Economic history of the Philippines (1973–1986)

The Philippine economy between 1973 and 1986 suffered from a downturn due to a mixture of domestic and international problems after experiencing years of positive growth. These were the years that saw the country under Ferdinand Marcos and martial law, the assassination of Benigno Aquino, Jr., changes to the Philippine energy law, and the success of the EDSA People Power Revolution.

Declaration of martial law

President Ferdinand E. Marcos declared martial law in the midst of rising student movements and an increasing number communist and socialist groups lobbying for reforms in their respective sectors. Leftists held rallies to express their frustrations to the government, this restiveness culminating in the First Quarter Storm, where activists stormed Malacañang Palace only to be turned back by the Philippine Constabulary. This event in particular left four people dead and many injured after heavy exchanges of gunfire. There was further unrest, and in the middle of the disorder on 21 September 1972, Marcos issued Proclamation No. 1081, effectively installing martial law in the Philippines, a declaration that suspended civil rights and imposed military rule in the country.

Marcos defended his actions stressing the need for extra powers to quell the rising wave of violence allegedly caused by the communists. He further justified the decree citing the provisions from the Philippine Constitution that martial law is in fact a strategic approach to legally defend the Constitution and protect the welfare of the Filipino people from the dangerous threats posed by vigilantes that place national security at risk. The emergency rule, according to Marcos’s plan, was to lead the country into what he calls a “New Society”.

The move was initially supported by most Filipinos and viewed by some critics as a change that would solve the massive corruption in the country. Indeed, it ended the clash between the executive and legislative branches of the government and a bureaucracy characterized by special interests. The declaration, however, eventually proved unpopular as excesses, continued corruption, and human rights abuses by the military emerged.

Macroeconomic indicators

Gross domestic product

1970-1980 Growth Rates of GDP per capita (in%)

The GDP of the Philippines rose during the martial law, rising from P55 million to P193 million in about 8 years. This growth was spurred by massive lending from commercial banks, accounting for about 62% percent of external debt. As a developing country, the Philippines during the martial law was one of the heaviest borrowers. These aggressive moves were seen by critics as a means of legitimizing martial law by purportedly enhancing the chances of the country in the global market. Much of the money was spent on pump-priming to improve infrastructure and promote tourism. However, despite the aggressive borrowing and spending policies, the Philippines lagged behind its Southeast Asia counterparts in GDP growth rate per capita. The country, in 1970–1980, only registered an average 3.4 percent growth, while its counterparts like Thailand, Malaysia, Singapore, and Indonesia garnered a mean growth of 5.4 percent. This lag, which became very apparent at the end of the Marcos Regime, can be attributed to the failures of economic management that was brought upon by State-run monopolies, mismanaged exchange rates, imprudent monetary policy and debt management, all underpinned by rampant corruption and cronyism. “[…]main characteristics distinguishing the Marcos years from other periods of our history has been the trend towards the concentration of power in the hands of the government, and the use of governmental functions to dispense economic privileges to some small factions in the private sector.”

Employment

Despite government efforts to pump-prime the economy to increase income and encourage spending, unemployment and underemployment grew. The unemployment rate rose from 5.2 to 5.9 percent from 1978–1983, while underemployment was a problem, the latter tripling, in the same time period, from 10.2 to 29.0 percent. Concurrently, the labor force of the Philippines grew at an average 4.47 percent in 1970-1983. This can be attributed to an increasing number of women seeking work in the market.

Poverty and income distribution

Income inequality grew during the era of martial law, as the poorest 60 percent of the nation were able to contribute only 22.5 percent of the income at 1980, down from 25.0 percent in 1970. The richest 10 percent, meanwhile, took a larger share of the income at 41.7 percent at 1980, up from 37.1 percent at 1970. These trends coincided with accusations of cronyism in the Marcos administration, as the administration faced questions of favoring certain companies that were close to the ruling family.

According to the FIES (Family Income and Expenditure Survey) conducted from 1965 to 1985, poverty incidence in the Philippines rose from 41 percent in 1965 to 58.9 percent in 1985. This can be attributed to lower real agricultural wages and lesser real wages for unskilled and skilled laborers. Real agricultural wages fell about 25 percent from their 1962 level, while real wages for unskilled and skilled laborers decreased by about one-third of their 1962 level. It was observed that higher labor force participation and higher incomes of the rich helped cushion the blow of the mentioned problems.

Main development strategies

In the two decades of Marcos’s rule, Philippine economic development strategy had three central pillars: the Green Revolution, Export Agriculture and forestry, and foreign borrowing.

