Vol. XIX No. 1 January - February 2001 ISSN 0115-9097

What's Inside The Philippine economy: SPECIAL ARTICLE!! page 8 Dr. Gloria Macapagal What lies ahead in 2001 Arroyo: The next Philippine president Josef T. Yap* could be an economist page 20 China's economic boom: he swift unfolding of events between October 2000 and January A boon to RP, other ASEAN nations 2001, the heightened emotions, and ensuing euphoria may have Tclouded the analyses of several pundits. In the aftermath of the downfall of President Joseph Ejercito Estrada’s administration, a bleak picture Editor's Notes of the economy was generally painted. Moreover, the blame for the poor state

It has been our tradition in the past years to of the economy was laid squarely on the ineptitude and corruption surrounding come out with an expert's forecast for the Phil- the Estrada government. An excerpt from an article in the International Herald ippine economy for the year. It is no different Tribune epitomizes this view: this time.

As the country faces new challenges after Mr. Estrada, a hard-living former movie actor, was ruined by accusations all the political hoopla which ended in Janu- that he had taken $11 million in bribes. He left behind a nation staggering ary 2001, the Institute once again contributes under a greater burden: spiraling budget deficits, a battered stock market, a de- to the restructuring of the nation through this valued currency, and a new reputation for chicanery that sent even the most loyal economic forecast written by Dr. Josef T. Yap, investors packing…..What makes the collapse all the more painful is that the PIDS senior research fellow. Philippines had emerged from the Asian economic crisis in better shape than most others in the region. In part that was because it never experienced the vertiginous This piece provides a balanced and inde- growth or asset inflation of countries like Thailand and South Korea. But it was pendent analysis on what the country had also a result of Manila’s fiscal discipline, which produced budget surpluses from 1 achieved in terms of economic (mis)manage- 1994 to 1997. ment and how these had affected the overall performance of the economy, taking into con- While the political crisis that developed out of the so-called “Juetenggate” sideration the impact of other external factors. controversy did affect its performance, the Philippine economy was far from a Dr. Yap also focuses on various issues which prostrate position when President Estrada stepped down. The gross domestic need to be addressed so as to facilitate growth product (GDP) grew by 3.9 percent in 2000, narrowly missing the government in the economic sector. target of 4 percent but still higher than the 3.3 percent recorded in 1999. Meanwhile, private consumption expanded by 3.9 percent in the fourth +2 In conclusion, Dr. Yap puts forward several possible scenarios for the Philippines this year. * Senior Research Fellow, Philippine Institute for Development Studies (PIDS). The author acknowl- Are they positive? Are they attainable? If the edges the excellent research assistance provided by Merle G. Galvan. The usual disclaimer applies. 1 M. Landler. 2001. Daunting Task for Manila’s New Finance Chief. International Herald Tribune. 10-11 +20 February. DEVELOPMENT RESEARCH NEWS 2 January - February 2001

obvious to any fairly rational person nal factors. However, the peso slide was The Philippine...from page 1 that Mr. Estrada did not have the nec- brought about by a combination of essary qualifications to effectively per- external and domestic events. Most quarter of 2000, which was the highest form the role of President of the Phil- currencies in the region had experi- among the four quarters of that year, ippines. The intention is to remind the enced a depreciation of their curren- and even higher than the 2.9 percent present team of economic managers cies last year (Table 1). The primary growth in the last quarter of 1999. This that any mess that has to be cleaned reason, particularly for Australia and is hardly the performance to be ex- up was partly caused by gaps in policy New Zealand, was a hike in US interest pected from an economy paralyzed by initiatives of both the Ramos and rates. Indonesia, the Philippines, and a political crisis. Aquino administrations.2 Since many Thailand also experienced large net of the present cabinet members played capital outflows related to repayment The scathing attacks on the principal roles in these two stages of of external debt. Korea was a net re- Estrada administration also obfuscate Philippine politics, they should be wary cipient of capital flows and hence the the less-than-sterling track depreciation of the won was record of the Ramos govern- merely to contain changes in ment. Despite the loud the real exchange rate. praises heaped upon the Ramos administration’s eco- The variation in ex- nomic programs by interna- change rate changes can be tional and domestic inves- attributed to domestic fac- tors—and more by the eco- tors. A greater degree of po- nomic managers them- litical uncertainty resulted in selves—the highest GDP a higher depreciation rate in growth that was achieved was Indonesia and the Philip- 5.9 percent in 1996, which was pines compared to Thailand. the second lowest in South- The importance of the politi- east Asia that year. Income cal risk factor was evident distribution deteriorated when the peso appreciated sharply between 1994 and and stabilized after the peace- 1997 with the Gini ratio ap- ful transition of power in the proaching Latin American lev- Philippines in January 2001. els. The fiscal surpluses that were achieved during the The higher exchange Ramos administration were The Philippine Star, 20 January 2001 rate was partly responsible for more a result of proceeds the low growth of imports in from privatiza-tion of state- 2000 (Table 2). Along with owned assets rather than a significant of committing the same mistakes. In higher fuel prices, the weak peso also improvement in tax effort. And—at addition, the higher-than-expected sparked an acceleration of inflation in the risk of sounding like a broken GDP growth in 2000 serves as a re- the second half of the year. Neverthe- record—it should be pointed out that minder that some policies followed by less, inflation averaged only 4.3 per- the manufacturing sector decelerated the Estrada government provided a cent, much lower than the original gov- for 15 consecutive quarters over the stimulus to economic activity. Mean- ernment target of 6 to 7 percent. Apart period 1995Q4 to 1999Q2. The slow- while, the analysis emphasizes that from stable food prices, low inflation down after 1997Q2 could well be ex- there are deep-rooted institutional and also resulted from the continued slug- plained by the East Asian financial cri- structural problems that have never gishness of domestic demand. The lat- sis but the slide in manufacturing out- been addressed effectively by any of the ter also contributed to the slowdown put prior to the crisis could be attrib- past governments, including Estrada’s. of imports. uted to shortcomings in economic policy. Recent Economic Performance Two prominent developments in 2 An assessment of the state of the economy and This sobering view should not be 2000 were the sharp depreciation of policy agenda is summarized in J. T. Yap. 1998. Beyond 2000: Assessment of Economic Perfor- interpreted as a vindication of the pre- the peso and the hike in fuel prices. mance and an Agenda for Sustainable Growth. PIDS vious administration. Indeed, it was The latter was clearly a result of exter- Discussion Paper 98-28. DEVELOPMENT RESEARCH NEWS 3 January - February 2001

ics sector (electrical machinery) had Table 1. Exchange Rate Movements in Selected Asia-Pacific Countries the most significant contribution al- (In percent, end-1999 to end-2000) though it comprises only 12 percent of the manufacturing sector. Value added in electronics has been expanding rap- Nominal Exchange Rate Real Exchange Rate idly due to the elevation of local firms from the simple contract assembly pro- Indonesia -26.6 -13.9 cess to elements of design. Their con- Korea -9.9 0.3 tribution to the electronic manufactur- Malaysia 0.0 7.9 ing service and semiconductor manu- Philippines -19.5 -10.4 facturing service has been increasing. Thailand -13.6 -2.1 Australia -14.9 -7.6 The service sector also registered New Zealand -14.9 -6.3 higher growth in 2000, fueled by the transport, communication and storage sector. The completion of the Metro Note: A [-] indicates a depreciation. Rail Transit (MRT) may have contrib- Sources: Bloomberg for nominal exchange rate and JP Morgan for real exchange rate uted to the performance of this sector but it was mainly the surge in the pur- chase of cellular telephones that led to In anticipation of a less benign September).4 Hence, while the GDP the 9.9 percent growth in 2000. As ex- international environment, the prog- growth of 3.9 percent in 2000 was be- pected, the agriculture sector deceler- nosis last year centered on the role of low the government target of 4 to 4.5 ated in 2000 but its 3.4 growth rate was domestic economic activity to prop up percent, it represented an improve- still higher than the historical trend of the economy.3 Four factors were iden- ment over prevailing expectations. 2-2.5 percent. tified that would work against the res- toration of consumer and investor con- Moreover, economic growth was Despite improved economic fidence: broad-based. This is largely due to the performance, the three sectors hard- healthy performance of the manufac- est hit by the crisis—construction, fi- * the lack of resources for pump- turing sector, which defied earlier pre- nancial services, and real estate—con- priming; dictions and expanded by 5.6 percent tinued to falter. The contraction in the (Table 2). A weak peso provided pro- construction sector was even more pro- * the slow progress of legislation tection to domestic manufacturers and nounced in 2000 as government con- needed to implement eco- a low interest rate regime supported struction declined by 8.7 percent com- nomic reforms; both local demand and access to work- pared to an increase of 14.9 percent in ing capital. Meanwhile, a stronger- 1999. This is clear evidence of the in- * the erratic performance of the than-expected US economy provided ability of the government to conduct manufacturing sector; and a market for manufactured exports. pump-priming activities. As a result, private construction continued its de- * the proclivity of the Estrada ad- The manufacturing sector mir- cline, which, in turn, contributed to a ministration for generating rored the broad-based growth of the near-zero growth in the real estate sec- controversy. aggregate economy. The balanced out- tor. put is evident in the food manufactures Indeed, notwithstanding the im- sector, which has the highest share in The financial sector continued to pact of higher fuel prices and a weaker manufacturing (35.6% in 2000) but reel from the 1997 crisis. The peso, these factors exerted a major in- grew by only 1.9 percent. The electron- nonperforming loan (NPL) ratio of fluence on the pace of economic commercial banks even increased to growth in 2000. 16.2 as of November 2000. This is the 3 Development Research News, January-February highest level since the onset of the cri- By the second quarter of 2000, 2000. sis. Initially, the rise in the NPL ratio 4 This is the forecast published by Consensus Eco- was attributed to technicalities, namely, the Consensus forecast for the Philip- nomics, Inc. The consensus forecast is the me- pines for that year had fallen to 3.4 per- dian of a survey of over 130 prominent financial the reclassification of certain cent (although it rose to 3.6 percent in and economic forecasters. loans after the merger of two +4 DEVELOPMENT RESEARCH NEWS 4 January - February 2001

