I thought of putting out this primer in aid of voter education on key issues that they would need to assess a Presidential candidate’s qualifications and stand on the same key issues. This has been made necessary as it appears that the candidates themselves are not as well-informed as they should be which gives voters the wrong impression.
Sovereign debt is any borrowing guaranteed by the Philippine government from private financial or multilateral financial institutions. Private financial institutions can be banks, investment banks, wealth funds, mutual funds and the like. Multilateral financial institutions are the Asian Development Bank, the IMF-WB and the Asian Infrastructure Investment Bank.
Official Development Assistance (ODA) is also borrowing but on government-to-government basis at extremely preferential rates and repayment periods. Examples are USAID, ChinaAID, JETRO, JICA and other state-funded overseas development agencies. Again, rates and repayment terms are lower and lengthier when compared to commercial financial institutions.
The Philippine government operates from a combination of both local and international debt or borrowing to bridge the budget deficit. Contrary to what is being bandied about, it’s not easy to balance the government’s budget. Even developed countries operate at a deficit. More so now because of the pandemic. Government debt is generally measured as a percentage of GDP. The higher the ratio means the higher the risk. But even at a level in excess of 100%, it doesn’t translate to bankruptcy for a government unless it starts defaulting on principal and interest payments which is what is commonly referred to in the national budget as debt servicing.
It is a misnomer to claim that each Filipino is in debt in an amount at particular point in time. It’s not just a function of simple arithmetic by dividing the total debt over the total population. One has to obtain the average interest rate and repayment of the principal over a particular period of time to determine exactly how much each Filipino owes in terms of taxes, in whatever form. The most common are income and consumption taxes.
Government is not a profit-oriented enterprise, which is not a view shared by some officials and bureaucrats who join government for the bribes and commissions from private companies who are suppliers to government. The larger the tax base, the more revenues for government but this doesn’t result in a balanced budget if the governments spends more in services to the public as opposed to what it collects in taxes. Local government units have their own tax base in terms of the businesses located in their jurisdiction, which is augmented by their share from the internal revenue allotment from the national government. So there is the national budget and there is also the local budget for provinces, cities, municipalities and barangays, in that order.
Foreign and local direct investments result in jobs and a larger revenue base for the government, both at the local and national level. Why is direct investment important? These are capital-intensive investments in manufacturing which create jobs and increased revenues. Think of it as a cycle where you have individuals consuming products and services which has the money flowing in a roundabout fashion.
The restrictive economic provisions of the Constitution is what prevents the Philippines from catching up with its more progressive ASEAN neighbors. This is largely due to the fact that even if it was the first in the region to gain independence from its colonial master, foreign direct investment was restricted. The Americans insisted on amending the 1935 Constitution to give them parity rights; this put them on equal footing as Filipinos as far as business ownership was concerned. This led to Singapore and Malaysia overtaking the Philippines in a relatively short span of time even if they only gained independence from the British in 1963. The parity rights granted to Americans only expired in 1973.
This is also the reason why the plantation-style economy was still the norm after 1946 with our main exports being sugar and coconut-based products. There was the politically-charged US sugar quota which hacenderos in Negros Island and the sugar producing provinces of Tarlac and Pampanga made a lot of money from. Coconut-based products made rich men in the Southern Tagalog provinces of Batangas, Laguna and Quezon. There was also some sugar lands in Batangas.
These hacenderos became the rent-seeking oligarchs who did not reinvest their monies into the local economy wholly but spent quite a sum in investing abroad, either in the US or Europe. Gerardo Sicat’s paper explains it in better detail below.
