The Multinational Monitor

JUNE 1989 - VOLUME 10 - NUMBER 6


Debt and Democracy in the Philippines

by Jennifer L. Smith

Philippine President Corazon Aquino wants the Philippine people to believe that the foreign debt crisis is a complicated financial problem that only her Finance Secretary, Vincente Jayme, and the Central Bank Governor, Jose Fernandez, can understand and resolve. A growing number of people in the Philippines understand, however, that the situation is really quite simple: the country will never be able to repay all of the $30.2 billion owed to foreign creditors, and, therefore, government and creditor policies must change. The government's debt policies are impinging upon democratic institutions in the Philippines and reveal President Aquino's willingness to sacrifice economic and political sovereignty to placate foreign creditors.

The government's debt policies

The Aquino government's program to address the debt crisis has four main components. The first has been to honor all debts of the previous government, despite the extensive graft and fraud by former Philippine dictator Ferdinand Marcos and his wife Imelda. Estimates of the Marcoses' personal graft, not including that of their cronies, run from $5 billion to $20 billion. Their deposits in Swiss bank accounts are said to be worth $3.5 billion and their illegal investments in New York City properties, which were disclosed in U.S. congressional hearings, are conservatively valued at $9 million. According to James Boyce, a professor of economics at the University of Massachusetts, who is currently writing a book on the Philippines, total capital flight from the country since 1962 is worth about $22 billion in 1986 dollars. Walden Bello, economist and author of Development Debacle: the World Bank in the Philippines, is one of many who assert that when President Aquino first came to power and her international legitimacy was at its height, she could have at least declared a moratorium on debt payments until the legitimacy of the loans was investigated.

To this date, the government has not investigated the use of foreign loans with the exception of the Bataan Nuclear Power Plant. This plant is a Third World white elephant; its cost has reached $2.67 billion; Westinghouse, the builder, paid Marcos approximately $80 million in commission; and it has never been and will never be put into operation since it was built within 25 miles of three active volcanos and an earthquake fault line.

The government's policy also involves rescheduling debt payments owed to foreign governments and private banks. (The multilateral banks such as the International Monetary Fund (IMF) and the World Bank do not reschedule their loans.) The Philippine government reached two rescheduling agreements in 1987 with the Paris Club of western governments, the seven leading industrial nations, and with their commercial bank creditors, extending loan payments over 10 to 17 years and providing a grace period of 5 and 7 years, respectively, on payments of principal. Consequently, service of the foreign debt was thus reduced to $2.9 from $4 billion annually from 1987 to 1992. Debt payments in 1988 came to $3.1 billion of which $2 billion was for interest and $1.1 billion was for principal.

The rescheduling of commercial and private debt certainly mitigated the immediate debt burden. There are problems, however, with rescheduling debt payments. Jose Ledesma, a member of the Philippine Freedom From Debt Coalition's Board of Directors, notes that "The country is still required to pay all of the debt and the crisis is simply postponed until 1992 when the principal is due." Ledesma, along with a growing number of Philippine senators and representatives, also argues that the country still cannot bear the present levels of annual debt service which will amount to 60 to 70 percent of export earnings each year.

Economic Planning Secretary Solita Monsod says that the current situation precludes economic recovery for the Philippines. Because the government did not receive additional loans from the commercial banks as part of the rescheduling agreement, the estimated outflow of capital will surpass current commitments of new loans and grants by $16.3 billion from 1987 to 1992. In 1988, debt service was $3.1 billion while new loans obtained came to $2.1 billion but only $1.126 billion worth of loans were actually drawn down. Secretary Monsod's office, the National Economic Development Agency (NEDA), has calculated that the nation will only be able to pay two-thirds of the debt service required through 1992 in order to attain the 6.5 percent growth in Gross National Product (GNP) necessary to merely return to 1981 real levels of income.

Commercial banks have not responded to Secretary Monsod's widely publicized predictions, with new loans. The United States, however, has initiated a new multilateral aid package which has been called the "mini-Marshall plan." This package fits into the third component of President Aquino's debt policy: encourage the inflow of foreign loans, aid and investment to minimize the net outflow. The promises of the new Multilateral Aid Initiative (MAI), as it is called in the United States, or the Philippine Aid Package (PAP), as it is called in the Philip-pines, require careful scrutiny. PAP was first proposed as $10 billion in foreign aid spread over five years beginning in 1990 with contributions from the United States, Japan, South Korea, Taiwan and European countries. From the start it was to include grants, loans, reduced debt payments, debt "swaps," trade preferences and foreign in-vestment.