percent in 1999. However, gross do- real sector. As mentioned earlier, con- The Philippine...from page 3 mestic capital formation hardly sumption spending did not show signs changed, with a 0.8 percent growth rate of a slowdown, particularly in the last large banks, and the fall in interbank in 2000. quarter of 2000. Investment in durable loans, which caused total gross loans— equipment also posted its highest the denominator—to decline. How- The positive developments in the growth rate in the last quarter. Net ever, with the resumption of growth in manufacturing sector and the enact- inflows of foreign direct investment commercial bank loans, an increasing ment of new laws indeed helped miti- actually had a modest gain—from $753 NPL ratio should be a source of con- gate the negative impact of higher fuel million to $1.04 billion—in the first 10 cern. Meanwhile, the capital adequacy prices, an undervalued peso and the months of 2000 compared to the same ratio of the banks fell to 15.6 percent loss of investor confidence following period in 1999. in October 2000, which is lower than the political crisis. The higher-than- the 17.2 percent achieved early last year expected growth of the US economy However, private construction did but higher than the international contract in the second half of norm of 8 percent.5 The bank- 2000 after eking out small positive ing sector was also affected by the Sale, sale everywhere but not a drop of money to spare. growth rates in the first half. The political crisis, as rumors on secret slowdown from 4.9 percent GDP bank accounts triggered minor growth in the fourth quarter of bank runs. 1999 to 3.6 percent in 2000 is also a possible indication of the ad- The general investment cli- verse impact of the political prob- mate was boosted with the enact- lems. But this could be largely at- ment of two economic laws, the tributed to the hike in interest General Banking Law of 2000 and rates and the rise in fuel prices. the Securities Regulation code. These laws are expected to raise On the whole, domestic de- the regulatory standards of the mand, especially investment, was banking sector and securities mar- sluggish last year. Fixed invest- ket and bring them closer to in- ment actually declined in 2000. It ternationally acceptable norms. has been three years since the Other economic laws enacted last Asian financial crisis and private year include the Retail Trade Lib- BusinessWorld Top 1000, Vol. 14 investment has not recovered. eralization Act, which opens re- The only remarkable category in tail trade to foreign investment; the E- eased the burden on domestic de- the expenditure sector was exports, commerce law, which provides basis for mand. Nevertheless, the higher eco- which grew by 16.4 percent in real peso transactions conducted over the nomic growth rate did not lead to the terms. Hence, the political crisis in the Internet; and the Regional Headquar- expected increase in revenues, which last quarter of 2000 was a manifestation ters law, which grants additional incen- was 11 percent off-target. Meanwhile, of the general lack of domestic inves- tives to multinational corporations es- expenditures exceeded programmed tor confidence since the beginning of tablishing regional headquarters in the levels by 2 percent. The net result was the Estrada administration. Philippines. The incentives provided an estimated P136 billion deficit, by these laws may have contributed to equivalent to 3.9 percent of GNP. Another indication of the im- the turnaround in investment in du- passe between the government and the rable equipment, which grew by 2.6 The last of the aforementioned local business sector was the softer re- percent last year after declining by 5 factors affecting consumer and inves- bound of the Philippine economy be- tor confidence was the proclivity of the tween 1998 and 2000 compared to Estrada government to generate con- other economies in the region (Table 5The Philippines is not yet following the Bank for troversy. Apart from the slide of the 3). In stark contrast to the Philippines, International Settlements (BIS) capital adequacy peso and fall in stock market activity— Indonesia, Korea, Malaysia and Thai- standards wherein the weights of different catego- part of which is attributable to exter- land experienced a surge in private in- ries of capital are risk-based. However, even if nal factors—there is apparently no vestment last year. Perhaps the differ- the capital adequacy ratio were adjusted for risk, it would remain above the international norm of 8 other concrete evidence of the impact ence between 4.5 percent—the upper percent. of the political crisis, especially in the limit of the government GDP target— DEVELOPMENT RESEARCH NEWS 5 January - February 2001

Table 2. Selected Macroeconomic Indicators, Philippines, 1992-2000, Forecasts for 2001 (Annual growth rates and share to GDP, with the latter in italics)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Forecast

Gross national product 1.7 2.8 4.6 4.9 7.3 5.2 0.1 3.7 4.2 3.8 Gross domestic product 0.4 2.1 4.4 4.7 5.9 5.2 -0.5 3.3 3.9 3.3 Agriculture, fishery and forestry 0.1 2.0 3.4 1.2 3.9 2.8 -6.6 6.0 3.4 1.5 22.75 22.75 22.36 21.55 21.13 20.71 19.50 19.99 19.89 Agriculture and fishery 0.4 2.5 3.8 1.9 3.9 3.3 -6.5 6.4 3.5 22.17 22.28 21.98 21.32 20.91 20.56 19.34 19.91 19.83 Forestry -12.0 -15.7 -16.3 -37.1 7.7 -39.0 -21.0 -45.5 -16.8 0.58 0.48 0.39 0.22 0.22 0.15 0.15 0.08 0.07 Industry sector -0.3 1.6 5.8 6.8 6.4 6.2 -1.8 0.9 3.6 3.3 34.41 34.25 34.71 35.38 35.58 35.91 35.35 34.52 34.41 Mining and quarrying 8.1 1.1 -7.2 -5.6 1.4 2.9 3.3 -8.4 8.7 0.0 1.60 1.58 1.40 1.25 1.20 1.16 1.20 1.06 1.11 Manufacturing -1.7 0.7 5.0 6.8 5.6 4.2 -1.0 1.6 5.6 3.0 25.03 24.69 24.84 25.34 25.27 25.04 24.91 24.49 24.88 Construction 6.1 5.7 9.4 6.6 10.9 16.4 -8.5 -1.6 -6.0 5.0 5.04 5.22 5.45 5.55 5.81 6.42 5.83 5.56 5.03 Electricity, gas and water 0.7 2.8 13.9 13.0 7.6 4.8 3.4 3.1 3.7 4.0 2.74 2.76 3.01 3.25 3.30 3.29 3.41 3.41 3.40 Service sector 1.0 2.5 4.3 5.0 6.4 5.5 3.5 4.1 4.4 4.0 42.84 42.99 42.93 43.07 43.29 43.38 45.15 45.49 45.70 Transport, communication 1.4 2.5 4.2 5.8 7.4 8.2 6.5 5.3 9.9 and storage 5.82 5.85 5.84 5.90 5.99 6.17 6.60 6.73 7.12 Trade 1.6 2.4 4.0 5.6 5.5 4.0 2.5 4.9 5.6 15.27 15.32 15.26 15.39 15.34 15.15 15.61 15.85 16.10 Finance 0.4 2.4 5.5 7.3 13.7 13.0 4.5 1.9 0.9 4.06 4.07 4.12 4.22 4.54 4.87 5.12 5.05 4.90 Ownership of dwellings 0.7 1.8 2.9 3.1 4.2 3.8 1.6 0.6 0.3 and real estate 5.64 5.62 5.54 5.46 5.37 5.30 5.41 5.27 5.09 Private services 0.6 2.9 4.3 4.3 5.0 4.9 4.7 5.8 4.7 6.89 6.94 6.94 6.91 6.86 6.83 7.19 7.37 7.42 Government services 0.2 2.9 5.5 3.8 5.9 2.6 2.6 3.7 0.9 5.15 5.18 5.24 5.19 5.19 5.06 5.21 5.23 5.07 Personal consumption expenditure 3.3 3.0 3.7 3.8 4.6 5.0 3.5 2.6 3.5 3.2 78.10 78.81 78.31 77.66 76.76 76.62 79.73 79.20 78.85 Government consumption -0.9 6.2 6.1 5.6 4.1 4.6 -2.1 5.3 0.2 0.0 7.70 8.00 8.13 8.20 8.07 8.03 7.92 8.07 7.78 Capital formation 8.5 7.9 9.0 3.7 13.3 11.6 -16.4 -1.7 0.8 5.0 21.46 22.67 23.59 23.33 24.78 26.32 22.16 21.08 20.44 Exports (nominal $)* 11.1 15.8 18.5 29.4 17.7 22.8 16.9 18.8 8.7 6.2 Imports (nominal $)* 20.5 21.2 21.2 23.7 20.8 14.0 -18.8 4.1 2.1 10.0 Inflation (average) 8.6 7.0 8.3 8.0 9.1 5.9 9.8 6.6 4.3 6.5 91-Day Treasury bill rate (average) 16.0 12.4 12.7 11.8 12.3 12.9 15.0 10.0 9.6 10.5 Nominal exchange rate (average) 25.3 27.2 26.3 25.8 26.2 30.1 40.8 39.3 44.2 48.7