The green revolution

Rice, the foundation of the Philippine economy, is the country’s single most important crop, and the staple food for much of the population. It is especially important to the country’s poor majority, as both consumers and producers.

A central element of Philippine development strategy since the mid-1960s has been the introduction of new rice technology, popularly known as the “Green Revolution”. The technological key in this strategy is the introduction of ‘high-yielding varieties’, also called as HYVs. The birthplace of this new technology was in Los Banos, where the International Rice Research Institute (IRRI) was established. Scientists were recruited from around the world, and the world’s largest collection of rice varieties was assembled to provide the genetic raw material for IRRI’s plant breeders. Their efforts focused on combining the genetic attributes of high fertilizer responsiveness and a short-statured plant type, so as to create a variety which could support heavy ears of grain without toppling under their weight.

The architects of this technology had one overriding objective: increased food production. Proponents of the strategy expected, however, that the new rice technology would also have a positive distributional impact on the poor. Three major benefits were taken to be virtually self-evident:

1. Increased rice output would, ceteris paribus, lower the price of rice.

Since the poor spend a larger fraction of their income on food than the rich do, the idea is that they would benefit excessively.

2. Poor farmers would share in the gains to rice producers.

The new technology was labor intensive. This would be a special advantage to smaller growers who have lower labor costs.

3. Landless agricultural workers would benefit too.

Thanks to the increased demand for labor and the resulting increased employment and higher wages.

New rice technology: Three essential elements

The following key factors of the new rice technology were interdependent. That is, if one was absent, the productivity of the others was greatly reduced.

1. ‘High-yielding’ or ‘modern’ rice varieties originated at the IRRI

2. Chemical fertilizers, to which these varieties are highly responsive

3. Water control, notably irrigation in the Philippine setting

Among these, water control remains a key constraint in Philippine rice agriculture. Improvements in often “can be most efficiently achieved by the mobilization of community labor”, but this poses problems with respect to public welfare. How will labor commitments and other costs be apportioned? How will irrigation water be fairly allocated? In some places, these problems have been resolved; but elsewhere, conflict and mistrust among individuals have “impeded collective action”.

The green revolution brought temporary relief from this impasse, allowing the country to achieve substantial rice yield increases via the shift to new seed-fertilizer technology. But constraints in irrigation did not permit the new varieties to attain their full potential yields, nor did it permit much increase in multiple cropping.

Green revolution: Overall effect

All in all, the green revolution in the Philippines succeeded in fulfilling its architects’ primary objective: greater food production. In little more than two decades, the country’s rice output doubled. In pursuit of this goal, the planners chose what appeared to be the easiest route―breeding of new varieties for “high fertilizer response”. In fact, the rise in fertilizer prices was sparked by the energy crises of the 1970s, but it did not act as a serious impediment to output growth.,

In addition, economic theory tells us that consumers in general, and poor consumers in particular, will benefit from increased output and the resulting price declines. Despite the positive impact of lower prices on poor consumers, absolute poverty increased. “Cheaper rice mitigated, but did not reverse the trend towards impoverishment.”

Export agriculture and forestry

The year 1962 was a good one for Philippine export agriculture. Devaluation and deregulation of foreign exchange brought windfall profits to agro-exporters, and were widely seen as a “political triumph” for its main traditional exports.

• Coconut products were the single largest export of the Philippines in the Marcos era. The Philippines accounts for more than half of world's coconut exports.
  

  Exports of Major Agricultural and Forestry Products, 1962-1985, in US $ million f.o.b value
  In fact, the country is sometimes termed as the ‘Saudi Arabia of coconut oil’, which understates its share of the market while overstating its market power (it is severely constrained by the existence of natural and synthetic substitutes). Copra exports began in the late 19th century in response to European and North American demand for margarine and soap manufacturing. The use of coconut oil in the world economy after the World War II shifted from edible to non-edible industrial products such as soap, detergents, cosmetics, explosives, and pharmaceuticals.
• Sugar was the Philippines’ second most important agricultural export during the Marcos years. Its exports date from the 18th century, but its commanding role in the Philippine political economy began in the latter half of the 19th century as large plantations were established in Negros. Sugarcane acreage doubled from 250,00 hectares in 1962 to more than 500,000 in the mid-1970s. In the mid-1970s, however, the Philippine sugar industry went into decline, ultimately reaching to the point in 1987 where the country had to import sugar in order to meet domestic needs. According to James K. Boyce, factors that caused this decline were the (1) softening of world prices, (2) loss of favored access to the US market, and (3) creation of a monopsonistic sugar trading apparatus under the Marcos regime.
• After coconut and sugar, Bananas were the Philippines' number three export crop. Their export began only after Japan lowered its tariff barriers in the 1960s. The Philippines became Asia’s ‘banana king’, attributed as the “only one of the world’s top six banana exporters outside Latin America.” The development of the banana export industry has been accompanied by dramatic yield increases.
• Pineapples are the fourth leading ‘non-traditional’ agricultural export of the Philippines. In the mid-1980s, the Philippines ranked as the world’s second largest exporter, after Thailand, of both canned and fresh pineapples. According to the official statistics, pineapple acreage more than doubled.
• Philippine forestry products include raw logs, cut lumber, plywood and veneer. These have been “comparable to sugar as a source of Philippine export earnings” since the early 1960s. From less than 10 percent of total exports in the early 1950s, it grew to more than 25 percent in the 1960s. However, export volume began to decline as the country’s forest resources were depleted.

