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Economic Crisis... Once More


Economic Crisis... Once More edited by Mario B. Lamberte

Caesar Cororaton Margarita Guerrero Generoso de Guzman Ponciano intal Jr. Mario Lamberte Rosario Erlinda

Manasan Medalla

Melanie Milo Aniceto Orbeta Jr. Virginia Pineda Celia Reyes Josef Yap

pls Philippine Institute for Development Studies Surian sotogaPag-aaral Pangkaunlaran ngPi/ipinas

:


Copyright

2001 by

Philippine Institute for Development 4/F NEDA sa Makati Building 106 Amorsolo St., Legaspi Village Makati City 1229, Philippines

Printed

in the Philippines.

Studies (PIDS)

All rights reserved.

The findings, interpretations and conclusions in this volume are those of the authors and do not necessarily reflect those of PIDS.

Please address all inquiries

to:

PHILIPPINE INSTITUTE FOR DEVELOPMENT NEDA sa Makati Building 106 Amorsolo St., Legaspi Village 1229 Makati City, Philippines Telephone: (63-2) 8924059, 89357051 Fax: (63-2) 8939589, 8161091 E_mail: publications@pidsnet.pids.gov.ph URL: http://www, pids.gov.ph

iSBN 971-564-033-8 RP 12-01_500

STUDIES


Table ofContents Foreword

Chapter 1

Introduction - Mario B. Lamberte

1

Part 1:

The Philippine Economy before the East Asian Financial Crisis

Chapter 2

Philippine Economic Performance Before the East Asian Financial Crisis - Melanie R.S. Milo

Part I1:

Impact of the East Asian Financial Crisis

Chapter 3

Overview of the Economic and Social Impact of the East Asian Financial Crisis - Melanie R.S. Milo

53

Chapter 4

The EastAsian Financial Crisis and Philippine Sustainable Development - Ponciano S. Intal, Jr. and Erlinda M. Medalla

75

Chapter 5

Impact of the East Asian Financial Crisis on the Philippine Manufacturing Sector - Mario B. Lamberte, Caesar B. Cororaton, Aniceto C. Orbeta, Jr. and Margarita Guerrero

109

Chapter 6

Impact of the East Asian Financial Crisis on Households - Celia M. Reyes, Rosario G. Manasan, Aniceto C. Orbeta, Jr. and Generoso de Guzrnan

145

Chapter 7

Fiscal Impact of the East Asian Financial Crisis - Rosario G. Manasan, Celia M. Reyes, Aniceto C. Orbeta, Jr. and Generoso de Guzman

199

23


Chapter 8

Impact of the East AsiaJnFinancial Crisis on Social Services Financing and Delivery - Virginia S. Pineda

Part III

Government's Response to the East Asian Financial Crisis

Chapter 9

Economic Policies and Measures in Response to the East Asian Financial Crisis - Mario B. Lamberte an_l Josef T. Yap

Chapter 10 _ Social Safety Net Programs in the Philippines - Melanie R.S. Milo Part IV Chapter11

223

263

335

Special Issues -

Currency Crisis: Where Do We Go from Here? - Mario B. Lamberte

353

Chapter 12 -

A Second Look at the Credit Crunch - Mario B. Lamberte

382

Chapter 13 -

Recent Developments in Corporate Governance in the Philippines - Mario B_Lamberte

403

Part V

Monitoring

Chapter 14 -

Developing an Early Warning System to Help Understand and Monitor Economic Crises - Josef T_Yap

423

Chapter 15 -

Assesment of Existing Monitoring Systems - Celia M. Reyes, RosariD G. Manasan, Aniceto C. Orbeta, Jr. _andGcneroso de Guzman

447

Systems


Foreword

here were many questions regarding the impact of the East Asian financial crisis on various Philippine sectors. The foremost being just how deeply affected the Philippine economy was by the crisis, especially by the sharp depreciation of the peso. In response, the Institute implemented a number of studies since 1997to understand the nature and causes of the crisis, examine its impact on the domestic economy, and recommend some measures to mitigate the negative impact on these sectors in the short-run and reduce the vulnerability of the economy to another currency crisis in the long-run. The result of the undertaking is a collection of exhaustive studies on the recent East Asian financial crisis, a modest achievement which the Institute is only too enthusiastic to share with its readers and clients. The book has five sections which deal separately on the following concerns, namely, the Philippine economy before the crisis, the socioeconomic impacts of the crisis, the government's response to the crisis, an assessment of the early warning and monitoring systems, as well as other important economic issues such as capital controls, credit crunch and corporate governance, that emerged as the crisis unfolded. Although no two crises are exactly similar, the lessons learned from the various chapters of this book can certainly be useful to policymakers in formulating policies and instituting measures to prevent the occurrence of another currency crisis, reduce its adverse effects should one occur, and better manage risks that may emerge as the country's economy deepens its integration with the rest of the world. Lastly, the Institute is grateful to the following organizations that provided support to some of the studies in this book, namely, the Institute of Southeast Asian Studies (ISEAS), the World Bank, Japan


Bank for International Cooperation (formerly the Overseas Economic Cooperation Fund, Japan) and the Asian Development Bank. Thanks are also due to a number of individuals who, in one way or another, had contributed to the completion of the studies in this book.

_tO

t

Mario ]_.Lamberte, LPresident

Ph.D.


Introduction Mario

B. Lamberte

he last quarter of the 20 t" century saw the Philippine economy experiencing three major crises, which amazingly occurred at regular intervals--every 7 years (Figure 1). The first and the worst among the three crises occurred in 1984 when the gross domestic product (GDP) shrank by 7.3 percent. It further contracted by another 7.3 percent the following year. The second crisis occurred in 1991 when GDP contracted by 0.6 percent. The third and latest crisis struck in 1998 when GDP shrank by 0.6 percent.

Figure 1. Real GDP growth rates (In percent).

[0 1

ml0

Year

Source:National StatisticalCoordination Board.


2

Economic

crisis... Once more

Indeed, the boom-bust cycle appropriately characterizes the Philippine economy in the last 25 years. Because of this, the economy grew only by an average of 3.2 percent annually during this period. For a population growth rate of more than 2 percent per year, this is precariously low that a small decline in economic activity can have a significant, negative impact on employment and poverty in the country. As Figure 2 shows, the country has not yet returned to the highest real per capita income attained in 1982. Figure 2. Real per capita income

1.3,500 13,000 12,500

_ jr'--

11,000

KJ

10,000

.

10,500

(In pesos).

_RGNP/Pop. -

"_

_RGDP/Pop,

,

_.L_

j

' Year i

Source: National

Statistical

Coordination

Board,

As yet it cannot be explained why economic crises in the Philippines occurred at regular intervals. However, their causes can be explained and their effects on the economy can be analyzed. This is what the PIDS has been doing over the years to enrich the quality of policy debates in the country and to reduce, if not avoid, policy mistakes in the future. This volume focuses on the third crisis. 1 It puts together the Institute's studies on the causes, effects, and policy responses

of the Philippine

authorities

to the East Asian financial

crisis.

It is hoped that lessons drawn from the rece_ crisis can be used by policymakers in shaping policies that would shepherd the Philippine economy out of the boom-bust cycle as well as to students of business and economics who will become

important

players in the economy

The East Asian Financial

in the future.

Crisis

Unlike the two previous crises experienced by the Philippines, the recent crisis is unique in that several countries in East Asia encountered a similar crisis almost at the same time, suggesting that these economies became vulnerable, 1For the Institute's studies (1989), Philippine Institute Yap (1994).

dealing with the first two Crises, see Lamberte et al. (1985), Lamberte for Development Studies (1986), Montes (1987), and Lamberte and


Chapter 1: Lamberte

3

albeit in different degrees, at about the same time. It would be worthwhile, therefore, to view this crisis from a regional perspective. What follows is a brief review of the East Asian financial crisis and a presentation of views attempting to explain it. 2 Just as many people were beginning to appreciate the so-called "East Asian Miracle, "3 a currency crisis occurred in the East Asian region. 4 It started in Thailand in July 1997 when the Thai central bank, after assessing that it could no longer changed exchange vis-a-vis

withstand the massive speculative attack on the Thai baht, suddenly its exchange rate policy from an implicit dollar peg to a floating rate system. In a week's time, the Thai baht lost 15 percent of its value the US dollar. The free fall of the Thai baht continued unabated in

subsequent weeks. The currency crisis then quickly spread to neighboring countries in the region, notably Indonesia, Malaysia, the Philippines, and South Korea, which like Thailand had been pegging their currencies to the dollar prior to the crisis. The sudden loss of investor confidence in these countries prompted private capital, which came in droves before the crisis, to flee at a staggering pace? As Radelet and Sachs (1998) pointed out, the US$109 billion net capital outflow that occurred in the second half of 1997 represented a sizable shock to the region, accounting crisis-hit countries.

for 10 percent of the combined

precrisis GDP of the five

The effects of the huge capital outflows immediately became evident in the currency and stock markets of crisis-hit countries. From June 1997 to December 1997, currencies of these countries depreciated by 29-50 percent in nominal terms and stock price indices plunged by 28-47 percent (Table 1). The following year, the economies of these countries shrank precipitously, reversing a substantial portion of the gains realized in the preceding 10 years. Imports were cut substantially, inducing a sharp reversal in the current account balance from substantial deficits in previous years to large surpluses in 1998 and 1999 (Table 2). The severity and speed with which the crisis spread in the region and later to other countries outside the Asian region went beyond everyone's 2There is no attempt to discuss at length these issues here since they were thoroughly discussed in several papers (e.g., Krugman 1998, Radelet and Sachs 1998, Furman and Stigfitz 1998, Mishkin 1999). The World Bank (1993) coined this term to refer to the rapid growth with equity experienced by 8 East Asian economies, excluding the Philippines, from 1965 to 1990. 4According to Ito (1999), "[A] currency crisis is usually understood to be a collapse of the domestic monetary system together with the drying up of foreign reserves in a country adopting a fixed exchange rate. Moreover, sizable fluctuations of the exchange rate beyond the theoretically appropriate range under a floating rate may constitute a currency crisis in a broader sense. Furthermore, even ff t_here_are.no currency fluctuations, a substantial decline of the foreign reserves to fend off speculation may be described as a currency crisis in the sense that the country's monetary system is subject to a speculative attack." 5The aggregate capital inflows of the five crisis-hit countries averaged US$40 billion annually in the 1990s, reaching a peak of about US$70 billion in 1996 (Dornbusch et al. 2000).


4

Economic

expectations monitoring

including economic

East Asian

financial

given

emphasis

certainly

crisis

It is, therefore,

Table

1. Market Asian

has raised

important

indicators countries

important

discussions

to the shaping

come.

Once

more

those of multilateral institutions, which have been closely developments in the region for a long time. Indeed, the

in previous

contribute

crisis...

of the international to understand

have

economy

performance

not yet been

These

issues

will

in the years

to

of this crisis.

of crisis-hit

East

change).

Noulina] exchange rate

1. Indonesia 2. South Korea 3. Malaysia 4. Philippines 5.ThaJlartd

that crises.

the nature

and economic (percent

June-December Co,retry

issues

on currency

1997 Stock price index

-50.16 -40.06 -34.21 -29.03 -29.03

-44.41 -45.08 -47.24 -33.94 -27.61

GDP. 1.998 -13.70 -5.80 -7.50 -0.60 -10.40

Source: ADB, Asia Recovery Information Center.

Table

2. Current

Year

account

Indonesia

1990 1991 1992 1_,_)3 1994 1995 1996 1997 1998 1999

-2.6 -3.3 -2.0 -1.3 -1.6 -3.2 -3.4 -2.2 4.0 4.0

balance

as % of GDP.

Rep- of Korea

MMaysia

Philippines

Thailand

-0.8 -2.8 -7.3 0.3 -1.0 -1.7 -4.4 -1.7 12.7 6.1

-2.0 8.5 3.7 4.5 , 6.1 9.5 4.6 4.7 13.0 15.8

-6.1 -2.3 -1.9 -5.5 -4.6 -2.7 -4.8 -5.3 2.4 10.3

-8.5 -7.7 -5.7 -5.1 -5.6 -8.1 -8.1 -1.9 1Z5 8.9

Source: ADB, Asia Recovery Information Center.

The Asian

Policy

Forum

(2000)

describes

as a "capital account crisis, the origin of which capital relative to the underlying current account term nature,

followed

by a sudden

and massive

the East Asian

financial

crisis

was large inflows of private deficit and of a largely shortreversal

of capital

flows."6

The

6 The Asian Policy Forum (APF) consists of 17 policy-oriented research institutes including PIDS representing 14 Asian economies. Earliel; Reisen (19_8) and Yoshitomi and Ohno (1999), among others, pointed out that the East Asian financial crisi_ was basically a capital account crisis, not the conventional current account crisis.


Chapter 1: Lamberte

5

large capital inflows created a "double mismatch," that is, mismatches in both maturity and currency, which made balance sheets of local financial institutions and nonfinancial enterprises extremely vulnerable to both currency devaluation and bank runs. The sudden and massive reversal of capital flows led to the "twin crises", i.e., currency and banking crises7 Several economists had put forward their views to explain the causes of the East Asian financial crisis? Ito (1999) identified three common causes: (1) the foreign exchange system, i.e., crisis-hit Asian countries adopted the dollar peg system; (2) vulnerable financial system, i.e., prudential regulations and supervision of financial institutions in crisis-hit countries were inadequate to deal with the double mismatch; and (3) excessive short-term foreign debts of the private sector in the wake of capital account liberalization. These countries' effort to simultaneously attain the three objectives--dollar peg system, capital liberalization, and independent monetary policy otherwise known as the impossible trinity--inevitably led to the crisis (Fig. 3). As the crisis quickly deepened, crisis-affected countries abandoned one of the three objectives (Table

3). Figure 3. The impossible

trinity. Fun capit_ controls

Monetary

Pure float

_

Exd._ .angerate

Full final_cialintegration

Monetary union

Source: Frankel (1999).

7interestingly, Kaminsky and Reinhart (1999)found that the link between banking and currency crisis has strengthened since the 1980swhen emerging market economies started to liberalize their financial sector. sFor example,see Radeletand Sachs (1998,1999),Krugman (1998),World Bank (1998),Hill (1999), Asian Development Bank (1999),and Sachs and Woo (1999).


6

Economic

Table 3. Policy objectives Dollar peg

Capital l_beralization

met by crisis-hit Independent monetary policy

crisis... Once more

Asian countries.

Resul.ts

Yes

Yes

Yes

Crisis

No

Yes

Yes

Adop_on flexible exchange system

Asian examples

Asian countries before 1997 of rate

Postcurrency crisis in Thailand, h_donesia, Philippines, Taiwan, South Korea and Singapore

Yes

No

Yes

Capital control

Cl_il_ and postcrisis Malaysia

Yes

Yes

No

Currency board

Hong Kong

Source:Ito (1999). Prior to the East Asian financial developed to explain the underlying that occurred in Western Europe common

features,

crisis, several theoretical

models were

causes of currency crises, specifically those and Mexico. Because some of them had

they were then categorized

into two groups of models: first-

generation or exogenous policy models, which view a currency crisis as the unavoidable outcome of unsustainable pohcy stances or structural imbalances (e.g., chronic budget deficits, huge current account deficit); and secondgeneration interaction

or endogenous policy models, which emphasize the point that the between investors' expectations and actual policy outcomes can lead

to self-fulfilling crises and the possibility of multiple outcomes or equilibria (Krugman 1998). They are also called fundamental and self-fulfilling views, respectively, of the currency crisis. However, these models have overlooked important features of the East Asian financial crisis, notably the role of the banking and financial sector and the strength of the contagion effect. 9 This has prompted several economists to develop new models, such as, the moral hazard/ asset bubble model, the liquidity crisis model, the banking crisis approach, the contagion approach, the panic model approach, and the credit cycle approach to explain the East Asian financial crisis. 1° Still, not one of these models offers satisfactory explanations of the events that unfolded in crisis-hit East Asian countries. Pesenti and Tille (2000), therefore, have proposed a synthesized view, which stresses the point that the role of the banking and finance sectors and the international transmission of crises or contagion encompass both fundamental and self-fulfilling

views. In this synthesized

financial sector, overborrowing

syndrome,

view, the health and stability of the common shocks, or displaying

similar

Dornbusch et al. (2000)define contagionas a "significant increasein cross-marketlinkages after a shock to an individual country (orgroup of countries),as measured by the degree to which asset prices or financial flows move together across markets relative to this comovement in tranquil times," 1. These are elaborated

on in Ito (1999).

•


Chapter 1: Lamberte

7

elements of domestic vulnerability such as high reliance on foreign-denominated debt and relatively stable exchange rate against the US dollar, trade and financial linkages, and common creditors all fall under the fundamental view. On the other hand, international liquidity-driven crisis and information asymmetries fall under the self-fulfilling view. Table 4 gives a summary of this synthesized view, which also captures the main issues addressed by other newly developed models mentioned earlier. Pesenti and Tille assert that: ",4 synthesized view approach combines the strengths of each view and stresses how they complement one another, Fundamental wealcnesses leave countries at the mercy of sudden shifts in market sentiment, and cont_dence crises have devastating implications when they act as catalysts o/ongoing processes. Indeed, advocates of both the fundamental and self[ultiTling views agree in principle that a deterioratlng economic outlook increases an economy's vulnerability to a crisis. Whether or not the plunges in assetprices after the eruption of the event are driven by self-fulf_71ingexpectations and investor panic, weak economic fundamentals are a crucial element the genesis and spread of a crisis. " Table 4. Synthesized view. Key aspects of the East Asian crisis View

Fundamental

Self-fulfilling

view

view

Role of banking and finm_cial sector

Contagion

Health and stability of the financial sector;

Common shocks; transmission through

overborrowing

trade and _lmlcial channels; con_non c_editors

International driven crisis

syndrome

liquidity-

In/ormation asymmetries (imperfect information, herding behavior)

Indeed, fundamental imbalances, such as large current account deficits, real currency appreciation (except in the case of Korea) resulting from the dollar peg system, and exposed position of the banking and corporate sectors in an environment of weak prudential supervision, that were present, albeit atvarying degrees, in the five crisis-hit economies prior to the onset of the crisis were absent in less-affected Asian economies, such as Singapore, Taiwan, and Hong Kong.


8 Overview

Economic

crisis... Once more

of issues and findings

The studies included in this volume were written at different periods as the East Asian financial crisis unfolded. It was, therefore, unavoidable to have some overlaps. Nonetheless, each one offers a unique contribution to the issues raised during the East Asian financial crisis. To highlight this point, the studies are organized into five thematic areas. Part I discusses the performance of the Philippine economy before the onset of the East Asian financial crisis. Milo's paper (Chapter 2) reviewed the reforms in the financial and real sectors of the economy initiated by the government in the second half of the 1980s. These reforms were broadened and deepened in the first half of the 1990s to reduce macroeconomic imbalances and liberalize a once extremely protected economy. She noted that the economy, aided by favorable external economic and stable domestic political environment, responded well to these reforms. After contracting in 1991, GDP growth rate steadily rose in succeeding years, reaching 5_8percent in 1996. Economic growth was also accompanied by improvements inI some social indicators, as gleaned from the rise in the Philippines' human development index during the period 1992-95. Because weak banks were weeded out in the wake of the 1984-85 crisis and prudential regulations and supervisio n of banks were strengthened, the banking system came into the 1990s with a relatively strong balance sheet. However, the country's vulnerabilities to a currency crisis had been gradually building up. More specifically, trade deficits had widened in the 1990s. Although its fiscal position had improved, however, it was highly dependent on privatization proceeds, which are nonrecurring income. The dominance of shortterm capital flows and the significant rise in Commercial banks' foreign liabilities that facilitated the lending boom in the 1990s had made the economy ".increasingly vulnerable to sudden shifts in market sentiments. Part II includes studies that examined the impact of the crisis on various sectors of the economy. Milo's paper (Chapter 3) provides an overview of the economic and social impact of the crisis in the Philippines. The immediate response of the Bangko Sentral ng Pilipinas (BSP), the Philippines' central bank, to the unfolding currency crisis in the region was to raise the interest rate to as high as 32 percent per annum in mid-July 19'97 and, at the same time, to heavily intervene in the foreign exchange market to keep the exchange rate stable at around P26 per US$1. After spending around US$1.5 billion of its reserves without achieving its objective, the BSP allowed the exchange rate to float freely, and the peso immediately reached record lows against the US dollar. Stock market prices plunged sharply as foreign investors divested of their holdings and headed for the exit door. The effects of the crisis, which were magnified by the E1 Nifio weather phenomenon that devastated the agricultural sector, were •fully felt in 1998. The number of firms affected by the crisis more than doubled


Chapter 1: Lamberte between

9

1997 and 1998 and unemployment

rate rose to 9.6 percent in the third

quarter of 1998. The decline in family income fell heavily on poor families and income distribution worsened. Unlike other crisis-hit countries in the region, the Philippines did not experience a widespread Nonetheless, the commercial banking systems'

failure of financial institutions. nonperforming loans rose to as

high as 14.4 percent in the third quarter of 1999. The sharp rise in interest payments caused by the surge in domestic interest rates and peso depreciation and the decline in government revenues as imports and corporate profits shrank had impaired the government's fiscal position. intal and Medalla (Chapter 4) studied the impact of the East Asian financial crisis on sustainable development concerns, that is, social development and natural resources and environmental regeneration, through four channels: employment, income and poverty channel; interest rate and inflation channel; real exchange rate channel; and fiscal contraction and expenditure realignment. The East Asian financial crisis aggravated the aggregate unemployment situation and poverty because the industrial sector could not provide better employment prospects for both urban and rural workers who were affected by the E1 Nifio weather phenomenon. The authors pointed out that the mandatory 25 percent reserves imposed on the 1998 budget aimed at arresting the ballooning budget deficit could constrain the capability of the government to provide social services and safety nets. n For the natural resource and environment sector, the program of the Department of Environment and Natural Resource (DENR) that could be most adversely affected was environment management, followed by forest management. Indeed, it made the 1998 budget for DENR's maintenance and other operating expenditures the lowest in real terms during the 1990s. High interest rates are expected to discourage investments in reforestation and modernization of wood processing plants, unless the government continues with its subsidization of reforestation activities. Interestingly, in their simulation analysis, Intal and Medalla found that trade reforms accompanied by exchange rate adjustment exhibited higher potential improvement in pollution intensity than reforms without exchange rate adjustment. Lamberte et al. (Chapter 5) examined the impact of the East Asian financial crisis on the Philippine manufacturing sector and its response to the crisis, using secondary and primary data specifically gathered for the purposes of this study. The classification of sample firms into five subsectors, size, and export orientation enabled them to assess the differential impact of the crisis on various types of firms. They found that capacity utilization of firms already declined even before the East Asian financial crisis occurred, indicating that the observed capacity

underutilization

rate of firms could be attributed

to both structural

u Editor_aote: This paper was written before the government decided to exempt the social services sec_r from the mandatory 25 percent reserves.


10

Economic

crisis... Once more

and cyclical factors. As a result, the average profit rate of sample firms dropped dramatically from 12.1 percent in 1996 to 3.5 percent in 1997, and to 2.1 percent during the first half of 1998. As expected, the capacity underutilization of nonexporters dropped much more significantly than that of exporters during the crisis. The significant drop in capacity utilization of firms would have required a large labor lay-off. However, firms resorted to certain means, such as reducing workweek or days, applying forced vacation leave, and freezing salary increases to minimize labor layoffs. Another significant finding was that firms reduced their debts as they began to feel the effects of the crisis. However, the adjustment made by small and nonexporting firms in their leverage ratio was much bigger than that made by large and exporting firms. Although the percentage of those who were denied loans from financial institutions doubled during the crisis, it was smaller than generally expected considering the economic uncertainty. Also, most firms surveyed claimed to have continued access to suppliers'

credit during

the crisis period.