*Exports and Imports data (January to November 1999) comes from the Bangko Sentral ng Pilipinas (BSP) homepage. Sources: National Accounts of the Philippines, National Statistical Coordination Board; Selected Philippine Economic Indicators, BSP; and forecasts of J.T. Yap. DEVELOPMENT RESEARCH NEWS 6 January - February 2001

must be implemented effectively. This the need to catch up in terms of infra- The Philippine...from page 5 would encompass the banking sector, structure, the continued stupor of pri- particularly the amendment of the Se- vate investment should be a priority and the 3.9 percent GDP growth in crecy of Bank Deposits Law. consideration. Hopefully, the new ad- 2000 could be attributed to the anti- ministration, which has close ties with Estrada sentiment of majority of the The privatization programs for the business sector, will be able to up- local businessmen.6 both the National Power Corporation lift investor confidence. Nevertheless, and the National Food Authority are the main focus should still be on ad- Key Issues still pending. However, these programs dressing the country’s low labor pro- The deterioration of the fiscal must be carried out without putting the ductivity. Apart from the usual recom- deficit from 3.5 percent of GNP in 1999 government at a due disadvantage. mendation to increase the investment to 3.9 percent in 2000 should be a cause Moreover, the competitive environ- rate, measures at the microeconomic for utmost concern. As mentioned in ment that the government should level—a well-defined technology policy, last year’s report, slower output growth maintain to sustain private sector measures to improve social cohesion, and the sharp nominal depreciation of investment must not be undermined and the need for better governance— the peso constrain fiscal flexibility, as by the process of privatization have already been discussed and pre- does the high initial level of debt. Nev- especially as there are concerns that sented at various fora. ertheless, for various reasons, cutting under the present proposal, expenditures should not be considered monopolies may emerge in the energy Prospects as the primary option. First, the defi- sector. If successful, the privatization A general slowdown is projected cit is more a result of shortfalls in rev- programs should promote efficiency for world economic activity in 2001. enue mobilization rather than expen- and boost revenues. The main reason for this is the decel- diture overruns. Second, the Philip- eration in the US economy (Table 3). pines lags behind other East Asian Finally, the issue of competitive- In this context, the relevant question countries in terms of infrastructure de- ness should be revisited since the en- is: To what extent will GDP growth fall velopment and any further reduction try of China into the WTO and the in the Philippines? For reasons dis- in spending for this purpose will have emergence of India have reduced the cussed below, it is virtually impossible dire consequences in the medium- attractiveness of Southeast Asia for for the economy to improve its 3.9 per- term. And third, scaling down govern- many traditional industries. Apart from cent performance in 2000. As can be ment expenditures may reduce the nec- essary social spending and contribute to the already serious poverty problem in the country. Table 3. GDP Growth Rates of Selected Countries and Regions (In percent)

Hence, the only alternative the new government has is to make a strong 1999 2000 2001 2002 push for a substantial improvement in tax administration. This issue has be- China 7.1 8.0 7.7 8.1 come as important as ever before. The Indonesia 0.3 4.8 3.6 4.3 political crisis that engulfed the Philip- Korea, Rep. Of 10.7 8.0 4.4 5.3 pines centered on the issue of corrup- Malaysia 5.6 7.5 5.2 6.1 tion. Together with the need to en- Philippines 3.3 3.9 2.7 3.4 hance tax administration, these issues Singapore 5.4 10.1 5.3 6.1 emphasize the need to improve gover- Thailand 4.2 4.0 - 4.5 3.5 4.3 nance in this country. The phenom- Japan 0.8 1.8 1.4 1.8 enon of a “weak state” has to be ana- North Americaa 4.2 5.0 2.1 2.4 lyzed carefully and reforms needed to Western Europeb 2.4 3.3 2.7 2.8 improve the institutional framework

aUS and Canada 6 It should be noted that the original target of 4.5 bGermany, France, UK, Italy, Austria, Belgium, Denmark, Finland, Greece, Ireland, the Nether- to 5 percent was scaled down to 4 to 4.5 percent lands, Norway, Portugal, Spain, Sweden and Switzerland. in the middle of the year primarily because of the Sources: Country sources (for 1999 and 2000 estimates), Asia Pacific Consensus peso depreciation and the rise in fuel prices. Forecasts (for 2001-2002 forecasts). DEVELOPMENT RESEARCH NEWS 7 January - February 2001

seen from Table 3, the Agriculture will be af- Consensus forecast is for a fected anew by the El GDP growth of 2.7 per- Niño weather distur- cent. bance and should grow by only 1.5 percent. Two key determi- The manufacturing sec- nants of the 2001 GDP tor would be adversely growth would be the rate affected both by the of deceleration in the US slowdown in the US economy and the trend in economy, which would international fuel prices. lower demand for The Philippines is one of manufactured exports, the more vulnerable, if not and by the lower growth the most vulnerable, coun- of agriculture, which tries in East Asia to a US would affect the food slowdown and persistence manufacturing sector. of high fuel prices. A rela- The manufacturing sec- tively large proportion of tor is predicted to grow its exports go the US. by 3 percent in 2001. Meanwhile, the declining The services sector energy efficiency and in- would also experience a creasing oil import depen- lower growth, which dence of the Philippines would likely be 4 per- makes it very sensitive to cent this year. the behavior of oil prices.7 Meanwhile, infla- Fortunately, the general consen- break the $30 threshold, oil importers tion would continue to accelerate in sus is that the US will experience a should not be too adversely affected. the first few months of the year before “soft” landing, where growth will slow stabilizing toward June. This is because in a benign inflationary environment. Among the domestic factors that the bulk of the peso depreciation and The scenario where rapid capital out- affect prospects, it is the fiscal deficit the rise in fuel prices happened in the flows and a depreciating dollar would that stands out. If it is perceived that second half of 2000. The whole year necessitate a sharp increase in interest there is no turnaround in the deterio- average would be about 6.5 percent. rates is not probable. The Federal Re- ration of fiscal balances, then interest Higher inflationary expectations serve Bank has actually trimmed key in- rates would rise and hamper the recov- should limit the impact of the cut in terest rates in an attempt to avoid a ery of investment. This would then interest rates of the Bangko Sentral ng recession. lead to the scenario where GDP growth Pilipinas. The average of the 91-day will fall below 3 percent this year. How- Treasury bill rate should be higher in Meanwhile, the projections for in- ever, it is likely that the new adminis- 2001 than the 9.6 percent average in ternational oil prices are not clear. tration will have success in pushing for 2000. There are indications for an upward legislation bills that would increase rev- movement but pronouncements by the enues, even if it is only a one-time Last year’s prediction of the ex- Organisation of Petroleum Exporting surge. This would then allow the con- change rate was way off. However, few Countries (OPEC) that consensus has tinuation of an accommodating mon- analysts—perhaps even none—pre- been reached to cut supply imply stable etary policy, a sufficient reason to ex- dicted that the peso would depreciate oil prices. However, the international pect GDP to grow between 3 to 3.5 per- that sharply. This year, the exchange oil price is currently $24.83/bbl (Feb- cent in 2001. rate should hover between P47 and ruary 15) but so long as it does not P51. Net capital flows are predicted to There should be a relatively turn positive for Indonesia, Korea, Ma- strong recovery in construction and in- laysia, the Philippines and Thailand (in aggregate) in 2001 after turning nega- 7 For a more comprehensive analysis, refer to the vestment, something that did not ma- Asia Recovery Report, October 2000 issue (http:// terialize last year. However, both vari- tive in 2000. The average exchange aric.adb.org). ables will be growing from a low base. rate would thus be about P48.70. DRN DEVELOPMENT RESEARCH NEWS 8 January - February 2001

Dr. Gloria Macapagal Arroyo: The next Philippine President could be an economist* Gerardo P. Sicat **

f the current impeachment Her academic preparation makes find it hard to raise their motivation of President Joseph Estrada her one of the best-prepared politicians level. So much could be had for the succeeds in his removal in the country from the standpoint of asking and, therefore, their best efforts from office, then Vice-Presi- educational attainment. Her knowl- may not be needed. The high achieve- Ident Gloria Macapagal Arroyo would edge of economics should be helpful ment of children of well-to-do parents become President. Her rise as a politi- to a leader when presented with com- who work on their own efforts is a fa- cian is one of the fastest in Philippine plex economic policy options. It would vorable reflection on the parents who history. There is no doubt that her therefore be useful to appreciate this had reared them. pedigree, as the daughter of a former point and discuss its implications. President whose name is still revered That Gloria Macapagal took fur- despite the distant years, helped her a As the daughter of prominent ther intensive graduate study is also a lot. parents, it is a remarkable achievement tribute to her own search for self-im- that she worked to obtain a Ph.D. de- provement. She initially studied gradu- But who is she, aside from the gree. Generally, young people who ate economics at the Ateneo Univer- political persona? come from families with inherited eco- sity where she also took a job as a fac- nomic stature or political power often ulty member in its Economics Depart- Toward the Ph.D. It is not as widely known that she is Dr. Gloria Macapagal Arroyo by vir- tue of a Doctor of Philosophy Degree It is not as widely known that she is Dr. Gloria in Economics that she received from the University of the Philippines in Macapagal Arroyo by virtue of a Doctor of 1985. In her submission to the School, Philosophy Degree in Economics that she re- she downplayed her maiden surname to an “M.” However, she connected ceived from the University of the Philippines in with that surname by dedicating her thesis “to my parents, former President 1985. of the Philippines and Mrs. Diosdado Macapagal.”

