1994. By 1995, approximately 4.3 million workers were forced to work overseas, in addition to the millions that had emigrated since the mid-1960s.

[The foreign exchange rate of the peso has further declined from $1:P26 in July of 1997, to around $1:P34 in late October, to almost $1:P45 in mid-January; it had recovered to $1: P 41.30 on January 16, 1998.]

I think it unnecessary to belabor the point: the neoliberal economic policies instituted since 1962 have been a disaster for the large majority of Filipinos. Additionally, they have failed by their own neoliberal criteria: not only has the balance of trade dramatically worsened, but the country now has over $45 billion of foreign debt, and nobody has any clue of how this impoverished country will pay it back. I think Mr. Stiglitz should be a little less arrogant about the quality of World Bank advice.