The Politics of Economic Reform in the Philippines The Case of Banking Sector Reform between 1986 and 1995 A thesis submitted for the degree of PhD School of Oriental and African Studies (SOAS) University of London 2005 Shingo MIKAMO ProQuest Number: 10673052 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a com plete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. uest ProQuest 10673052 Published by ProQuest LLC(2017). Copyright of the Dissertation is held by the Author. All rights reserved. This work is protected against unauthorized copying under Title 17, United States C ode Microform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106- 1346 2 Abstract This thesis is about the political economy of the Philippines in the process of recovery from the ruin of economic crisis in the early 1980s. It examines the dynamics of Philippine politics by focussing on banking sector reform between 1986 and 1995. After the economic turmoil of the early 1980s, the economy recovered between 1986 and 1996 under the Aquino and Ramos governments, although the country is still facing numerous economic challenges. After the "Asian currency crisis" of 1997, the economy inevitably decelerated again. However, the Philippines was seen as one of the economies least adversely affected by the rapid depreciation of its currency. The existing literature tends to stress the roles played by international financial structures, the policy preferences of the IMF, the World Bank and the US government and the interests of the dominant social force as decisive factors underlying economic and banking reform policy-making in the Philippines. However, the excessive focus on these factors limits our ability to examine economic reform policy-making since they depict Philippine politics as a process in which policy outcomes are determined by relatively immediate expressions of either foreign-rooted or socially-rooted demands. This thesis will offer an alternative view, by seeking to show the merits of an approach which locates "policy elites and institutions" at the centre of the analysis of banking reform policy-making. It will be argued that the decisions of policy elites, including the President, legislators and state officials (Central Bank officials), and the interactions among them, which are affected by changing political institutions, are vital to explanations of the success or failure of banking reform. Political institutions strengthen or weaken the interests and capacities of presidents, the centre of Philippine government, in promoting reforms in the banking sector. 3 Table of Contents Chapter 1. Introduction: The Recovery and Reform of the Philippine Banking Sector Introduction 12 Developments and Reforms in the Banking Sector since the Early 1980s 15 Explaining Economic and Banking Reform Policy-Making 21 The Policy Elites-Institutions Centred Approach 31 The Interests of Policy Elites, Changing Political Institutions 37 and Banking Reform Conclusion 52 Chapter 2. The Economic Crisis and the Banking Sector between 1980 and 1986 Introduction 64 The 1980 Structural Reform in the Banking Sector 68 Saving for All Banks: The Rescue Operations and Their Failures 73 between 1981 and 1983 Crisis and Reforms in the Banking Sector between 1984 and 1986 87 Conclusion 102 Chapter 3. The Transition from Marcos to Aquino and Banking Sector Reforms Introduction 105 Redirecting Marcos's Policy 109 Changing International Influences 116 Rebuilding the Banking Sector: Rehabilitation of the State Banks 123 Conclusion 135 4 Chapter 4. Aquino Reforms in the Early 1990s: Initiating Liberalisation through Regulatory Reform and the Failure of Structural Reform in the Banking Sector Introduction 138 Initiating Liberalisation through Regulatory Reform 140 The Restoration of the Legislature and Banking Sector Reform 148 The Failure of Central Bank Reform through the Legislative Process 153 Conclusion 161 Chapter 5. Banking Sector Reform under the Ramos Government (Part I): The Establishment of the New Central Bank (Bangko Sentral ng Pilipinas) Introduction 164 The Establishment of the New Central Bank 166 The Central Bank Proposal 170 Drafting House Bill No. 7037 179 Drafting Senate Bill No. 1235 182 The Bicameral Conference Committee 185 Changing Political Institutions and The Central Bank Reform 187 Under the Ramos Government Conclusion 199 5 Chapter 6. Banking Sector Reform under the Ramos Government (Part II): The Entry of New Foreign Banks Introduction 206 Liberal Coalition: "Anti-Oligarchy" Campaign 208 House Bill No.8226: Drafting the Liberal Bill 211 Senate Bill No. 1606: Insertion of Restrictive Provisions 216 The