* Gloria Macapagal Arroyo became President of the Philippines two and a half weeks after this paper was first publicly released as a Discussion Paper of the University of the Philippines School of Economics on January 2, 2001. After one try to change the subjunctive mood to reflect this reality, the author reverted to the original title, with minor revisions, and decided to retain the speculative nature of the paper. ** Professor of Economics, School of Economics, University of the Philippines. In my own lexicon, this paper was designed as a topical comment on a very important issue–the possibility that a Ph.D. in Economics and a graduate of the U.P. School of Economics could become President of the Philippines. Gloria Macapagal was never my student. I have talked to her only once, in a neighborhood Christmas party just before she became a candidate for Vice President (we happen to live in the same neighborhood). She was a graduate student at the School of Economics when I was still connected with the government. When she finished her doctoral work, I was already working with the World Bank in Washington D.C. and I returned to my post at the School only in 1998. My colleagues at the School remember her as a serious student. DEVELOPMENT RESEARCH NEWS 9 January - February 2001

ment. Later, she sought a faculty award comprehensive examinations fail to fin- This project involved a large team from the Ateneo faculty development ish their degree for a number of rea- of economists at the School of Econom- program to enable her to enroll at the sons. Some lack the concentration ics that was then headed by the late University of the Philippines School of needed to do the research and finish renowned Dean José Encarnación, Jr. Economics (UPSE). the thesis. Some get lucrative jobs that Her involvement in this project helped get in the way. Others have family obli- to crystallize her research thesis related Ph.D. studies are for those who gations to fulfill, especially in the case to government expenditure on tourism seek a specialist training. The program of married graduate students who are for the doctorate, which was to analyze at the UPSE is not a mediocre course. raising children. Still others might have the impact of tourism expenditures on Economics has become a specialist sub- a unique difficulty focusing the re- the economy. Her Ph.D. thesis acknowl- ject and at U.P., the work is up to cur- search topic as to foment frustration edges this point. rent developments in the discipline. and, later, disappointment. The faculty is varied, some have Gloria Macapagal did man- obtained their degrees from age to finish her Ph.D. course. She graduate schools in the U.S. and took undergraduate studies at elsewhere. The faculty engages in Georgetown University, the Jesuit both research and policy work, and University in Washington D.C. This has a professional stature in the period of her studies appeared to Asian region and internationally. have coincided with the years when Bill Clinton was also a co-student. One aspect of Ph.D. study She finished her undergraduate that often defeats many a student education in Assumption College. who has passed the early hurdles But her having finished a Ph.D. in is the research effort that is put in Economics at U.P. should be her the thesis. The thesis has to be of crowning achievement as a stu- acceptable quality to the faculty. dent. This means that the student has to aspire to the status of her men- In 1968, she got married to a tors. The thesis is the final hurdle scion of the Tuason clan and prior to acceptance within that se- settled in La Vista in Diliman, lect group of professionals. To Quezon City, a community flanked qualify for that stage of research by the campuses of UP and Ateneo writing, it is important that the stu- and Maryknoll (now Miriam). She dent passes comprehensive exami- was married and with children nations for the Ph.D. candidacy. when she began her graduate stud- This requires written and oral ex- ies. Here was how she justified get- aminations with the faculty. A com- ting a job outside and studying fur- Asiaweek, 3 November 2000 mittee of three faculty members ther: serves a Ph.D. thesis panel, and the research is defended in an oral exami- It helps to be connected with a “…When I got married, I lived nation. research project that provides a job as with my in-laws. I lived with my well as stimulus for the intellectual ef- husband’s family, so I didn’t re- The Ph.D. degree is for the stu- fort. This was what Gloria Macapagal ally have my own home to run. dent with high intellectual aspirations. had at the U.P. School of Economics. So in that kind of environment, It is professional education of the high- At the stage when she was about to it’s really conducive …to look for est order. Aside from intellectual equip- write a doctoral thesis, she also became something to do outside.”1 ment, it also requires of the student a teaching fellow at the School. She also enormous personal discipline. Such a got recruited into a long-term research +10 discipline would be most exacting es- project. This was the multi-year Eco- pecially in the preparation of the Ph.D. nomic and Social Impact Analysis 1 As I was finishing this paper, a timely interview thesis. In that endeavor, the student Project that had for its objectives the with Gloria Macapagal Arroyo appeared in the De- cember 24, 2000 issue of the Philippine Daily In- would be essentially on his own. Many evaluation of the impact of develop- quirer. This and the next paragraph are taken from students who have already passed their ment projects in the government. said interview (Anonymous 2000). DEVELOPMENT RESEARCH NEWS 10 January - February 2001

At the heart of the Gloria...from page 9 issue is whether fiscal defi- cits lead to income expan- She wanted to become a teacher. sion or provide competi- She wanted to become a professional, tion with private sector ac- and finally a technocrat in government. tivities. The doctrinal is- In her application for the Ph.D. course sue critical to her ques- at the UPSE, she said that she wanted tion was the effect of gov- to take up a doctorate in economics be- ernment expenditure on cause she wanted to be a technocrat. output. In particular, is government expenditure The doctoral thesis likely to lead to an expan- The doctoral thesis that Gloria sion of output, and if so, Macapagal submitted to the School of by what mechanism, if Economics provides a clue to her com- any? This was the topic of petence as an economist. The study was lively debate in recent entitled “An Investigation of the Real years, a debate in which Effects of Government Expenditures the major tenets of main- with an Application to Tourism Expen- stream Keynesian eco- ditures.” It dealt with issues in public nomics came under at- finance and macroeconomics that were tack in doctrinal terms. current in the profession at the time. There were different In turn, those issues—the real effects modes of thinking about of public expenditures on the the role of government and output, The other proposition of eco- economy, in particular on the private some of them even emanating from nomics is that government expenditure sector—are at the center of current older principles. The issue centered on competes for the same resources so doctrinal controversy in macroeconom- old propositions with new and unex- that government expenditure could ics. This doctrinal controversy flared in pected twists. crowd out private activity. The conven- the field of economics as a result of the tional view at that time was that in the challenge waged against the dominant One of these is known as the presence of excess capacity and unem- theory of aggregate demand embodied Ricardian equivalence proposition, an ployment of labor, any new expendi- under Keynesian economics. old idea discussed by David Ricardo, a ture would lead to a multiplier impact classical economist of the 19th century. that raises output and employment. The doctrinal debate is in the This proposition claimed that people context of the effectiveness of fiscal reduce their income expectations The essence of these two propo- policy, trade-offs between inflation and equivalent to the amount of the repay- sitions—resuscitated by a stream of growth, and, in brief, the debate be- ment of the debt at a future time. In macroeconomic critics of Keynesian tween Keynesian economics, on the such a world, when a government in- economics—was to put doubts on the one hand, and the revival of the old curs new debt, households anticipate effectiveness of fiscal policy. The new classical economics through the ratio- this by expecting that their future in- school of economists challenging the nal expectations school, on the other. come would be affected by future taxes. conventional results of Keynesian eco- Her study sought to study fiscal expen- In that event, households discount the nomics was called the rational expec- diture issues in the context of models beneficial output effects of new deficit tations school. offered along the new classical lines in finance by anticipating the taxes that contrast to Keynesian. are due to finance the debt repayment. By the 1970s and 1980s, alterna- tive explanations were being sought to account for the failure of fiscal deficits to raise employment rates in industrial She wanted to become a teacher. She wanted economies. This led to the formulation to become a professional, and finally a tech- of alternative macroeconomic hypoth- eses. The debate centered on what was nocrat in government. then called the “Philips curve contro- versy.” The Philips curve formulation DEVELOPMENT RESEARCH NEWS 11 January - February 2001

predicted a trade-off between growth including output (GNP), tax revenues, The chapter that focused on the policy (represented by fiscal and real transfers, the public debt as proxy expenditures on tourism examined the growth stimulus following Keynes) and for wealth, and corporate retained magnitudes of the public expenditures employment rates. Many observed that earnings. on tourism and analyzed their impact that trade-off was weak or did not ex- on output. The period under study cov- ist, and it was the major point raised by These econometric calculations ered the 1970s and early 1980s. She the rational expectations school that used statistical techniques of regres- found that tourism expenditure on the began to challenge the macroeco- sion, making sure that the accepted re- Folk Arts Theatre, the Miss Universe nomic mainstream. gressions met statistical standards of contest and the Ali-Frazier fight, among goodness of fit and that the equations others, had some multiplier effect on The literature on public finance defined by the time series data also output. But she examined such posi- includes a study of Robert Barro used satisfied tests of statistical reliabil- tive findings against the alternative of (1981), with insights from Martin Baily ity. Her regression estimates found no employing the same amount of expen- (1968, 1971), which led to the revival evidence of the existence of the diture on social services. She concluded of the Ricardian equivalence proposi- Ricardian equivalence hypothesis in that the net difference in economic im- tion. The proposition stirred controver- the Philippine context. There was no pact would have been higher if the re- sial waters. Empirical validation of the evidence to indicate that incurring a sources were spent on social services theory became the main issue. The em- fiscal deficit implied a corresponding rather than on tourism. pirical literature tested the effective- ness of government expenditure as an instrument of output change.