Reyes et al. (Chapter 6) analyzed crisis on households and their response

the Iimpact of the East Asian financial to the crisis using recently published

secondary data and primary data gathered specifically for this study. As unemployment rate rose due to the crisis and the E1Nifio weather phenomenon, per capita income declined in real terms. What made it worse was that the average family income of all decries, except for the richest decile, decreased in 1998, worsening income inequality. Survey results showed an increase in selfrated poverty during the crisis. The vulnerable groups affected by the crisis were farming communities, which also had to absorb the adverse effects of the E1 Nifio phenomenon; fishing communities, which had to deal with rising operating costs; children, who had to stop schooling to take care of younger siblings so that their parents could work or to become additional income earners of the family; and women, who had to take on additional jobs to raise family income. Households adopted some measures to cope with the crisis, such as reduction and reallocation of expenditures, borrowing, and selling of assets to compensate for reduced income, among others. Although households protected their budget for food, however, they made some changes in consumption patterns, such as having only one viand per meal, doing away with nonessential food commodities, and substituting more expensive food with cheaper food. Some households postponed the entrance of their children into the elementary and secondary levels so that their children who were already in school could continue their studies. Others transferred their children from private to public schools and asked them to walk to school to save on transportation expenses. Adjustments matte by households during the crisis will certainly term implications on human development and labor productivity.

have long-


Chapter 1: Lamberte Manasan

11

et al. (Chapter 7) examined

the impact of the crisis on the fiscal

position of the government. Tax effort dropped from 16.4 percent of GNP in 1996 to 16.3 percent and 14.9 percent in 1997 and 1998, respectively. For 1998, the Bureau of Internal Revenue and the Bureau of Customs missed their revenue targets by a wide margin. On the other hand, the national government's budget for 1997 was expansive. Although this expansive mood was carried over in 1998, however, the government, after making a downward adjustment in the revenue program in the early part of 1998, imposed a 25 percent reserve on total maintenance and operating appropriations of all national government agencies. In July 1998, the government decided to exempt government agencies engaged in the delivery of basic social services, which unfortunately was implemented only toward the latter part of the year. Local government units (LGUs) were also affected by the budget crunch as the government imposed a 10 percent reserve on their internal revenue allotments, which have been their most important source of revenue. Thus, a revenue gap was observed in most of the sample LGUs. Since LGUs were not allowed to incur a budget deficit due to recurrent expenditures, the revenue gap immediately resulted in lower levels of LGU expenditures. Pineda (Chapter 8) focused on the impact of the crisis on the government's financing and provision of social services through the Department of Health (DOH), Department of Education, Culture and Sports (DECS), and the Department of Social Welfare and Development (DSWD). She observed that the government accorded the highest priority to the social services sector by providing it the biggest budget allocation. Thus, social services sector expenditures, after cutbacks were restored, increased in real terms in 1998, while those of other sectors declined. Among the social services subsectors, education and social welfare appeared to be the most protected subsectors, while housing was the most adversely affected subsector by the budget crunch. In 1999, however, the appropriation for the social services sector declined in real terms. In view of this financial constraint, the social sector agencies adopted some remedial measures. For instance, the DOH, among others, adopted focused targeting and reallocated inputs in favor of vulnerable groups. DECS, among others, increased the maximum number of pupils per class to deal with classroom shortage, ordered the return of teachers holding administrative positions back to the classrooms to address the shortage of teachers, and declared a 2-year moratorium on acquiring supplementary reference materials so that it could use the savings to buy more textbooks. For its part, the DSWD, among others, encouraged LGUs to give priority in allocating funds for its services and intensified social marketing business sector.

and advocacy to encourage

support from the private


12

Economic

crisis.,. Once more

Part III puts together two studies that examined the government's response to the East Asian financial crisis. Lamberte and Yap (Chapter 9) discussed the economic policies and measures adopted by the Philippine government in response to the crisis. The BSP instituted several measures to stabilize the exchange rate and mitigate the effects of the currency crisis on the banking system. These measures included, among others, the prohibition of banks from entering into nondeliverable forwards (NDF) with nonresidents, including offshore banking units without BSP prior approval; adjustment in the overbought/oversold position of banks to discourage them from speculating in the foreign exchange market; establishment of the Currency Rate Protection •Program, which is a BSP-sponsored NDF facility; increase in overnight borrowing rate; rise in liquidity reserves of_banks; revision in the treatment of past due loans; tightening of specific loan-loss provisioning and imposition of a general loan-loss provisioning; increase in the minimum capital requirement of banks; tightening of rules on insider borrowings; and issuance of policy guidelines on resolving issues related to problem banks. In contrast to the previous 4 years, the national government ran a budget deficit in 1998 to pumpprime the economy and funded it mainly by borrowing abroad to reduce pressure on domestic interest rates. • The authors also discussed the future direction of economic recovery and development given domestic and international environments. They identified downside risks, such as the possibility of a second round of sharp currency depreciation and slowdown in global growth, that can undermine the recovery as well as positive developments, such as decline in US interest rates, passage of key reform measures in Japan, and favorable weather condition, that can support the recovery of the domestic economy. The authors outlined some short-term and medium- and long-term action plans that may be adopted by the government to stage a rapid economic recovery in the short run and sustainable growth in the long run. Short-term action plans are confidencebuilding measures that the government must immediately initiate and complete within 2 years. They include pump-priming measures for 1999 that will highly focus on key sectors of the economy and resource mobilization measures, such as renegotiating the short-terra bridge financing, privatization, and acceleration of financial sector reforms. Medium- to long-term action plans are aimed at restructuring the economy or specific sectors of the economy, and must be immediately initiated but may not be completed in 2 years. They include consistent monetary and exchange rate policies, improvement on information system on capital flows, development o 4 a coherent competition policy framework, establishment of competitive irlfrastructure sector, improvement in tax collection, rationalization of taxes on the financial sector, pension fund system reform, industrial restructuring, and agricultural development.


Chapter 1: Lamberte

13

Milo (Chapter 10) discussed the existing as well as the newly installed safety net programs in the Philippines to alleviate the social impact of the East Asian financial crisis. The major safety net programs are food subsidy, public employment, and credit-based livelihood programs. Of the three, credit livelihood programs were the most developed and extensive. Overall, she concluded that these programs were inadequate both quantitatively and qualitatively, and pointed out the need for better targeting and improvement in efficiency in the delivery of social safety net programs. Part IV includes studies dealing with three special issues that emerged during the East Asian financial crisis. Lamberte (Chapter 11) tackled the issue of whether the Philippines should re-impose currency controls, in general, and caPital controls, in particular, in the light of the currency crisis affecting the region. To put this issue in proper perspective, he reviewed the different views on sequencing of economic liberalization, including full capital account convertibility, and selective capital controls and contrasted Malaysia's capital control program, which was imposed to eliminate speculative flows that had battered the ringgit, with Chile's capital control program, which was aimed at changing the composition of capital inflows. Although the Philippines has already substantially liberalized its economy, its capital account, however, is still not fully convertible. Lamberte concluded that imposing additional capital controls similar to that of Chile or Malaysia to the Philippine economy during the crisis is inappropriate. Instead, he recommended the continued adoption of a flexible exchange rate, improvement in corporate governance, and strengthening of the banking system through improved prudential regulations to accelerate the recovery and make the country less vulnerable to another currency crisis. Another issue that cropped up during the East Asian financial crisis was the possibility that the crisis-hit countries in the region were experiencing a credit crunch. Lamberte (Chapter 12) reviewed the literature on credit crunch, which is part of a larger literature on monetary transmission mechanisms and business cycle, and emphasized the need for differentiating credit slowdown, which refers to the combined effects of both supply factors and demand considerations on the quantity of credit, from credit crunch, which refers only to a reduction in the available supply of credit. The results of the empirical analysis suggested that the Philippines has not been experiencing a credit crunch since the onset of the East Asian financial crisis. On the contrary, they showed that the slowdown in bank loans merely reflected depressed economic activity. Thus, loosening up prudential regulations to encourage banks to lend to the business sector was not deemed advisable. One of the issues that figured prominently during the crisis was weak corporate governance, which accordingly made countries in the region more vulnerable to external shocks. Lamberte (Chapter 13) highlighted this in his


14 paper. Most banks, especially

Economic those that survived

crisis... Once more

the 1984-85 crisis, came into

the Asian crisis with much stronger balance sheets than those of neighboring crisis-hit countries. Also, Philippine nonfinancial corporations were less indebted compared with corporations of other crisis*hit countries. This does not mean, however, that they were not adversely affected by the crisis. Several corporations had gone bankrupt, affecting the balance sheets of banks that heavily lent to them. Lamberte reviewed recent efforts m_de by the government to improve corporate 'governance of financial and nonfinancial firms. He noted some progress, particularly in existing laws governing distressed corporations because they have encouraged weak governance in the past. For instance, corporations can be more aggressive in borrowing because they know that they can easily get a suspension of payment once they suffer financial difficulties. Part V includes studies that proposed the development of monitoring systems: one, to anticipate future crises; and the other, to quickly assess the social impact of the crisis. Since crises have now become more frequent and their effects more devastating to affected economies, it is therefore necessary to develop a system that will help policymakers detect symptoms of an imminent crisis. Admittedly, no two crises are exactly the same. However, they may have some common elements that can signal their beginning. Yap (Chapter 14) attempted to capture these common elements in the early warning system he applied for understanding and monitoring economic crises in the country. The results he derived from using a slightly modified Kaminsky-Reinhart signals approach suggested that the huge, sudden reversal of capital flows explain the magnitude of the crisis in the Philippines, not the macroeconomic fundamentals. However, the latter served as the trigger in Thailand, exacerbated the crisis. He extended the same methodology and found similar results.

while the contagion to 11 other countries

Among the three crises in the last 25 years, the last one has raised greater concerns about its social impact. The lack of an adequate monitoring system, however, has hampered the ability of various stakeholders to quickly analyze and make appropriate responses to amy adverse social impact of a macroeconomic crisis. Data on different dimensions of welfare are collected by various government agencies and published separately with a considerably long time lag. Reyes et al., (Chapter

15). _herefore,

proposed

that a social

monitoring system be developed and a focal Iagency be designated to maintain it? This agency shall obtain data from administrative reports being collected by national and local government agencies, cenguses, and surveys of the National Statistics Office as well as from community-based monitoring systems.


Chapter

1: Lamberte

Economic

crisis..,

once

The gloom quickly

15

that pervaded

disappeared

recovery

more... East Asia

in 1999 (Fig. 4). These

countries

rates, interest rates, and short-term gross international (Table external crisis

reserves

5). The swift

underpirmed

environment.

Their relatively

it possible

which

Cooperation

Figure

4. GDP

successfully

brought

good

of East Asia's

Development

growth

fiscal

rates

(OECD)

levels

countries

policies

was

and favorable

at the onset

expansionary

countries,

inflation and raised

than precrisis

position

rapid recovery

by robust growth

levels

of crisis-hit

macroeconomic

to have

a "V-shaped" down

debts to manageable

for them to conduct

was supported

and

1998 seemed

exhibited

of the economies

expansionary

and 1999, One of the drivers growth,

foreign

and

countries

to levels much more comfortable

recovery

by domestic

made

in 1997

as the five crisis-hit

of the

fiscal policy

in 1998

was the strong

export

of Organization

for Economic

particularly

the US.

(In percent).

10

Indonesia Rep. of Korea

5

_

o

_'_

-_'_

&

....

........ "%// .....

- 10 -15

MMaysia

-i- Ph ippine _

Thailand

Source: ADB, Asia Recovery Information Center.

Table

5. Inflation rates, lending term external debt.

Country

h_donesia Korea Malaysia Philippines Thailand

h_flation rate (in percent) 1998 58.4 7.5 5.3 9.7 8.1

1999 20.5 0.8 2.7 6.7 0.3

rates,

Lending rate (in percent) 1998 Q4 1999 Q4 35.2 21.7 11.9 8.7 8.2 6.8 14.4 10.9 12.3 8.3

international

reserves

International reserves (-US$billion) 1997 16.6 20.4 20.8 7.3 26.2

1999 26.4 74.0 30.6 13.2 34.1

and

short-

Sh0rt-termexternaldebt (US$ billion) 1997 38.5 66.3 16.7 13.7 42.4

1999 21.0 45.8 9.1 9.1 16.5

Source: ADB, Asia Recovery Information Center, Bangko Sentral ng Pilipinas, and BIS-IMF-OECDWorld Bank Statistics on External Debt.


16

Economic All this, however,

crisis... Once more

does not mean that the five crisis-hit

countries

have

already gone over the hump. Nonperforming loans of banks in these countries, particularly, Indonesia, Thailand, and the Philippines, have remained high and the problems of many distressed corporations have yet to be resolved decisively. It is to be noted that the expansionary fiscal policy adopted by crisis-hit countries in the wake of the crisis has caused fiscal deficits to rise sharply (Table 6). This certainly cannot be extended for a long period as it will cause domestic price instability. Also, the robust growth of the US economy, which has now run for almost 10 consecutive years, cannot be expected to last long. In fact, the US Federal Reserve Bank has been trying to engineer a soft landing or gradual slowdown of the US economy by raising interest rates in several steps for a total of 175 basis points since November 1998_Thus, while the economic recovery of crisis-hit countries is swift, it is still essel_tially fragile. Table 6. Fiscal balances Year 1995 1996 1997 1998 1999

Indonesia 2.2 1.2 -02 -2.3 no data

as % of GDF. Rep. of Korea 0.3 0.1 -1.3 -3.8 -4.6

Malhysia 0.8 0.7 2.4 -i .8 -3_2

Philippines 0.6 0.3 0.1 -1.9 -3.7

Thailand 3.2 O.9 -0.3 -2.8 -3.3

Source:ADB,Asia RecoveryInformation Center.

This fragility has been demonstrate d by the turbulence that recently rocked the financial markets of the five crisis-hit countries. In particular, currencies inthe region have remained volatile, except for the Malaysian ringgit, which has been fixed to the US dollar since 1998 (Table 7). Stock market indices plunged by 18 percent to 39 percent during the same period. Investors view East Asia's recovery to have been affected by external factors, such as rising US interest rates and international oil prices, and internal factors, such as rising fiscal deficits, slow progress with corporate and banking restructuring and other reforms, and political instability in the case of Indonesia and the Philippines. A hard landing or rapid decline of the US economy cannot be underestimated. As The Economist (2000) pointed out, "history shows that soft landings are hard to pull off." A hard landing of the US economy can significantly hinder, if not reverse, the progress of economic recovery of crisis-hit countries, which export a sizable countries

proportion of their GDPs to the US, and make it harder for these to attract foreign funds as panicky investors seek safer havens. With

Japan's economic recovery uncertain in the next few years, a simultaneous slowdown of European economies can easily aggravate the situation.


Chapter 1: Lamberte

17

Table 7. Movement

of exchange

rates and stock prices indices January - November

Country

(In percent).

2000

Nomilml exchange rate

Stock price index

1. Indonesia 2. South Korea

-22.2 -2,3

-37.0 -43.4

3. Malaysia 4. Philippines 5. Thailand

0.0 -18.7 -14.6

-18.3 -29.5 -39.0

Note: Computations

are based

Source: ADB, Asian Recovery

on average

monthly

Information

Center.

values.

If another crisis strikes the region soon after the 1997 crisis, then such a crisis will easily dwarf any of the crises in the past and will likely extract more painful adjustments on the part of recovering East Asian countries for several reasons. One is that the fiscal position of crisis-hit countries, including the Philippines, is no longer as strong as before the onset of the crisis. The national governments of these countries, therefore, will be constrained from absorbing the additional costs of cleaning up the balance sheets of failing corporations and banks as they did in 1998 and 1999. Another reason is that the banking systems of the five East Asian economies are still saddled with a sizable amount of nonperforming loans, and another crisis will inevitably cause more corporate bankruptcies, and hence, further impair the balance sheets of banks. This can delay the recovery Still another reason is that a large chunk of the International Monetary Fund's (IMF) resources is still locked up in rescue packages it installed in Indonesia, Thailand, Korea, Brazil, Russia, Turkey, and more recently, Argentina. It would be extremely difficult for capital-rich countries to quickly mobilize relatively huge financial resources to complement IMF rescue packages as they did for crisis-hit countries in the region especially since they may need to pumpprime their economies in the event a worldwide economic slowdown OCCURS.

The biggest challenge facing the Philippines as well as other crisis-hit countries is how it can reduce its vulnerability to currency and banking crises and make the economy more nesilient. Taking a cue from the Pesenti-Tille synthesized view that "the Asian crisis resulted from the interaction between structural weaknesses Philippine authorities regional, and global.

and the volatility of the international capital markets," must approach the challenge from three levels: national,

At the national level, the various papers in this volume have offered several recommendations to strengthen the fundamentals of the economy. These


18

Economic

crisis... Once more

include, among others, the adoption of appropriate exchange rate and monetary policies as well as prudent fiscal policy, improvement in the supervision and prudential regulation of financial intermediaries to strengthen the health and stability of the financial sector, refinement in the country's bankruptcy law, development of the domestic bond market, and strengthening of corporate governance. The reforms envisioned in the new General Banking Act and the Securities Regulation Code can certainly strengthen corporate governance in financial and nonfinancial firms in the country. Structural and institutional reforms aimed at improving the efficiency of key sectors of the economy must continue. It is not enough to put these measures in place. Equally important is the need to constantly monitor not only macroeconomic indicators but also microeconomic indicators (e.g., leverage ratios of nonfinancial firms, maturity mismatches on banks' foreign assets and liabilities) so that the country's policymakers can immediately institute appropriate measures to prevent the buildup of vulnerabilities and reduce the risk of a currency crisis. Should a crisis occur, the government must exert efforts to minimize its social impact. In this regard, well-designed social safety netl programs must be in place even prior to the occurrence of any crisis. At the regional level, the Philippines should continue its active participation in the establishment of a regional financial arrangement and other regional cooperative efforts to reduce the region's vulnerability to currency and banking crises. At the global level, the Philippines must actively participate in discussions aimed at reforming the international financial architecture. Fischer (1998) pointed out the two most important reasons I for revamping the international financial architecture. First, the internationalicapital flows to emerging markets are too volatile and that volatility subjects recipient countries to shocks and crises that are both excessively frequent and lexcessively large. Second, there is too much contagion in the system. Although some efforts have already been made to reform the international financial a_chitecture since 1997 (e.g., private sector involvement in crisis resolution, lender of last resort facility at IMF), many issues remain unresolved (e.g., rules cov!ering cross-border transactions, governance structure of the Bretton Woods institutions). It is to be noted that developing economies including East Asian economies and industrialized economies represented by the G-7 still hold divergent views on many of these unresolved issues (Lamberte 2000).


Chapter 1: Lamberte

19

References Asian

Development Bank. 1999. Asian Oxford University Press.

Development

Outlook.

Hong

Kong:

Asian

Policy Forum. 2000. Policy recommendations for preventing another capital account crisis. Tokyo: Asian Development Bank Institute. Dornbusch, R., Y.C. Park, and S. Claessens. 2000. Contagion: understanding how it spreads. The World Bank Research Observer, 15(2). Washington D.C.: The World Bank. Fischer, S. 1998. Reforming the international monetary David Finch Lecture, Melbourne, 9 November Frankel,

Furman,

system. Presented at the 1998. Available at http:/

/wwwimf.org. J. 1999. No single currency regime is right for all countries or at all times. Working Paper No. 7338. Cambridge: National Bureau of Economic Research. J. and J. Stiglitz. 1998. Economic crises: evidence and. insights from East Asia. Brookings Papers on Economic Activity 2. Washington D.C.:

The Brookings Institution. Hill, H. 1999. An overview of the issues. In: H.W. Arndt and H. Hill (eds.), Southeast Asia's economic crisis: origins, lessons, and the way forward. Singapore: Institute of Southeast Asian Studies. Ito, T. 1999. Asian currency crisis: its origin and backgrounds. Development Fund.

Assistance,

5(1). Tokyo: Overseas

Journal

of

Economic Cooperation

Kaminsky, G. and C. Reinhart. 1999. The twin crises: the causes of banking and balance-of-payments problems. American Economic Review, 89(3). Krugman, P. 1998. What happened to Asia? Unpublished paper. Massachusetts Institute of Technology. Lamberte, M.B. 1989. Assessment of the problems of the financial system: the Philippine case. Working Paper Series No. 89-18. Makati City: Philippine Institute for Development Studies. Lamberte, M.B. 2000. Reforming the international financial architecture: the East Asian view. Discussion Paper Series No. 2000-37. Makati City: Philippine Institute for Development Studies. Lamberte, M.B. and J.T. Yap. 1994. The Philippines. In N. Hamid and S.N. Zahid (eds.), External shocks and policy adjustments: lessons from the Gulf crises. Manila: Asian Development Bank. Lamberte, M.B., R.G. Manasan, R.S. Mariano, E.M. Medalla, M.F. Montes, and C.M. Reyes. 1985. A review and appraisal of the government response to the 1983-84 balance-of-payments crisis. Monograph Series No. 8. Makati City: Philippine Institute for Development Studies.


20

Economic

crisis... Once more

Mishkin,

F. 1999. Lessons from the Asian crisis. Working Paper No. 7102. Cambridge: National Bureau of Economic Research. Montes, M.E 1987. Financing development: the political economy of fiscal policy in the Philippines. Philippine Institute for Development Studies Monograph Series No. 13. Pesenti, E and C. Tllle. 2000. The economics of currency crises and contagion: an introduction. Economic Policy l'_eview. New York: Federal Reserve Bank of New York. Philippine Institute for Development Studies; 1986. Economic recovery and longnan growth: agenda for reforms. Volume I, Main Report. Radelet, S. and J. Sachs. 1998. The onset of the,East Asian financial crisis. Working Paper Series Research.

No. 6680. Cambridge:

National

Bureau of Economic

Reisen, H. 1998. Domestic causes of currency crises: policy lessons for crisis avoidance. Technical Papers No. 136. Paris: Organization for Economic Cooperation and Development (OECD) Development Centre. Sachs, J.D. and W.T. Wool 1999. The Asian financial crisis: what happened, and what is to be done. Unpublished. The Economist. 2000. America's economy: slowing down, to what. London: The Economist Newspaper Limited, 9 December. World Bank. 1993. The East Asian miracle: economic growth and public policy. New York: Oxford University Press, Inc. World Bank. 1998. East Asia: the road to recovery. Washington, D.C.: The World Bank. Yoshitomi, M. and K. Ono. 1999. Capital account crisis and credit contraction. Working Paper, No. 2. Tokyo: Asian Development Bank Institute.


Part I:

The Philippine Economy Before the East Asian Financial Crisis


2 Philippine Economic Performance Before the East Asian Financial Ma. Melanie

Crisis

R.S. Milo

his paper describes the state and performance

of the Philippine

economy

before the East Asian crisis. It is divided into four sections. The first section discusses the major macroeconomic developments in the 1990s. The following section gives an overview of developments in the financial sector from 1980 to 1997. Social sector developments are reviewed in the third section, while the last section presents some conclusions and continuing policy issues. Macroeconomic

developments

The challenge faced by policymakers in the 1990s was to turn the illusion of the 1980s-- the transformation of the Philippines into an outward-oriented, export-led economy_into a reality. Only by painful structural adjustment could the Philippine economy hope to achieve sustained growth. And this had to be accomplished while the macroeconomic environment needed break the pattern of growth, overheating, balance-of-payments

stabilizing, to (BOP) crisis,

restrictive policies, and economic slowdown, which had consistently characterized the postwar Philippine economy (Fabella 1994, World Bank 1992). In May 1992, President Ramos was elected into office. His vision was to • transform the Philippines into a newly industrialized

economy (NIE). The tasks

involved in this transformation included: (1) the restoration of political stability; (2) implementation of economic reforms to level the playing field and democratize the economy to make it more competitive; (3) infrastructure and energy development; (4) environmental protection and preservation; and (5) bureaucratic reforms (Ramos 1994). In line with the second objective, the government implemented policy reforms in critical areas of the econom)_ which served to reinforce the reforms of the 1980s. In particular, further tariff reforms


24

Economic

crisis...

Once more

were implemented to achieve a more neutral tariff policy. In the fiscal sector, various tax reforms were initiated, such as the expanded coverage of the valueadded tax in 1995. Also, the government's privatization program was accelerated, and private sector participation was encouraged especially in various energy and infrastructure projects through the Build-Operate-Transfer (BOT) scheme. The Foreign Investments Act of 1991 expanded the number of sectors open to full foreign ownership, streamlined approval procedures, and made the remaining restrictions and prohibitions more transparent. The government further liberalized foreign investments _ October 1994. Foreign exchange transactions were also significantly liberalized and upgraded. Beginning in January 1992, there was full deregulation of remaining restrictions on current account transactions. The full lifting of mandatory surrender requirements on foreign exchange

receipts, foreign

exchange transactions

outside the banking

system, deposits in foreign currency deposit units (FCDUs), and full and immediate remittance privileges for investment purposes were some of the measures put in place to support the policy thrust of open trading and investments. Rules covering foreign investments in Central Bank-approved securities were also relaxed. Finally, entry barriers in key industries such as telecommunications, transport (land, air, and sea), banking, and other key commodities, such as cement were dismantled or relaxed. Following

near-zero

growths

in 1991-92, the economy

again began to

post modest growth rates in 1993 (Table 1). This was attributed to improvements in infrastructure,

'particularly

in power g_neration

which eased supply-side

constraints; continued liberalization Imeasures which increased the competitiveness of several sectors and encouraged the inflow of foreign investment; a stable macroeconomic and political environment which buoyed investor confidence; and the economic recOvery of the country's major trading partners. All these helped to create a more conducive business environment. Furthermore, the Philippines was deemed as finally being on the path towards more stable and sustainable growth after decades of boom-bust cycles, and a decade of structural reforms that considerably reduced macroeconomic distortions

and liberalized

a once extremely

protected

economy.