Philippine earnings, nevertheless, did not rise equally owing to worsening terms of trade. The country experienced severely declining terms of trade and great price instability for its agricultural exports from 1962 to 1985. These price movements were “the result of external political and economic forces over which the Philippines could exercise little control.” Thus relying on export agriculture as an “engine of economic growth” proved unfeasible.

Export agriculture and forestry: Overall effect

The income generated by exports accumulates not to countries, but to “specific individuals within them”. In the Philippines, these arrangements typically have led to a highly inequitable result―where the peasants and laborers who produce the crops have received minimal rewards for their efforts, and those who control land and markets, especially the state, have profited greatly.

Yes it is true that the explicit aim of the Marcos regime’s development strategy for export agriculture was “growth in output and export earnings”. Behind the scenes, however, the regime “aggressively pursued another agenda”―the redistribution of income to favored individuals. Marcos even deployed state power to put control of the country’s top agricultural exports securely in the hands of presidential cronies. The result is sad: dramatic redivision of the agro-export income pie having bigger slices for the privileged few and smaller for the rest.

Foreign borrowing: The debt-for-development strategy

Foreign borrowing was a key element in Philippine development strategy during the Marcos era. The primary rationale was “borrowed money would speed the growth of the Philippine economy, improving the well-being of present and future generations of Filipinos”.

Debt-driven growth, 1970-1983

Table 1

The government financed its spending primarily from foreign debt. From $2.9 billion in 1973, it rose to $6.8 billion in 1976 and $17.3 billion in 1980. The balance of payments also behaved generally well in the earlier years, with surpluses recorded from 1973 to 1974. However, an increasing trend of deficits followed the years afterwards. From 1974 to 1976, investments were still very high as the government still engaged in massive spending. Spending on infrastructures was primarily the focus of the government, targeting an increase economic growth and tourism. Because of the large influx of investments from the public and private sector and the increase in economic activity, together with high domestic savings which financed part of government spending, the Philippines survived the first oil price shock, the Middle East oil embargo which started in 1973 and caused inflation to rise in the Philippines.

By the years 1977-1980, the Marcoses primarily supported and focused on the expansion of its government-owned corporations, which were able to loan from foreign institutions for investments. According to Joseph Lim of the University of the Philippines, a businessman in 1981 related to Marcos fled the country with $80 million worth of debt in international and local banks. Because of the gravity of the parties involved, the Central Bank, together with national banks like Philippine National Bank and Development Bank of the Philippines, formed a bailout package and rescued the banks and companies implicated, which paved way for “the expansion of the money supply from 1980 to 1983.” The outflow of capital, termed “capital flight", contributed to the foreign exchange depletion as seen in Table 2 (qtd. in Boyle, 1990). "As the import liberalization program started to be implemented, important sectors … became more and more monopolized by the cronies of Marcos.”

Battle for stabilization, 1983-1986

After the assassination of political rival Benigno Aquino, the Philippines saw itself at the brink of an economic freefall.

Table 2

Due to the sudden collapse of confidence and credit ratings from international financial institutions, the Philippine government, had difficulty borrowing new capital to cut the increasing budget deficit, much of it payments to interest from debt. The government was thus forced to declare a debt moratorium and started to impose import controls and implemented foreign exchange rationing, which temporarily halted its import liberalization program. The peso was again devalued in 1984 by almost 100 percent. The Central Bank was later forced to start a new program, issuing “Central bank bills ... at more than 50 percent interest rate – which most likely contributed to the high inflation in 1984 and 1985.” This was aimed at attracting inflows of foreign currency due to the higher domestic interest rate and to lower deficit and aggregate demand. This resulted in a reduction the balance of payments and national account deficits but at the same time also started an economic decline of about 7 percent in the years 1984 to 1985. Investments also fell by about 50 percent in 1985 due to lower economic growth.