At the time of the writing of her She came out with strong conclusions [in her thesis, prominent works along the line thesis] that social expenditures had a much included investigations of Martin Feldstein (1982) whose work provided stronger impact on the economy than the same a defense of accepted theory of the multiplier impact of government volume of expenditure on tourism. spending. The empirical work of Roger Kormendi (1983), whose investigations provided the grist to the crowding-out effect of government spending on pri- anticipation that future taxation would The last part of her study was far vate consumption, supported the be expected. removed from the empirical investiga- points stressed by Baily and Barro. tions described above. She followed a The more important finding in different research tradition by using in- Dr. Macapagal’s study took a part her study, however, confirmed that put-output analysis. She verified the of this tradition to pose questions about there was strong evidence of crowd- direct and indirect inter-industrial im- public expenditure policy in the Phil- ing out of private expenditure when pact of expenditures on tourism on the ippines. Using national income and government expenditure was intro- rest of the economy and compared the government spending data, she then duced. Her findings on this score were same with similar expenditures on so- explored alternative hypotheses with robust. These findings, as discussed cial services. Using the 1978 input-out- her own econometric investigations, above, formed the article that she pub- put model of the Philippine economy, following the lines individually pro- lished in the Philippine Review of Econom- she applied a given final demand pro- posed by Feldstein and Kormendi. ics and Business in 1987. jection on the input-output structure. She came out with strong conclusions The effort meant estimating But her doctoral thesis covered that social expenditures had a much equations that served as alternative hy- more ground. The work was extended stronger impact on the economy than potheses for the behavior of private to two other aspects of the problem the same volume of expenditure on consumption in relation to different that were treated separately in two tourism. streams of output and other forms of more chapters. The latter part of the expenditure. Her propositions exam- thesis was devoted in particular to pub- Gloria Macapagal’s doctoral the- ined consumption expenditure as be- lic expenditures for the development sis demonstrates a state-of-the- ing dependent on a number of factors of tourism. art effort dealing with an em- +12 DEVELOPMENT RESEARCH NEWS 12 January - February 2001

The post-Estrada scenario and Estrada factor is mainly a perception Gloria....from page 11 lessons from the past arising from poor management, erratic The most likely scenario of an style, and lack of credibility of the lead- pirical topic. Correctly, she focused on Estrada conviction, or resignation even ership. That perception discourages research issues dealing with the if acquitted, is the Constitutional route. any favorable decisions that are ben- country’s problems. Her treatment of This means that Gloria Macapagal Ar- eficial to growth and development the subject contained a reasonably royo becomes president. If this specific from being made. It is a factor that adds brief summary of the relevant theoreti- scenario becomes the flow of history, to the gloomy forecast of future events cal literature to her research agenda. what economic issues of performance and makes decisionmakers postpone Her research covered three different would await the new president?2 their decisions. When the Estrada fac- approaches to the study of the impact tor is taken off, a leap of government spending. First, there in confidence by busi- was an econometric estimation of the ness and investors determinants of aggregate consump- Had she decided to become a researcher would be easier to re- tion expenditure when the alize until a new lead- government’s activities are taken into rather than a public official and a politi- ership proves its account. Second, she undertook a worth through hard quantitative assessment of fiscal expen- cian, she would have been properly equipped work and wise deci- ditures in the tourism sector. Finally, to contribute to the profession more than ad- sions. she employed input-output analysis to examine the comparative impact of equately. Based on the tourism as against social expenditures. way the economy im- mediately responded The doctoral thesis showed to the accusations of Gloria Macapagal as an accomplished The removal of Estrada does not corruption against the President, to- economist with a good command of the guarantee better growth and develop- gether with the other reasons that be- current debates in economic theory. ment. The economy, however, stands a came apparent as he continued in of- She also knew how to employ up-to- much better chance of improving than fice, the negative Estrada factor could date empirical methods used in eco- under Estrada, given his failure to at- at least be around 20 percent of cur- nomic analysis. She was at home in dif- tend to the work of the presidency dur- rent indicators.4 The impeachment ferent modes of economic analysis. ing the almost three years that he has trial of Estrada in the Senate took away been in office.3 The easy part is pull- part of the volatility of that negative fac- Had she decided to become a re- ing off from the nation’s back the nega- tor. It helped to produce a temporary searcher rather than a public official tive Estrada factor. In its place, it would but relative calmness in expectations. and a politician, she would have been be possible to put in place a new start However, that calm presages a big properly equipped to contribute to the and a restoration of business and in- storm, especially if the judgment on the profession more than adequately. vestment confidence. The negative impeachment should fail to become

2 There are, of course, countless other scenarios. So long as the new leader faced the economic challenges of the nation squarely, the economic issues would present themselves in whatever scenario. From among the competing scenarios, the Constitutional route appears to hold sway, because it is what the country’s political institutions would demand (Fabella 2000). 3 In a moment of candor, perhaps a slip of the tongue, Executive Secretary Ronaldo Zamora was reported to have said in a radio interview that Estrada had the practice of sleeping during what should be his working hours. This “damaged” not only the presidency but also his ability to lead effectively. Zamora said that the economic crisis and the impeachment trial made Estrada realize that he “had to be awake at the right hour… In the morning, there is need for papers to be signed and processed.” Secretary Zamora ought to know because as cabinet officer, he manages the office of the President, the center of the cabinet officialdom (Nocum 2000). 4 This negative factor can be measured by using standard indicators. One approach would be to project the performance of the economy if a different leader were in charge of the country by way of some counterfactual hypothesis. Some of the problems related to the stock market scandal and the high level of the fiscal deficit need not have happened. The loss of confidence arising from these events led to the decline of overall economic performance. A more easily calculated alternative approach would be to use the exchange rate as some measure of the negative factor. At year-end (refer to Manila newspaper accounts of December 28, 2000), Governor Buenaventura of the Bangko Sentral ng Pilipinas (BSP) said that the peso should be at around P46 to P47 to the dollar rather than the current rate of P50 to P51 range if there were no political crisis. The impeachment proceeding had actually helped to stabilize the exchange rate and reduced uncertainty. Otherwise, the peso exchange rate could have risen far above the P51 to the dollar rate by now if the impeachment process had not absorbed the shock of uncertain events. It is to be recalled that prior to the Asian crisis, the peso was slightly higher in value than the Thai baht. Today, despite the problems in Thailand, the peso is about 17 percent cheaper than the Thai baht in terms of the US dollar. The current baht is around P41 to P42 to the dollar. It would therefore be justifiable to use the base of P40 to the dollar as the basis of the negative Erap factor. DEVELOPMENT RESEARCH NEWS 13 January - February 2001

credible. That appears to be implementation not only for the way in which Estrada has their experience but also for created divisiveness in the the institutional memory social fabric in so short a that they embodied. The re- time. sult was that some important programs suffered disrup- Lessons from the post- tions for an unduly long pe- Marcos transition riod. The circumstances of the succession are in sharp A result of these mis- contrast to the succession of takes was the neglect of Corazon Aquino to Marcos some critical sectors by Mrs. in 1986. The economic cri- Aquino’s government. To- sis of the Marcos period was ward the second half of her prolonged. It was an ever- term, the neglect of the en- deepening crisis for almost ergy sector caused regular three years. The crisis dated back to Au- to correct the mistakes of the Marcos power shortages to the detriment of gust 1983 when Ninoy Aquino was as- rule made them commit mistakes that both households and business institu- sassinated and it worsened until the could have been avoided. tions. The energy development pro- EDSA revolt in February 1986. The pro- gram was a major casualty of political longed economic crisis led to a large On the other hand, the disconti- wrangling. The nuclear power project external debt, a legacy of economic de- nuity in some government programs itself symbolized the corruption of the pression and severe shortages in the were not necessarily caused by the dras- Marcos leadership and discontinuing economy. The resulting crisis set the tic fall of fiscal resources inherited by it in turn gave the succeeding leader- country back for almost a decade. the Aquino government during the im- ship problems in searching for energy mediate post-Marcos transition. In fact, replacement sources that could meet The problems that Mrs. Aquino there were economic projects and pro- the growing energy needs of the coun- faced when she took office in 1986 were grams during the Marcos rule that were try.5 far more difficult and more frustrating neutral from the contentious political than those that Gloria Macapagal issues that divided the nation at the Faced with the consequences of would face in a post-Estrada world, as- time. A discontinuity occurred because this neglect toward the end of her term, suming that Estrada’s disappearance the turnover at the top of the govern- Mrs. Aquino’s presidency was perceived from the scene would be accomplished ment echelon encouraged turnover at to be weak and she became the target by January 2001. The economic disrup- the senior level of the government ser- of a constant threat of challenge from tions that Mrs. Aquino endured during vice. Although such was not the offi- the military. (Of course, Mrs. Aquino the transition from the Marcos rule cial policy, there were terminations and had a major share of two catastrophic were deep and very challenging. Some forced resignations of critical person- natural disasters that shifted the atten- of them were psychological. The deep nel at the middle and senior levels of tion of the national leadership: the resentments felt by the members of the the bureaucracy. These personnel were earthquake of 1990 and the Mount new government and their zealousness important to project management and Pinatubo eruption of 1991, both of which had negative effects on eco- nomic performance.)