On the supply side, the industrial sector, which accounted for around 35 •percent of GDP, was a major contributor to the country's growth performance. Construction, in particular, performed strongly. Manufacturing, which accounted for around 25 percent of GDP, also performed fairly well. There was also strong growth in the services sector, wtlich constituted more than 40 percent of GDP, particularly transportation and communication, and financial services. The latter was due to efforts to liberalize these subsectors.


Chapter 2: Milo Table 1. Growth

25 of real GDP by industry, 1990

1_91 0,3 •

1990-97 (In percent).

1992

]993

1994

1995

1996

1997

GNP

5.0

1.7

2.1

5,3

5.0

7.2

5,3

GDP

.3,2

-0,6

0.4

2,1

4,4

4.8

5,S

5.2

AgriCUlttu_

0.5

1,0

0`1

2.0

3,4

4.3

2,8

lndusn_

0.8

3.0

-2,7

,0.3

1,6

5,8

7,0

6,2

6,2

Manufacttaing Construction

2,7 12,1

-0,5 -15,9

-1.7 6.1

0.7 5.7

S,0 9.4

6,8 6.6

5.6 10,9

4,2 16.4

Ufi/ities

-0,3

4,7

0,7

2,8

13.9

13

7.6

4,8

S_rvice

49

0,2

1,0

2.5

4.3

5.0

6.4

5.5

"lYanspoctafi on -and tY2_lTll_tLrficat_On

2.2

0,5

1.4

2.5

4,2

5,8

7.4

8.2

Finatrfal. lv-al estate

10,1

-2,7

0.4

2.4

5.5

7,3

13,7

13,0

Source:

ADB,

National

Statistical

Coordination

Board.

Philippine economic growth in the 1990s was also qualitatively different in that it was truly propelled by exports and investments. Manufactured goods constituted the bulk of exports, thus reducing the country's traditional reliance on volatile commodity earnings. External debt and debt service payments were also significantly lower in real terms relative to the late 1980s. As a result of restructuring and the rapid growth of exports, the country's debt servicing burden in 1997 was at a more comfortable level of 10.4 percent of exports, compared with around 35 percent in the mid-1980s. Moreover, international investors' confidence in the economy was stronger than ever, as evidenced by the substantial inflow of foreign investments. The country's growth performance was also mirrored in employment trends, although not as strongly. The October unemployment rate, which is deemed as the least affected by seasonal factors, fell from 8.6 percent in 1992 to 7.4 percent in 1996. The underemployment rate, on the other hand, fell from 21.4 percent in 1993 to 19.4 percent in 1996. In actual numbers, the number of unemployed persons declined from 2.3 million in 1992 to 2.2 million in 1996. However, the number of underemployed persons rose from 5.1 million to 5.3 million over the same period. Also, in terms of sectoral growth of employment, most of the increase was recorded in the services sector and construction with their percentage shares in total employment increasing in the 1990s (Table 2). In contrast, the share of manufacturing in total employment fell slightly from 1992 to 1997.


26

Economic

crisis... Once more

In terms of labor productivity, however, the trend was reversed in the 1990s relative to previous periods. In particular, gross value added per worker in all sectors, except mining and quarryin+, increased between 1991 and 1997. Medalla (1998) attributed the seeming incoi_sistency between improvements in efficiency measures in the manufacturing sector and continuing structural problems to a period of adjustment to a more open trade regime, an overvalued currency, and a shift in protection from manufacturing to agriculture. Table 2. Distribution

of total employment

by major industry

group,

1990-97 (In percent). Industry

To_I

1990

fin thousands)

Agriculture,

22,532_0

fishery,

and

1991

1992

1993

1994

1995

22,979.0

23,917.0

24,443.0

25,166.0

Z5,696.0

1996

1997

27,442.0

27,888.0

45.2

4.5.3

45.4

45.8

44.7

44.1

41.7

40.4

16,6

16.7

fores_y

h',d us v,3."

1KO

16,0

16,0

15.5

15-8

15.6

Minir_g and quarrying

0,6

0,7

0.6

0,5

0-4

0,4

Mamffactufing

9,7

10.4

10,6

10.0

10.3

10.0

10.0

9-9

Electricity,

04

0.4

0,4

0.4

0-4

0,4

" 0.4

0.5

4.3

4.6

4.3

415

4.7

4,8

5.7

5,9

39.7

38.7

38.5

38.6

39,5

40.3

41,6

42,9

14,0

13,8

13,7

14.0

14.2

14.6

14,8

1.5.1

5,0

5,0

5.1

5.6

5.6

5.8

6.0

6.3

2.0

2.0

1-9

Z0

2,0

2.1

2.5

2.4

18,7

17,9

17.8

17.1

17,8

17.7

18.3

19,0

gas, and water

Collsl:l-uct jol_

Services Whotesale

and _'etalt

Transl-_or tation, ¢ommunlcatlon, Financial

0_4

0,4

and storage

real estate,

ond

business Comrnullj,

ty, sndai,

and

personal

Source:October Rounds of the Labor ForceSurve_ National StatisticsOffice. L Concerns

over the sustainability

of the country's

economic

growth had

been expressed. Of particular concern was the widening gap in the trade balance (Fig. 1). Although export growth overtook impor t growth in 1995, most Philippine manufacture exports had very high import contents so that their growth contributed much less to foreign exchange earnings than the numbers suggest (Krugrnan et al. 1992). In particular, _lectronics accounted for over half of total exports m 1997. On the other hand, the increase in merchandise imports was accounted

for by capital

formation

goods

necessary

for production


Chapter 2: Milo

27

expansion. Also, unlike in previous periods, fiscal expansionism was not to blame for the large deficit and it was mostly financed by nondebt capital inflows. Furthermore, some improvements in the efficiency and competitiveness of the manufacturing sector following various reforms had been reported (Medalla et al. 1995, Tecson et al. 1996). The country's merchandise trade deficit was significantly offset by the surplus in nonmerchandise trade, which was largely due to remittances of overseas Filipino workers (OFWs). Thus, the current account deficit remained fairly stable at around 5 percent of GDE

Figure 1. Trade balance of GDP).

and current account balance,

0 -2

_

-4 -6

/

-8

,,__._"_"'"

_.....,_

__

1990-97 (In percent ---.

Trade balance

--

Current

account

balance

.,...,_. %

-10 -].2

%_,.,,,.

"-_._ _.,_..,_.

-14

"_'"

--'-"

-16 1990 Source: National

1991

1992

Statistics

1993

1994

Coordination

1995

1996

1997

Board (1998).

On the other hand, the country registered BOP surpluses from 1994 to 1996 as a result of strong inflow of foreign investment. The net inflow of foreign investment to the Philippines from 1970 to 1987 was negligible, averaging just 0.3 percent of GDE Fairly significant inflows were recorded beginning only in 1988 due to the government's debt-for-equity program, and foreign investment and foreign exchange market reforms in the 1990s. Thus, net foreign investments reached around 4.2 percent of GDP in 1996. In terms of composition, the surge in portfolio investment inflows began in 1993 and significantly out-paced foreign direct investment inflows. For instance, in 1996, total inflow of portfolio investments amounted to almost US$6.9 billion, while total foreign direct investment inflows amounted to around US$1.5 billion. In net terms, however, foreign direct investments

were still dominant

because portfolio

investment

outflows were also substantial (Fig. 2). This indicated the short-term and speculative nature of foreign portfolio investments. A more significant recent source of foreign exchange inflows were changes in net foreign assets of commercial banks, which rose from around US$40 million in 1991 to more than US$4.2 billion in 1996, or around 5 perc ant of GDE


28

Economic

Figure

2.

Main components GDP).

investment,

Once

more

1970-76

(In percent

2.5 -

7.5 _

Direct, outflow

2.0 -

6.0 __ Portfolio, inflow

1,5 -

4.5

"-

of foreign

crisis...

of

Portfolio, outflow

IH

o.0._..... __ _ 0,0 -1.5 -3.0 4_5

- •

• 11.975

1970

, 19_0

1985

, 1995

-6.0

Note: Inflow and outflow of foreign direct investment are plotted on the left scale, while in flow and outflow of portfolio investment are plotted on the right scale. Source: Bangko Sentral ng Pilipinas; National Statistical Coordination Board.

Another For the

first

area of concern time

was

in the postwar

the management period,

of government

the national

government

finances. posted

a

budgetary surplus of less than 1 percent of GNP from 1994 to 1997 (Fig. 3). The consolidated public sector fiscal position 1 (CPSFP) also improved, falling to a deficit of about 0.5 percent of GNP This was due partly to an extensive past

decade,

in 1975-85

which

in 1994 and restructuring

led to the rise in tax effort 2 from

to 16.2 percent

in 1996. However,

CPSFP

and t2 24.9 billion,

still registered

deficits

These meant

2.5 percent

and

respectively. Also, there was a deterioration in the buoyancy in relation to GNP. The tax buoyancy coefficient _ fell from 1.15 in 1993-97, 1994, 1998).

which

implied

in 1996. over the

of 11.3 percent in fiscal position

proceeds, which are nonrecurring in 1994 and 1995 amounted to more

respectively.

of around

an average

the improvement

was also highly dependent on privatization' income. For instance, privatization proceeds than ia34 billion

registering a surplus of the tax system

a deterioratiOn

that the underlying 1.5 percent

of GNP,

of the tax system 1.41 in 1987-92, to

in tax administration

(Manasan

LThe consolidated public sector fiscal position (CPSFP) include the combined balance sheets of the national government, monitored government-owned or controlled corporations, local government units aM govelTtrnent financial institutions. 2 I.e., the ratio of total tax revenue to GNP (Manasan 1_)98). -_The tax buoyancy coefficient measures the percentage change in tax yield given a percentage change in the tax base (Manasan 1998).


Chapter 2: Milo

29

Figure 3. Consolidated government's 6 4

public sector (CPSFP) and the national fiscal positions, 1985-97 (In percent of GNP).

0_ _

2

I

i

4- ....

---

CPSFP

--

National

"_" ------

"_-__...f_

-- -- Primary 0

/

/....-

-2 ..,d 4:.,

,

1985

..

!.,

T

1987

Source: Department

Thus, while especially remained

Gov't balance

1989

1991

of Budget

significant

1993

Management,

1995 National

gains had been

1997 Statistical

achieved

Coordination

Board.

in tax mobilization

in the last 6 years, the fiscal position remained tenuous, to be done. Efforts to broaden the tax base and improve

and more collection

efficiency had so far been insufficient to ensure the stability of public sector finances in the long run (Manasan 1994, 1998). Compared with fiscal excesses of the past, however, fiscal policy in the 1990s was considerably more prudent. Furthermore, the CPSFP had been posting surpluses in its primary balance 4 since 1987, which averaged around 4.5 percent from 1991 to 1996. Thus, total national government expenditure net of debt service was fairly stable. The rapid growth in debt service, however, was at the expense of capital outlays, and maintenance and other operating expenditures (MOOE), which suffered major cutbacks. The cutbacks were not restored even with improvements in fiscal position in the 1990s. Hence, capital expenditures of the national government consistently fell from 4.6 percent of GNP in 1975-85, to 2.9 percent in 1986-91, and 2.7 percent in 1992-96 (Manasan 1998). The low level of public investment in infrastructure would necessarily impair the economy's growth prospects. Monetary policy in the 1990s was also tighter compared with previous periods. Thus, while high inflation in the past was attributed primarily to the growth of money supply, this was not the case in the 1990s. Although inflation had been brought under control from the mid-1980s, it reemerged as an immediate concern towards the end of the 1980s and early into the 1990s. This was due to the growth of the fiscal deficit and its monetization; cost push effects from the nominal depreciation of the exchange rate; sharp oil price increase due to the Gulf war; and supply bottlenecks that resulted from adverse weather

4 The primary balance is equal present a more accurate picture

to the overall balance less interest payments, and is deemed of the government's fiscal stance (Manasan 1998).

to


30

Economic

crisis... Once more

conditions. The monetary authorities' contractionary stance reduced the growth of money supply from 28 percent in 1989 to just 11 percent in 1992. Inflation consequently went down to single-digit levels, averaging around 8.5 percent from 1992 to 1996 (Fig. 4), and even falling to 4.6 percent in the first half of 1997.

Figure 4. Inflation 1990-96.

rate, 91-day Treasury bill rate, and exchange

30

rate,

-- - inflation rate (%)

25 20

_

--

15

**

--

-- - 91 _day Tbillrate (%) Exchange rate (P/US$)

"-- _'_ "

'I0

"" k

....... -......--''''--..,

.....

5 0 1990

1991

1992

1993

1994

1.995 1996

Source:Bangko Sentral ng Pilipinas.

The conduct of monetary policy was complicated by the liberalization of the capital account in 1993. The surge in foreign exchange inflows put strong pressure on the Philippine peso to appreciate. Because of the potential adverse effect of such appreciation on the export sector, monetary authorities sought to minimize it by intervening in the foreign exchange market, among other measures. The rapid increase in the Philippine central bank's net foreign assets accelerated the growth of money supply to an average of 25 percent from 1993 to 1995. Higher liquidity contributed to the decline in interest rates, although it also fueled inflation. To meet monetary and inflation targets set under the country's IMF stabilization program, the BSP sterilized the monetary effects of its foreign exchange purchases. However, the appreciation of the peso was not arrested as the substantial differential between domestic and foreign interest rates induced further capital inflows. The fiscal surplus eased the pressure on domestic interest rates, but tight monetary policy prevented domestic interest rates from going down further to reduce the differential (Lamberte 1994). Although sterilized intervention enabled the BSP to build up its gross international reserves, it also proved to be very costly because the BSP incurred huge quasi-fiscal losses on the interest-bearing securities it issued to sterilize excess monetary growth (Cororaton 1995). Thus, the combination of still relatively high inflation rates, stable interest Fates, and a strong peso prevailed in 1993-96. The appreciation of the peso, Which experienced the largest real currency appreciation during the 1990s relative to other Southeast Asian


Chapter 2: Milo

31

currencies, exacerbated the country's trade deficit. Also, the peso appreciation coupled with high interest rates led to the growth of the nontradable sector, with investments going into real estate and the stock market, and encouraged foreign borrowing. Overall, the Philippines' macroeconomy was marked by significant improvements in the 1990s. There was some cause for concern, particularly on the widening trade deficit and fiscal position. However, these were not considered "critical" and were expected to improve as the economy continued to grow and restructure. More importantly, with the exchange rate becoming more responsive to financial flows relative to real flows, and the dominance of short-term capital flows, the economy was becoming more vulnerable to shocks in the international capital markets. Hence, the importance of fine-tuning monetary, fiscal, and exchange rate policies to maintain astable macroeconomy was emphasized (Yapand Reyes 1994). Financial sector developments The period from 1980to 1997was marked by substantial financial reforms. There was a snowballing effect, in that the reform process set the motion for further reforms. The Philippines formally embarked on a financial liberalization program in 1980as part of an overall structural adjustment program. Itincluded the gradual liberalization of interest ratesfrom 1981to 1983;easing of restrictions on the range of operations financial institutions were allowed to conduct in domestic markets, such as the introduction of universal banking in 1980; and rationalization of financial market regulations, including higher capital requirements for banks and nonbank quasi-banks (NBQBs) (Remolona and Lamberte 1986). But soon after the start of financial liberalization, the financial system underwent a crisis of confidence, which was triggered by defaults of a prominent businessman who fled the country in 1981, and compounded by a series of investment frauds and stockbroker failures (Laya 1982). The financial crisis deepened as a result of the political and economic crises in 1983-85, which led to significant financial shallowing (World Bank 1986). Financial reforms were resumed in 1986, which specifically addressed problems endemic to the system since the 1960s, and further highlighted by the reform effort and financial crisis during the early 1980s. These included the interlinked problems of fraud or insider abuse by bank owners or officers and inadequate/ineffective prudential supervision and regulation of banks. Policies effecting prudentialbank management were instituted. These included increased minimum capitalization requirements; compliance with the minimum risk asset ratio; the single borrower's limit; limit on loans to directors, officers, stockholders, and related interests (DOSRt);allowable interlocking directorships and officerships; provisions for loan loss or doubtful accounts; audit and


32

Economic

reporting

requirements;

crisis,,. Once more

and stricter bailout policy of problematic

banks (Bautista

1992). The government also rehabilitated ailing financial institutions, notably government-owned banks and rural banks. However, the problem was not just the lack of prudential rules, but a weakened Central Bank of the Philippines (CBP)---both financially and politically, a3 well. And a strong central bank, which effectively carries out its role of supervising financial institutions, is a prerequisite for a stable financial system (World Bank 1988). Thus, the CBP was rehabilitated in 1993, with the creation of a new, independent called the Bangko Sentral ng Pilipinas (BSP). Other reforms

implemented

central monetary

in the 1990s included

authority

the deregulation

of

the entry of new domestic banks and bank branching in 1993, which was further rationalized in 1995, and easing of restrictionsI on the entry of foreign banks in 1994. Ten foreign banks were initially allowed to open up to six branches, while others could buy up to 60 percent of an existing local bank or subsidiary. Reforms in other sectors of the financial system included the liberalization of the private insurance industry in 1995, and efforts to develop equity markets such as the unification of the Manila and Makati Stock Exchanges to form the Philippine Stock Exchange in 1994. In particular, liberalizing foreign investments and foreign exchange transactions had a significant impact on the growth of the capital market. The Philippine financial system consists of banks and nonbank financial institutions (NBFIs). Banks are classified .as commercial banks (including expanded commercial or universal banks), thrift banks (savings and private development banks, and stock savings and loan associations), rural banks, and specialized government banks, although the latter had all been upgraded to commercial bank status by 1996. NBFIs include insurance companies, investment houses, financing companies, securities dealers and brokers, fund managers, lending investor s, pension funds, pawnshops, and nonstock savings and loan associations. Figure 5 shows the total assets of the Philippine

financial

system from

1980 to 1997. The system has been consistently dominated by banks in general, and commercial banks in particular. The growth of commercial bank assets was significantly higher in the 1990s as a result Of the entry of new domestic and foreign banks, and further increases in minimum capital requirements. On the other hand, the share of NBFIs in total assetsifell from 24 percent in 1980 to just 15 percent in 1997. Government-owned social security institutions, in particular, accounted for over half of the total assets of this subsector.


Chapter 2: Milo Figure

33

5. Assets of the Philippine 1980-97 (In P billion).

financial

system,

by type of institution,

3000 2500

[] Con_mercial banks • Other banks

2000

I NBFIs

1500

1.,

,ooo 0 1980

...... 1985

1990

"l! |

1995

Source: BangkoSentral ng Pilipinas.

Despite the rapid growth of the banking sector in terms of assets and number of offices, financial deepening from 1980 to 1997 was fairly modest. After stagnating for decades around the 20 percent level prior to financial liberalization, the ratio of M2 to GDP rose to around 26 percent in 1983. There was considerable financial shallowing during the crisis period from 1984 to 1985, and a substitution away from deposits into secure, higher yielding government securities. Significant financial deepening occurred beginning only in 1993, with the M2 to GDP ratio reaching 43 percent in 1997. But this should be interpreted with caution. In a comparative study of financial liberalization in Asian and Southern Cone countries, Cho and Khatkhate (1989) found that to the extent that short-term inflow of foreign savings is incorporated into this ratio, an increase in this ratio cannot automatically be interpreted to mean enhanced efficiency in mobilizing resources by drawing them away from less productive uses. Also, the Philippines' M2 to GDP ratio was still fairly low compared with other countries in the region, and considering the robust state of the financial sector and the economy as a whole. This was partly due to the tight liquidity management pursued by the BSP to meet inflation targets set with the IMF. Also, high reserve requirements and the 20 percent withholding tax on interest income resulted in low rates of return to deposits. Thus, there was a sharp increase in off-balance sheet activities of commercial banks, which was facilitated by the easing of banking regulations. These included the use of foreign currency (FCDU) deposits to extend foreign currency loans, and trust accounts for securities investment, especially in the 1990s (Table 3). For instance, the trust fund operations of banks increased significantly from P13.5 billion in 1980


34

Economic

crisis... Once more

to almost P320 billion in 1996, or an almost 200 percent growth in real terms. Since trust accounts were not subject to various intermediation taxes until 1993, they were able to offer higher yields relative to traditional bank deposits. Thus, if the trust operations of banks were included in measuring financial deepening, since banks were effectively using them in the same way and for the same purpose as deposits and deposit substitutes, the ratio would reach 55 percent. While the development of trust accounts enabled banks to tap additional sources of funds, they also drew a significant portion of funds from deposit substitutes, and catered particularly to large depositors (Lamberte 1993). Foreign currency deposits, on the other hand, amounted to around 28 percent of traditional deposits in 1996. Table 3. Selected

liabilities

of domestic

Traditional deposits Total (billion P)

Distribution by type (%) Demand Savings

Time

:ommercial

banks, 1980-96.

Deposit

Tiltst

FCDU

substitutes

accounts

deposits

(% of total deposits)

(billion us$)

1980

72.63

19

32

50

17

19

1985

143,02

10

39

50

6

18

1.86

1990

310.74

10

58

31

1

25

2.56

1991

365.61

11

58

31

1

37

3.16

1992

426.58

10

62

27

1

42

4.37

1993

556,80

10

65

25

0

33

1994

693.08

9

68

23

1

34

7.72

1995

873,83

9

67

24

1

30

9.12

1996

1,119.56

9

61

29

1

29

14.52

5.61

Source:Bangko Sentral ng Pilipinas. One of the criticisms leveled against the Philippine banking system was its poor performance in savings mobilization. This was partly attributed to the fixity of interest rates especially on savings deposits. Tan (1989) cited the existence of market segmentation: small savers who receive low, even negative, real deposit rates, and big savers who have access to the money market, and whose deposits banks compete for. Thus, the large pool of low cost savings deposits contributed to commercial banks' high profit margins. The danger with persistently large negative real deposit rates is that they misdirect savings (Dombusch 1991). The problem of low domestic savings needs to be addressed because the sustainability of economic growth is closely linked to this. The major determinant of savings is income, and income growth depends on growth of


Chapter 2: Milo investments.

35

On the other hand, low savings mobilization

hinder investment

growth, particularly in the private sector. Thus, a policy gridlock could ensue (Yap and Reyes 1994). The savings-investment gap (Fig. 6) that resulted from low domestic savings and high investment requirements was filled by private capital inflows in the 1990s, as opposed to official flows in previous periods. Figure 6. Gross domestic of GDP).

savings and investment

rates, 1990-96 (In percent

30 .... 25, 20 , 15 10 5 0

Grossdomestic _

_

_ "'" .....

. ......

__

savings Gross domestic investment

"".........

1990 1.991 1992 1993 1994 1995 1996 1997 Source:ADB (1998). Another trend that was observed in the 1990s was the significant increase in foreign liabilities of commercial banks, as reforms resulted in easier access to foreign funds. The total foreign exchange liabilities of private commercial banks increased from around US$0.52 billion in 1993, prior to the deregulation of foreign exchange transactions, to more than US$7 billion by the third quarter of 1997. When expressed as a percentage of total foreign exchange liabilities of the country, it rose from around 1.5 percent to around 15.2 percent for the same periods. Figure 7 shows the foreign assets and foreign liabilities of commercial banks expressed as a percentage of GDE The gap between the two steadily increased from 1992 onwards, but what is striking is the substantial increase in foreign liabilities of private commercial GDP. Figure

banks in 1996 to almost 32 percent of

7. Foreign assets, foreign liabilities, and total loan commercial banks, 1990-96 (In percent of GDP).

60 50

."

40

.."

30 .o

20

.o

-..

Loanportfolio

--

Foreignliabilities

- -- Foreignassets

. .---''

..............

o 1990

1991

1992

1993

1994

1995

portfolio

1996

Source:Bangko Sentralng Pilipinas;National StatisticsCoordinationBoard.

of


36

Economic

crisis... Once more

This rapid increase in commercial banks' foreign liabilities facilitated the lending boom in recent years. For instance, the contribution of foreign currency loans to domestic lending of eight commercial banks that resorted to international capital markets was estimated at 12 percent in 1993, rising to 40 percent in the first quarter of 1997. The increase in foreign liabilities is not necessarily a problem. What ultimately matters is how the funds were used, and this was the source of concern in the Philippines. The distribution of FCDU loans, for instance, showed that while at least 50 percent went to exporters, the share of nonexporters increased from 4 percent at the start of 1994 to 30 percent by the third quarter of 1997. The distribution of loans outstanding iby commercial banks according to industry (Table 4) shows that there was a significant drop in the share of agriculture (sector 1). The share of manufacturing (sector 3), on the other hand, increased during the recovery years of the 1980s, but its share has since consistently fallen as well. In fact, the share of manufacturing to total loans outstanding of commercial banks in 1996 reverted to its prereform level. In contrast, sectors that increased their share were those in the services sector (sectors 6-10). communication

The increase in the share, of transportation, storage, and was due to the liberalization of these sectors. The increase in

the share of consumer loans such as housing credit cards (sector 10) was also notable. Table 4.

