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The Philippines After the Asian
Crisis
Joseph Anthony Lim
The Growth Pattern Before and After the Crisis
The Asian crisis was one of the busts in boom-bust cycles
in a span of 3 decades: 1984-85, 91-93, 98-99, 2001.
These busts made Phil. a laggard in East Asia
GNP and GDP per Capita
18000
16000
14000
10000
GDP Per Capita
GNP Per Capita
8000
6000
4000
2000
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
0
1946
1985 Pesos
12000
Growth Rates Before and Asian Crisis. Looks like return
to pre-1998 growth rates from 2002 to 1st Q of 2007.
Continuing rise of overseas’ workers’ remittances
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
20071
Q
GDP Growth
4.68
5.85
5.19
-0.58
3.40
5.97
1.76
4.45
4.93
6.18
4.97
5.37
6.91
GNP Growth
4.88
7.24
5.25
0.41
3.73
7.07
2.26
4.18
5.95
6.72
5.64
6.21
6.64
NFIA, % of GDP
2.78
4.13
4.20
5.23
5.57
6.67
7.20
6.92
7.96
8.51
9.19
10.07
9.27
But there are problems:
- The growth rates may be overestimated.
- The quality of the growth is marred by:
-
-
There are lower investment rates, as they are
replaced by lower trade gaps, and the lead
growth sector on the demand side is
consumption. Productive capacity in the future
is jeopardized.
The growth rates occur as both savings and
investment rates (as % of GDP) are falling
It follows the previous growth path of a very
low manufacturing and industrial base, and the
current growth is spurred by services.
The latest high growth rates in 2002-2006 marred by exceedingly
high and positive statistical discrepancy, which makes one suspect
the supply side data are overestimated. Base year of constant prices
is 1985, where the relative prices no longer hold.
Statistical discrepancy, % of GDP
12
10
8
6
4
2
-2
-4
-6
-8
04
06
20
20
00
02
20
20
96
98
19
19
92
94
19
19
88
90
19
19
84
86
19
19
80
82
19
19
78
19
76
19
74
19
72
19
70
19
68
19
66
19
64
19
62
19
60
19
58
19
56
19
54
19
52
19
19
50
0
Clear continuing decline in the share of investment after Asian
crisis. Consumption share increases with each recession. Current
growth spurred by consumption and declining trade deficits.
Demand Components, % of GDP
100
90
80
70
1. Personal
Consumption
Expenditure
2. Government
Consumption
3. Capital Formation
50
4. Exports
5. Imports
40
30
20
10
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
0
1946
Percent
60
There was large investment-savings gap (representing trade deficits)
before crisis. This gap was reduced after the crisis as investment
share fell, even as gross domestic savings as share of GDP also fell.
Declining savings and investment rates!
Gross Domestic Savings and Gross Investments, % of GDP (not using stat disc)
40
35
30
25
Gross Domestic Savings
Gross Investments
20
15
10
5
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
1946
0
Economic Collapse in Mid-80s brought industry and manufacturing
shares down and these have remained stagnant. As agriculture share
falls, main growth comes from services
Share in GDP of Economic Sectors, by Industry
60
50
AGRI.FISHERY,FORESTRY
INDUSTRY SECTOR
Manufacturing
Construction
SERVICE SECTOR
30
20
10
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
1948
0
1946
Percent of GDP
40
High inflation rates occur during recessions because of the massive
devaluation. The pass-thru effect had lessened in the Asian crisis
and further depreciation
GDP per Capita Growth vs CPI Inflation Rate
50.000
40.000
CPI Inflation Rate
20.000
GDP per capita grow th
10.000
0.000
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
-10.000
1950
Percent
30.000
The External Sector
The Philippines Usually Enters a Crisis When International
Reserves Fall Below Two Months of Imports
International Reserves in No. of Months of Imports of Goods and Services
12.00
8.00
6.00
4.00
2.00
0.00
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
No. of Months of Imports
10.00
Until the Asian Crisis, High Growth Leads to Current Account Deficits,
Recessions Preceded by High Current Account Deficits, Recessions
Accompanied by Devaluations and Improvements in Current Account Deficits
Current Account Balance as % of GDP vs GDP per Capita Growth
6.00
4.00
2.00
Current Account Balance, % of GDP
-2.00
GDP per capita grow th
-4.00
-6.00
-8.00
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
-10.00
19
77
Percent
0.00
Balance of Payments, % of GDP
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
CURRENT ACCOUNT
-4.8
-5.3
2.4
-3.8
-2.9
-2.4
-0.4
0.4
1.9
2.0
4.3
Goods and Services
-9.4
-12.3
-4.1
-10.0
-10.3
-12.0
-9.8
-9.8
-8.6
-9.3
-6.5
-13.7
-13.5
0.0
-7.8
-7.9
-8.8
-7.2
-7.3
-6.6
-7.9
-5.9
4.2
1.2
-4.0
-2.1
-2.5
-3.2
-2.6
-2.5
-2.0
-1.4
-0.6
4.7
7.0
6.5
6.2
7.4
9.6
9.5
10.2
10.5
11.3
10.8
CAPITAL AND FINANCIAL ACCOUNT
10.0
1.5
-0.4
8.7
2.3
1.5
0.6
-0.5
-2.2
0.4
-1.8
Net Financial Account
13.6
7.9
0.7
5.5
4.3
0.5
0.5
0.6
-1.9
2.2
-1.6
Net Direct Investment
1.6
1.3
3.3
1.5
2.8
0.5
1.9
0.2
0.1
1.7
1.9
Net Portfolio Investment
6.4
0.7
-1.4
4.8
-0.7
0.1
1.0
0.7
-0.7
3.5
2.3
Net Financial Derivatives
0.0
0.0
0.0
0.0
0.1
0.0
0.0
-0.1
0.0
0.0
-0.1
Net Other Investments
5.6
5.9
-1.1
-0.8
2.1
0.0
-2.3
-0.3
-1.4
-3.0
-5.7
Net Errors and Omissions
-3.6
-6.4
-1.2
3.0
-2.1
0.9
0.0
-1.1
-0.3
-1.8
-0.3
OVERALL BOP POSITION
5.2
-3.8
2.0
4.9
-0.6
-1.0
0.2
-0.1
-0.3
2.4
2.5
Goods 1/
Net Services
Net Income and Current Transfers
Volatilities in the External Account. Capital
Account volatile due to capital account
liberalization
The recent growth period is still accompanied
by trade deficits but no longer current account
deficits because of the exploding remittances of
overseas workers
 High portfolio and ‘other’ investments in 1996
(pre-crisis), fall in 1997 and 1998, fleeting and
partial return in 1999 and 2000, net outflows in
2001 to 2004 because of political instabilities
and fiscal crisis, return of direct and portfolio
investments in 2005 and 2006, but increased
outflows from residents in ‘other investments’
in 2005 and 2006.