Bicameral Conference Committee 224 Conclusion 227 Chapter 7. Conclusion 234 Banking Reforms and the Avoidance of the Banking Crisis of the 1990s 235 The Policy Elites-Institutions Centred Approach 239 Concluding Comments 251 Bibliography 254 6 List of Tables Table 1 -1. Key Macro Indicators of the Philippine Economy Table 1-2. Total Assets, Credits and Deposits of the Financial System Table 1-3. Total Assets of the Financial System Table 1-4. Number of Offices Table 1-5. Total Commercial Banks, Statement of Income and Expenses Table 1-6. Non-Performing Loans of Commercial Banks Table 1-7. Philippine Commercial Banks (1983-2002) Table 1-8. Key Characteristics of Political Institutions, Policy Coordination and Banking Reform Table 2-1. Reserve Money and Central Bank Assistance to Financial Institutions Table 3-1. Total Assets: Banking System, PNB and DBP Table 5-1 CB Loss / Special Accounts Table 5-2. Differences Between House Bill No. 7037 and Senate Bill No. 1235 Table 6-1. Proposals of the BAP Table 6-2. The Comparison of S.B. 1606, H.B. 8226, BSP (Executive) Position and R.A. 7721 List of Abbreviations ADB Asian Development Bank ADFU Apex Development Finance Unit APEC Asia-Pacific Economic Cooperation AFTA ASEAN Free Trade Area APT Asset Privatisation Trust ASEAN Association of Southeast Asian Nations BF Banco Filipino Bancom Bancom Development Corporation BAP Bankers Association of the Philippines BOI Board of Investments BIR Bureau of Internal Revenue BPI Bank of the Philippine Islands BSP Bangko Sentral ng Pilipinas CB, CBP Central Bank of the Philippines CDCP Construction Development Corporation of the Philippines CMA Central Monetary Authority Combank Commercial Bank of Manila DBP Development Bank of the Philippines DOSRI Directors, officers, stockholders and related interests ECB expanded commercial bank (universal bank) E.O. Executive Order FEBT Far East Bank and Trust Company GATT General Agreement on Trade and Tariffs GDP Gross Domestic Product GNP Gross National Product Genbank General Bank and Trust Company GSIS Government Service Insurance System Herdis group the diversified conglomerate of Herminio Disini IBAA Insular Bank of Asia and America IBP Interim Batasang Pambansa IMF International Monetaiy Fund Interbank International Corporate Bank I SI import-substitution industrialisation KBL Kilusang Bagong Lipunan (New Society Movement) KKK Kilusang Kabuhayan at Kaunlaran (Movement for Livelihood and Progress) LBP Land Bank of the Philippines LCs Letter of Credits L.O.I. Letter of Instruction LP Liberal Party Manilabank Manila Banking Corporation Metrobank Metropolitan Bank and Trust Company MHS Ministry of Human Settlements Overseas, OBM Overseas Bank of Manila NISA National Intelligence Security Agency NDC National Development Corporation NEDA National Economic Development Authority NICs newly industrialising countries NP Nationalista Party OBU Overseas Banking Units PBC or Philippine Bank of Commerce PBCommerce PCA Philippine Coconut Authority PC IB or Philippine Commercial and Industrial Bank, after 1983, PCIBank Philippine Commercial and International Bank PCCI Philippine Chamber of Commerce and Industry PCGG Philippine Commission on Good Government P.D. Presidential Decree PDIC Philippine Deposit Insurance Corporation PDCP Private Development Corporation of the Philippines 9 Philexport Philippine Exporters Confederation Philfinance Philippine Underwriters Finance Corporation Philsucom Philippine Sugar Commission Philtrust or Philippine Trust Company prp£ PI SO Philippine Investments Systems Organisation PNB Philippine National Bank R.A. Republic Act RCBC Rizal Commercial Banking Corporation SEC Securities and Exchange Commission SGV Sycip, Gorres & Velayo (a prominent Manila accounting and business consulting firm) SSS Social Security System UCPB United Coconut Planters Bank unibank universal bank (expanded commercial bank) USAID U.S. Agency for International Development 10 Acknowledgements I would like to express my deep gratitude to many teachers and friends from whom I learned a great deal and many individuals and organisations which assisted me to complete this thesis. In Sapporo, Japan, Professor Kenich Nakamura and Professor Jun Furuya helped me to start my unexpectedly long post-graduate study in London. They have supported me continuously from my undergraduate days at University of Hokaido. In London, at LSE, Dr James Putzel and Dr E. A. Brett introduced me to the "excitement" of studying the politics of developing countries. Their stimulating teaching during the first year of my graduate study was influential in deciding to continue my research. At SOAS, the base for