We are into the four or fifth month of a very, very rapid unravelling of the global economy and financial institutions, and one very interesting phenomenon is that actual developments in the US and internationally have been much worse than the projections of the experts. From the decline in growth rate to the rise in unemployment rate, to the collapse of the financial sector, things have been consistently much worse than predicted.
When it comes to the situation in the Philippines, we cannot underestimate the depth of the crisis. We have already been pushing for measures, the call for which have been taken up by other organizations, like the moratorium on foreign debt service. FDC has said that the government cannot continue to afford allocating massive amounts for debt repayment when the economy is likely to contract, and we should be channelling investments back to the local economy in the form of social spending to be able to buffer it from economic contraction. Other FDC demands that have resonated widely are the cancellation of illegitimate debt and the demand that the Value Added Tax (VAT) be rescinded— these measures and others are, in the short term, quite essential to be able to really prime the local economy to meet the impending crisis.
Our main problem when it comes to taking the necessary immediate steps is that there’s a systematic effort on the part of the government to downplay the crisis. People who are looking in from the outside raise this—why does the Philippine government seem to minimize the crisis when other countries already on war-footing?. In spite of some concessions on the part of administration spokespeople that things do not look that well, there is no strong policy statement that says that given the contraction of the international economy and its surefire impact on our export-oriented economy, we should declare a state of economic emergency.
The reason for what is tantamount to a state of denial is that the main agenda of the GMA administration, in my view, is still charter change. If it says that economic contraction is the big problem, then the urgency of charter change will be blunted because, basically, what you‘re saying is that we will need to focus on saving the economy. The priorities are quite different, depending on your definition of the need of the moment. Clearly in other situations it would have been urgent for an administration to define economic crisis as the number one issue, but today’s context is one where there is a desperate administration that really wants, in my view, a shift to a parliamentary system so that the first family can stay in power beyond 2010 and avoid being prosecuted for high crimes after the first day of the presidential changeover in 2010. I think this is what is pushing the de-prioritization of the economic crisis.
Aside from the question of short-term measures, my sense is the crisis right now opens up the opportunities for a real discussion and debate on where the Philippine economy should be going strategically. So, let me just pose a number of issues of a strategic character that can serve as a springboard of debate over the next few months.
The End of Export-oriented Industrialization
First of all, the economic model that reigns in the Philippines at this point is what we call export-oriented growth, or export-oriented industrialization (EOI) This was a model that was prescribed by the World Bank in the late 1970s, and the idea was to stop thinking about internal markets, because internal markets were small and limited. What you really needed to do was to take advantage of the demand in export markets and reorient your industry to these more promising magnets for your economic growth. Of course, the context was one where a large part of the agriculture was already export oriented; that is, our agriculture had developed in the traditional, colonial pattern, with specialization in export crops like sugar. But what the Bank was saying was that it was also really important to reorient the industry to export oriented development.
In the first phase of structural adjustment that we experienced in the 1980s, the main element was trade liberalization. We were subjected to a process of trade liberalization that was very radical, that really brought down the average tariff in this country to low levels. This structural adjustment took place at a time of international recession. That’s why in 1983-1985, structural adjustment and global recession led to the 1984-1985 depression, as Dean Rene Ofreneo of the University of the Philippines called it. What happened was a collapse of the economy in ’85 and we cannot understand the ouster of Marcos without realizing that it wasn’t just political alienation that led to Marcos’ ouster in 1986 but a terrible economic crisis as well.
Then the consolidation of export-oriented growth happened during the period of Corazon Aquino, where many internal measures were made to begin the process of deregulation and to push the economy to the priority of servicing the external debt. This meant that since we could not pay our debt in pesos—and we had such massive debts at that point in time—the only way to service our debt was to earn dollars, and the only way to earn dollars was to make exports competitive and channel investment to export industries. Debt repayment as the national economic priority was what led us to consolidate export orientation.
And then finally, during the Ramos period, we had a second wave of trade liberalization, which was imposed by doctrinal technocrats who were in command at that point, like Ciel Habito. They aimed to bring down, across the board, all tariffs between 1 to 4%. Their model in this exercise was the Pinochet government in Chile, because at that time in Chile they brought down, across the board, the average tariff to 11%. Their thinking was that if the Chileans can withstand tariffs being brought down to 11%, then of course we Pinoys can bring down our tariffs to 1-4% and we will survive. What that accomplished was to accelerate the crisis of our industries during the Ramos period. More and more firms fell into bankruptcy; the investment atmosphere was so bad that the local industry refused to invest significantly. So basically, this process tied into the process of globalization that really became the official ideology and the official push in the Philippines in the 1990s. Basically what we now have is really a crisis of a reoriented Philippine economy. It has been oriented from the import-substitution, “inward-looking” industry of the ‘50s and ‘60s to one that is now thoroughly integrated into the global economy. That, of course, seemed like a good thing because growth globally would translate into growth locally. What our technocrats never anticipated was that there would be a major downswing and a major collapse and that this would be a very, very drastic sort of unravelling. What they did not anticipate is that once the global economy begins to go down, you also go down with it. This is now what is happening: all these dynamic economies, including China and other South East Asian economies that tied themselves to this globalized integrated market, are now also the ones that are suffering the most in this downturn. There is a very interesting comparison of the decline in growth rates among different developing countries: it is the export-oriented economies in Asia and Latin America that are going down fastest whereas in those economies that were smarter and did not thoroughly liberalize themselves, the decline in growth rates has been much smaller. Basically, the economies that will be able to buffer themselves more fully are those that only undertook very selective and discriminate liberalization. So don’t expect the Philippines to be one of the blessed.