Capital Account Liberalization Starting in the 1980s Has Resulted in
Volatilities in Exchange Rate
Grow th Rate of Exchange Rate
90.00
80.00
70.00
60.00
40.00
30.00
20.00
10.00
0.00
20
03
19
97
20
00
19
94
19
88
19
91
19
85
19
82
19
76
19
79
19
73
19
70
19
64
19
67
19
61
19
58
19
52
19
55
-10.00
19
49
Percent
50.00
Recent Strong Appreciation of Peso Worries
Exporters and Overseas Filipino Workers

Strong appreciation of the peso in 2005 up
to present due to global weakness of the
dollar and strong remittances of Filipino
workers (plus some portfolio inflows as
fiscal crisis waned)
 Worries exporters and import-competing
domestic sectors
 Reduces purchasing power of the
overseas Filipino workers
Loss of Confidence in Financial System
Continues
Low Financial Confidence: Declining M2 and Domestic Credit as
% of GDP After Asian Crisis

Weak financial confidence: Banks don’t
want to lend to private sector because of:





Strict capital adequacy ratios, loan-loss
provisions,
Strict view of having to quickly dispose of nonperforming assets
Financial institutions prefer government
securities – had kept interest rates low despite
fiscal crisis
Political instabilities
Fiscal crisis (and other economic instabilities –
high oil prices included)
Ingredients of Another Asian Crisis Philippine
Style in the Making