Distribution by industry,

of loans outstanding 1986-97.

Total Year

(billion P)

loans (sector 9), and car loans and

Distribution 1

2

3

4

of commercial

banks

by industry (In percent) 5

6

7

8

9

10

1986

88.3

15.9

8.4

25.0

2.1

4.2

15.7

3.5

17.7

2.5

5.0

1987

101.1

12.3

7.0

39.9

1.1

3.1

14.2

3.5

10.7

2.6

5.5

1988

126.6

10.7

5.4

42.2

0.8

1.7

17.7

3.8

8.9

2.8

5.8

1989

165.9

8.4

7.5

42.7

0.7

L4

16.0

4.9

8.7

3.3

6.3

1990

].99.6

8.2

8.4

42.8

0.5

2.2

17.7

3.8

7.9

4.0

4.5

1991

144.3

9.5

1.8

40.3

0.6

3.8

17.6

3.2

11.1

4.3

7.7

1992

256.3

9.6

5.6

37.3

0.9

2.4

20.3

3.8

10.6

3.7

5.8

1.993

235.3

5.4

3.3

38.0

1.1

2.3

14.4

4.2

17.9

5.5

7.7

1996

1,203.7

4.1

0.9

26.5

2.2

3,8

16,3

5.2

23.8

8.0

9.1

1997

1,542.3

3.9

0.8

27.2

2.1

3.6

16.8

7.1

17.2

10.4

10.7

i Note: 1 -- Agriculture, fishery and forestry; 2 -_ Mining and quarrying; 3 = Manufacturing; 4 -Electricity, gas, and water; 5 = Construction; 6 = Wholesale and retail trade; 7 = Transport, storage, and communication; 8 =- Financing, insurance, business services; 9 = Real estate; and 10 -Community, social, and personal activities. No data was available for 1994-95. Source: Bangko Sentral ng Pilipinas.


Chapter 2: Milo

37

More dramatic

trends

are revealed

by the distribution

of loans granted

by commercial banks according to industry from 1981 to 1997 (Table 5). The downward trend in the shares of manufacturing and mining was also evident. On the other hand, the downward trend in agriculture's share from 1984 to 1993 was reversed in 1996. The share of construction, in addition to the services sector, substantially increased. The growth in the amount of loanable funds that went to construction and real estate between 1993 and 1996 led to the imposition of a 30 percent cap on commercial banks' total exposure to the property sector in June 1997 by the BSP. The dominant share of financing, insurance, and business services, on the other hand, was largely accounted for by interbank loans. If this sector were excluded, the same trends would still be evident. The overall trend in the loan portfolio of commercial banks was thus worrisome because it had serious repercussions on the viability and stability of the financial sector, and the sustainability

of the country's

growth performance.

Finally, although there had been some lengthening of loan maturities, loans outstanding of commercial banks were still predominantly short term (Fig. 8).

Table 5. Distribution 1986-97.

of loans granted

Year 1986

(billion Total P) . 325.9

1

2

6.5

2.0

25.7

3 Distribution 4 2.3

1987

368.8

5.9

1.5

26.2

1.0

1988

421.9

6.2

1.9

30.2

1989

385.9

6.0

2.1

36.8

1990

512.4

6.2

1.4

1991

844.0

4.5

1992

1,094.1

3.7

1993

3,459.6

1996

10,253.7

1997

9,653.2

by commercial

banks by industry,

5 industry6 (In percent) 7 8 by 1.2 14.7 1.6 42.4

9

10

0.6

3.0

1.1

15.0

1.3

41.7

1.0

5.3

0.7

1.3

14.2

1.6

36.1

1.5

6.3

0.9

1.5

18.3

1.9

20.7

2.6

9.1

32.3

0.7

1.8

17.0

2.1

28.0

2.6

7.9

1.3

26.8

0.7

1.3

12.0

1.7

412

1.8

8.1

2-2

23.4

0.7

1.1

10.4

1.6

48.1

1.4

7.4

1.1

0.7

8.1

0.4

0.8

4.9

0.7

74.8

0.6

7.9

5.7

0.4

6.3

0.5

6.0

13.2

7.8

43.5

6.0

10.6

3.9

0.6

6.7

0.8

2.5

13.3

3.9

51.0

6.6

11.0

Note: 1 =- Agricultttre, fishery, and forestry; 2 = Mining and quarrying; 3 -- Manufacturing; 4 -Electricity, gas, and water; 5 = Construction; 6 = Wholesale and retail trade; 7 = Transport, storage, and communication; 8 = Financing, insurance, business services; 9 -- Real estate; and 10 -Community, social, and personal activities. No data was available for 1994-95. Source: Bangko Sentral ng Pilipinas.


38

Economic

Figure

8.

Distribution maturity,

of 1990-96

loans outstanding (In P billion).

of

crisis...

Once

commercial

more

banks

by

1200 1000

[] Long-term • Intermediate

800 600

400

1

1991

Source: Bangko

On the source

other

of trading

the

of four from

than

in the

rapidly

in

region 1975

to 1997.

copper

mining

was

a speculative and

boom

economic

Trading

volume

economy

recorded

returned

in 1989

Philippine P41

9. Philippine

billion

due

in

gradually

increased

following

the

country

fundS.

market,

to more

Thus, than

billion

the

beginning

In

As

a

market in 1986

in government. and

the launching

capitalization

grew

in 1989,

or a four-

1975-97.

800 "r 600 700 + +

market

P261

1970s.

1992).

1980s,

change swaps

market

to the Bank

early

the even

the volume

securities

prior

(World

the

base, and

9 shows

private

stocks

to the debt-equity

in 1986

stock

The

important

small years

Figure

in oil stocks

turmoil

a more

a very recent

in 1994.

and

closed-end more

Figure

was

very

became

from

from

in the

An increase

grew

market

starting

of gold

contracted.

as confidence

stock

Albeit

market

political

significantly

Philippine

years.

markets

stock

[] Short-term

I

mostly

there

of the

the

market

in the

1970s,

result

hand,

all other

composed

I!!

ng Pilipinas.

in recent

stock

outperformed

was

Sentral

of funds

Philippine

1

@

250

_

Tradfi'tg value

200

_

No. of listed

500 + 4O0 +

150

300 +

100

I

companies 200 + 100 +

_

50

0 l.-V-t. : '._: : _; ; .... 1975

1980

1985

L 1990

_._

0

1995

Note: Trading value is plotted on the left axis, while number the right axis. Source: Philippine Stock Exchange.

of listed companies

is plotted

on


Chapter 2: Milo

39

fold increase in real terms. As a ratio of GDE it increased

from less than 7 percent

in 1986 to more than 28 percent in 1989. However, market capitalization, was almost halved in 1990 as a result of various crises. Dramatic increases in trading volumes were recorded beginning in 1993 with the liberalization of the capital account and the recovery of the economy. The privatization program of the government also continued apace. Thus, total market capitalization rose to 97 percent of GDP in 1996. There were 216 companies listed in the Philippine Stock Exchange at the end of 1996, compared with 138 a decade ago. However, only about 75 of these are actively traded, and the market is concentrated in several shares. For instance, of the total market capitalization of P1,355 billion in 1994, around 40 percent was accounted for by six companies. The largest component is the property sector, with residential and property developers accounting for 23.1 percent of market capitalization at the end of 1995. The consumer sector accounted for around 17.4 percent, although it was largely dominated by the beverage corporation giant San Miguel, the single largest stock on the equity market (with a capitalization of P122 billion at the end of 1995). It alone made up 8.5 percent of the entire stock market's value. Conglomerates accounted for 15.4 percent of the market, banking for 14.0 percent, and utilities for 12.8 percent (BMI 1996). As in the real sector, the Philippine financial sector was a lot stronger in the 1990s compared with the 1980s. Several worrying trends, however, were also beginning to emerge. In particular, the years of significant net capital inflows were associated with rapid expansion in the banking sector's foreign currency liabilities, deposits, and domestic lending. As a result of the rising proportion of external debt intermediated through commercialbanks, a significant portion of which went into the nontradable sector, commercial banks became vulnerable to sudden movements

in the exchange

rate.

Social development Ultimately, the goal of economic policy is to maximize some social welfare function. Thus, in assessing the growth episode of the 1990s, its social impact needs to be considered as well. Along with various economic reforms that were necessary in transforming the Philippine economy to make it more competitive and efficient, goals for human development and poverty alleviation were also integrated in the Ramos administration's development plan. Proposed policies to achieve the latter included: (a) promotion of sustained income and employment growth among the poor; (b) provision of safety nets for displacements due to structural adjustments; (c) effective response to natural and man-made calamities and disasters; and (d) public resources and efforts directed toward basic social services, disadvantaged regions, and specific groups of the poor. Employment


40

Economic

crisis... Once more

generation was seen as the key to increasing incomes and alleviating poverty. The Social Reform Agenda (SRA) 5 was launched in 1994 as the government's poverty sectors.

alleviation

and safety net program

for specific geographical

areas and

The SRA represented a government attempt to streamline all direct antipoverty programs under one package. It operationalized the human development goals that were embodied in the government's development plan. Its macro poverty reduction target was to bring absolute poverty down from 40 percent in 1991 to 30 percent in 1998, when a new president would have been elected. The SRA centered on three major strategic interventions: (a) access to basic social services as an imperative for survival; (b) asset reform and access to economic opportunities for employment and_income generation; and (c) people's effective participation in governance toward self-reliance and empowerment. The SRA was initially formulated to address the minimum basic needs of priority provinces, which were identified in a series of consultations between representatives from different government Offices and community members in 1993-94. Priority provinces were chosen based on poverty incidence, existence of armed conflict, isolation, and special development needs. Specific target beneficiaries included farmers and landles_ agricultural workers in agrarian reform communities; fisherfolk in coastal communities in priority bays and lakes; urban poor; workers in the informal sector; and other disadvantaged groups such as women, children, youth, persons w_th disabilities, senior citizens, and victims of disasters and natural calamities. _ key factor in drawing up the SRA was the participation of disadvantaged groups and nongovernment organizations (NGOs) in formulating specific goals and projects. Components of the SRA began to be installed in priority provinces in 1995, and its implementation began in 1996. Acknowledging the different needs of marginalized sectors, the SRA constituted nine flagship programs that were to serve as its core commitment to these sectors: (1) agricultural development; (2) fisheries and aquatic management; (3) ancestral domains; (4) socialized housing; (5) comprehensive and integrated delivery of social services (CIDSS); (6) workers' welfare and protection; (7) livelihood; (8) credit; and (9) institution-building and effective participation in governance. Thus, poverty alleviation was not the sole concern of the SRA. Convergence,

or focusing

and synchronizing

the delivery

of

programs and resources to priority areas and target groups, was the major strategy for localizing the SRA. The ins,titutional structure designed to operationalize municipal,

the SRA thus cut across

and barangaylevels,

the national,

regional,

with basic sector counterpart

provincial,

structures

at each

The discussionon poverty alleviation and the SRAdraws heavily on Reyes and del Valle(1998).


Chapter 2: Milo

41

level. It also involved establishing interorganizational interfaces to facilitate convergence. The overall governing body for the SRA is the Social Reform Council (SRC). To fund the SRA, the 1996 national budget was subjected to a disaggregation process to identify public sector investments for the SRA. That is, agency budgets were tested for their sensitivity to antipoverty and other social reform efforts. Of the total budget of P394.9 billion, P86.7 billion or 22 percent was found to be "SRA-enrolled," or focused on specific commitments made to basic sectors under the SRA. Whether these investments actually benefited the poor is another issue. The amount allocated for SRA-directed activities in the 1997 national budget was lower both in absolute and relative termsmP85.6 billion or 19.7 percent of the total budget. Thus, it was ironic that the 1997 budget was hailed as an antipoverty budget. In general, there were minimal increases in budget allocation for social services, which accounted for around 25 percent of total allocation from 1993 to 1997. In addition to the national budget allocation, SPA programs were funded by a special purpose fund called the Poverty Alleviation PAF amounting to P4 billion was intended for priority

Fund (PAF). The 1996 areas where standard

government programs were inadequate, particularly in agricultural development, CIDSS, and workers' welfare. Specific projects funded by the PAF in 1996 included communal irrigation, scholarship programs, hiring of teachers and purchase of school desks, and reintegration assistance for returning overseas Filipino workers (OFWs). The 1997 PAF appropriation was specifically intended for poverty alleviation programs in the two lowest municipal classes in priority provinces, and amounted to P2 billion. Overall, economic growth was accompanied by improvements in some social indicators. The Philippines' Human Development Index 6 improved from 0.621 in 1992 to 0.677 in 1995 (UNDP 1998). More specifically, gains were made in health, nutrition, and education as evidenced by increasing life expectancy and literacy rates, and declining mortality and malnutrition rates. Overall there was wider access to health, nutrition, and family planning services. Thus, the general health condition of the population improved, with life expectancy at birth increasing from 66.6 years in 1993 to 68 years in 1997. The infant mortality rate declined from 52 per 1,000 live births in 1993 to 45.8 in 1997, while the crude death rate decreased from 6.9 per 1,000 population in 1993 to 6.1 in 1997. The total fertility rate likewise declined from 4.2 percent in 1990 to 3.6 percent in 1997. The nutrition status also improved, with the prevalence of underweight preschool and school children declining from 10.0 percent and 9.4 percent in The Human Development Index measures a country's overall achievements in three basic dimensions of human development - longevity,knowledge, and a decent standard of living.It is based on life expectancy at birth, educational attainment, and real GDP per capita.


42

Economic

crisis... Once more

1992, to 8.4 percent and 7.4 percent in 1996,irespectively. The basic literacy rate likewise improved from 89.9 percent in 1989 to 93.9 percent in 1994, while the functional literacy rate 7 rose from 75.2 percent to 83.8 percent. The participation rate for both elementary and secondary levels also improved from 1993 to 1997. There was also some improvement in access {o safe water, sanitary toilet facilities, and electricity of the bottom 30 percent of families. The proportion of households with safe water supply increased from 80 percent in 1992 to 86 percent in 1996, while those with sanitary toilet facilities ro._e from 69.5 percent to 74.4 percent. As for poverty alleviation, poverty incidence declined from 39.9 percent of families in 1991 to 32.1 percent in 1997. In terms of percentage of the population, poverty incidence went down from 45.3 percent to 37.5 percent during the same period. However, the decline primarily took place in Metro Manila, while the situation in rural areas in particular only marginally improved (Table 6). The subsistence incidence likewise Went down from 20.4 to 16.5 percent of families, or from 24.3 to 20.4 percent ofi the total population from 1991 to 1997. Again, subsistence levels were sigrlificantly higher outside of Metro Manila, or in rural areas in general. The latter measure refers to the proportion of families or individuals who were unable tOmeet their basic food requirements, or the core poor. In terms of magnitude, however, the downward trend in number of poor families from 1991 to 1994 was reversed in 1997 (Table 7). The number of subsistence families also increased from almost 2.30 million families in 1994 to 2.34 million in 1997.

Table 6. Poverty incidence 1985

1988

and subsistende 1991

1994

Pover!y incidence of families

incidence,

199_ _

1985

1985-97 (In percent). 1988

1991

1994

1997

Poverty incidence of population

Philippines

44.2

40.2

39,9

35.5

32.1

49.3

45.5

45.3

40.6

37.5

NCR Outside of NCR

23.0 47.5

21.6 43.1

13.2 44.2

8,0 39,9

7.1 36.2

27.2 52.8

25.2 48.7

16.7 49.9

10.5 45.5

9,6 42,1

Urban Rural

33.6 50.7

30.1 46.3

31.1 48.6

24.0 47.0

18.5 44._

37.9 56,4

34.3 52.3

35,6 55.1

28.0 53,1

22.5 51.2

Philippines

Subsistence incidence of families 24.4 20.3 20.4 18.1 16,_

NCR Outside of NCR

6.0 27,2

5.0 22.7

2.1 23.3

0.7 20.8

0.8 19.0

7.1 31.9

6.3 27.2

2.8 27.8

1.0 25.1

1.0 23.5

Urban Rural

15.2 30.0

12.1 25.3

14.3 26,4

10.4 25.6

7.2 24.8

17.8 35.2

14.4 30,4

17.0 31.7

12.8 30.8

9.3 30.4

I

Subsistence incidence of population 28.5 24,3 24.3 21.8 20.4

Note: NCR stands for National Capital Region or Metro Manila, Source: National Statistical Coordination Board,

7 Basic literacy refers to the ability to write a simple message in any language functional literacy also includes numeracy and problem-solving skills.

or dialect,

while


Chapter 2: Milo

43

Table 7. Magnitude

of poor families, 1985

1985-97.

1988

1991

4,355,052

4,230,484

4,780,865

301,973

310,284

217,602

4,053,079

3,920,200

4,563,263

4,389,499

4,412,594

Urban

1,250,398

1,198,555

1,847,579

1,521,882

1,246,173

Rural

3,104,655

3,031,929

2,933,286

3,009,288

3,307,215

Philippines NCR Outside

Source:

of NCR

National

Statistical

Coordination

1994

1997

4,531,170

4,553,387

141,671

140,793

Board.

There was also a downward trend in the poverty gap ratio, which measures the inadequacy of family income relative to the poverty threshold, from 13 percent in 1991 and 11.2 percent in 1994, to 10 percent in 1997. Thus, on average, poor families were better off in 1997 compared with previous years. But again, the decline was more pronounced in the NCR (from 2.9 to 1.2%) and urban areas (from 10 to 5%), compared with the rural areas (from 16.0 to 15.2%). Furthermore, income distribution worsened from 1991 to 1997, although it improved from 1991 to 1994 as the average annual family income of the wealthiest decile declined while the rest increased (Table 8). The widening gap between the poorest and richest deciles is stark. The lack of improvement in income distribution becomes even more evident over a longer time frame (Fig. 10). The richest 20 percent of families consistently accounted for over half of total income from 1985 to 1997, with the Gini coefficient at its worst in 1997.

Table 8.

Distribution of total family by income decile, 1991-97.

income

and average

income

Decile

hlcome share of families (%) 1991

1994

1997

1991

1994

1997

(%)

Philippines

100.0

100.0

100.0

42,886

42,800

51,790

3.2

First

1.8

1.9

1.7

7,853

8,040

8,621

1.6

Second

2.9

3.0

2.7

12.618

13.002

13,801

1.5

Third

3.8

3.9

3.4

!6.251

16,839

17.783

1.5

Fourth

4.7

4.9

4.3

20.911

22.187

1.7

Fifth

5,7

6.0

5.3

27,676

2.1

Sixth

7,0

7.4

6,7

30,108

34,751

2.4

Seventh

8.8

9.1

8.6

37,555

39,062

44,715

3.0

Eighth

11.4

11,8

11.4

48,832

50.558

59,149

3.2

Ninth

16,1

16.4

16.1

69,041

70,363

83,648

3.3

35,5

39.7

162.081

152,106

205,543

4.0

Tenth '_urce:

37,8 Family

Income

and

Expenditure

Average annual family income (P, in constant 1988 prices)

family

20,033 24.481

Survey,

National

25,630 31,478

Statistics

Office.

Ave. annual gn'owth rate, 1991-97


44

Economic

crisis... Once more

Figure 10. Distribution of total family income by income quintile Gini coefficient, 1985-97.

and the

i

0.5 T 0.49 * 0.481-

..... /? /

0.47 J"

_

/

_=_

__

°4st _-0.44_

0.42 x 0"46T 0-41

_

i ..... L__

1.985

11.988

,

1991

100% 90% 80%

_ Ffffl'_ _ Fourth mrrnThird

70%

_

Second

50% N

_ J 1994 1997

40o 3O%

_Gini

10% 60% 0%

--First

Note: The bar chart is plotted on the right axis, while the Gini coefficient Js plotted on the left axis. Source: Family Income and Expenditure Sttrve}_ National Statistics Office.

Clearly, the Ramos administration's adoption of a comprehensive and consolidated antipoverty program midway into its term was both timely and necessary. Some improvements in key social indicators were observed. However, such improvements were evidently not happening fast or deep enough, and there remained large discrepancies within and between geographical areas. That the magnitude of the poor continued to increase suggested that the program has not had a positive impact yet. Reyes and del Valle (1998) attributed this to the following factors, among others: •

°

The SRA was still in its infancy. And because it largely took an institutional approach to address identified social problems, it would therefore take some time for its intended effects to be fully _ealized; Although the SRA appeared to correctly identify

the problems

of the poor,

funding for specific projects remained inadequate and was inefficiently used in some cases. Furthermore, notwithstanding the government's claim of an antipoverty budget, there had been no visible increase in the share of social services expenditures in the national budget from 1993 to 1997; and °

Poverty is also a function of factors other than direct intervention programs. Economy-wide and sectoral policies have a greater impact on the situation of the poor. Thus, it was difficult to say to what degree poverty reduction could be accounted for by direct interventions vis-a-vis indirect programs. Despite

the government's

good intentions,

the amount

allocated

for

poverty alleviation would seem to belie its true importance. In fact, PAF allocations were consistently halved from P4 billion in 1996 to P2 billion in 1997. The original allocation for 1998 was P1 billion, although this was later


Chapter 2: Milo increased

to P2.5 billion. It was estimated

45 that, for the government

to have

achieved its poverty incidence reduction target of 30 percent of families by 1998, it needed to have additionally spent an average of P9.6 billion annually from 1994 to 1998. As it was, the P6 billion total allocation for 1996-97 was estimated to help reduce poverty incidence by only 1.1 percent in each year (cited in Reyes and del Valle 1998). Hence, the government needs to ensure that future PAFs are substantial enough to have a strong impact, especially given the magnitude of the problem. One estimate of the amount needed to eradicate poverty completely was P86.2 billion annually, which represented the value of insufficiency of poor families. The enormity of this amount indicated that direct income transfer was not a feasible option for the government. Instead, this suggested that the government still needed to focus on programs that would enable the poor to earn income on a sustained basis. In particular, the focus should still be on broad-based economic growth to generate gainful employment and livelihood opportunities. There should also be continued and much-improved provision of basic social services, which had proven effective in alleviating poverty in the past. Programs that improve the poor's access to quality education and primary health care, in particular, were effective towards equalizing human capital. Finally, there was still the need for social safety nets to assist the poor during the transition period. However, these should be targeted programs appropriately designed to minimize leakages (Reyes and del Valle 1998). In a comprehensive study of poverty in the Philippines up to early 1990, de Dios (1993) cited the following reasons for poverty: (a) failure of growth and lack of employment opportunities; (b) declining productivity; (c) high population growth; (d) inequality of incomes; and (e) inadequate provision of social services. Clearly, these reasons continued to hold all throughout the 1990s. Simply put, poverty remained high in the Philippines because of the economy's failure to grow rapidly enough, sustain that growth, and generate employment. Growth was also lopsided, which consequently resulted in significantly higher poverty reduction in urban/capital cities than in rural areas. The failure of past growth was attributed to the failure, in the long run, to restructure the economy to make it externally more competitive and allow broader participation by the people. That is, the quality of growth is just as important as its magnitude (de Dios 1993). Reforms instituted in the 1990s were precisely directed toward those objectives. Adjustments in the right direction were being made, such as improvements in efficiency and competitiveness of the manufacturing sector as a result of trade reforms. But overall, the structure of the trade sector was slow to change. Medalla (1998) noted that relatively more investments were going into nontradable sectors than in exportable sectors, which could have serious repercussions in the medium term, especially in the


46

context of a growing

Economic

trade deficit. Overall, production

crisis... Once more

and investment

patterns

were still not optimal for growth, and qn e source of distortion was the overvalued currency prior to the currency c_isis in 1997 (Medalla 1998). There was also a continuous decline ha productivity, particularly in the agricultural sector, which remains the primary source of income for most of the poor. Another reason for poverty that continued to hold in the 1990s was the inequality of incomes. Rapid and sustained economic growth would significantly contribute to poverty alleviation. The speedl at which it does, however, would depend on whether the benefits from growfla are equally distributed (de Dios 1993). But this was not so in the Philippines even in the 1990s. Thus, poverty incidence remained high, not only because growth was not sustained, but also because of the uneven distribution of benefits that were generated. Finally, there was the inadequate provision of social services, which directly contributes to the poor's low productivity and are important tools for income redistribution (de Dios 1993). The fiscal crises in the past put severe pressure on budgets for social services. BUt with the government's surplus positions in the 1990s, this should have bean less of a problem. In fact, there was no appreciable increase in budgetary allocations for social services. This was compounded by low levels of capital expenditures, which constrained the economy's overall growth capacity. In principle, the government's poverty alleviation strategy involved raising both the poor's private income (i.e., income from productive assets they own, including from employment) and public income (i.e., income derived from the state via social production of free or subsidized goods and services, and income transfers). In practice, it relied heaVily on the former. However, the quality of growth overall was not socially Optimizing, in terms of providing sustained employment and improving income distribution across regions and income groups. Ultimately, the means ch0sen to alleviate poverty proved inadequate. Also, despite the comprehensiv e approach to poverty alleviation, the social impact of macroeconomic and se_toral policies were still not fully understood and accounted for. Although various social safety nets were in place to help mitigate any adverse impact of policy on specific sectors of the population, overall, they were poorly designed and implemented. Conclusions The outlook for the Philippines for 1997 was quite bullish, and with good reason. Following a recession towards late 1990, the economy began to recover in 1993 and further strengthened in 1994-96. More than that, the Philippines was deemed as finally on the path towards more stable and sustainable growth after decades of lackluster economic performance characterized by boom-bust cycles and unsustained

growth

momentum.