5 The nuclear project was a flagship economic project of the Marcos government. It was conceived during the energy crisis of the 1970s when the objective was to diversify the dependence of the country The post-Estrada transition on energy sources, including nuclear fuel. The plant was designed to represent a major capacity boost Gloria Macapagal’s transition into toward meeting the country’s energy needs. Even as the project selection was about to be made in favor a prospective post-Estrada period is of General Electric, there was a reversal of the award to Westinghouse Electric, with a change in tech- seen to be less filled with problems that nical specifications. In later investigations of the project, it became clear that the change in the award was a classic case of corruption through commissions paid indirectly to a crony who was tied to the Mrs. Aquino had in her time. Although leadership. The project was almost finished by the time of the EDSA revolt. The alliance between those in political terms, it is as sensational be- who criticized the project as an environmental disaster and those who wanted to leave the project as an cause of the impeachment process and example of the corruption of the Marcos leadership led to the project being abandoned. But the project the public disemboweling of the ac- had cost the country billions of pesos. It was as if the country, poor in resources, decided to build an aircraft carrier and, during a typhoon while at sea, the aircraft carrier sank. Billions of pesos of business cused, the post-Estrada succes- debt therefore sunk with the project, with the country paying for it as part of the external debt. sion does not provide the dra- +14 DEVELOPMENT RESEARCH NEWS 14 January - February 2001

the effect of expanding Gloria...from page 13 the demand for labor faster than the supply. The matic backdrop on the state of the objectives of their overall economy compared to that of the post- development policy were Marcos succession. Up to the present, to increase the growth of the economy is still holding up. The efficient and competitive main problem today is how to prevent investments and indus- the economy from further deteriorat- tries, relying on the mar- ing, and to restore the momentum ket demand that they were that was available to the leadership able to command and not when political power was transferred on the basis of the state from Ramos to Estrada. The Asian cri- subsidies that they re- sis provided a new dimension to the ceived. Structural reforms economic issues facing the Estrada in the industrial and trade presidency, but there were enormous sectors which previous ad- opportunities available which he failed ministrations imple- to take advantage of. Provided that the mented through major trial is relatively quick and Constitu- economic liberalization of tional succession is not delayed, it policies led to an increase would be possible to restore the ditions of the poor will improve with a in foreign investments and exports. As economy back to relative health. The change in focus of the leadership is very these reforms took root, the country longer the succession is postponed important. began to reap the harvest of rising in- (that is, if Estrada digs in and decides dustrial exports throughout the 1990s, to continue in office if an acquittal in For the short-term, the problem especially in the second half of that de- the Senate would take place), then the of Arroyo is how to reverse Estrada’s cade. more the prospects of an economic erratic management of the economy tailspin and crisis of grave costs to the and replace it with an economically The expansion of labor-intensive nation become almost certain. focused leadership. Estrada’s legacy is types of export industries is an impor- a compounding of the country’s eco- tant sign in that should this continue The major political issue that nomic problems. Some of the missteps and the export sector become more di- Macapagal faces is how to bring about of Estrada have damaged the future of versified, the domestic industrial base a cohesion among disparate groups the economy because of mixed signals.6 would be more integrated not only in- that had helped to remove Estrada Such thoughtless changes in policy ternally but also with the world from government because of its corrup- were short of catastrophic but were cer- economy. This would make the de- tion and inefficiency. Assurance of the tainly in a ruinous direction. Estrada mand for labor grow much faster. It will main constituency of Estrada—the simply missed good opportunities and only be then that the country will ex- poor—will require not only a major aggravated problems where there perience a strong rise in real wages. effort in public information campaign ought to have been none. The prob- Thus, focusing on the expansion of on the reasons for his removal from lem of Arroyo is how to get a stalling investments for industries that utilize office but also genuine efforts to show engine to perform toward a smoother our inexpensive labor for products that the government is not turning its run. back on pro-poor and social justice pro- grams. Despite the widespread public- This can only be done effectively 6 An example was the unexpected decision to ab- ity of the trial on television, some atti- by improving the conditions for rais- rogate the Philippine-Taiwan air agreement, which tude surveys indicated that Estrada’s ing both domestic and foreign invest- sent the wrong message to Taiwanese investors. hold on mass opinion remains strong, ments. This requires a continuation of Of course, the policy was to give support to a crony’s case of strengthening the position of the even though his fall from power will the liberalization program of the Philippine Airlines in a dispute on market sharing. assure that the graft and corruption economy to raise its competitive level In the end, Estrada retreated from this position cases that he was accused of would be- and improve efficiency. Most econo- after causing harm to the economy’s investment come public knowledge and therefore mists understand that the reason why promotion prospects and disruption of transporta- tion routes for thousands of Filipino industrial con- weaken that charismatic hold. The other Asian countries have progressed tract workers in Taiwan’s factories and establish- main message therefore that the con- far ahead of us is that their policies had ments. DEVELOPMENT RESEARCH NEWS 15 January - February 2001

needed in foreign markets is a good cal gap. By falling into a relaxed pos- ment. These included the sale of the policy focus. ture in implementing the privatization copper smelter plant and the phospate program, it fell further into the trap of fertilizer plants. Estrada’s poor fiscal management allowing major public corporations to is a major concern. The result of this is depend on budget subsidies because In general, work on remaining fiscal deficit. It has deteriorated each they were not allowed to pursue price privatization projects were stalled. One year since Estrada has been president. increases to meet the costs in selling of these are the reforms in the electric- From close to zero as a percent of the their economic services to the general ity generation sector which included GDP, the fiscal deficit has been rising public. The contingent liabilities of the law designed to unbundle the huge each year. It is inching towards 3 per- these corporations became actual li- generating assets of the NPC by priva- cent of GDP whereas it was almost zero abilities of the fiscal sector. Among tizing the electric generation and dis- percent when he took office. (In nomi- these corporations were the Metro tribution sectors. If said law was passed, nal terms, a fiscal deficit of about P120 transit authorities, the National Food new investments in the power sector billion is expected by the end of 2000.) Corporation (NFA) and the National would certainly follow. Another benefit This fiscal deficit was not only caused Power Corporation (NPC). would be to have a part of the public by a growing demand for expenditure: external debt reduced since, by virtue it was a failure on the revenue side. The privatization of the NFA was of privatization, some of that debt designed, from a fiscal standpoint, to would be acquired by the private sec- While the deficit was partly due bring in new and extraordinary rev- tor. But the major legislation on the to the Asian economic crisis, the other enues, and improve the distribution of power generation sector reform lan- part dealt with the government’s slow food staples as well as reduce the losses guished in the Congress because of lack reaction to critical issues and develop- draining the budget. But Estrada could of presidential leadership on this mat- ments. Foremost among these prob- not make up his mind to pursue a com- ter. This resulted in a major loss in lems, of course, is fiscal restraint on the mitment made with the Asian Develop- terms of new investments because prior expenditure side followed by to the 1998 presidential elec- inadequate revenue efforts. tion, the legislation was al- ready close to passage by Con- In fact, the increase of gress. the fiscal deficit was also the handiwork of sloppy revenue Admittedly, major eco- work. First, tax administration nomic policy problems re- weakened. The collapse in the main unresolved. But these pursuit of the Lucio Tan tax were the problems that evasion case ruined incentives Estrada, with his huge man- and morale in the tax collec- date and popularity, failed to tion agency front. The rise of pursue because his attention customs smuggling has been apparently was on other associated with duty free im- things—the things that ports by those with duty-free caused his impeachment. The shop privileges. This was a impeachment trial has taken problem of implementation valuable time away from criti- that has been exacerbated by cal economic development is- the perception that certain sues. Thus, Estrada’s succes- cronies of the President were behind ment Bank (ADB) in line with a public sor will inherit a legacy of unresolved the smuggling problem. policy reform program designed to im- and difficult problems. Hard decisions prove food distribution. This brought are required and important steps have Second, the government did not down Estrada’s international credibil- to be made in lifting the confidence of pursue the privatization program as vig- ity as a leader in the eyes of multilat- the investment sector and reintroduc- orously as required by the expected eral institutions. And while a number ing foreign investments into the coun- budget gap. The privatization program of privatization transactions of state as- try. was supposed to yield significant sets took place, these were the sales that supplemental revenues for the govern- were near that stage before former The rising fiscal deficit al- ment to meet part of the expected fis- President Fidel Ramos left the govern- ways poses a threat of inflation. +16 DEVELOPMENT RESEARCH NEWS 16 January - February 2001