In the collapse of this model, we really are at the end of the globalization project because whatever happens at this point in time, there will be a move away from globalization.
Issues and Challenges for a Strategic Program
What should we be looking at in terms of programs of reform?
I think we should really begin to reorient our economy back to the domestic, back to the local, to derive dynamism from our population, from our resources, and from our internal market. And, I think, to be able to successfully do this, we need to address several challenges.
One is the articulation of industry and agriculture. Our agricultural development and our industrial development have been out of synch for a long, long time. Whereas agriculture and industry were complimentary in the newly industrializing countries like Korea and Taiwan, in the Philippines this has not been the case. When we look at some of the successful Asian economies, we find that very important in the first stages of their development was agrarian reform. Agrarian reform created a prosperous peasantry that then became a market for industry. So, actually, if we look at Korea and Taiwan, the first phase of their industrialization was rural industrialization—the creation of implements and other inputs by industry to support agriculture. I think this is often forgotten now, but since most of our population is in the rural areas, agrarian reform is really going to be the key to raising purchasing power to stimulate sustained industrialization.
The second thing that I think we should address is our economic relations with the outside world. One of the lessons to be learned from the Asian financial crisis of 1997 and the current crisis is the importance of capital controls; what has brought us to this crisis is the unregulated capital flows globally. It would be very important at this point that capital controls are brought back to act as speed bumps in the flow of global capital, so that this kind of high-speed or cyber-speed flow is slowed down and controlled so it does not destabilize the global economy and the local economy. Equally important is we really need to be able to move away from the free trade agenda. My sense is that very central will be a new agenda of managed trade; that is civil society and the state must act to actively supervise trade rather than let the market have its own way. I hesitate to use the word protectionism because it has negative connotations, but I think, at the same time, the way protectionism in the past has been practised in the Philippines has not been good. It was one of uncoordinated protectionism that mainly served vested interests. It was not a coordinated strategic protectionism that was meant to build up the economy through industrial policy. In other words, the Philippine industrial class has been very, very short-sighted. For instance, in the 1990s, we worked with FPI, Federation of Philippine Industries, and we collaborated in formulating a program what would lead to a trade policy that would be basically one of managed trade. We thought that there was serious engagement in the process from the Concepcion group. However, once Raul Concepcion got the protection he wanted—meaning that the tariffs on the goods he was specializing in would not be lowered—he abandoned the coalition. He left us holding the bag. Basically he said, “I’ve gotten what I want, bahala na kayo sa sarili niyo.” In other words, the main problem with protectionism in the past was that it was very much vested-interest protectionism. And what we really need to be doing is using managed trade or strategic protectionism to build up and deepen our industries.
What this means is that we should be open to the fact that we can use protective tariffs as well as selective liberalization as weapons to make the economy more solid. We should be able to pragmatically de-protectionize or protect industries depending on our strategic economic objectives. The Japanese say that there are sunrise industries and there are sunset industries. You protect and support sunrise industries, and you find a way to lay the sunset industries to bed, with a great deal of social support for the people affected and making sure to move the workforce from those industries to the dynamic industries. This kind of forward -looking protectionism needs to be one of the things that should characterize the new economy.
A third area that we should be looking at is a reconfiguration of the system of property ownership. There used to be a really dynamic debate on this in the late ‘80s and the early ‘90s, when people were talking about the “mixed economy” –you have the private sector, you have the state enterprises, you have the cooperatives, you have collectives, you have private-state partnerships. Basically what you aim at is a variegated property system, instead of one consisting of just private and state enterprises. I think that what we need is rethinking or reconfiguring the property base of the economy in the interest of both effective development and social justice. But we have to have an important proviso, which is that we will never let the transnational corporations be part of this mixed economy. I think that this would make it quite important still to retain the nationalist provisions of the constitution.
The fourth item in a strategic agenda is an expansion of economic democracy. This means two things. One is a major effort at income and asset redistribution to end poverty and expand purchasing power, something we already touched on when we discussed agrarian reform. The second is expanding democratic decisionmaking to the enterprise level as well as to the making of mesoeconomic and macroeconomic decisions. For instance, it should not be left up to technocrats or the market to determine whether we should build a computer industry or an automobile industry. We must subject decisions such as these to a democratic vote.
The fourth issue that I would like to flag is the relations between labor and capital. I think that the situation in this country has been such that labor has been extremely weak and capital has almost total hegemony. This is, of course, not good, not only for social justice reasons but for reasons of development. In fact, if we let capital be hegemonic, it will always provoke a race to the bottom, that is to seek dirt cheap wages, which means that you do no not create the base of expanded purchasing power that is the centrepiece of a dynamic industrial economy. So when people argue for decent wages, they do not just argue for social justice reasons, they also argue for economic reasons. This is why I think there should really be preferential support for labor within this reconstituted economy, whereby we make rising living standards and wages central to dynamic economic growth. What this would mean of course is that the state and civil society will have to really play a very important role in bringing about this new relationship between capital and labor.
Of course—and I will not take this up but just mention it— all these reforms should be done in the context of a sustainable economic development strategy that is very sensitive to the environment and the environmental crisis, especially at a time of climate change. This means that the kind of technological base and the kind of growth that we have will really have to be very, very sensitive to green considerations, because there is no returning to the ecologically damaging industries of the past.
These are some of the strategic issues that we really need to confront and discuss as we enter this era of crisis to just make sure that when we see the light at the end of the tunnel we shall have generated the conditions for a move forward rather than a step backward.