This was attributed

to prudent


Chapter 2: Milo

47

macroeconomic management, continued structural reforms, and political stability, which resulted in a more liberalized investment setting and a more conducive business environment. The Philippine economy's strong performance was thus expected to continue. As in the real sector, the Philippine financial sector was also a lot stronger in the 1990s compared with the 1980s, and adjustments in the right direction were being made. Nevertheless, the Philippines is still mending its economy and further strengthening its economic fundamentals. A truly solid foundation toward sustained and robust economic growth is still being laid. Thus, the fairly stable macroeconomic conditions remain fragile, and some macroeconomic vulnerabilities still exist (Intal et al. 1998). Similarly, financial development in the 1990s was accompanied by some trends, particularly the significant increase in commercial banks' foreign liabilities and lending to the nontradeable sector. The latter could become problematic if they are not managed well or if they persist (Intal et al. 1998). While the concerns raised were not considered "critical" and were expected to improve as the economy continued to grow and restructure, they made the macroeconomy and financial sector vulnerable, especially to sudden shifts in the external environment. Vigilance, policy consistency, and continued reform efforts are thus crucial to preserve and deepen the growth momentum, and improvements in poverty alleviation and other social indicators. A more progressive approach to poverty alleviation, and the provision of social services and social safety nets is also necessary to cushion the impact of necessary structural adjustments on the more vulnerable sectors of society. While some improvements in poverty alleviation and key sociai indicators were observed, they were evidently not happening fast enough or deep enough. There also remained large discrepancies within and between geographical areas. Thus, the government needs to do more and to do so more efficiently, to make a truly sizable impact on poverty. Growth per se may not lead to socially optimizing outcomes. What matters is not just the level of economic growth, but its overall quality in providing sustained employment and improving income distribution across regions and income groups. Ultimately, "Poverty is an unacceptable human condition. It is not immutable; public policy and action can, and must, eliminate poverty. This is what development is all about" (ADB 1999).


48

Economic

crisis... Once more

References Asian Development Bank. 1998. Asian Development Oxford University Press. Asian Development

Bank. 1999, Fighting poverty

Outlook 1998. New York: in Asia and the Pacific: the

poverty reduction strategy of the Asian Development Bank, draft. Bautista, E.D. 1992. A study of Philippine monetary and banking policies. PIDS Working Paper Series No., 9211. Makati City: Philippine Institute for Development Studies. Business Monitor Ltd.

International

Cho, YJ. and D. Khatkhate.

Ltd. 1996. Philippines

1996-98. London:

1989. Lessons of financial liberalization

comparative study. World Bank Discussion D.C.: World Bank.

BMI

in Asia: a

Paper No. 50. Washington,

Cororaton, C.B. 1995. Surge in capital inflows, response of the government and effects on the economy: the Philippine case. Discussion Paper Series No. 95-24. Makati City: Philippine Institute for Development Studies. De Dios, E.S., E. Medalla, S. Gochoco, E. Tan, G. Jurado, C. David, E. Ponce, R Intal, A. Sanchez, B. Balagot, and F. Alburo. 1993. Poverty, growth, and the fiscal crisis. Makati City: Philippine Institute for Development Studies. Dornbusch, R. 1991. Policies to move from stabilization to growth, in Proceedings of the World Bank Annual Conference on Development Economics 1990. Washington, D.C.: World Bank. p 1%48. Fabella, R.V. 1994. Investment and the allocation of resources under macroeconomic instabihty, in Fabella R.V. and H. Sakai. (eds.) Resource mobilization and resource use in the Philippines. Tokyo: IDE. Intal, R, M. Milo, C. Reyes and L. Basilio. 1998. Case study: the Philippines, in MacCleod, R.H. and R. Garnaut (eds.). East Asia in crisis: from being a miracle to needing one? Routledge, London. Krugman, P., J. Alm, S. Collins, and E. Remolana. 1991. Transforming the Philippine economy. Quezon City: NEDA-APO Production Unit. Lamberte, M.B. 1993. Assessment of the financial market reforms in the Philippines, 59.

1980-1992. Journal

of P1)ilippine Development. /

20(2):231-

Lamberte, M.B. 1994. Managing surges in capital infows: the Philippine case. PIDS Discussion Paper Series No. 94-20. Makati City: Philippine Institute of Development Studies. Laya, J.C. 1982. A crisis of confidence of the Philippines.

and other papers.

Manila: Central Bank


Chapter 2: Milo Manasan,

49

R.G. 1994 Breaking

away from the fiscal bind: reforming

the fiscal

system. Makati City: Philippine Institute of Development Studies. Manasan, R.G. 1998. Fiscal adjustment in the context of growth and equity, 19861996. Discussion Paper Series No. 98-11. Makati City: Philippine Institute of Development Studies. Medalla, E.M. 1998. Trade and industrial policy. Discussion Paper series No. 98-05. Makati City: Philippine Institute of Development Studies. Medalla, E.M., G. Tecson, R. Bautista, J. Power and Associates, E. Tan, R. Aldaba, and L. de Dios. 1995. Philippine trade and industrial policies: catching up with Asia's tigers. Vol. 1. Makati City: Philippine Institute of Development Studies. Ramos, EV. 1994. Towards Philippines 2000: a resurgence of optimism and growth. Manaila: Office of the Press Secretary. Remolona, E.M. and M.B. Lamberte. 1986. Financial reforms and balance-ofpayment

crisis:

the case of the Philippines.

Philippine

Review

of

Economics and Bus/iae_, 23(1 & 2): 101-141. Reyes, C.M. and E.A. del V_ille. 199_. Poverty alleviation and equity promotion. Discussion Paper Series N 0. 98-06. Makati City: Philippine Institute of Development Studies. Tan, E. A. 1989. Bank concentration apd the structure of interest. UPSE Discussion paper No. 89-15. Quezon City: School of Economics, University of the Philippines. Tecson, G., M. Austria, V. Pineda, L. de Dios, D. Lapid, C. Medilo, C. Banzon, F. Trabajo, and E. Mendoza. 1996. Philippine trade and industrial policies: catching up with Asia's tigers. Vol. 2. Makati City: Philippine Institute of Development Studies. United Nations Development Programme. 1998. Human development report 1998. New York: Oxford University Press. World Bank. 1986. The Philippines a framework for economic recovery. Washington, D.C. World Bank. World Bank. 1988. Philippines financial sector study (in three volumes). Washington, D.C. World Bank. World Bank. 1992. Philippines capital market study (in 2 volumes, Vol. 1: Main Report; Vol. 2: Contractual Savings Sector). Washington, D.C. World Bank. Yap, J.T. and C.M. Reyes. 1994. Country report on the Philippines. presented at the 7th Workshop on Asian Economic Outlook, Development Bank, Manila, 26-28 October.

Paper Asian


3 Overview of the Economic and Social Impact of the East Asian Financial Crisis Ma. Melanie R.S. Milo

his paper discusses both the immediate contagion effects and the indirect longer-term impacts of the East Asian financial crisis on the Philippines, together with the government's policy responses to contain them. The first section discusSes direct effects and policy responses, while the second section explores the immediate and longer-term impacts of the crisis on the Philippine financial sector. Income and employment effects are discussed in the third section, which is followed by a discussion of their eventual impact on the poor. Following the implementation of fire-fighting measures, the policies that the government implemented to bring about economic recovery are discussed in the fifth section. The sixth section places these policies in the bigger context of the interrelationship between macroeconomics and poverty, and the underlying relationship between the government's choice of policies and the evolution of the crisis. Some conclusions are presented in the final section. Immediate impact and policy responses Thailand's property and financial crises broke out in April 1997, which led to the pullout of foreign investments from the stock market. This, coupled with the country's widening current account deficit, put tremendous pressure on the baht. The Bank of Thailand finally devalued the baht in July, its first devaluation in 14years. Speculators then began to prey on the other currencies in the region initially, the Malaysian ringgit, the Philippine peso, the indonesian rupiah, and the Singaporean dollar, and later the Hong Kong dollar and the Korean won. In general, the combination of contagion effects from Thailand, overvalued currencies, vulnerable capital inflows, and increased uncertainty fomented the regional currency crisis (Magdaluyo 1998). The Philippine Central Bank (Bangko SentralngPihpinas) or BSP's initial response to the speculative attack on the peso was to raise its key overnight


52

Economic

crisis... Once more

borrowing rate from 11.25 percent in May tO 20 percent in June and 32 percent in mid-July, to penalize speculators and discourage the conversion of peso holdings into US dollars. The BSP then began to heavily intervene in the foreign exchange market in early July to keep the exchange rate stable around the P26/ US$1 mark. Finally, the BSP allowed the peso to depreciate in mid-Julj6 after spending around US$1.5 billion in its defense. The exchange rate subsequently breached the P30/US$1 mark in August, reaching more than P45/US$1 in early 1998. The BSP then successively lowered its overnight borrowing rate to 20 percent

at the end of July to 14 percent in August, In addition

to widening

the trading

band

and 12 percent in October. of the peso,

the BSP also

tightened some foreign exchange controls.lit placed a cap of US$100,000 on over-the-counter sales of foreign exchange (or nontrade purposes, which was further lowered to US$25,000 at the end of J_ly. This ceiling was partially lifted I for residents in September. BSP also imposed a limit on commercial banks oversold position of 10 percent of unimpaired capital, while their overbought position was set at 20 percent, with penalties and sanctions imposed on banks that exceed the allowable positions. The limits were later reversed, and the overbought position of banks was even lowered to 5 percent, US$10 million, to force commercial banks to off-load their holdings. To further stabilize the foreign exchange market, Bankers Association of the Philippines (BAP) entered into

but not to exceed foreign exchange the BSP and the an agreement in

December to set daily quotas for the supply of dollars to be sold at an agreed rate, and for the BSP to provide forward cover to banks that had nondeliverable forward contracts with unhedged dollar borrowers. Finally, the BSP increased reserve requirements on deposits, deposit substitutes, common trust funds, and other trust and fiduciary accounts of banks. In addition to a 13 percent statutory reservel the BSP imposed an additional 3 percent liquidity reserve, that is, hands required to be placed in short-term market yielding instruments. This was raised consecutively until it reached 8 percent in August, to siphon off excess peso liquidity in the system and to limit banks' dollar purchases. The BSP's tight monetary policy to defend the exchange rate led to a sharp increase in domestic interest rates (Fig. 1). From a low of 10 percent in April 1997, the bellwether 91-day Treasury bill rate rose to 19 percent in January 1998, while the average lending rate went upito more than 20 percent in the last quarter of 1997 from less than 13 percent in April 1997. Overall, however, the tight monetary policy failed to arrest the depreciation of the peso. But in contrast to previous

episodes

of peso devaluations,

the inflation

rate was fairly steady

during the first 6 months of the crisis. This _as due to the relative stability of food prices. Also, domestic manufacturers ci3ose to run down their inventories and deferred price increases to compete with cheap imports, whose entry was facilitated by the more liberalized trade environment.


Chapter 3: Milo

53

Figure 1. Trends in exchange rate, interest rates, and inflation 1997-October 1999. 50

m

45

_

35 3O 40 25

_...-%

/_

rate, January

Ave exchange

rate

(pesos / US$)

... Tbill rate (%) -Ave lending rate (%) -- -- h_flation rate (%)

_

15 10

--

_ ....

5

Source: Bangko

Sentral

ng Pilipinas.

Impact on the financial sector Figure 2 shows the monthly movement of the Philippine stock exchange's composite price index (Phisix) and total value turnover from 1987-99. It indicates increased volatility in the stock market from 1993 as a result of the opening up of the capital account. As in other bourses plunged as the domestic currency reached and foreign investors divested themselves 3,171 points at the end of 1996, the Phisix 1997, which was just slightly higher than

in the region, stock market prices record lows against the US dollar of their holdings. From a high of fell to 1,772 points by November its preboom level. Banking and

property stocks were the worst hit. The thinness of the stock market and the surge in portfolio capital inflows made the stock market highly vulnerable to shifts in international capital, as well as the domestic and international environments. Figure 2. Philippine stock market composite price index (Phisix) and total volume turnover, January 1987-October 1999. 4,000 -

700,000 _

-- Phisix

3,5°° •

600,000 _

-- Total

,-,2500 • '_ 2"000

400,000 _. 300,000

115001 1,000

200,000

3,000. _ 500. 0

............

1987

1989

Source: Philippine

500,000 _ 0100,000 _,_ 1991

1993

Stock Exchange.

1995

1997

1999

ttmlover


54

Economic

crisis... Once more

In contrast to Thailand, Indonesia, and Korea, there was no systemic failure of financial institutions in the Philippines. Only one fairly small, newly upgraded commercial bank--Orient Bank--failed in the immediate aftermath of the currency crisis. As in previous cases of bank failures, insider abuse was the ultimate cause of the bank's failure. Of its reported P6.1 billion worth of nonperforming loans, around P5.7 billion directly or indirectly benefited its owner. In particular, there was excessive lending to the real estate sector, primarily to companies associated with the bank owner, who also tapped other commercial banks and the stock market to finance his property acquisitions. He reportedly amassed more than P22 billion in loans from a total of 30 creditor banks. The currency depreciation, the stock market crash, soaring domestic interest rates, and the property sector bust _ledto the collapse of his real estate ventures, In addition to Orient Bank, 6 thrift banks and 15 rural banks closed in 1998. The adverse effect of the crisis on banks became evident in the volume of nonperforming loans, or loans that missed debt payments for 3 consecutive months, relative to total loans of commercial banks. Prior to the crisis, commercial banks'

nonperforming

loans accounted

for just less than 3.4 percent

of total

loans. The sudden depreciation of the peso plus the uptick in interest rates, and the weakening of the economy with the characteristic drop in levels of production and consumer demand, rising 'unemployment, and low business confidence, impaired the ability of both corporate and individual borrowers to service their debts. As a result, nonperforming loans rose to 4.7 percent of total loans at the end of 1997, to 10.4 percent at the end of 1998, and climbed even further to 14.4 percent in the third quarter of 1999. The ratio appears to have peaked or to be nearing its peak. Companies, that borrowed in dollars were hard hit when their debts nearly doubled as the peso fell steeply against the dollar. On the other hand, businesses with peso-denominated loans suffered as interest rates shot up to as high as 30 percent. Commercial banks' total loans, and consequently total assets, fell following the write-offs and provisioning for bad loans (Table 1). The alarming growth of past due loans and loan loss provisions caused banks to be overly cautious in their lending in 1998o99. The contraction in outstanding loans of commercial banks until the first quarter of 11999was a dramatic reversal of the 41 percent loan growth seen in 1996. Loan growth significantly slowed down to 4.9 percent in 1997, and contracted by 2.2 p_rcent in 1998. While the increase in nonperforming loans has slowed down in recent months, other components of commercial banks' nonperforming assets continued to grow. In particular, commercial banks' exposure to the property sector was reflected in the increase in their real and other properties owned or


Chapter 3: Milo

55

Table 1. Selected Year

data on commercial

Total assets

Total loans

(billion pesos)

(billion pesos)

banks,

1997-99.

Nonperforming

loans

Loan loss provision

(% of total loans)

(% of total loans)

1997 Mar

2,005.00

1,284.59

3.3

1.3

Jun

2,085.60

1,418.95

3.4

1.3

Sep Dec 1998

2,310.70 2,513.00

1,499.25 1,573.15

4.0 4.7

1.4 2.2

Mar

2,417.00

1,517.63

7.4

2.6

Jun

2,535.90

1,595.37

9.0

2.7

Sep Dec 1999

2,529.00 2,528.00

1,586.25 1,542.49

11.0 10.4

3.1 4.0

Mar

2,508.30

1,484.46

13.2

4.6

Jun

2,583.10

1,505.60

13.1

4.8

Aug

2,546.90_

1,504.44

14.4

5.1

Source: Bangko Sentral ng Pilipinas.

acquired (ROPOA). ROPOA assets increased from around P14.6 billion prior to the crisis to more than P82.9 billion at the end of the third quarter of 1999. The decline in lending, in turn, inevitably became a drag on commercial banks' profitability, which went down although it remained positive. Return on equity fell from 16.3 percent in 1996 to 12.4 percent in 1997, and 6.6 percent in 1998. With lending activities down, banks were forced to concentrate on other sources of income such as fees and charges, foreign exchange trading, and other investments. The 1998 data show that bank investments grew by 47.6 percent to P1.2 trillion from 1997 figures, as banks shifted to holding government securities such as Treasury bills instead. Thus, much of the money that fueled the 1999 first quarter's 2 percent growth in real GNP came from pump priming and remittances. To mitigate the impact of the sharp depreciation of the peso and the deterioration in bank assets, the BSP mandated increases in minimum capital requirements for banks over the period 1998-2000. For instance, the required minimum capital for universal banks was raised from P3.5 billion prior to the crisis, to P4.5 billion in 1998, P4.9 billion in 1999 and P5.4 billion pesos in 2000. For commercial banks, the increase in minimum capital requirement was from P1.6 billion to P2.8 billion in 2000, while minimum capital requirement for thrift banks located in Metro Manila doubled from P200 million to P400 million. The BSP likewise instituted stiff penalties for failure to comply with the new minimum capital requirements. As a result, there has been a rise in merger and


56

Economic

crisis.,. Once more

acquisition activities especially in 1999, which could lead to a restructuring of the banking system (Lamberte and Yap 1999). Despite the crisis' negative impact, the Philippine banking sector still fared relatively well compared with the crisis economies, particularly of Thailand and Indonesia. This was attributed to reforms that had been implemented, and the adjustment period in the 1980s that saw weak banks weeded out and stronger prudential regulations instituted. The implication is that the expected benefits of financial sector reforms were actualized. This was true to a certain extent. In particular, banks were better capitalized, with capital adequacy ratio ranging between 17 percent and 20 percent from 1992 to June 1997. However, the emergence of similar trends in lending behavior and foreign liabilities of commercial banks raises the question of whether efficiency gains from financial liberalization in particular were realized. Overall, the answer would seem to be no, and this could be attributed both to commercial bank behavior and monetary authorities' policy stance (Milo 1998). Doubtless the banks' imprudence contributed to their problems, as they became lenient in their lending activities. The rapid buildup in resources and the increasing number of players fostered a more competitive lending environment. Thus, banks tended to relax credit evaluation procedures. There was also the emphasis on collateral as the basis for granting a loan, instead of cash flows, for instance. Hence, the penchant for real estate, which was traditionally seen as a sound investment and collateral. On the other hand, there was the policy stance of the BSP, which reinforced the banks' false sense of security. In particular, prior to the crisis, monetary authorities in the Philippines gave a strong signal that the exchange rate level was not only appropriate, but would be maintained for an extended period. This stance led to the underpricing of foreign exchange risk, which encouraged foreign borrowing and dollar-denominated lending, and discouraged the development of a forward market. The underpricing of risk plus the BSP's implicit policy of ensuring that no commercial banks would fail, would necessarily be allocationally inefficient since it would lead the financial system towards excessive exposure to high-risk activities, such as the property sector and the stock market. Fortunately, such worrying trends were fairly recent and had not yet reached the same proportions as those in the crisis economies. Hence, the muted effect of the regional Income

crisis on the Philippine

financial sector.

and employment effects The growth momentum from 1994 to. 1996 was sustained

during the first

6 months of the Asian crisis, although there was a deceleration in GDP growth (Table 2). Growth of gross capital formation even accelerated, as ongoing and planned investment activities were completed. Exports also continued to


Chapter 3: Milo

57

perform well. On the other hand, the slowdown in construction became evident in the last quarter of 1997. The impact of the crisis on the economy became more evident in 1998, particularly in the construction and manufacturing sectors. This was compounded by the poor performance of agriculture as a result of adverse weather conditions. The latter also resulted in higher inflation rates, which again reached

Table 2.

double-digit

levels by the end of 1998.

Growth of real GDP by expenditure share and industrial origin, and other macroeconomic indicators, 1994-99 (In percent). 1994 1995 1996

Growth Growth

of realGNP of realGDP

Growth by industrial origin Agticul_re, fishery & forestry Industry Manufacturing Construction Services Inflation rate Trade balance (% of GDP) National govertunent deficit (% of GDP) Source:

National

Statistical

1998

1999

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

7.3 5,9

5.4 5,5

5.3 5,6

5,1 4,9

5,1 4.7

1,5 1.1

-0.5 -1.0

0.7 -0,1

-1.2 -2.0

2.1 1.2

3.8 3,6

3.3 3,1

3.7 6,1 9,0 15.2 15,6

3.8 4.6 5,6 4.1 3,7 13.3 16.2 9.6 16,0 16,9

5.0 4.5 14.9 8.6 3,0

5,1 5.0 4.9 7.3 6.2 0.4 7-1 9.3 15,0 15.2 15.0 14_8 2_7 10.2 15,0

4,5 3,9 2,9 2,6 -5,4 -2,4 -1.3 0.6 -6,0 -18.2 -19.1 -22,3 10.6 -1.4 3.9-14,4 -2,3-12,1-13,1-33.9

2.5 7,6 -9.7 0,7 -16,7

2.6 6.2 6,2 3,0 2,4

2.6 3.7 -5,3 8,0 1,9

3.4 5.8 5.0 9.4 4,3

1.2 3.9 6.8 6,4 6.8 5.6 6,6 10.9 5.0 6.4

4.9 5,1 2.3 21,3 6.2

1.8 0.4 7,6 6.4 5.3 4.3 18.5 18,1 5.8 5,5

2,9 11,1 -2,2 -0.7 _1.0 0.9 -6.0 -5.3 3,0 4.0

5,6 0,2 2,2 -5,9 4,4

4,6 4.4

Growth by expenditure share Personal consumption Government consumption Gross capital formation Merchandise exports Merchandise impor_

1997 Q1

4.9 4,7

8.3 8.0 9.1 -12.2 -12,1 -13.7 1,0 0,6 0.3

Coordination

4,1 5,6 4.7 7.6 4,4

5.3 5.3 5.9 7,3 -13,7 -12,6 -15.5 -12.2 -0.1 0,8 0,1 -0,4

-3.8 -11,5 0,2 -0,7 2.0 -0.9 -12.8 -5.1 4,5 3,6 7,9 -7.2 -1.9

9,9 -1.6 -1,9

-3.1 -2,0 -1,5 -7.5 2,8

-7,8 _4.7 -3.5 -8.5 3,2

10,4 10,6 3.3 4.3 -0.3 -3.2

10,0 3,1 4,9

6.8 0.8 -2.6

5.6 _4_

Board.

On the demand side, gross capital formation declined as high interest rates, tight financing, and the uncertain economic environment discouraged investment spending. Merchandise exports continued to grow, albeit at a substantially decelerated rate in 1998, while merchandise imports significantly declined. However, total exports declined as exports of nonfactor services such as tourism fell. The nominal peso depreciation led to a significant adjustment in the real effective exchange rate, which depreciated by 30 percent from June 1997 to February 1998. The real depreciation effectively wiped out the real appreciation international

of the peso during the 1990s, and thereby helped improve the competitiveness of Philippine exports especially of labor-intensive

manufactures (Intal et al. 1998). Contraction in domestic output was tempered by the inflow of overseas workers" remittances, although the latter also declined from US$5.7 billion in 1997 to US$4.1 billion in 1998.