rises at least by the additional cost of revenues and efficiency gains in pub- Gloria...from page 15 the downgrades. They themselves lic corporations. The first gains would could suffer downgrades if they are in- therefore be felt in the improvement A growing fiscal deficit could weaken ternationally rated by the credit agen- of the fiscal deficit. (But the popular the rest of the economy by transmit- cies, as indeed the major Philippine mind does not digest the implications ting higher borrowing costs on the rest banks such as the Metropolitan Bank and benefits of reducing the fiscal defi- of the economy. The increase in the and the Bank of Philippine Islands are. cit. It is only when its effects hit the fiscal deficit could also mean crowding people that people become aware of out meaningful private sector activity. The obvious cost of the rising fis- its bad consequences.) The other ben- cal deficit and the downgrade of sover- efits would be improved efficiencies in Moreover and significantly, the eign debt rating is for the banks to pass the whole economy because the energy size of the fiscal deficit has put the on the rising cost of credit to Philip- reform bill, if done right, could lead country out of compliance with the pine borrowers. This means that com- not only to cheaper energy prices in macroeconomic program with the In- panies and institutions in need of the longer term for the consuming ternational Monetary Fund (IMF). This credit, including those that are already public but also toward a large increase means that the government could not in debt and/or have credit to refi- in infrastructure investments in the turn to the IMF and other multilateral nance, will have to face an increase in economy. financial institutions to provide support interest cost. This is the lurking dan- for the financing of the fiscal deficit. ger, for if borrowing costs went up with But a new, highly motivated and This is the reason why the government the deteriorating posture of the over- forceful president who does the neces- has turned towards more expensive all macroeconomic picture—the nega- sary homework (unlike Estrada who funds (offshore dollar funds and exter- tive Estrada factor—many companies was essentially sluggish in these mat- nal capital) to finance the deficit. Ini- that are highly leveraged are in dan- ters) could articulate these benefits and tially, this financing method does not ger of financial collapse. This could could force the solution to the issues pose an inflationary threat, but it raises only lead to rising nonperforming and get the work done. the external debt burden and the loans (NPLs) in the banking system, country’s foreign exchange rate expo- the average of which had risen in 2000. All of these will put to the test the sure. Thus, a prolonged crisis will aggravate, political skills of Gloria Macapagal Ar- royo. This is, however, an area where she has not been sufficiently tested. But a new, highly motivated and forceful presi- Her background is largely in academic and technocratic work like in the in- dent who does the necessary homework...could ar- dustry department of government. Her stint in the Senate was relatively brief, ticulate these benefits and could force the solu- and her management of the Depart- tion to the issues and get the work done. ment of Social Welfare and Develop- ment (DSWD), the assignment that she accepted as Vice President, was largely as head of a relatively safe sinecure The fiscal deficit already caused not help, the financial position of Phil- uninvolved in the economic issues fac- the downgrade of the Philippine ippine companies. ing the Estrada government. government’s sovereign debt ratings made independently by Standard and The succeeding president is The political calendar has a presi- Poor’s and by Moody’s during the therefore faced with difficult policy is- dential election in 2004. For any new fourth quarter of 2000 by one notch in sues. These issues are not popular is- president, introducing difficult eco- the rating levels, with a warning of a sues that could be easily understood. nomic reforms during the second half review for future reduction. This sim- Some of the measures might require of an unexpired term could pose some ply translates into higher cost of bor- pain before the gains from their adop- serious calculations because the gains rowing for the national government tion become obvious. The improve- from those policies could only be real- when it accesses the international mar- ment would help reduce the opera- ized later. But if these succeed, enor- ket. With the downgrade, the obvious tional deficits of state corporations that mous potentials for future expansion secondary impact is on Philippine com- keep rising because the government of the economy would be in the off- panies and banks. Their borrowing cost fails to take needed actions to improve ing. Policies are best put in place dur- DEVELOPMENT RESEARCH NEWS 17 January - February 2001

ing the first half of the presidency so directions of reforms that a program mand for labor and the employment that the benefits from them could be for the poor could have made a major rate is to pattern the economy’s growth harvested during the second half. Dur- dent under the Estrada presidency—is toward the maintenance of industries ing the second half of the unexpired how to raise the number of jobs in the that are competitive and whose exist- term of Estrada, potential candidates country. This is far more important ence are justified by commerce rather for president would attempt to make than the preoccupation with protective than protected markets. The momen- their presence felt to challenge her. labor legislation, which has been the tum for growth was established by the Therefore, the last three years could hallmark of Philippine policymakers’ strong efforts undertaken by the pose difficult challenges regarding the concern for decades. Key solutions Ramos government to bring the coun- passage of the most difficult economic could have been focused on raising in- try toward the international level. But reforms. there were major short- comings because there The Estrada gov- was not enough time to ernment is remarkable pursue the next stage of in that it has failed to reforms. Those reforms undertake any major re- were part of the man- forms because of the in- date of Estrada that nate deficiencies of the were conveniently for- president as an eco- gotten as soon as he nomic leader. Every stepped into office. time he proposed re- forms, he retreated The coming years quickly when the criti- are critical for the coun- cisms got tougher. 7 try because it is a period Lacking the patience or of rapid international- the ability to articulate ization. First, the these programs, he ASEAN market will be failed to make the in- moving toward the real- vestment climate ac- AsiaWeek, 3 November 2000 ity of a common group- tive.8 ing of countries with re- gional commerce as a Estrada’s accomplishment in the vestments, both domestic and foreign. major aim. The net result is the expan- economy was one of providing the con- Ultimately, such preoccupation could sion of the domestic market of the ditions for relative standstill. The raise the demand for labor and domes- economy. Second, the world’s trading economy grew at a level of growth per- tic wage rate in the country. rules have been redefined by treaty ob- mitted by an economy already beset in ligations agreed upon in the World part by the Asian economic crisis. The A sustained program that leads to Trade Organization (WTO). The inter- period of rising growth rate that was high employment growth results from national trading system opens up enor- the result of the economic reforms a robust economy in which industries mous opportunities for countries to were stalled because of a multiplicity thrive because they operate at a com- reap major rewards if they play their of factors, including the Asian crisis, petitive level with other countries. The cards right. When China—the but more because of Estrada’s poor best medicine for increasing the de- last of the socialist countries— +18 management style and inadequate leadership. The economic liberaliza- tion program stalled in some direc- tions, notably in tariff reforms.9 There 7 The following are instances of these retreats. He backtracked from the pork barrel issue that he had promised to do away with without substantial legislative concessions. The retail trade liberalization was were some gains in policy—even in the passed with much watered-down provisions. The power reform bill had not yet passed; the constitutional tariff reforms—but overall, the actions revisions that he proposed were shelved. The tariff reform program was not fully revised as planned. of the government were to stall here 8 Refer to G. Sicat (2000) on the issue of Erap’s weak economic leadership. and there. 9 Refer to G. Tecson (2000). Her study cautiously noticed the progress in tariff reforms. However, the study noted the setbacks from planned tariff reforms in the manufacturing sector where some reversals in tariff changes had been put into effect to favor some industries. The issuance of Executive Order No. Among the main problems re- 63 singles out a number of manufacturing industries in which the action to raise tariffs reversed the lated to poverty in the country—the general trend that the government has adopted since the 1980s. DEVELOPMENT RESEARCH NEWS 18 January - February 2001