According to Lim, the government also employed measures to reduce overall government expenditures to reduce deficits. This effort, however, was partially caused by the fall in tax revenues during that time as public speculation about the weaknesses of the government was increasing. However, because of the large deficit incurred by the Central Bank due to bailouts and assumption of debts from bankrupt firms, this measure had relatively no effect on the overall deficit that the government had by the end of 1986. the marcos regime has fallen

External debt: magnitude and composition

Between 1962 and 1986, the external debt of the Philippine grew from $355 million to $28.3 billion. By the end of the Marcos years, the Philippines was the “ninth most indebted nation in Asia, Africa, and Latin America in absolute terms”.

Other development policies

The Marcos regime, during the early to mid-'70s, focused primarily on improving the economy and the country's public image through major increases in government spending particularly on infrastructures. Its main beneficiaries were the tourism industry, with numerous constructions, such as the Philippine International Convention Center, hotels, and even the hosting of international events like the Miss Universe and IMF forums to be able to improve the international status of the county. This policy generally continued even through the 1980s, when the world was experiencing stagflation, an international debt crisis, and high increases of interest rates.

The early effects of the increase in government spending were generally positive. Private businesses and firms, seeing this action by the government, felt bullish and also engaged in aggressive investment and spending patterns. Initially, the gross domestic capital formation to GDP rose up to 28% and foreign investments to the country also increased.

The government, in the 1970s, also focused on an “Export-led Industrialization Program” which focused on “non-traditional manufactured exports and foreign investments.” This led to an increase of foreign direct investment in the country particularly to manufacture export-oriented goods. This program also allowed the government to be able to “shift the composition of exports toward a more balanced mix between non-traditional manufactures and primary/agricultural exports.”

With this growth in the export sector, there also accompanied growth in the import sector particularly since imported raw materials (also known as intermediate imports) were sourced for domestically produced goods. This led to the worsening deficit at that time, especially by the end of the decade, accompanied by the second oil price shock.

Assessment of the Marcos regime

Poverty during the Marcos era deepened despite a modest increase in average national income. Even by the narrower objective of economic growth, the Philippine strategy cannot have claimed great success. Compared to other East and Southeast Asian countries during the same period, economic growth was slow, and by the mid-1980s “it was grinding to a halt.”

The three central elements of the government’s development strategy―the ‘Green Revolution’ in rice agriculture, continued growth in agricultural and forestry exports, and massive external borrowing―received strong intellectual and financial support from international officialdom. The new rice technology increased output but failed to bring substantial reductions in poverty. Export agriculture and forestry failed to provide an engine for economic growth. Foreign borrowing led to too little investment that was genuinely productive. This three-prong failure of the Philippine development strategy thus was also a failure of the international development establishment.

Moreover, the Marcoses have been notoriously linked to the massive government debt that the Philippines is still facing today. Marcos's goal of strengthening the Philippines to be internationally competitive may have been well-intentioned, but its execution ultimately led to widespread corruption and mismanagement. Together with his declaration of martial law and the suppression of civic freedom, the Philippines faced serious threats to the integrity of its social and economic structures.

The initial period of the martial law and Marcos’ economic policies generally stimulated the Philippine macro-economy. During this period, the Philippines grew “in pace with its ASEAN neighbors… although more lavish and wasteful in its spending.” However, progresses were only temporary as the government struggled to manage its growing debt that was the direct result of its massive spending. Aggravated by worldwide crisis like the Middle East oil embargo and “high world interest rates and the Brazil-Mexico debt moratoria” the Philippines had difficulty sourcing new funds mainly to pay its interest dues from debt. This demonstrates how Keynesian ideals work in the short run, but not in the long run.

The Marcos era was clearly an example of how a centralized government can fail because of its insistence on protecting the interests of the few in power. Filipinos ultimately paid the price in bailing out large companies and literally paying for the debt from which only a handful of people benefited. The government overspent, even in times of positive economic growth, and failed to improve its local industries primarily geared towards exports on par with its borrowing. This is similar to the Mexican Crisis in the 1980s with the difference that the government failed to recover as well because of corruption, mismanagement, and also rising political instability that led to a shift in power in the EDSA People Power Revolution.