Critics of the proposal point out that he plan consists mostly of loans and not solely of outright grants. Even if it did consist primarily of loans, there would still be a net annual outflow of $1 to $2 billion until 1992 and much more thereafter. Economists John Cavanagh and Robin Broad, currently research associates at the University of the Philippines School of Economics, have dubbed PAP "Phony American Promises" and write: "Western nations can commit aid only one year at a time. So any talk of a multi-year commitment is sheer rhetoric. Secondly, aid budgets in donor countries like the United States are shrinking at the moment. As a result, squeezing out anything more than small new commitments is next to impossible." In fact, some countries have expressed concern about the ability of the government to absorb additional aid while as much as $4 billion in allocated aid lies unspent as new projects are developed. Japan, the largest donor to PAP, seems to be holding back on current aid to counterbalance contributions to PAP. In the end, most of PAP will probably consist of repackaged loans which had already been committed.

The fourth component of the government's debt pro-gram is to maximize the country's capacity to pay debt obligations by fostering high growth and keeping inflation down. According to an officer at the Philippine Embassy, "The current debt obligations will not be a problem with the current levels of (7 percent) growth in the economy and low levels of inflation (at 9 to 10 per-cent.) There is no need for the government to consider alternative debt policies, as long as these trends continue."

A closer look at the numbers shows this assessment to be overly optimistic. The Philippine Resource Center suggests the growth must be placed in perspective. The economy is still in a process of a recovery best demonstrated by the levels of GNP per capita. At $600 in 1988 it is still far from the 1981 level of $790. Sustainable development has yet to begin in the Philippines.

A proper perspective on economic recovery takes into account which sectors of the economy are growing. The current growth has had few benefits for the 70 percent of all families that live in poverty. There is unlikely to be much "trickle down" because President Aquino failed to adopt a meaningful agrarian reform program, which more than any other program, would have benefitted the rural-based majority of Filipinos. The law that was passed last year guarantees that 75 percent of agricultural land will be exempt from redistribution. The program will do little to change the income distribution, the most unequal in Southeast Asia, allowing the top 20 percent of the population to monopolize 51 percent of the national income.

Furthermore, the economic growth is not building greater self-reliance and independence from debt. Both the extreme poverty and the IMF-proscribed emphasis on production for export rather than domestic consumption constrict the development of domestic markets. Exports are composed increasingly of light manufactured goods which are heavily dependent on imported materials. As a consequence of this, according to Ledesma, the economy naturallly falls into debt. He says, "Growth in an import-dependent economy leads to more imports, a widening trade deficit because of increased imports and eventually a widening current account deficit ... which is then financed by increased borrowing.

Professor Boyce argues that continued growth is unlikely. Boyce says, "The current growth is consumer-led (rather than investment-led) and is largely due to greater utilization of existing capital. It will not continue because little of the current investment is going into plants and equipment," and therefore, productive capacity is not expanding. Cavanagh and Broad have written that the World Bank model of export-oriented growth which worked for the Newly Industrialized Countries (NICs) is bound for failure in the long run for LDCs. The competition is much greater now because the NlCs did not move out of production of light manufactured goods, as the World Bank predicted, and too many LDCs are pursuing the same path at the World Bank's encouragement. Furthermore, protectionism is blocking markets and substitution of synthetics for primary commodities is diminishing demand in industrial nations.

The impact on democracy

These policies defy the spirit and intention of the country's new constitution. First, the constitution states that the largest budget priority should be education, but currently debt service makes up the largest portion of the budget. Second, the constitution gives the Congress power to authorize and appropriate the national budget, yet 40 percent of the national budget is automatically appropriated to debt service without any deliberation by Congress.

President Aquino's recent attempts to limit the ability of the Congress to act on debt-related policies also lead critics to question her commitment to genuine democracy. Aquino asked the House of Representatives to place a six month moratorium on all bills that dealt with the foreign debt. This was after the Senate passed a bill that would limit debt service to 20 percent of export earnings. She then vetoed a bill that would have created a Debt Commission composed of representatives from the executive and legislative branches of government, business and private sectors. The Commission would have served solely an advisory function. Aquino charged that it would infringe upon her powers to negotiate and contract for loans. The Senate, with a great uproar, subsequently voted for the first time to override the presidential veto. The bill was subsequently modified and signed by President Aquino.