a broader set of factors, including, of out” private sector activity. She will have Gloria...from page 17 course, economic ones. a healthy skepticism about the so-called countercyclical policies. endorses active engagement within the It is fortunate that she chose to WTO to promote her economic study government expenditure and its Second, she will pay attention to growth, it is time for a country, such as impact on the economy. That is an im- the composition of public expenditure. ours, to buckle up and work at how best portant area where it is possible to have She will make efforts to improve the we could gain from the international a good reading of her views on manag- share of social expenditure – educa- trading. ing fiscal issues. If her study provides a tion, health, and other social services. clue to what she would do if she were This means that specific budget com- Probing what an Economist in the shoes of a President, I venture ponents will have to be prioritized, pay- as President would do to make a few comments on how she ing greater attention to the need to im- If one’s early professional work could serve as a gauge of a nation- builder’s approach to problems, could we predict what President Gloria ... An economist seeking the ultimate im- Macapagal Arroyo would do? provement in the country’s plight would at- Here, I am reminded of a quote tempt to position the country toward greater from a sage economist when he was posed the ultimate question: “As an efficiency and to direct the country’s resources economist, what would you do if you were President?” The answer was, “But toward comparative advantage as a principle if I were President, then I would be a of gaining world market attention. politician!” Of course, this is an exag- geration designed to avoid the ques- tion. would approach them if she were prove social development services. This The political skills of a leader are mainly dealing with these issues from follows from the fact that, following her definitely important. But an economist an economic context. own investigations, she finds that ex- seeking the ultimate improvement in penditures on social services have a the country’s plight would attempt to First, I think she might become a higher impact than expenditures on position the country toward greater ef- fiscal conservative if she does not get tourism. ficiency and to direct the country’s re- afflicted with the common disease that sources toward comparative advantage hits all political leaders: to spend more. Third, she will likely strengthen as a principle of gaining world market All political leaders tend to regard pub- public investment financing so that attention. To do this, the country’s fac- lic spending as a way to demonstrate public infrastructure investment need tors of production have to be competi- ability to serve the constituents. But not hinder the growth of private invest- tive. This means taking advantage of economists understand better that ex- ment. She will follow new techniques the competitive edge of labor as the cessive spending not matched by a of financing public investment from magnet for attracting foreign invest- growth in tax resources could lead to private sector sources. But she will ments. An economist can read better inflation and to other economic dislo- make an effort to make these financ- the myths and fallacies of cations. She will have reservations ing arrangements productive so that policymaking10 and can understand the about having large budget deficits to they are not burdensome on the bud- need to avoid their worst conse- finance operational deficits of the gov- get. quences. ernment. For this reason, she will put the budget deficit under a much tighter Fourth, although the responsibil- If her doctoral thesis in Econom- rein. This follows from her finding that ity of the Presidency will take on many ics could serve as a rough guide, what excessive fiscal deficits could “crowd demands, she will pay greater attention can we predict about her economic to economic issues. Her professional inclinations if she becomes President training as an economist will provide 10 Some of the glaring myths and fallacies that have of the Philippines? As President, she afflicted Philippine policymaking are discussed in her with appropriate equipment in would have to make decisions based on one piece in a recent article (Sicat 1999). dealing with intricate issues. DEVELOPMENT RESEARCH NEWS 19 January - February 2001

Fifth, she will likely encourage the tor Behavior. American Economic Review growth of the domestic economy in line 73(12):994-1010. with improving the Philippine competi- The full texts of recent Nocum, Armand. 2000. Post Mortem: Estrada tive position abroad. In doing this, she slept on the job – Zamora. Philippine Daily Development Research News will have a greater appreciation of the Inquirer. 26 December 2000. importance of a sound exchange rate (DRN) issues and other policy as a means of pricing Philippine Sicat, Gerardo P. 1999. Myths and Fallacies in PIDS publications (Discussion factors of production more competi- Economic Policy Debates. Public Policy tively for international markets. Since 3(3):17-34. July-September. Paper Series, Policy Notes and she has a more thorough understand- Economic Issue of the Day) ing of many economic policy questions Sicat, Gerardo P. 2000. Estrada’s Ruinous Eco- nomic Leadership. BusinessWorld. 4 De- may be accessed at: than most Philippine leaders, she will cember 2000. surely show a quicker absorption of http://www.pids.gov.ph/ economic issues than her immediate Tecson, Gwendolyn R. 1999. Where Are We in publications/index/html predecessor. Tariff Reform? Public Policy 3(3). July- September. The country therefore faces the prospects of having good luck on the Development Research News leadership front after almost three Vol. XIX No. 1 years of a rudderless presidency. DRN January - February 2001 ISSN 0115-9097

References Editorial Board: Dr. Mario B. Lamberte, President; Dr. Gilberto M. Llanto, Vice-President; Mr. Mario C. Feranil, Director for Project Services and Development; Ms. Jennifer P.T. Liguton, Anonymous. 2000. Gloria in excelsis. In PDI Director for Research Information; Ms. Andrea S. Agcaoili, Director for Operations and Finance; Atty. Roque A. Sorioso, Legal Consultant. Staff Interview. Philippine Daily Inquirer. 24 December 2000. Staff: Jennifer P.T. Liguton, Editor-in-Chief; Genna J. Estrabon, Issue Editor; Sheila V. Siar, Jane Arroyo, Gloria M. 1985. An Investigation of the C. Alcantara, Edwin S. Martin and Gizelle R. Gutierrez, Contributing Editors; Valentina V. Real Effects of Government Expenditures Tolentino and Rossana P. Cleofas, Exchange; Delia S. Romero, Galicano A. Godes, Necita Z. with an Application to Tourism Expendi- Aquino and Federico D. Ulzame, Circulation and Subscription; Genna J. Estrabon, Layout and tures. Ph.D. dissertation, University of the Design. Philippines School of Economics. DEVELOPMENT RESEARCH NEWS is a bimonthly publication of the PHILIPPINE Arroyo, Gloria M. 1987. An Investigation of the INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and Real Effects of Government Expenditures. recommendations of PIDS research projects and important policy issues discussed during PIDS Philippine Review of Economics and Busi- seminars. ness 24:55-78. PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the Institute's program to disseminate Bailey, Martin J. 1962. National Income and information to promote the use of research findings. the Price Level. New York; McGraw-Hill. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, Barro, Robert. 1981. Output Effects of Gov- or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all ernment Purchases. Journal of Political correspondence and inquiries to: Economy 89(12):1086-1121. Research Information Staff Fabella, Raul. 2000. The J2K Crisis and the Philippine Institute for Development Studies Economy. University of the Philippines Room 304, NEDA sa Makati Building, School of Economics Discussion Paper No. 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines 0012. Quezon City: UPSE. Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 Feldstein, Martin. 1982. Government Deficits E-mail address: [email protected] and Aggregate Demand. Journal of Mon- etary Economics (1):1-20. Reentered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P200.00 for local subscribers; and US$20.00 for foreign subscribers. All Kormendi, Roger. 1983. Government Debt, rates are inclusive of mailing and handling costs. Prices may change without prior notice. Government Spending, and Private Sec- DEVELOPMENT RESEARCH NEWS 20 January - February 2001

reaucracy and infrastructure such as power, telecommunication and trans- China’s economic boom: portation. The government should also be on guard that the peso is not overvalued.

A boon to RP and other Palanca also recommended that the Philippines should coordinate with China in the conduct of joint research ASEAN nations to identify trade opportunities and niches based on comparative advantage as well as on intra-industry division of he Philippines, together swiftly. Likewise, China’s focus on ru- labor. She added that the Philippines with its neighboring coun- ral industrialization will force it to in- should explore investment possibilities tries in Southeast Asia, has crease its imports for food and primary in China to facilitate the expansion and a lot to gain from China’s inputs. In this case, she suggested that growth of the country’s export of in- Trapid economic growth, particularly its the Philippines can explore the gaps puts and services. increasing foreign trade and invest- in agricultural and mineral resource ment activities. supplies in China and fill up said insuf- Finally, Palanca explained that ficiencies by exporting agricultural and greater liberalization in China would This was the conclusion of a study other primary inputs to China. also result in an increase in China’s for- entitled “China’s Changing Trade Pat- eign investments. Thus, she concluded terns: Implications for ASEAN-China However, she stressed that before that special attention should be given Trade”by Dr. Ellen H. Palanca, a pro- the Philippines could tap the growing to attract Chinese direct investments to fessor of economics and the director trade opportunities in China, it has to the Philippines. According to her, of the Chinese Studies Program at the improve first the efficiency of its indus- these investments will not only provide Ateneo de Manila University. The re- tries, particularly the export industries, capital but also technology that may be search paper is part of a bigger project to make them more globally competi- more appropriate than those from ad- on China undertaken by the Philippine tive. This includes improvement in the vanced countries. GFG APEC Study Center Network (PASCN), country’s labor productivity as well as the lead convenor of which is the Phil- the efficiency of the government bu- ippine Institute for Development Stud- Editor's Notes ies (PIDS).

This finding is contrary to the From page 1... common belief that some Southeast economic managers "do not commit the same Asian countries are going to lose their mistakes," there is no doubt that a better 2001 competitive advantages in many sectors is possible. because of China’s economic rise. Palanca argued that based on the data The other special article in this issue is a available, the rapid economic growth middle-of-the-road profile of the new president, of China, specifically its foreign trade, Gloria Macapagal-Arroyo, and how she may has not been at the expense of the address the economic woes of the nation, be- growth of its neighbors’ trade activities. ing an economist. The piece was written a little Forthcoming more than two weeks before the historic four Palanca’s paper explained that days culminating on January 20, 2001. It was business opportunities are expected to PASCN book!! written by Dr. Gerardo P. Sicat, former socio- multiply following China’s accession to economic planning secretary of the Philippines the World Trade Organization (WTO). and professor at the University of the Philip- Demand for imports will increase, par- pines School of Economics (UPSE) where ticularly consumer products and ser- President Arroyo obtained her Doctor of Phi- vices, as the standard of living of losophy Degree in Economics in 1985. DRN China’s huge population goes up