During the 20 years before Marcos, the country’s development was generally good on paper. But with a high population growth, the growth of output per head was much lower. During these years of dependence on industrial growth with high levels of protection, the country was faced with periodic balance of payments crises. Such crises brought in bouts of booms to the class of industrialists and businessmen who were the largest beneficiaries of high protection. But because of their innate lack of competitive strength, these very same industries would endanger the wellbeing of all those employed by them – the larger population and the nation – for they would eventually suffer the fates of uncompetitive industries. They were dependent on subsidies and protection and their low capitalization made them rely mainly on high debt to run their operations. Thus, the potential for economic busts was in their future. Moreover, they helped to weaken the government: their demand for subsidies and indirect budgetary support eventually helped to create rising fiscal deficits. Those fiscal deficits helped to weaken the value of the peso and raised inflation. The protected import‐substituting industries consumed quite rapidly the Gerardo Sicat The Economic Legacy of Marcos
foreign exchange earnings that were earned by the traditional export sector from the agricultural and natural resources sectors. While initially extracting high profits from their operations, they used special access to foreign exchange resources to buy their imports of machinery and raw materials to sustain their operations. Tensions over these restrictive practices meant serious debates over economic policy. The export sector, based on agriculture and natural resources, clamored for more open use of their earnings, but the government undertook a trade and payments system that required the sale of these dollars to the central bank at the official rate. The scarce dollars were rationed to support the domestic import‐substituting industries for their import needs. Thus, the country’s foreign exchange resources and credit resources gradually dissipated. But no political figure would dare go to the extent of dealing with the economic restrictions on foreign capital as written in the Constitution. It meant the kiss of political death. (As provided in the Laurel‐Langley Agreement, all those economic restrictions would be fully effective on all foreigners.) During the Marcos presidency, the Laurel‐Langley Agreement would cease to function by 1973. This signaled the end of the period of special relations with the United States. The last vestige of those special relations was connected with the military bases. The bases lease was to be under the control of the US government for 99 years from political independence in 1946. The decisive defeat of the French by the Vietnamese in Dienbienphu in 1954 opened the way for American direct entry into the Vietnamese conflict. The bases then became a key element of the geopolitical strategy of containing the advance of communism in Asia. From an economic perspective, the military bases were a major source of support to the Philippine economy. They provided enormous expenditures of dollars that were fed into the local economy. Gerardo Sicat The Economic Legacy of Marcos
Up to today, the economic provisions of the 1987 Constitution continue to be the major stumbling block to economic growth. Duterte’s economic team has been able to prod Congress to pass amendments to the Retail Trade Liberalization Act. The amendments to the Public Service Act are still pending. There is also the easy fix insertion of the phrase “unless otherwise provided for by law,” as proposed by several legislators which still hasn’t been taken up by Congress. There is also the last package of the Comprehensive Tax Reform Program which is one of the linchpins of the economic strategy of the Duterte administration as part of its 0 – 10 Point Socio-Economic Agenda.
If the pandemic had not stalled the global economy, the country would be well on the road to become a middle income nation by 2025. The Presidential candidates have vaguely outlined their economic recovery strategies. The biggest problem is the focus on social amelioration in the form of handouts to those affected and to MSMEs. The Department of Finance has been successful in getting Congress to pass Package 2 and 3 of the CTRP with amendments to address the disruption caused by the pandemic. It’s imperative that the candidates are asked about their contradictory position about criticizing the administration for its borrowings but continuously zeroing in on ayuda or social amelioration in a bid to win votes. This also makes balancing the budget next to impossible. About the only doable promise is to minimize corruption or budget leakage through the digitization of the bureaucracy.
The private sector also needs to adopt digitization. It would be best if the government and private sector worked hand-in-hand to make it easier for both individuals and companies to transact with government both at the national and local level. Digitization is also an economic growth driver as has been the experience of developed countries.
It is imperative that voters demand a cogent economic recovery strategy and action plan from each candidate. The issue can’t be left to motherhood statements. Whoever is elected President should be able to hit the ground running on Day One.
If the Philippines is to become truly progressive, the next President should recognize the root of the problem and initiate the reforms needed in the political-economic structure of the country. It’s about time that we break away from the choke hold that oligarchs have on the economy.
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