58

Economic

The

slowdown

in

the

unemployment rate, which 7.4 percent 2 years earlier unemployed with almost directly 1997

economy

was

crisis...

strongly

Once

reflected

more

in

the

rose to 9.6 percent in the third quarter of 1998, from (Fig. 3). This translated to more than 3 million

persons out of a labor force of almost 31.3 million in 1998, compared 2.2 million unemployed in 1996. The number of firms and workers

affected to 1998

by worsening (Table

economic

3). Again,

worst

conditions hit

were

more those

than in the

doubled

from

construction,

manufacturing, and services sectors (Table 4), which spearheaded growth the 1990s. In addition to lost jobs as a result of the crisis, the slowdown

in in

economic activity the labor force.

to

Figure

prevented

3. Unemployment

the creation

of new jobs to absorb

rate, first quarter

14 13

1997-third

quarter

new entrants

1999 (In

mrcen0.

....

1997

--..-.

1998

_

1999

.IL t

12

t

*

.

•.

t

10 9

_,

11 8

"_-_..

4

' " • ' m il

_

_

! ii ": _

I

,

_.

7 6 Q1

Q2

Q3 • :

Q4

Source: National Statistics Office.

Table

3.

Number

of firms

reasons

and number Firms reporting

Year

1996

Total

Closure

that

(no.)

Retrenchment

closed

or retrenched

of workers

affected,

. RotatlOn,

etc.

due

to economic

1996-99. Workers

affected (no.)

Total

Permanent layoff

Temporary layoff

i

Rota_iom, etc.

1,(/79

347

724

39

80,70_.

47.008

29,487

4,206

1"t aem

614

146

455

20

,t0,323

22,631

15,915

1,777

2''d s_m

599

21]

372

23

40,378

24,377

]3_572

2,429

1,155

i

338

804

48

62,724

•39,176

19,843

3,705

1_tsere

580

'180

381

26

33,115

21,463

9,773

1,879

2"a sere

683

163

_J8

25

29,609

17,713

10,070

1,826

1998

3,072

642

2,310

293

155,198

76,726

50,744

27,728

y,t sere

1,936

403

1,420

172

83,852

39,923

29,442

14A87

2'_'tsere

] ,725

254

1,378

169

71,346

36,803

21,302

13,24]

_,ug-99

2,107

257

1,341

S21 _

45,238

34,167

28,833

1997

:

108,_8

Note: Permanent layoff means complete and total separation from employment; temporary layoff means separation of workers for not more than 6 moflths; rotation, etc. means rotation of work, reduced working time. Numbers may not add up due ito multiple reporting. aIncludes fh-ms that reported temporary layoffs. Source: Bureau of Labor and Employment Statistics, Department of Labor.


Chapter 3: Milo Table 4.

59

Number

of firms

that closed

reasons

by industry,

1996-99.

or retrenched

due to economic

Industry

1996

1997

1998

Aug-99

All industries

1,077

1,155

3,072

1,586_

97

70

95

44

Industry Mining and quarrying

545 14

568 23

1,254 48

565 7

Manufacturing Construction

508 21

505 31

1,025 173

479 72

2

9

8

7

Services

435

517

1,723

977

Transportation, commrmication, and storage Wholesale and retail trade

68 134

91 167

257 600

142 339

Financing, insurance, and business services Community, social, and personal services

93 140

130 129

491 375

306 95

Firms located in National Capital Region (NCR) Firms located outside of NCR

610 467

575 580

1,708 1,364

1,284 823

Agriculture, fishery, and forestry

Electricity, gas, and water

Excludes 521 firms that reported temporary layoffs, rotation, etc. Source: Bureau of Labor and Employment Statistics, Department of Labor.

Table 5.

Change in average current prices).

family income

decile,

1997-98 (in

Income decile

1997 FIES

1998 APIS

Philippines

123_000

121,438

-1.3

100.0

100.0

20,659

]4,644

-29.1

1.7

1.2

Second

33,064

26,852

-18.8

2.7

2.2

Third

42,611

36,689

-13.9

3.5

3.0

Fourth

53,101

47,211

-11.1

4.3

3.9

Fifth

66,291

60,176

-9.2

5.4

5.0

Sixth

83,224

76,641

-7.9

6.8

6.3

Seventh

106,919

100,170

-6.3

8.7

8.2

Eighth

141,394

135,051

-4.5

11.5

11.1

Ninth

199,891

196,018

-1.9

16.3

16.1

Tenth

482,927

520,928

7.9

39.3

42.9

First

% change

by income

% distribution of total family income 1997 FIES 1998 APIS

Note: FIES stands for Family Income and Expenditure Survey; APIS stands for Annual Poverty Indicator Survey. These two surveys are comparable since they had the same household samples, although the former is more extensive. APIS was started only in 1998. Source: National Statistics Office.


60

Economic

crisis...

Once more

With the economic slowdown and rise in unemployment, average family incomes, except those from the richest decile, expectedly declined (Table 5). The poor performance of the agricultural sector due to adverse weather •conditions further worsened the poor's situation, who live predominantly in rural areas. The rate of decline in average family income was regressive, with families belonging to the poorest decile suffering the highest decline of 29 percent. Income distribution consequently worsened in 1998. The increase in average family income of the richest decile could be due to windfalls from the crisis. Only the top three deciles increased their savings from 1994 to 1997 in real terms, with the richest decile registering the highest growth and share (Fig. 4). This decile also had access to a wider range of saving instruments, such as peso and dollar deposits, trust accounts, and Treasury bills. Thus, families belonging to the top decile were well placed to benefit from increases in interest rates and the peso depreciation as a result of the financial crisis. In contrast, savings deposit, which carried low and static interest rates, was practically

the only financial asset available to small savers.

Figure 4. Average family income and savings 1997 (In constant 1988 prices). 250000 200000

!

150000

/,

100000

-50000

decile,

1994 and

125000

_

1.994 Savings

100000

_

1997Savings

.......

1994 Income

--

1997 Income

.75000 .50000

50000 0

by income

25000 __ ...........

0

Is[ 2nd 3rd 4th 5th 6th 7fl_ 8th 9thl0ft:

Source: Family Income

and Expenditure

-25000

Survey, s gtatistics

Office.

Impact on the poor In considering

the social impact of theicontagion

effects of the Asian crisis

on the poor, one has to consider that the crisis took place simultaneously the weakening of the agriculture sector due to adverse weather patterns. sector accounts for more than 40 percent of total employment.

with This

Thus, the decline

in this sector would have reinforced• the adverse impact of the Asian crisis on production, employment, and income, an d contributed significantly to the increase in inflation rates. In October

1998, the National

Statistics

Office conducted

an Annual

Poverty Indicator Survey (APIS) to supplement its triennial Family Income and Expenditure Survey (FIES). Results on the impact of the financial crisis on Filipino families showed that, of the projected 13.5 million families, 96.6 percent


Chapter 3: Milo

61

were affected by higher prices of food and other basic commodities as a result of the financial crisis; this was also due to adverse weather conditions. More than 20 percent reported losing jobs within the country, while around 17 percent reported reduction in wages. Less than 5 percent of total families reported job loss of a migrant worker. In addition to the financial crisis, more than 76 percent of families belonging to the poorest 40 percent cited the drought or the E1 Nifio effect as their second most serious problem (Table 6). Table 6. Impact of the financial

crisis on Filipino

Projectedno.

families.

Pmventage of families affected by:

Income sWata

of families

Higher prices

Job loss (local)

Job loss Reduced (migrm_t) wages

Drought

Philippines

13,487,569

96.6

20.3

4.9

17.0

62.9

la'_west40%

5,495,298

95.7

17,9

3.7

15.2

76.0

Highest 60%

7,992,270

97.0

22.0

5.9

18.4

,54.0

Source:Annual Poverty Indicator Survey 1999,National StatisticsOffice. Table 7 shows the various ways Filipino families coped with problems brought about by the financial crisis. Almost 50 percent reported a change in their eating pattern; around 29 percent increased their working hours; almost 7 percent took their children out of school; more than 5 percent reported a family member migrating to the city or another country, more than 16 percent received assistance from relatives or friends, while only less than 7 percent received assistance from the government. Figures for the lowest 40 percent income brackets were a few percentage to the poorest income brackets attendance

rates, further

Table 7. Filipino

points higher. Considering that those belonghng already have lower nutrition status and school

declines would have grave consequences.

families'

responses

to problems

due to the financial

crisis

Percentage of families reporting: income

Change

Took

Member

Received

Received

Increased

Other

strata

in eating pattern

children out of school

migrated to city/another country

assistance from family/friends

assistance from gov't

working hours

steps taken

Philippines

47.9

6.9

5,2

16,2

6.9

28.8

9.9

Lowest 40%

51.4

7.5

6.1

18,5

9.7

31,5

10.0

Highest 60%

45.5

6.4

4.6

14.7

5.0

27.0

9.9

Som'ce:Annual Poverty Indicator Survey 1999,National StatisticsOffice.


62

Economic

crisis... Once more

Minimum daily wage earners were among the hardest hit, since the minimum daily wage rate only rose slightly. In Metro Manila, it increased from P185 prior to the crisis to P198 in February 1999, which is less than half of the estimated daily cost of living of P441 for a family of six. Thus, it is almost certain that the small gains made in alleviating poverty in the 1990s have been nullified as a result of the Asian crisis. The Asian Development Bank (ADB), for instance, foresees that poverty incidence in the Philippines will grow by 5 percentage points from 32.3 in 1997. The various human development indicators are thus expected to take a turn for the worse (Reye_ 1998). The surge in interest rates adversely affected the government's fiscal position as it significantly raised interest' payments. Furthermore, import declines and the slowdown in economic activity led to shortfalls in revenue collection. Thus, from a minimal surplus in the first half of 1997, the government posted a deficit of P2.3 billion in the second half of 1997. This further grew to P50 billion in 1998. To contain the deficit, the government imposed a mandatory 25 percent reserve requirement on all expenditures other than personnel and debt service and a 10 percent deferment in internal revenue allotment for local government units, in addition to suspending all tax subsidies of all government agencies and corporations. The social services subsectors were eventually exempted from mandatory reserves in July 1998. Expenditures on social services fell by around 10 percent relative to programmed levels in 1998 in contrast to economic services, for instance, which fellby B0percent. Although this reduction was less than that in other sectors, it has Serious repercussions on the poor, especially given the government's historicalunderinvestment in the health and education sectors. Decreases in capital outlays, and maintenance and other operating expenditures will also have a direct negative the quality of capital stock (Pineda 1999). Policies toward economic recovery To date, the worst of the crisis seems

impact on growth

and

to be over, and even the crisis

economies are deemed to be on the (long) road to recovery. True to earlier predictions, the Philippines was among thel first to recover, posting a positive growth rate in the first quarter of 1999 along with Singapore and South Korea. However, first quarter growth was attributed primarily to the recovery of agriculture, which in turn was due to improved weather conditions, and government pump priming. But how far carl the economy's recovery go, with the continued weak performance of the in_tustrial sector? The latter, in turn, was attributed to continued weak consumer demand, tight credit conditions, and the uncertain economic and political environment. To avert economic slowdown, the government in 1999 to take up the slack in private sector spending.

shifted to pump priming The government resorted


Chapter 3: Milo

63

to foreign borrowings to finance its pump-priming strategy and the resulting deficit, which was programmed at P68.4 billion. It secured US$3 billion worth of external financing to cover its programmed 1999 budget deficit. The amount consisted of borrowings from official development assistance (ODA) facilities, as well as bond flotations in the international capital market. It began the year with a US$1 billion two-part global fund, which was further increased by US$200 million. This was followed in March 1999 by a 350-million Euro bond, which was Asia's first overseas bond venture in the single European currency. By shifting the government's financing source from local to foreign creditors, the government sought to lower domestic interest rates and avoid crowding out the private sector. Thus, the benchmark 91-day Treasury bill rate followed a declining trend from a peak of more than 19 percent at the start of 1998 to reach a 5-year low of less than 9 percent in October 1999, which was even lower than its precrisis level of 10.5 percent. The government's foreign borrowings also beefed up the country's gross international reserves, which rose from a low of US$8.5 billion dollars at the start of 1998 (equivalent to less than 2 months' worth of imports) to almost US$14.5 billion as of end-September 1999 or more than 4 months' worth of imports. Thus, the exchange rate has appreciated and stabilized around the P38-39 per US dollar. Resumption of foreign investment inflows also contributed to the strengthening of the peso and the stock market. But while foreign borrowing helped stabilize the peso and lower domestic interest rates, the government was also criticized for allowing the country's foreign debt to surge. Monetary policy was likewise eased, with the successive lowering of the BSP's overnight borrowing and lending rates to 8.8 percent and 11.0 percent, respectively, as of November 1999, compared with 13.4 percent and 15.4 percent at the start of the year. The sustained reduction in interest rates was made possible by the downward trend in inflation rates, which began to decelerate from 11.5 percent in January to 5.4 percent in October 1999. The BSP also cited its overperformance relative to monetary ceilings set with the International Monetary Fund (IMF). In addition to interest rate cuts, the BSP reduced total reserve requirements on banks from 17 to 15 percent. However, the reduction was on liquid reserves, that is, funds that can be placed in government securities and can carry market rates, rather than the statutory reserve requirement that stood at 10 percent. The BSP pays only 4 percent on 40 percent of the funds placed in its vault. Bank lending rates likewise followed a declining trend. As noted in the previous section, however, commercial bank lending continued to contract in the first quarter of 1999. This was due to weak private sector demand, and the banks' cautious stance. The easing of monetary policy, particularly the reduction in liquid reserve requirement, had little impact on bank lending behavior since


64

Economic

crisis... Once more

they opted to increase their holdings of government securities instead. This explains why recent bids during weekly auctions of treasury bills have reached as high as P12 to P18 billion, compared with offerings of about P5 to P5.5 billion. Thus, it has been argued that, since private sector demand for funds was still weak and interest rates had already gone down to precrisis levels, it would have been cheaper for the government to fund its 1999 pump-priming activities from the domestic credit market (Lamber_e et al. 1999). Strong demand for government securities works to the government's advantage because it incurs lower financing costs for the securities it issues. The economy, however, may not gain anything or may not gain as much when banks invest in government securities instead of releasing fresh funds _at can be used more productively by the private sector. Also, further declines in the treasury bill rate may not be followed by equivalent their profits.

drops

in lending rates as banks struggle

to maintain

While the government is doing its best to bring down the cost of funds, cutting key rates and bringing down liquidity reserve requirements do little to address the credit environment bankers currently find themselves in. The issue of risk then becomes an issue of confidence, both in emerging positive economic trends and the sustainability of the government's policy stance, in the context of possible shifts in the international environment. Political issues, such as the proposed constitutional amendment, also add to the uncertainty. If the banking sector is to play a more significant role in the economy's recovery, stronger positive trends in the real sector need to emerge. Thus, the role of fiscal policy in stimulating aggregate demand is crucial. Banks are set to become more liquid as bad debt portfolios are removed from their balance sheets. Any premature tightening of policy, however, could derail the economy's still nascent recovery. Macroeconomics and poverty Stabilization policy in the Philippines typically relied on tight fiscal and monetary policies. The social impact of this policy stance was unmistakable. The reduction in social sector expenditures, which were already deemed inadequate, came at a time when demand for basic social services was expected to increase as economic conditions deteriorated. The crisis also exposed the i underlying weakness of the government's fiscal position, which relied primarily on privatization proceeds and expenditure! cuts to post a surplus. A budget deficit ceiling of P68.4 billion was originally set with the IMF for 1999. This was raised to P85 billion when it became apparent that the original ceiling would be breached due to poor revenue collection. But the actual amount was a much higher Pl13.6 billion, or around 3.6 percent Of GNP. The real concern is not the deficit per se, but the weak revenue performance government's intertemporal budget constraint.

and its implications on the Although the government


Chapter 3: Milo

65

attributed the revenue shortfall due to weak tax administration.

to the economic

downturn,

ultimately

it was

The government's fiscal framework envisages a steady improvement in its fiscal position beginning with a lower deficit of P62.5 billion in 2000, toward a small surplus over the medium term. But the improvement must be derived from an enhanced revenue effort. Otherwise, expenditures on priority areas, such as infrastructure, the social sector, and antipoverty programs, may again be sacrificed. The latter's adverse effect on economic growth and social development is well established. Furthermore, without a sustainable revenue base, the government will not be able to manage its foreign debt burden, which again grew significantly as the government shifted to foreign financing. If this is the case, the brunt of the adjustment will again fall on monetary policy, and monetary authorities may again be constrained to manage the exchange rate very conservatively via a high interest rate policy. This was one of the factors that made the Philippines vulnerable to the contagion effects of the Thai crisis. In fact, the BSP governor had broached the idea of increasing its key overnight rates if the recent weakening of the peso, which was in turn due to the government's higher fiscal deficit and some political concerns, continues. The linkage between the conduct of monetary policy and the poor has to do with the former's influence on economic prices that affect the latter, both directly and indirectly. In particular, monetary policy influences inflation rate, interest rates, and exchange rate (Gochoco 1993). Monetary policy in the Philippines has typically been used to defend the exchange rate. In the past, this was due to the Philippine central bank's limited foreign exchange reserves, which constrained its ability to directly intervene in the foreign exchange market. The exchange rate, in turn, was linked to the foreign debt service of the government (Lim 1992). In particular, high interest rates were used to prompt a switch to peso-denominated assets, when an excess demand for foreign exchange was evident. Domestic interest rates had to carry a premium to compensate for the perceived risk of devaluation, which reflected the concern that the peso was overvalued. This accounted for the large differentials between domestic and foreign interest rates (Krugman 1991). Monetary authorities' penchant for a strong peso was also because of its positive impact on inflation, given the economy's dependence on imports. But the linking of the exchange rate to financial flows was detrimental in that it brought about a dichotomy between exchange rate policy and trade and industrial policies (Lira 1992). In contrast to the 1980s, the BSP became a net buyer of foreign exchange in the 1990s because

of the surge

in capital

inflows

and

the consequent

appreciation of the peso. However, monetary ceilings set with the IMF resulted in the BSP sterilizing its foreign exchange purchases. Thus, domestic interest rates remained high, which in turn encouraged more capital inflows. Ultimately,


66

Economic

crisis... Once more

monetary authorities' continued conservative management of the exchange rate gave rise to some perverse results: In particular, the very stable and strong peso, which was considered overvalued, itself became a source of instability. Because the policy target was exchange rate misalignment, the peso was subjected culminated in the mid-1997 currency successful in defending the peso from

stability at the cost of a currency to several speculative attacks, which crisis. Although the BSP was fairly speculative attacks prior to the 1997

currency crisis, there were economic costs. IAllowing interest rates to increase fended off speculators, but only temporarily. And it had adverse, longer-term effects on the banking system, the pat!ern of investment, production, employment, growth, and ultimately the poor. That is why the BSP's use of high-interest rate policy to defend the peso at the outbreak of the crisis was highly criticized for its failure to stem the fall of the peso and its adverse effect on the economy. The BSP was urged to loosen up on its defense of the local currency and to focus instead on bringing, down interest rates, which had a stronger impact on the economy than the peso depreciation. The adjustment lag, especially in the response of banks, underscores the importance of maintaining the current low interest rate policy stance. One major outcome of financial liberalization in a regime of floating exchange rates was to increase the influence of financial markets in exchange rate determination, with financial flows vastly exceeding the value of international trade in goods and service s .Financial markets clear or adjust faster than real markets, hence the overshooting of nominal (and real) exchange rates in the short run (Dornbusch 1976), in response to surges in capital inflows. Over time, as the impact of trade and industrial reforms become more fully realized, underlying structural changes should exert a greater influence on the real exchange rate, moving it to a more realistic level. In the interim, however, macroeconomic policies--fiscal and monetary policies, external borrowing, and exchange rate management--also play an important role because of their impact on aggregate demand and price levels, including the nominal exchange rate. Thus, they can either reinforce, neutralize, or even temporarily reverse the effects of structural changes on the real exchange rate (World Bank 1987). The choice of exchange rate regime depends on several economic and political factors, including the nature of disturbances, structure of the economy, information available to agents, and policyrnakers' preferences. And central bank intervention in the foreign exchange market will have 'different objectives at different times. Given the changing environment, the alternative is no longer between fixed versus floating exchange rates. On the one hand, there is the difficulty and cost of maintaining a fixed exchange rate in a deregulated, globalized environment. On the other hand, leaving exchange rates to be


Chapter 3: Milo

67

determined exclusively in a market _ that does not always behave as an "efficient financial market" is also not tenable since the costs of ignoring speculative swings could be very high (Cutler et al 1990, Macfarlane and Tease 1989, Miller and Weller 1991). Thus, there is a body of theoretical literature that suggests that a purely fixed or flexible exchange rate would not generally be optimal, given the diverse nature of shocks facing an economy (Dornbusch 1993, Turnovsky 1994). Rather, some intermediate degree of flexibility is seen as generally best able to stabilize the economy in response to economic disturbances. As Krugman (1989) pointed out, exchange rate volatility, that is, high frequency fluctuation around the "true" fundamental value, is not necessarily an acceptable or even inevitable cost of allowing the foreign exchange market to operate freely. Efforts to stabilize the exchange rate, however, must also guard against inducing a currency misalignment, or a persistent deviation from fundamentals. Compared with the impact of persistent deviations of the exchange rate from its long-run equilibrium value, the welfare costs of exchange rate volatility seem to be rather small. For instance, firms' investment decisions may be distorted, even if they are perfectly aware that a particular value for the exchange rate may be u_nsustainable (Dixit 1989a, 1989b). Also, international portfolio investment that takes place when exchange rates are misaligned can lead to large welfare losses resulting from resource misallocation. These suggest that welfare costs of exchange rate misalignments are likely to be substantial (Miller and Weller 1991). Although excessive fluctuations in the exchange rate would also need to be avoided in a still shallow and inefficient foreign exchange market, greater exchange rate flexibility would also encourage the development of forward markets, which would lead to improved management of exchange rate risks. Then currency speculators would bear the exchange rate risks, while hedgers (usually traders and arbitrageurs) would be able to cover their foreign exchange exposures in the forward market. Simply put, a poor exchange rate policy risks misrepresenting true opportunities, and thus misallocating resources. Ultimately, the goal should be a competitive, stable, real exchange rate (Dornbusch 1993). Only then will the Philippines undergo a structural experience in export development. What the events of the past two years show is that the Philippines

has

yet to escape the grip of a boom-bust cycle that had characterized its economy for decades. But the Philippine economy is als0 one of the more open, transparent, deregulated, and democratic economies in the region. Thus, it is well poised to adapt to the changing external environment, and to take advantage of the opportunities in a more liberal environment. The importance i A market is said to be efficient ff all available information is fully reflected in current market prices. Miller and Weller(1991)discuss some important arguments that have been forwarded to explain the divergencefrom market efficiency.


68

Economic

crisis... Once more

of maintaining sound and consistent policies cannot be overemphasized. Furthermore, care has to be taken that the reforms are not reversed but deepened further, both in the financial and the real sectors. The financial sector is crucial because it serves as the mechanism through which monetary policy is transmitted to the rest of the economy. The financial system also plays a very important role in facilitating economic growth andprosperity by channeling funds from savers to investors. The more competitive and efficient is this intermediation process, the more likely it iS that funds will be made available and allocated according to their most productive uses. However, the financial system does not operate in a vacuum, and inefficiencies and distortions in the real sector will be reflected in the financial sector as well. Conclusions In discussing the impact of the Asian crisis on the Philippines, three key points need to be made. First, the impact of the Asian crisis on the Philippine economy and financial sector has been quite moderate, especially when compared with the crisis economies of Thailand, Indonesia, and South Korea. The Philippine economy contracted from the 2nd to the 4th quarter of 1998. But true to earlier predictions, it was among the first to post positive growth rates, from 1.2 percent in the 1st quarter of 1999 'to around 3.1 percent in the third quarter. While there has been a significant weakening of the commercial banking sector in particular, again, it was still very moderate. Second, the social impact has also been less severe. This was borne out by a microeconomic study, which conducted focus group discussions and household surveys to determine the social impact of the crisis on the more vulnerable members and sectors of Philippine society (Reyes et al. 1999). Finally and most importantly, as it has been frequently noted in the literature, the Philippines was a laggard in the region both in economic growth performance and human development. Thus, even a slight deterioration in economic and social conditions will have severe implications, especially on the poor. It is almost certain that the crisis has nullified the gains that have been made on poverty alleviation and other human development indicators. Furthermore, while the direct impact of the Asian crisis may have been fairly moderate, the disruption that it caused in the Philippines' growth and adjustment process could prove to be more significant and costly. The positive reports about the Philippines clearly need to be kept in perspective. The fundamental restructuring of the Philippine economy toward greater efficiency and competitiveness will necessarily hurt certain sectors during the adjustment period, especially in the short to medium run. Thus, policies need to be designed such that they will hurt the poor the least, or distribute the burden of the adjustment

in the fairest manner possible (de Dios 1993). Clearly, properly


Chapter 3: Milo

69

designed and targeted social safety nets still have an important role to play in alleviating the effects of stabilization and structural adjustment measures. In particular, the globalization of financial markets has resulted in labor bearing the brunt of adjustments to external shocks, as increased capital mobility narrows the range of variation of returns to capital within a country to match "world" rates (Rodrik 1997). The UNDP's Human Development Report (UNDP 1998) even said that globalization has been bad for the poor. Thus, the importance an adequate system of social protection cannot be overly emphasized.

of


70

Economic

crisis... Once more

References Cutler, D.M., J.A. Poterba, and L.H. Summers. 1990. Speculative dynamics and the role of feedback traders. NBER Working Paper No. 3243. New York: National Bureau of Economic Research. De Dios, E.S. 1.993. Poverty, growth, and the fiscal crisis, in de Dios and associates. Poverty, growth, and the fiscal crisis. Makati City: Philippine of Development Studies. Dixit, A. 1989a. Entry and exit decisions under uncertainty. Economy 97:620-39. Dixit, A. 1989b. Hysteresis, import penetration, Quarterly Journal of Economics.

