Statements on the Economy of the Philippines
The Republic of the Philippines, or more commonly known as simply, the Philippines, is an archipelago nation in Southeast Asia, in the Pacific Ocean. With a population of ninety-two million people spanning over its seven thousand plus islands, it has the twelfth largest population in the world. Its history began in the prehistoric times as Negritos were its earliest inhabitants. From their prehistoric roots the nation has continuously evolved and advanced economically. Since the Philippine’s Spanish and then American occupation, ending after World War Two, the nation has been allowed to advance on its own. As a newly industrialized country, the country has seen rapid economic transformation. Through examining the history of their development process, including their industrialization process, the role of their government in the economy, the impact of the financial crisis, and economic integration, the place of the Philippine’s economy as the world’s forty-sixth largest economy will be understood and justified. The Republic of the Philippines has such a rich history, and it is only fitting that their economy is just as rich.
As a newly industrialized country, the Philippines began its transition from a primarily agriculture based economy to a more manufacturing and service based economy. Despite its status as a newly industrialized country, it still has far to go. Currently agricultural based activities still makes up thirty-two percent of employment (only thirteen and eight tenths of the Gross domestic product) while the much more prosperous manufacturing only employs thirteen and seven tenths of the employed population, while making up thirty percent of the gross domestic product. The service industry in itself is forty-six and a half percent of the employed population and accounts for over fifty-six percent of the gross domestic product. The service and manufacturing industries accounts for the largest portions of the GDP, but there is still a significant percent of the population employed in the agricultural (least significant part of the GDP) industry. The nation’s recent economic history begins around World War Two. After the war, it was second only to Japan in all of the East Asian nations. However, by the 1960’s they were overtaken. For decades the nation saw minimal economic growth and went through multiple down turns and recessions, and it was only in the 1990’s did the economy begin to turn around. Like most Asian nations, it too ran into economic problems caused by the 1997 Asian Financial Crisis. Emerging from the crisis less affected than its Asian neighbors, the Philippines saw some signs of improvement since the beginning of the twenty-first century. With a six and four tenths percent growth in 2004 and over seven percent growth in 2007, the nation has shown some signs of improvement. Its limiting factor is that in the time span of the 1960’s until 2007, per capita GDP has been minimal, while the other Pacific nations have seen a six percent growth per capita. Despite this, the increasing development in the manufacturing field and service industry over the agricultural industry is offering the Philippines a lot of room for advancement. Jim O’Neil, a global economist for Goldman Sachs wrote in his 2001 paper entitled “Building Better Global Economic BRICs” (BRIC refers to Brazil, Russia, India and China), that like the BRIC’s, whom are in stages of advanced development, the Philippines are among a group of “The Next Eleven” that will follow. Growth potential is seen in the service industries for tourism and process outsourcing. With such advances the Philippines will see growth. Macro micro economics
In terms of economic growth, it is also important to look at one of the most often used models to determine growth. The Solow Growth Model, a variation of the Cobb’s-Douglas Function where Y is equal to total production in an economy, is used to sum up all parts of an economy to a model of long-run economic growth.
Variables: A-technology, K-capital and L-labor.
As shown in the function, labor is one of the determining factors of economic growth. By looking at the trend of population growth in the Philippines, this seems as a variable that could play a significant role in their long-term growth. Since 1961, the nation has seen a continuous upwards trend in population, and as of 2009 the total population was over ninety-two million, making it among the top twenty population nations in the world.
After World War Two, the economy was among the top of all East Asian economies, but like all nations, the government’s role can either help or hamper the economy. In the case of the Philippines, the government held the economy down for decades. Under the dictatorship/presidency of Ferdinand Marcos in the 1960’s, the economy stagnated and growth came to a halt. During his first term from 1965-1969, he focused the government’s efforts on infrastructure projects. While successful in building roads and providing more utilities to the population, the nation’s treasury was already depleted. As he put it in his “mandate for greatness”, “…Our government is in the iron grip of venality, its treasury is barren… You know that the government treasury is empty…” To fund his programs, he used deficit spending, not only in the literal construction of these programs, but also in the hiring of specialized technicians to oversee the projects. On top of the infrastructure spending, he also sent forces to Southern Vietnam, further increasing the debt. Due to the over-spending of government dollars, previous to the Marcos administration, the International Monetary Fund, or IMF, decreased the exchange rate of the Philippine Peso against the United States of America’s dollar from PHP2 to USD1 to PHP3.95 to USD1. Upon his election, he did not cease spending, and continued to spend more than revenues brought in. During mid- 1966, the Marcos government was increasing the budget deficit by nearly 2 million Philippine pesos a day. To pay for his infrastructure projects, large loans were taken out, many of which matured by the end of his first term, and by the end of 1969, he had doubled the government borrowing levels to that of before he took office.
Despite putting the economy in a volatile situation, the projects made him a popular leader, allowing him to win a second term. In this term he focused a large portion of government dollars on propaganda, including the removal of business billboard advertisements, and replacing them with his own likeness and pro-Marcos messages. With the economy facing economic shocks from internal and external forces, the restrictions on business advertisements hurt the businesses and hurt the economy more. This all led up to 1970, where the currency exchange rate was left to float, leading to an instant devaluation, bringing it to 6.4 pesos to the U.S. dollar. Inflation already high, the devaluation led to further inflation as the imported goods became more expensive. As a result of this too came a negative trade balance between the Philippines and the United States. What was once a positive balance went negative due to the Marcos administration.