The volatile external sector, the strong appreciation of
the peso
Banks not lending to private sector
Recent rise in bank lending in early 2007 mostly to real
property (possible property bubble)
Even as bank lending recovered in 2007, the Central
Bank instituted mopping up liquidity due to high inflows
of remittances due to the inflation targeting policy
Stock market increasing by almost 100% between
2004 and present (speculative bubble)
Growing portfolio inflows especially to the stock market
Only missing ingredient is current account deficits but
Phil international reserves much smaller than other
countries
The Fiscal Crisis
Fiscal Crisis: 1) High national government deficit, initial losses of
National Power Corporation (state cos.)
National Government Deficit, % of GDP
2.00
1.00
0.00
-2.00
-3.00
-4.00
-5.00
20
01
20
03
20
05
19
97
19
99
19
93
19
95
19
89
19
91
19
83
19
85
19
87
19
79
19
81
19
75
19
77
19
69
19
71
19
73
19
65
19
67
19
61
19
63
-6.00
19
57
19
59
Percent
-1.00
Fiscal Problem: 2) Decline in Tax Effort, temporary rise in 2006
with implementation of expanded-VAT system
Tax Effort, % of GDP
18.00
16.00
14.00
Percent
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
In 2002 to 2006, Fiscal Crisis Being Addressed by Expenditure Cutback as
Interest Burden Increased and Fiscal Deficit Reduced
7.00
6.50
6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
ECONOMIC SERVICES
SOCIAL SERVICES
DEFENSE
GENERAL PUBLIC SERVICES
NET LENDING
INTEREST PAYMENTS
Extreme burden of public debt service, high
public debt burden
As % of NG Revenues:
NG Debt Service Payments
35.6
42.9
44.3
48.4
61.9
73.5
85.1
83.2
87.2
Interest
21.6
22.2
27.4
30.8
32.1
35.4
36.9
36.7
31.7
Principal
14.0
20.7
16.9
17.6
29.8
38.1
48.2
46.5
55.6
As % of GDP
As of July 2006**
Total National Gov't Debt
56.1
59.6
64.6
65.7
71.0
78.2
79.0
72.3
69.6
Domestic
31.9
32.9
31.8
34.4
37.1
39.7
41.5
40.2
38.2
Foreign
24.2
26.8
32.7
31.3
33.9
38.5
37.5
32.0
31.4
Total Public Sector Debt
94.6
101.5
108.0
106.0
110.2
118.2
109.8
93.4
n.a.
Domestic
35.2
32.8
32.1
32.7
34.4
35.7
35.4
33.0
n.a.
Foreign
59.5
68.7
75.9
73.3
75.9
82.5
74.4
60.4
n.a.
As % of GDP
But fiscal crisis continues despite improvements in 2006
S & P and Moody’s refused to upgrade Phil
sovereign credit rating in 2007
 Increase in 2006 tax effort due to
implementation of expanded VAT (very popular
with big business, very unpopular with the
people)



Expanded coverage of VAT to include services
Increased VAT rates from 10% to 12%
But fiscal crisis continues despite improvements in
2006