Journal of Political

and exchange rate pass-through.

Dornbusch, R. 1976. Expectations and exchange Political Economy 84:1161-1176. '

rate dynamics.

Dornbusch, R. 1993. Policymaking University Press.

in the open economy.

Gochoco,

for banking

M.S. 1993. Policy options

Institute

Journal

of

New York: Oxford

and financial reforms,

in: de

Dios and associates. Poverty, growth, and the fiscal crisis. Makati City: Philippine Institute of Development Studies. Krugman P.R. 1989. The case for stabilising exchange rates. Oxford Review of Economic Policy 5(3):61-72. Krugman, P.R. 1991. Transforming APO Production Unit.

the Philippine economy. Quezon City: NEDA-

Lamberte, M.B. and J.T. Yap. 1999. Scenarios for economic recovery: the Philippines. Discussion Paper Series No. 99-05. Makati City: Philippine Institute of Development Studies. Lamberte,

M.B., C.B. Cororaton,

M.F. Guerrero,

and A.C. Orbeta. 1999. Impact

of the Southeast Asian financial crisis on the Philippine manufacturing sector. Discussion Paper Series No. 99-09. Makati City: Philippine institute of Development Studies. Lira, J.M. 1992. A study on Philippine exchange rate policies. PIDS Working Paper Series No. 9209. Makati City: Philippine Institute of Development Studies. Macfarlane, I.J. and W.J. Tease. 1989. Capital flows and exchange rate determination. Research Discussion Paper No. 8908. Sydney: Economic Research Department, Reserve Bank of Australia. Magdaluyo, R.E. 1998. Southeast Asian currency flu: a look at the fundamentals. A.I.M. Policy Forum Briefing PaperS. No. 2 (January):2-14. Miller, M. and P. Weller. 1991. Financial liberalization, asset prices and exchange rates. Working Papers No. 95. PariS: Department of Economics and •Statistics,

Organization

for Economic

Cooperation

and Development.


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71

Milo, M.M.R.S. 1998. Financial liberalization in the Philippines: retrospect and prospect. Unpublished dissertation. Canberra: Australian National University. Pineda, V.S. 1999. Impact of the financial crisis on social services financing and delivery. Discussion Paper Series No. 99-30. Makati City: Philippine Institute of Development Studies. Reyes, C.M. 1998. The social impact of the regional crisis in the Philippines. MIMAP Research Paper. Micro Impacts of Macroeconomic Policies (MIMAP) Project. Makati City: Philippines Development Studies. Reyes, C.M., R.G. Manasan, A.C. Orbeta, and G.G. de Guzman.

Adjustment Institute of 1999. Social

impact of the regional financial crisis in the Philippines. Discussion Paper Series No. 99-14. Makati City: Philippine Institute of Development Studies. R0drik, D. 1997. Has liberalization International Economics. Turnovsky,

D.J. 1994. Exchange

gone too far? Washington, rate management:

D.C.: Institute for

a partial review, in Glick, R.

and M.M. Hutchison. (eds.) 1995. Exchange rate interdependence: perspectives from the Pacific Basin. Cambridge University Press.

policy and Cambridge:

United Nations Development Programme 1998. Human Development 1998. New York: Oxford University Press. World Bank. 1987. The Philippines: issues and policies in the industrial

Report sector.


Part I1:

Impact of the East Asian Financial Crisis


4 The East Asian Financial Crisis and Philippine Sustainable Development Ponciano

Intal, Jr and Erlinda Medalla

ustainable discussions

development on the East

issues Asian

a

have so far been overlooked in financial crisis. To some extent

this is not surprising because, as Paul Krugman (1998) stated, "...nobody anticipated anything like the current crisis in (East) Asia." Thus, the first order of business is to understand why the crisis happened, why it involved several countries, and why a few countries were particularly hard hit. In the process, appropriate policy and adjustment measures can be proposed and undertaken to address underlying problems and thus minimize the adverse social and economic effects of the crisis and point to a faster resolution. Asia is the most polluted and environmentally degraded region in the world. Moreover, it has the largest number of poor households in the world. Thus, because of its magnitude, the current economic and financial crisis of East Asia is expected to impact on the region's sustainable development prospects and challenges. Whether or not the impact is large or small, temporary or permanent, and short term or long term in each of the affected countries is likely to be determined by the state of the environment and social development before the crisis. Impact is also affected by the magnitude, length, and nature of the adjustment and policies that each country undertakes in response to the crisis .3

This paper was presented during the Meeting on the Asian CurrencyCrisis and Sustainable Development, Sixth Session of the United Nations Commission on SustainableDevelopment, New York,21-24April 1998. 2The authorsacknowledge the assistance of the other membersof the Philippine StudyTeam, namely,Cielito Habito,MariandelosAngeles,RaphaelLotilla,andEllaAntonio,and theexcellent researchassistance of LeilanieBasilioand RonaldYacat. 3Thesocial impact of the EastAsian financialcrisisis discussedin Chapter 6 of thisbook.


76

Economic

crisis... Once more

This paper presents an analysis• of the impact of East Asia's financial crisis on sustainable development challenges facing the Philippines. It is exploratory, given the paucity of data and information on hand. Nevertheless, we hope that analyses and and •economic It must

the paper would contribute, even modestly, to more in-depth discussions in the future on the impact of East Asia's financial crisis •on the region's sustainable development. be noted that the crisis occurred at the same time that the E1 Nifio

phenomenon took its toll on the country. Thus, both the crisis and E1 Nifio significantly shaped the country's economic performance and affected its sustainable development concernsmsocial development, and natural resources and environmental regeneration. This paper has four major sections. Section one provides an overview of the East Asian economic and financial crisis. Section two looks at the Philippine •economic performance and prospects in the light of the crisis. Section three explores the actual or potential impact of the crisis on Philippine social development and the environment and natural resources sector. The last section discusses the implications of the crisis and E1 Nifio on• a number of policy and institutional challenges facing the country especially in the areas of water resources, upland and coastal areas, and the urban environment. Overview

of the East Asian financial

crisis

The suddenness and severity of the East Asian currency and financial turmoil has spawned a burgeoning body of literature that helps us understand what went wrong and what needs to be undertaken to minimize the havoc, and at the same time hasten the recovery of affected East Asian economies. The crisis arose as a result of both microeconomic and macroeconomic factors, especially microeconomic and regulatory infirmities in the financial arena and macroeconomic vulnerabilities, particularly to the contagion and lossof investor confidence (for example, see Krugman 1998, Radelet and.Sachs 1998, Stiglitz 1998, Garnaut 1998, Nasution 1998, and Nidhiprabh a 1998). In addition, Radelet and Sachs (1998) assert that the initial, policy response to .the crisis, drawn with the International Monetary Fund (IMF) .and the donor community, appears to have been inappropriate, thereby causing :financial panic and deepening the crisis unnecessarily, especiallyin IndonesiA. I " There is a growing consensus that the financial and capital markets played a big role on why the crisis occurred, in the number of countries affected, and in ,

.

I

ii

its unexpected severity. On hmdmght ther_ appears to have been irrational exuberance" among foreign and local inve_tors and bankers before the crisis, which was probably caused partly by severe moral hazard problems, arising from perceptions of implicit government gtiarantees on liabilities of local banks .(Krugman 1998). The inherent imperfections of the financial market arising


Chapter 4: Intal and Medalla

77

partly from asymmetric information (Stiglitz 1989) puta premium on prudential banking rules and regulations, which have been inadequate in several East Asian countries affected by the crisis. There appears to have been some "herd behavior" on the part of foreign portfolio investors, facilitated partly by a revolution in telecommunications .that allowsthe international transfer of massive funds in seconds, The apparent "irrational exuberance" before the crisis turned into an apparent "irrational pessimism" which led to massive capital outflows as macroeconomic uncertainty deepened partly because of, as Radelet and Sachs (1998) emphasize, inappropriate While the crisis is rooted

initial bailout packages.. in the financial sector, there were nonetheless

macroeconomic

in the affected

vulnerabilities

where the crisis .started', was particularly

countries

vulnerable

(Table 1). Thailand,

to currency

speculation

and loss of investor confidence because of the high share of short-term debt to total foreign debt (about a third), an excess of short-term debt to international reserves, and a high ratio of current account deficit to gross domestic product (GDP). The failure of financial institutions (as the real estate market softened markedly) and the stagnation Ofexports in 1996 pointed further to the need for a currency correction. The rapid spread of the Thai contagion to other countries can also be attributed partly to macroeconomic vulnerabilities in these countries. Although the Philippines had a much smaller share of short-term debt to total debt and its external debt service burden has declined significantly during the 1990s, it experienced the largest real currency appreciation and the highest ratio of merchandise trade deficit to GDP during the 1990s among the Association of Southeast Asian Nations (ASEAN) countries. Hence, the country was vulnerable to a major Thailand. handicapped short-term compared

currency depreciation of an important competitor country like Indonesia, despite manageable current account deficits, was by a heavy external debt service burden and a higher ratio of debt (primarily of the private sector) to international reserves with Thailand. As such, Indonesia's corporate sector became

particularly vulnerable to sharp depreciations of the rupiah and to a sharp rise in interest rates. South Korea's ra_o of short-term external debt to international reserves was even higher tb _ those of Thailand and Indonesia (Table 1). As a result, South Korea, particv_rly the private banking and nonbanking sectors that were the borrowers, also became vulnerable to the increased skittishness of foreign lenders and investors of the Thai financial collapse:

toward

countries

in the region in the aftermath

The return of foreign portfolio Capital into the region, together with the slowdown in import payt. ents, has triggered the ongoing recovery of currencies and stock markets, and the reduction in interest rates, especially in South Korea, Thailand, and the Philippines. Ironically, Indonesia, which before the crisis had


78

Economic

relatively

manageable

current

account

crisis... Once more

deficits and fiscal situation,

and one of

the least overvalued currencies in the region, became the hardest-hit economy. Radelet and Sachs (1998) attribute this to policy missteps contained in the initial IMF adjustment program and the attendant serious erosion of international credibility of the Indonesian government when it balked at fully implementing the initial package of reforms. As a result, the initial contagion turned into financial panic with dire socioeconomic effects. The severity of socioeconomic effects has fueled greater political uncertainty to slow down the full recovery

in the country, which is expected

of the Indor_esian economy. i

Table 1.

Selected

ASEAN

(Averages,

countries:

macroeconomic

vulnerabilities

in percent of GDP Unless other_iseindicated).

Item

Indonesia "1991-95 1996

Export growth rata (value in US $)

Malaysia 1901-95 1996

Pl'dlip pine_" 1991-95 1996

Thailand 1991-95 1996

11.4

10,3

20.3

5.8

16,6

17,8

19.7

1,3

-3,3

-5.'1

-7,8

-4.2

-36.9

-5,9

4.7

-5,2

Excha nf_ rate Real effective exchange

ra te [percent chtlnge

over the period; appracia Balance of payments

lion (_)jr,

Current

accottnt deficit

-2.4

-3,6

-6.5

-5.2

-3,6

-4.1

-6,7

-8,0

Capltal Debt

inflows (net) ¢

4.0

5,2

11,5

7.7

5,8

8,9

10.4

9,2

191,5

178.5

43.8

40,3

168.2

103.6

105,5

118.6

7.7

8.5

18,2

_,7

15).

13.8

44.4

43.6

32.4

32.8

6,7

25.4

I5,4

10.9

11,4

EXtum_I debt (% of exports of goods and selvlces) Shot tqerm debt (% of ext_rl_a[ debt) Debt-service

ratio (% of exports

of g0_xts and _rvlces)

5.7

Financial st-ability Central government

balance

Publlc debt

Interne tiona[ claims held by/oceigcl Short-termReserves

-0.2

1.0

0.1

0,7

-1.6

-0.4

2,8

37.2

27,7

21.8

15.9

113,0

88.0

17.2

1995-96

M/d- 97

"19cJ5-96

1.9

1,7

Mid- 97

1995_96

M_d-97

1995-96

0.6

0.6

0.8

1.2

2.3 103

Mid-97

bal_k__

(ratio) '1

Memo item International claims held by foreign banks Short-term/Reserves (ratio)

0.4

1,5

Mexico End 94 5,2

End 95 1,5

°Allratios are in percent of GNP,unless otherwise indicated. bFor 1996,December 1996over December 1995. ¢Includes errors and omissions. dAverageo£December 1995and 1996. Sources: Hicklin,Robinson, and Singh (1997);Short-term/Reserves estimates from Radelet and Sachs (1998).

The East Asian financial crisis appear s to be stabilizing as currencies and stock markets have started recovering and ii_terest rates have likewise started declining. Nevertheless, with asset deflation, reduced capitalization of banks, higher debt service and interest rates, and sltlggish domestic demand, the crisis


Chapter 4: Intal and Medalla

79

can be expected to further run through the real and corporate sectors of affected economies for perhaps another year or two. Most analysts agree that several fundamentals that have contributed to the rapid growth in East Asian countries during the late 1980s and early 1990s remain (e.g., comparatively high saving rate, demographic transition, and export orientation). Moreover, real exchange rate adjustments, institutional reforms toward greater transparency and better prudential regulations, and the ongoing restructuring of corporate sectors can be expected to strengthen the growth prospects of affected countries. Hence, East Asian countries are likely to recover and resume robust economic growth rates in the near future, although probably not at sizzling rates of past years. The crisis brought out the need for prudence and "less exuberance" in both corporate and macroeconomic arenas domestically and among foreign investors and lenders. The East Asian financial

crisis and the Philippine

economy

The Philippines is one of the Southeast Asian countries that have not been hit very hard by the crisis so far. A decade-long process of financial reform and rebuilding is a major factor behind the country's greater resiliency during the crisis. At the same time, the Philippine financial institutions' foray into the intemational capital market came later than those of Thailand, Indonesia, and South Korea. in addition, the peso depreciation, in conjunction with the crisis, is in fact the unexpected marketqed and depoliticized exchange rate adjustment needed to cushion the domestic industry from a significant peso appreciation in the face of tariff reduction during the 1990s. However, the country's macroeconomic condition remains fragile primarily because the government's fiscal situation is particularly vulnerable to high interest rates. The country has the highest ratio of public debt to GDP among the Southeast Asian countries. Thus, an unwarrantedlong and high interest rate regime could lead to a "doubledeflationary whammy" on the Philippine economy, namely, an adverse impact on investments and operations of large and small businesses and sharp cutbacks on noninterest payment government expenditures. Thus, it is critical for the Philippines that the regional currency situation stabilizes so that monetary policy and interest rates could ease up appreciably. At the same time, the crisis points to the need to strengthen further the fiscal situation of the country primarily through an increase in tax and overall revenue effort as well as through further streamlining of government operations. Exchange rate and [iaaace The East Asian financial

crisis had an immediate

effect on the foreign

exchange and financial arena in the Philippines. When Thailand devalued its currency in early July 1997, the Philippines eventually had to let the peso


80 depreciate

Economic

crisis... Once more

in mid-July when the Bangko Sentral ng Pilipinas (BSP) intervention

in the foreign exchange market, amounting to about US$1.5 billion sales, proved useless because of the heavy speculative attack on the peso. The exchange rate rose to more than P30 per dollar in August, hitting P45 per dollar in early 1998 before appreciating to around P38 per dollar by mid-April 1998. The Philippine policy response to the crisis centered on monetary policy and balance-of-payments management. The BSP tightened monetary policy as it raised overnight lending rates, increased liquidity reserves on banks on top of the required reserves, momentarily closed the overnight lending window, and imposed tighter rules on oversold and overbought positions of banks on foreign exchange. The result was a sharp rise in domestic interest rates. For example, the banks' average lending rate rose from 12.9 percent in February 1997 to 20.9 percent in October 1997; the bellwether 91-day Treasury bill rate increased from 10 percent in April 1997 to 19 percent in January 1998, while the average high prime lending rate of banks was 26.8 percent in January 1998. Interest rates, however, have been dropping in response to the easing of reserve requirements (both liquidity and required) and the increased stability of foreign exchange markets in the regioN. Thus, the 91-day T-bill rate had declined to 15.5 percent, whereas the average high prime lending rate had dropped to 22 percent in April 1998. Nevertheless, interest rates remained high and the gap between deposit and lending rates remained substantial; as a result, businessmen in southern Philippines demonstrated against the high interest rate regime. Portfolio flows, as expected, turned negative as a result of the crisis. Indeed, foreign portfolio investments turned from net inflow during the first four months of 1997 to net withdrawals beginning in May up to November, except surprisingly in August. Predictably, the high interest rate and the flight of foreign portfolio capital led to a sharp dro p in the stock market, with the Philippine Stock Exchange composite index iplunging from 3171 points at the end of 1996 to 1772 in November 1997. Foreign portfolio investments have gradually trickled in, resulting in the uptick in the composite index (2185 in mid-April 1998). The Philippines' financial institutions did not fail as a result of the crisis. Only one bank a fairly small and newly upgraded

commercial

bank failed due

primarily to DOSRI (directors, officers, stockholders and related interests) loans mainly to the real estate companies of the maior owner. Behind the resiliency of the Philippine financial system to the East Asian crisis are the decade-long reforms that have been undertaken in response to its own financial crisis in the early 1980s. Most of the reforms are prudential in nature, including increased capitalization requirements, compliance wit h the minimum asset ratio, limits on single borrowers and on DOSRI loans; stricter audit and reporting requirements, and stricter policies on bail-outs of problematic banks (Bautista 1992).


Chapter 4: Intal and MedaUa The series of increases

81 in bank capitalization

requirements,

together with

the further opening up of the financial sector to a limited number of foreign banks, have proved to be important stabilization factors in the financial turmoil in tbe region. The average capital adequacy ratio in the country hovers around 16 percent, significantly higher than the Bank for International Settlement (BIS) requirement of 8 percent. It is likely that this ratio is not fully risk-adiuSted. The ratio of nonperforming loans to total loans of commercial banks has remained manageable at 4 percent 3 months after the crisis compared with 3 percent before the crisis. These rates are much lower than in the mid-1980s, reaching more than 20 percent during the economic crisis. While the Philippine financial sector has largely weathered the regional crisis, the government's fiscal situation has turned precarious because of the high interest rates and slowdown in the economy. For example, the national government budget deficit more than doubled during the first quarter of 1998 compared with the same period in 1997 (i.e., P12.4 billion vs. P5.7 billion), arising from the shortfall in customs duties as dutiable imports declined. In addition, public debt service payments increased significantly because of the Philippines' higher ratio of public debt to GDP compared with other Southeast Asian countries (Table 1). The precariousness of the fiscal situation arises from internal dynamics--the larger the deficit, the greater is the need of the government to borrow domestically, and therefor interest rates to remain high.

e the greater

is the pressure

for domestic

The Philippine government has realized the precariousness of its fiscal position. Among the more important measures undertaken and promised under the Memorandum of Economic and" Financial Policies with the IMF are the 25 percent mandatory reserve on all expenditures other than personnel and debt service; a 10 percent deferment in the internal revenue allotment (IRA) for local government units (LGUs), suspension of all tax subsidies to national government agencies, corporations, and LGUs; suspension through presidential veto of a specified amount of new programs and proiects in the 1998 budget; and renewed effort to strengthen tax administration. In addition, the Philippines is tapping foreign long-term loans to help finance the budget to reduce pressure on the domestic debt market, thereby allowing for the softening of domestic interest rates. The fiscal belt tightening, while important for macroeConomic purposes, means cutting government expenditures for social development, and environment and natural resources protection and rehabilitation two central concepts in sustainable development. This is discussed in another section.

Output and trade Wl_ile the crisis had an immediate and significant impact on the country's financial sector, its impact on the country's output and trade had been much


82

Economic

crisis... Once more

more muted. On the surface, the East Asian crisis appeared to have had a significant impact on the country's national output (Table 2). The growth of GDP decelerated from 6.1 percent and 5.4 percent in the third and fourth quarters of 1996 to 4.9 percent and 4.7 percent in the third and fourth quarters of 1997, respectively. However, a closer look at the quarterly growth figures gives a less clear picture. For example, growth rates decelerated even during the first and second quarters of 1997 relative to the first two quarters of 1996. It is clear that the crisis did not precipitate the deceleration in growth of the Philippine economy. Table

2.

Philippines: macroeconomic otherwise indicated).

indicators

Annual [11d.J,cato1

19_)6

growth

ra_;s

unless

Quarterly

1997

1996 Q]

ReaJ GDP

(In percent

1997

Q2

Q3

Q4

Q1

Q2

Q3

Q4

5.7

53

5,1

6,1

6,1

5,4

5

5.8

4,9

4,7

6,9

5,8

6,!)

8,1

6.9

6.7

5.8

6,4

5.7

5,2

Ab_-iculture

3.1

2,8

1,9

5,9

3,6

1,6

3.7

2.9

0.7

3,4

Mat_ufacturing Sarvices

6,3 (_,5

5,7 5,6

6,1 63

6,4 5,9

6,8 6,7

6 7.1

4 6.4

6.9 6.2

6-2 5,6

5,8 4,5

25,7 11,6

23,2 10,5

23,9 7,]

24.8 4,8

27.9 4.7

23.9 4.5

24.1 4.9

25,6 6,1

10,9 7,4

7.5 h.3

7.4 1.4

7.7 2.5

10,4 -3.4

8,7 -4,8

7.9 -10,4

-4.8 -5.1

-2,3 -3.3

-7,1 -8,2

-6,9 -8.4

-3.3 -4.7

Real. GNP growth rates Growth ('at cor_stant pric._,s) in:

]'I/"ves {flleo t I'_{_ (GI3CI _ as % oIGPCP; in real temls) hfflatiol_ ra t'es

24.4 8.5

25.4 53

Unemp/0ymen{ rate (period average) Overall ba[_.ce of payi_._el_.ts Positlon (% oICNP)

8,6 .1,7

_,7 -3,9

Current account balance (% of GNP) Trade balance (% of GNP)

-4.5 -5.2

-4.9 -62

-3.8 4,6

-9.4 -10.l

4).2 -l.1

Growth in eoltm set-rictus

24.3

21,5

30.5

18.3

20.6

19

32

24.3

15,4

17

17.7

22.8

25.8

13,9

I1,8

20,9

17.5

26.5

24.7

22.2

22,5

21,2

26,3

18,5

23.4

22.8

26.9

18

28.7

12.9

20,8

14.0

31,0

,23,4

16.9

14,2

14.2

12.9

33.3

29.3

8.3 r, ,_.8

20.9

11.3

29

76.1

Change in net foleignl investments Change, in direct in vc_stm¢_lts

118.6 -1,7

-78.2 -16,5

7,5 10.6

-I28,2 -10.6

-101.5 -46.5

Change il7 portto/ioinvestlnel7tS (_,_ral t_ su p us/defici (-) (";, of GNP) Ratio cd debt _rvice bul'dell

778,6 0,3

-ll6,1 0,1

3.8

-170,3

-147.7

12.7

11.3

5.8

6.2

Growth

exports

in meccl_anclise

Growtln h-t dollar serv),ces

imports

Growth

in me;chandise

Change

in _'orkers'

to expores

of goods

and

exports of goods

aid

impocts

rem.itrances

of G & S (%')

[_.,:Ltioof cl,_bt 'aax'k.'i¢_burdell

_o (_N.Ip (%)

8,3 -.t,4

-98.2 -2"1.1 -115.2

Note: Growth rates for quarters are on year-on-year basis. Sources: PIDS Data and Information Resource Program; BSP Selected Philippine Economic Indicators, Yearbook1996and March 1998;NSCBNational Income Accounts,various years. It is more likely that the crisis aggravated

the deceleration

in growth of

the economy. Thus, for example, net reduction in inventories in the third quarter and only a small increase in inventories in the fourth quarter of 1997 partly reflect the cautious attitude of manufacturers with the onset ofthe crisis. The inventory drawdown contributed to the deceleration output during the second half of 1997.

in growth of manufacturing


Chapter 4: Intal and Medalla

83

Other factors which are not strongly linked to the crisis contributed to the deceleration in economic growth. For example, the more important cause of economic slowdown during the third quarter of 1997 was the sharp deceleration in the growth of agriculture relative to the previous year's corresponding quarter, arising primarily from sharp declines in rice and sugarcane output. This was linked to the E1 Nifio phenomenon, which had affected the farming timetable. Another sector that was also badly hit by E1 Nifio was the water utilities industry, which declined during the fourth quarter of 1997 as a result of the worsening drought problem. Finally, government services also grew only marginally during the last quarter of 1997. Another factor was the slowdown in granting of salary adjustments in the public sector in 1997 compared with the previous year. However, this may have resulted from the crisis. In sum, the national account estimates did not indicate that the East Asian crisis exacted a heavy price on Philippine months of the crisis.

output during

the first 6

Similarly, the crisis did not have a significant impact on Philippine foreign trade so far. The growth of imports in real terms was higher in the third and fourth quarters of 1997 than during the first two quarters of the year. Aggregate merchandise exports had been growing at a robust pace in 1997 and at an even faster pace during the first 2 months of 1998. 4 Indeed, given the substantial real appreciation of the peso during the early 1990s, the depreciation of the peso arising from the crisis should in principle be conducive to the growth of exports. During the early 1990s, the appreciation of the peso, reduction in tariff, and rise in wage rates reduced the international competitiveness of some labor-intensive manufactures and forced them to restructure due to greater competition. The textile industry is a good example of industrial restructuring to enable it to face a more open at the same developing accelerated

economy. The sector's output had been declining for several years; time textile exports had been growing as some firms succeeded in export niches. It is not yet known if industrial restructuring had or slowed down because of the crisis.