President Aquino has also maintained secrecy around negotiations with the IMF and the World Bank, preventing any knowledge or discussion of their proposals outside of the negotiating panel. Economic Planning Secretary Solita Monsod was recently dropped from the IMF negotiating panel after opposing the growth rate target set by the IMF. Members of Congress have lamented the fact that they requested information on the discussions with the IMF and did not receive any until they were given the final "Letter of Intent." Members of both the House and the Senate were furious when told that they could not amend the Letter of Intent and had no choice but to approve it in a matter of days. If they did not, the Philippines would have lost IMF standby credits, and thus the PAP, a $500 million soft loan from Japan, any further loans from commercial banks and the rescheduling of $1.2 billion of Paris Club loans which are all conditioned upon a standby agreement with the IMF. Members of Congress, led by Speaker Pro Tempore Antonio Cuenco, then demanded the removal of the leaders of the negotiating panel - Central Bank Governor Jose Fernandez and Finance Secretary Vincente Jayme - whose "continuous bungling has worked against the best interests of the people."

Debt and sovereignty

President Aquino's debt strategy sacrifices economic and political sovereignty because of its extreme dependence on inflows of foreign capital. The greatest issue of political sovereignty confronting the Philippines today is the renewal of the U.S. Military Bases Agreement (MBA). Although there is growing opposition to having foreign bases with nuclear weapons on Philippine soil, the MBA would have to be renewed in order to receive current levels of U.S. foreign aid and perhaps also the $10 billion PAP. Cavanagh and Broad write that "Despite all of President Aquino's assurances that the PAP will not be linked to retention of the bases, the quiet signal from the United States is unmistakable. As U.S. spokespersons diplomatically put it, the climate for approving new assistance to the Philippines would be damaged considerably by any decision to remove the bases."

Philippine dependence on foreign aid and loans also allows the IMF and western donors to dictate the development strategies and specific economic policies that the country must follow. The outlines of the most recent IMF accord include budget cuts, import liberalization, the devaluation of the peso, the elimination of the cereal subsidy and increases in fuel, power and water rates. IMF austerity programs are notorious for resulting in fewer social services for the poor, increased prices of basic private services and goods, including transportation and rice (the main staple) and more expensive imports. These policies hurt poor people the most. Secretary Monsod warned in a memo to President Aquino that the IMF program would set back economic growth and spark political unrest. The Congress realized how little power it has when it tried to amend, and considered rejecting altogether, the IMF Letter of Intent.

The U.S. bases agreement, the IMF austerity program and increased reliance on foreign aid and investment all promote economic dependence and undermine political and economic sovereignty. The first step out of this trap is for President Aquino to adopt debt policies based on the people's needs and on building national self-reliance.

Alternative policies

The Manila-based Freedom From Debt Coalition (FDC) is a private coalition working with members of Congress to change the way the Philippines is handling the debt crisis. The FDC program calls for a new rescheduling agreement with the nation's creditors based on the nation's ability to pay and a moratorium on all debt payments until such an agreement is reached. The capacity to pay would be defined as limiting payments to no more than 10 percent of actual merchandise export earnings. At current levels of exports, annual debt service would amount to $600 million compared to the anticipated level of $3.4 billion. The FDC also calls for the government to legally disengage from loans proven to have been illegally appropriated by Marcos and to refuse to accept responsibility for loans originally contracted by private borrowers.

The Aquino government asserts that the Philippine economy would not be able to withstand the retaliation from private banks that such a program would provoke, including the cut off of new lending and the elimination of trade credits. But it ignores the fact that even with new lending, the country could experience a $16. 3 billion net outflow from 1987 to 1992. Thus, paying the debt would hemorrhage the economy more than the cut off of new credits. Moreover, the elimination of trade credits would be counterproductive if the level of debt payments were tied to export earnings.


The Philippines may soon be one of the first countries to undergo an IMF-coordinated debt reduction program. It would be part of the new U.S. Brady proposal which calls for commercial banks to voluntarily reduce outstanding debt by 20 percent in exchange for IMF and World Bank guarantees on the remaining debt. But the Brady proposal will do little to alleviate the Philippines current debt burden and nothing to promote debt- free, self-reliant development. Secretary James Brady's plan assumes that developing nations such as the Philippines can grow out of debt while implementing IMF austerity programs and World Bank export-oriented development strategies. Both institutions have had just the opposite impact on the Philippines and other developing nations in which they have operated.

For any debt reduction program to be successful, it must be based upon the needs of developing countries as defined by them not by the U.S. Treasury Department, private banks or the IMF. President Aquino has not asserted an appropriate, distinctly Philippine, proposal. Her handling of the debt crisis thus far indicates a greater commitment to the interests of the IMF, World Bank, private banks and foreign governments, especially the United States, than to the Filipinos' desire for genuine democracy and political and economic sovereignty. It may be too late for her to regain the full support of the "people power" coalition that brought her to power, but it is not too late to listen to the Filipino people and adopt debt policies based on their needs.

Jennifer L. Smith is a political economist who spent nine months in the Philippines in 1987 working with the Philippine Rural Reconstruction Movement and the Freedom from Debt Coalition.

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