Tax effort fell to 11.6% in first quarter of 2007 despite
economy growing at 6.9%. Revenue collection and budget
deficit targets from Jan to May 2007 missed.
 IMF, credit rating agencies and international financial
sector demanding new tax measures. Government
officially resisting because of defeat in senatorial
elections
 Gov’t realizes need to increase tax administration of the
big corporations and rich, but political will (??). Bureau
of Internal Revenue head sacked in June 21, 2007.
 Gov’t plans to sell and privatize government assets and
companies to make up for missed targets
 Gov’t has promised massive infrastructure building –
now may no longer be feasible (effect on business
confidence?)
 Fiscal targets very strict -- trying to reach fiscal balance
in 2008. Shooting oneself in the foot. Inability to
achieve target fiscal balance causing loss in confidence
Jobless Growth
GDP Growth Rate and Unemployment Rate
Fig. 7: Unemployment Rate vs. GDP Growth Rate
14
12
10
8
4
2
0
-2
-4
-6
-8
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Percent
6
Unemployment Rate
GDP Growth Rate
Persistent High Unemployment in 2000-present: High Labor Force
Entry, Low Absorption in Agriculture & Industry
Fig. 13: Employment by Sector and Unemployed, As % of Labor Force
45.00
40.00
35.00
Percent
30.00
Agriculture
Industry
Services
Unemployed
25.00
20.00
15.00
10.00
5.00
0.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Increasing Labor Productivity in Agriculture and Industry at the Back of High
Unemployment: Labor Cost-Cutting Is Coping Mechanism to Trade Lib and
Adverse Macro Conditions
Fig. 14: Labor Productivity and GDP per Capita (in 1985 Prices)
38000.00
36000.00
34000.00
32000.00
30000.00
28000.00
Pesos
26000.00
GDP per Capita
Labor Productivity
24000.00
22000.00
20000.00
18000.00
16000.00
14000.00
12000.00
10000.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Unemployment rate was supposed to have
fallen significantly in the first quarter of
2007 when GDP growth was 6.9%. But is
this sustainable?? (Recall missed targets
on tax revenue and budget deficit,
jeopardizing pump-priming and
infrastructure building)
Recipe for Another Crisis?
It is clear that the refusal to address the root
causes of the Asian crisis and the faithful
implementation of the standard ‘Washington
Consensus’ policies
- very strict fiscal targets
- capital account liberalization
- floating exchange rate regime
- full trade lib and deregulation
- monetarist policy to inflation (inflation
targeting)
are laying the ground for another potential
financial crisis.
Alternative Economic Policies
Undervalued Currency With Market-Based Capital
Controls on Inflows
Establish Peso narrow band at undervalued level (by
more interventions in current appreciation trend)
Supported by Chilean tax on short-term capital inflows,
or exit tax for capital outflows on funds less than one
year (Malaysian style)
To reduce exaggerated short-term capital inflows
and outflows
To ensure more exchange rate and price stability
To protect export and import-competing sectors
To protect purchasing power of overseas workers
Policy will bias monetary policy to more
accommodating rather than contractionary
stance
May still need to manage possible sudden sharp
pressures for currency depreciation and capital
outflows due to fiscal problems and political
instabilities, but more manageable if currency is
already undervalued.
Relax Overly Strict Fiscal Targets and Implement
Progressive Taxation
Instead of imposing indirect taxes and targeting
taxation of fixed income earners, the government
should improve tax administration and remove
the high exemptions for corporations and rich
individuals
Fiscal deficit targets should allow for 2% to 3% of
GDP, which are not at dangerous levels
The current high public debt service burden should
be reduced by strong negotiations for debt and
interest reduction, and if not possible, at least
long-run rescheduling at lower interest rates to
reflect current international lending rates
Industrial Policy: Market Failures vs. Gov’t Failures



Despite free trade policies, the government is actually
promoting call centers and business process
outsourcing (BPO). The high growth in services involve
this sector plus financial sector and the informal lowproductivity services. BPO has little multiplier effect.
It is recommended that promotion also be undertaken
for viable sectors with more multiplier effect, higher
technological spillover, employment generation and
high economies of scale, via providing complementary
infrastructure, direct or credit subsidies, tax incentives
for such sectors (e.g. backward linkaging of semiconductors)
This requires an efficient and honest government that
undertakes these processes with transparency, fairness
and correct incentives. Political struggle needed.
Reducing Restrictive Inflation Targeting and
Financial Liberalization Policies
Monetary and credit policies should be
supportive of the integrated industrial
policy, so that liquidity in the system will
not be wasted in speculative activities (too
much investments in high-end real
property and the stock market)
Instead of mopping up liquidity for fear of
inflation or over-speculation, the low
lending to the private sector should be
corrected by redirecting liquidity to
lending of priority sectors through proper
economic and credit incentives.
A More Pro-Growth Monetary Policy
Rediscount windows of Central Bank may
become more active in credit allocation to
banks with loan portfolios that are more
productivity and employment-sensitive
with healthy repayment rates. (Targeted
credit is uphill fight in the Philippines)
If oil price and world interest rate increases
abate, possible consideration of some
monetizing of fiscal deficits to ease the
fiscal problems (this is also an uphill fight
for the Philippines) and stop constriction
of fiscal spending