When the 1973 oil crisis hit, the economy took a further hit due to its dependence on foreign imports for its energy needs.
On top of the economic turmoil brought on an increasingly authoritarian Marcos and his deficit-spending programs came more turmoil. In 1971 the Communist movement saw a revival, and as a result of this martial law was imposed. Under this rule, he maintained power longer than his original constitutional limits and imposed economic restrictions on the media, businesses and imposed curfews on its residents, further restricting businesses, and silenced political dissidents. On top of this, businesses were seized in given to those close to Marcos himself, leading to Crony Capitalism, further leading to embezzlement and high levels of corruption. Despite this, during the rest of the 1970’s the country saw some growth. The gross national product went from P55 billion in 1972 to P193 billion in 1980. A lot of this growth came from seizing private business (Profit Maximizing Firm) and land of foreign owners and distributing them to Filipino owners. Large monopolies were now in the control of the Philippine nation, and added new streams of revenue, and land was given to farmers to further the agricultural output. The new streams of economic revenue from seized lands and businesses and the national savings from no longer holding national elections led to budget surpluses and a trade surplus once again. These positive numbers were short lived and did not last into the 1980’s.
In summary, while the Marcos economy showed occasional positive spots, it was in general less than what the economy was before his long reign. Before the government involvement, the economy saw three and a half percent growth per capita from 1951 to 1965. Under Marcos the increase was only one and four tenths percent. The growth seen was largely financed by U.S. and other foreign aid and loans. These loans were so significant that even as of today, more than half of government revenue each year is spent on paying off the debt and its interest. Despite attempts at economic relief, the government corruption led to minimal recovery results, with results mostly being found in remittances. By the time of Marco’s removal of power in 1985, the unemployment levels was over twelve percent, and the economy was diminished, despite its strong footing after World War Two.
Upon the ending of his reign, the economy did start to show some modest growth as a result of economic liberalization, however this was short lasted as the Asian Financial Crisis hit in 1997. As a result, the value of the peso fell along with the stock market. With its fall in values, it did see significantly less decline than its Asian counterparts. This was largely due to the fiscal conservatism of the new government, and as a result of supervision of the International Monetary Fund. While other Asian economies were largely dependent on government expenditures, the Philippines were practicing slower growth and fiscal conservatism. After the crisis began on July second, the Philippine Central Bank instantly fought to defend the peso. From twenty-six pesos per dollar initially, it had reached thirty-eight by 1999. At the worse part of the crisis, the Gross Domestic Product fell by less than one percent, and had returned to three percent growth by 2001.
In terms of economic integration, the ASEAN (Association of Southeast Asian Nations) was challenged by the economic crisis, as many nations sought a quick fix to their own nation, versusa fix for the region as a whole. Despite this, ASEAN maintained their form and continued advancing the ASEAN Free Trade Area.
“AFTA and other forms of regional economic integration heighten competition in the Philippines and intensify competitive pressures on firms catering to the domestic market. But they also open other Southeast Asian markets to competition from Philippine goods and thus offer immensely larger, regional opportunities for Philippine companies. There is a market of half a billion people with a gross domestic product of more than US$700 billion out there.
In any case, we can be quite confident of the ability of Philippine companies to compete on the same playing field as those of Indonesia, Malaysia, Singapore and Thailand, particularly at home, where conditions and markets are familiar.
My confidence, which I know you share, rests not on national loyalty but on solid experience. Since the AFTA process started in 1993, the Philippines’ trade with the rest of ASEAN has expanded more than three-fold, from US$2.7 billion in 1993 to US$8.2 billion in 1998. This is faster than the expansion of the Philippines’ total global trade, which itself has been growing at a torrid pace. The result is that the share of ASEAN in the Philippines’ foreign trade has risen from 9.2 percent in 1992 to almost 14 percent today.
Contrary to the fears spread by some in the Philippines, this shift is accounted for more by the rise in Philippine exports to ASEAN than by the influx of ASEAN goods into the Philippines. Philippine exports to ASEAN expanded almost five-fold from US$795 million in 1993 to US$3.8 billion last year, while imports from ASEAN grew from US$1.9 billion to US$4.4 billion in the same period. Thus, since AFTA’s implementation started, Philippine exports to ASEAN have grown at 39.5 percent a year, much faster than the growth of Philippine imports from ASEAN, which has been recorded at 21.1 percent a year. In fact, imports from ASEAN actually fell from US$4.9 billion in 1997 to US$4.4 billion in 1998.
This has resulted in a significant drop in the Philippines’ trade deficit with the rest of ASEAN, from about US$1.1 billion in 1993 to around US$600 million last year. So much for the damage to Philippine industries from so-called “cheap imports” from ASEAN!”
As an expansion of ASEAN in the form of free trade, “” If we take AFTA here as shorthand for regional economic integration, I say that AFTA regional economic integration is not only relevant, it is more imperative than ever before for the recovery and the enduring growth of the industries and economies of Southeast Asia.The Philippines has much to gain from it. As I earlier pointed out, Philippine industries, and the economy as a whole, have already been benefiting from it.”
The Philippine nation has benefited from integration with its Southeast Asian counterparts, and is seeking to further benefitting with a complete free trade zone in the region.