The robust growth of merchandise exports in 1997 and 1998 was fueled largely by electronics exports, including computer parts. The surge in electronics exports is likely not caused by exchange rate adjustments but rather by the increase in investments in export-oriented electronics and computer parts during the past 3 years. About 75 percent of all investments in the Philippine Export Zone Authority's (PEZA) sanctioned industrial estates and special economic zones during 1995-97 were in the electronics and semiconductor industry. It is likely that the depreciation of the peso would be beneficial to the export sector in the medium term. Of course, what matters is the real 4 Estimatesof services exports in the national income accounts are not very reliable because of problems related to the attribution of peso conversions of foreigncurrency deposits (FCDs).


84 depreciation

Economic of th e peso, not nominal

depreciation.

crisis... Once more

In this regard,

one of the

significant impacts of the crisis is that the substantial nominal depreciation of the peso has been translated into a significant real depreciation, thus possibly making the output and trade effects of the depreciation positive in the future. In contrast to past decades, the substantial depreciation of the peso during the crisis has not translated so far into significantly higher inflation rates. This can be attributed to (a) the relatively tight monetary and fiscal policy adopted, (b) high protection rate in food crops like rice before the crisis, coupled with the large duty-free importation of rice and cornby the government whicheffectively dampened upward price adjustments in such politically sensitive items like rice; (c) responsible and relatively noninflationary wage adjustments during the crisis, and (d) reduction in the world price of oil, an important imported input. Real exchange employment

rate

adjustment

and

trade

re[orms

on output

and

Over the medium term, the real depreciation of the peso is expected to serve as the much-needed complementary measure, which the government failed to take advantage of when it started to implement ongoing trade reforms in the 1980s. Basically, the currency adjustment would further reduce price distortions, which in the long run would benefit the economy. In particular, the real depreciation of the currency is expected to improve the relative price of tradables (especially export-oriented sectorslwith relatively high value-added) compared with nontradabJ.es. ! A recent study by the Philippine Institute for Development Studies simulated the impact of ongoing trade reforms implemented by Executive Order (EO) 264 (together with more recent amendments) on output and income. Using the same model this paper attempts to analyze the impact of the Asian currency crisis by comparing estimated potential effects of ongoing trade reforms with and without exchange rate adjustment. Scenarios with exchange rate adjustment provide some indication of the possible impact in the medium term of the peso depreciation in the aftermath of the East Asian crisis. The model is partial equilibrium in nature in that it assumes zero crossprice elasticities and could not incorporate other factors such as investment and monetary variables. These shortcomings limit the analysis to comparative statics. The advantage of the model, however, is its multisectoral, input-output framework, highlighting best the variation in effective rates of protection and the varying effects of trade reforms across s6ctors, and incorporating to some extent linkages among them. Basically, the model works as follows. Changes in tariffs (or tariff equivalents in the case of removing quanfitaiive restrictions) brought about by


86

Economic

crisis... Once more

with or without exchange rate adjustment. Without exchange rate adjustment, however, output growth would increase by only about 0.40 to 0.75 percentage point (for low and high elasticity assumptions, respectively) due to trade reforms under EO 264. Income growth would even decline slightly by around 0.03 to 0.06 percentage point. This is attributed mainly to a decline in the growth in manufacturing value-added. This also implies a reallocation of resources to sectors with relatively lower value-added ratio, which characterizes the Philippine manufacturing sector including its major exports. The effects on the growth in both output and value-added for agriculture are positive. This is mainly because EO 264 maintains protection for agriculture while lowering industrial tariffs substantially to 10 percent and below. The exportable sector benefits most, which could grow by around 4-8 percent. This is brought about mainly by improved relative prices due to trade reforms.

Table 3. Simulation

of the impact of trade reforms (E.O. 264). l W/o

Sector Output Importables Exportables

exchange rate adjustments A B

With 10% exchange rate adjustments A B

With 20% exchange rate adjustments A B

0,75 -2,09 7,85

0.40 -1.16 4.27

7,81 11.07 21.45

4.27 6.02 11.77

14.85 24.22 34.96

8.13 13.20 19.22

Agriculture Importables Exportables

0.82 0.74 2.03

0.51 0.46 1.27

5.87 8.82 9.18

3.67 5.51 5.74

10,93 16.89 16.33

6.83 10.56 10,20

Mant_facturing lmportables Exportabtes

1.92 -2.08 10.33

1.03 -1,11 5.51

17.08 12.72 26.51

9.11 6.78 14.14

17.16 14.67 22.70

32,18 27.51 42.56

-0,06 -4.02 6.20

-0.30 -2,21 3.40

6.29 8,24 19.15

3.48 4,57 10.61

12.61 20.50 32,02

6.99 11,34 17.77

Agriculture Importables Exportables

0.92 0.77 2.01

0.58 0,48 1.26

6.42 8.85 9.16

4.02 5,53 5.72

11.93 16.93 16.30

7.46 10.58 10.19

Manufacturing Jmportables Exportables

-0.12 -4.97 8.49

-0.06 -2.65 4.53

14.88 9.53 24,51

7,94 5.09 13.07

29.83 24.04 40.37

15,91 12,82 21.53

Income lmportables Exportables

A : Effects of E,O, 264 using high supply elasticities. B : Effects of EIO, 264 using low supply elasticities.

With real exchange rate adjustment, growth in both output and income increases much nlore. Output growth could increase by as much as 4.3-7.8 percentage points with a 10 percent real exchange rate adjustment, and by much


Chapter 4: Intal and Medalla

87

higher rates (8.1-14.8 percentage points) with a 20 percent real exchange rate adjustment. The corresponding effect on income is slightly less at around 3.56.3 percentage points for 10 percent adjustment and 7-12.6 percentage points for 20 percent adjustment. This implies an increase in GNP of up to 1-2 percentage points per year. These results are drawn from a model subject to constraints and limitations,

and the magnitudes

are not absolute. Nonetheless,

results highlight

the complementary role of the exchange rate in trade reforms. It is likely that the output and export impact of the peso depreciation will take time to be felt. To some extent, this depends on the state of the real interest rate and the availability of credit, considering that investments and financing are important means of seizing opportunities offered by the real depreciation of the peso. As the interest rate declines further, it is likely that the output and trade effects of the real peso depreciation willbecome more apparent and appreciable. Impact of the East Asian and environment

financial

crisis on Philippine

The two key pillars of sustainable

development

social development are social development

and poverty alleviation, and natural resources and environment regeneration and protection. The East Asian crisis impacts on these two pillars through several mutually interacting channels, both direct and indirect. One is the employment, income, and poverty channel arising from the general slowdown of the economy. Another is the interest rate and inflation channel, because investments in both human resource development and natural resource regeneration are long gestating. The third is the real exchange rate channel that impacts on the relative profitability of production of industries, especially export-oriented, importcompeting, and nontraded industries. The fourth channel is fiscal contraction and expenditure realignment, which directly affects government provision of social services, and natural resources and environment management. The eventual

impact of the crisis through

these and other channels

would depend

partly on the institutional, political, and policy factors affecting the behavior and welfare of the various participants in the sectors and industries. •Employment, income, andpoverty The Philippines has the highest poverty incidence and unemployment rate in Southeast Asia, with more than a third of all Philippine households poor in 1994 (Table 4). Thus, other things being equal, even a small decline in output and income will have a potentially significant impact on poverty in the country. In addition, most of the poor in the country are in the rural sector, primarily farmers. Hence, the state of Philippine agriculture has a particularly important


88

Economic

effect on poverty. an important (Intal 1994),

Finally,

outside

of Metro

share of the income of households indicating that industrialization

employment outside in the country.

Table

in regions

4. Poverty

of Metro

indicators,

Economy

Manila

crisis...

Manila,

Once

wage

income

in the higher income and nonagricultural

is an important

means

more

is

brackets wage

of reducing

poverty

1985-95. Head-count

index

Poverty

1985

(percent) 1993

1995

Malaysia Thailand

10.8 10.0

<1.0 <1,0

Indonesia

32.2

Philippines

32.4

China Papua New Guinea

gap

1985

(percent) 1993

1995

<1.0 <1.0

2.5 1.5

<1,0 <1.0

<1,0 <1,0

" 17.0

11.4

8.5

2.6

1.7

27.5

25.5

9.2

7.3

6.5

37.9

29.7

22,2

1,0.9

9.3

7.0

[5,7

n.,a,

21.7 t_

32

t_.,a.

5.6 b

Leo PDR c

61.1.

46,7

41,4

18.0

H,5

9.5

Vietnam

74,0 a

52.7

42.2

â&#x20AC;˘ 28.0'_

17.0

11.9

Mongolia East Asia"

. .â&#x20AC;˘

East Asia excluding

China

Merno item

85,0

n,a.

81.4

42.5

n,a.

38.6

37,3

27.9

21.2

â&#x20AC;˘I0,9

8.4

6.4

35,6

22.Y

18.2

11,1

6-0

4.6

1985

1988

1991

I994

Subsistence

24,4

20.3

20.4

18.1

Total basic expeoditure

44.2

40.2

39.9

35.5

Philippines (in % of families below poverty

line)

I n.a. = not available Note: All ntunbers in this table (except for Lao PDR) am based on the international poverty line of $1 per person per day at 1985 prices. Figures in italics ihdicate specific data sources different from all the figures and follow some methodological exemptions. " Includes only those economies presented in the table. b Data are for 1996. Available data on purchasing power parity (PPP) exchange rates and various.price deflators for Lao PDR are not very reliable and lead to anomalous results. Poverty estimates for Lao PDR are based on the national poverty line, which is based on the level of food consumption that yields an energy level of 2,100 calories a person per day and a nonfood .component equivalent to the value of nonfo,_d spending by households who are just capable of meeting their food requirements. While the. $1 dollar a day poverty line is based on characteristic poverty lines in low-income countries that have comparable food and nonfood consumption needs, this is a different methodological approach than that used for the rest.of the economies in the table. Thus the poverty estimates for Lao PDR are not strictly comparable with those for other economies. a Preliminary estimate from Dollar and Litvack forthcoming. Sources: Ahuja et al. (1997); Memo item for the Philippines is from Gerson (1998).


Chapter 4: Intal and Medalla

89

Aggregate employment and unemployment estimates show that the reduction in total number of unemployed in 1996 and the first half of 1997 reversed starting from the third quarter of 1997 until the quarterly labor force survey in January 1998 (Table 5). Thus, the slowdown in the economy during the second half of 1997 and the first quarter of 1998 had resulted in increased unemployment. The unemployment rate had risen from 7.7 percent in January 1997 to 8.4 percent in January 1998). Table 5. Employment

indicators

(Numbers

Jai_uary 199b 1997

Selected variables

in thousands;

April

rates in percent).

July

1996

1997

1996

1997

October 1996 1997

Labor force participation rate

65,5

65.4

69.1

68,8

66,3

65.7

65.8

65.5

Employment rate

91,7

92.3

89.1

89,6

92.6

9] .3

92,6

92,1

Total employed persona By class of worker

26527

27M6

27358

28105

27419

27531

27442

27888

Wage and _lary Own accouter

12171 10246

12974 10332

12395 10367

13386 10416

12934 10395

13917 10016

13096 10297

13565 10647

4110

4040

4595

4302

4090

3598

4049

3675

11485 2645

11428 2686

11975 2627

11601 2791

11668 2754

10987 2697

11451 2756

11260 2785

8.3 -28

7,7 -101

10,9 -180

10,4 -92

7,5 -278

8.7 385

7.4 -147

7,9 182

2I,0

21.1

22.2

23.4

2].5

" 23,1

19,4

20.8

Unpaid family worker By indust D' Agricul_are Manufacturing Unemployment rate Change in the number of _a_employed Undererl_ploymerlt rat_: Note:

Numbers

may

not add

up to total

due

to rounding.

Sources:PIDSData and InformationResourceProgram;NSOSectoralStatistics, onlineedition; BLESLabstatUpdates, Vol.2, No. 1. The low aggregate employment stemmed largely from a sharp decline in employment in agriculture and a sharp reduction in increase in industrial employment especially in manufacturing. Low agricultural employment was largely caused by the drought in many parts of the country arising from E1 Nifto. (For example, the Philippine government estimated that rice production declined by 12.7% during the first quarter of 1998 and by 25% during the second quarter compared with 1997.) The marked slowdown in manufacturing growth partly caused by the East Asian crisis has meant, however, that the dislocation in the rural sector arising from the El Nifio phenomenon could not be absorbed by the industrial sector. The January 1998 employment estimates showed that unemployment rate greatly increased in Metro Manila and urban areas, whereas it remained constant in the rural areas compared with January 1997. This suggested that the drought situation in the countryside encouraged migration into urban areas especially Metro Manila.


90

Economic

crisis... Once more

The migration pattern during the recent crisis differed from that during the crisis in the 1980s. In the early 1980s, migration to uplands accounted for more than half of interregional migration (Cruz and Repetto 1992), resulting in increased population in the uplands. Upland migration in the early 1980s was affected by the sharp fall in industrial production due to the economic crisis. But at that time, relatively better agroclimatic conditions allowed increases in agricultural output. In contrast, the E1 Niflo phenomenon hit the uplands, with its heavy reliance on rainfall for agricultural production, hard? Thus, the poverty and sustainable development problem after the East Asian crisis and the E1 Nifto phenomenon is less about upland migration and soil erosion and is more about rural distress and rising urban unemployment. The substantial reduction in agricultural output together with the large peso depreciation has not translated into significant price increases though. There are two major reasons for this. First, the rate of protection in the two major grains, rice and corn, was very high around 65 percent in the mid-1990s. In effect, rice has become a largely nontradable commodity, and as such its domestic price is not affected as much by peso adjustments as by the interplay of domestic demand and supply. Second, because of the adverse effect of E1 Nifio on imports. farmers' the bulk challenge the rural

domestic production, domestic rice supply was stabilized by large Given that domestic prices of grains have not risen substantially, incomes will likely suffer significant declines due to poor harvest. With of the poverty problem among farmers, it is apparent that the major facing the government in terms of poverty alleviation efforts will be sector.

In the nonagriculture sectors, the longer the high real interest rate regime remains, the greater are the dangers of growing pressures toward economic recession and larger numbers of corporate retrenchments or closures and worker layoffs. The number of firms that reported retrenchments ballooned during the fourth quarter of 1997 spilling into the first two months of 1998. Interestingly, the number of firm closures declined substantially during the last quarter of 1997 compared to the first three quarters of the year. The number of workers affected by the firm closures or retrenchments increased significantly in January and February of 1998 compared to the previous year. To minimize the adverse impact of the crisis on employees and firms, employers, labor unions and the government signed a social compact during an economic summit in February 1998 to work together to prevent strikes and layoffs. This social compact

is a positive

development

given the historically

s The reported deaths of around 40 starved tribal people or ]umads in severely drought-stricken parts of Mindanao due to eating wild yams,which are poisonous unless prepared well, indicates that the uplands had alsobeen badly hit by the E1Nlftophenomenon and therefore cannot be an important migration destination at this tirneunlike in the early 1980s.


Chapter 4: Intal and Medalla

91

adversarial relationships between management and labor in the Philippines. The improved industrial relations environment is seen in the more cooperative arrangements that have been worked out at the firm level both within and outside the collective bargaining agreements (CBA), such as, subcontracting to displaced employees, greater financial assistance to affected workers than is stipulated in CBA provisions, training of affected workers, transfer to sister companies, greater focus on working conditions, among others. Indeed, wage adjustments that were agreed upon in the regional wage and productivity boards last December 1997 to February 1998 were remarkably restrained, which contributed to the modest inflationary impact of the crisis on the country. The government has been monitoring the labor situation partly because of the social compact. It is apparent, however, that the government monitoring system is geared primarily to the formal sector and establishments. Monitoring of the rural labor market is particularly inadequate. As a result, public discussion and proposed policy measures have focused on the formal sector, while the rural sector, which was actually the hardest hit because of the E1 Nifio phenomenon, has been relatively neglected. The East Asian financial crisis has caused the hobbling of the industrial sector, preventing it from providing better employment opportunities for the distressed rural populace. The employment (and poverty) problem during late 1997 and early 1998 was an E1 Nifio problem aggravated by the East Asian crisis. The longer the crisis and the E1 Nifio problem dragged on, the greater were the adverse effects on the employment and poverty situation in the country. At the same time, the employment problem became less tractable for the government because stresses in the labor market were in the informal sector. For example, the January 1998 labor force survey showed that the percentage of unpaid workers increased. Similarly, there had been anecdotal reports that children were being "bumped off" in the queue in informal labor markets by older men. Since the working children likely came from very poor families, their being bumped off may have meant greater financial distress. The overseas employment market has been a major safety valve for the Philippines especially since the 1980s. The East Asian financial crisis sparked worries over Filipino overseas workers in the region being forced to go back home due to economic difficulties. So far, this initial fear has not been realized, however. While a few may have been sent home, the number of overseas workers in East Asia actually rose in 1997 compared with the level the year before. Perhaps the deterioration in domestic employment during the economic slowdown may have been a factor in the rise in overseas employment. However, a more compelling reason was the substantial depreciation of the peso, which made foreign employment more financially rewarding. The higher overseas deployment (by 13.3%) and the significant increase in remittances (76% in the


92

Economic

crisis... Once more

4th quarter) from Filipino overseas workers in 1997 (Table 2) provided an important safety net during the economic slowdown and with the devastation wrought by E1 Nifio in the countryside. Budget High interest rates and the peso depreciation immediately affected the government's budget. The peso depreciation increased the 1998 government expenditure budget by about 3.9 percent, while the increase in T-bill rate raised total budgeted expenditures by 5 percent. The total projected increase in budgetary expenditures arising from the peso depreciation, interest rate hike, and increase in inflation was estimated by the Department of Budget and Management at around P50 billion. With the slowdown of the economy and the significant deceleration in import growth resulting in lower growth of tax revenues, substantial increase in expenditures arising from the peso depreciation, and hike in interest rates effectively threatened an upsurge in the government's public sector deficit. In response, the Philippine government adopted several emergency measures, including a 25 percent mandatory reserve on all expenditures other than personnel and debt service, a 10 percent deferment in the IRA for LGUs, suspension of all tax subsidies of government units, continuation of the selective ban on creation of new civil service positions, suspension of about P14.4 billion worth of new programs and projects, and renewed effort to strengthen tax administration (GOP 1998). The imposition of the 25 percent mandatory reserve impacts on the capability of the government to provide social services and safety nets during the economic slowdown and the E1 Nifio phenomenon. For example, with 8090 percent of the government budget for primary and secondary education allocated to personnel costs, the 25 percent mandatory reserve has to be charged against regular programs. The negative impact will be evident on the printing of instructional materials; conduct of special education, school health, and teacher training programs; and construction of school buildings. For the Department of Health, the peso depreciation and the 25 percent mandatory reserve will likely mean less supply of drugs; reduced laboratory and diagnostic services, lower case finding and treatment, higher caseload of government facilities, and probable widening of service gaps particularly for vulnerable groups with limited access to health care (NEDA 1998). The budget of the Department of EnVironment and Natural Resources (DENR) is shown in Tables 6 and 7. Both tables show the impact of the 25 percent mandatory reserve. DENR's major operations bore the brunt of the budget cuts (Table 6). The program that was most adversely affected was environment management and forest management. The 1998 budget for protected areas and


Chapter 4: Intal and Medalla wildlife management

93

dropped

slightly from the 1997 level, but is nonetheless

significantlY higher than the 1996 budget. Although budget appropriations tend to be somewhat bloated and can be further trimmed, large drops in operational budgets are expected to impact negatively on the quality of services provided by the Department. Indeed, with adjustments for inflation, DENR's 1998 budget for maintenance and other operatIng expenses (MOOE), adjusted for the 25 percent mandatory reserve, is the lowest during the 1990s (Table 7). The 25

Table 6.

New appropriations, by program/project, of Environment and Natural Resources.

1996-98,

Depaz_ment

1996

1997

1998

645,636,000

656,765,000

832,746,000

I. Office of the Secretary A, Programs 1. General

administrative

a. General

b. Productivity Subtotal, 2, Support

and support

administrative incentive

services

and support

services

benefits

Gen. ad_rdnistrative

and support

services

38,478,000

38,146,000

645.636.000

695_243.000

870,892.000

86,236,000

100,657,000

118,368,000

57,078,000

63,541,000

70,852,000

37,943,000

58,071,000

19,715,000

11,633,000

13'572,000

14,674,000

92,909,000 45,486,000

41,633"000 51,197,000

44,900,000 63,469,000

27,000,000

28,000,000

55'520,000

3,957,000

4,077,000

3,507,000

to operations

a. Coordination,

formulation

and integratictn

of ENR sectoral plans and policies b. Coordination, monitoring and evaluation of ENR programs those devolved c, Information

and projects

system

development

d, Statistical services e. Production ea_d dissen'dnafion and popular

materials

and develop_ent

in support

,'rod environmental h. Adjudication i. Provision resources including

of technical

resources

education

of special studies,

development

designs

of forestry,

u|anagement

of pollution

payment

of rewards

and seizure

as amended

mining

operations illegal forest activities, to informers

of illegally

tr,'trtspor ted forest products of violatol_

and

cases

for operations against extraction/utilization

the discovery

Units and maintenance

ha the conservation

of natural

including envirmtn_ntal f, Legal services g. Conduct

inck_ding

to Local Government

in

collected/

and apprehension

of Section 68 (b) of P.D. No. 705, by E.O. No. 277, the hauling

of confiscated representation

fees

logs, space rentals, guards, expenses

ha the disposal/selling

and other expenses of confiscated

logs, subject to Special Budget by the President j. Laboratory services Subtotal, Support to operations

illegally

cut

and approval 8,100,000

10,500,000

8,460,000

25,159,000 395,501,000

40,702,000 411.950,000

33,445,000 432,910,000


94

Economic

crisis... Once more

Table 6. continued... 1996

1997

1998

3. Operations a. Forest mea_agenrea_t b. Land management c. Protected

. .

areas and wildl.ife management

d. Mh_es and geosciences e. Enviromnental

developn_ent

1,655,358,000

2,025,587,000

1,569,430,000

555,784,000

628,663,000

689,061,000

149,700,000

300,136,000

268,760,000

115,408,000

m_magement

f. Ecosystenxs resetn'ch and development Subtotal, Operations

Total, Progr_ns

......

295,461,000

305,403,000

144,287,000

11.1,765,000 2,883.476,000

146,068,000 3,405.8572300

255,043,000 2,926.581,000

3.924,613,000

4,513.050,000

4.230.383,000

B- Projects 1. Locally funded

project (s)

a. Construction

of Region_

b, Lon-oy Watershed

Office V building

Development

10,000,000

Project

J.n,Region I c. Maasin Watershed Project in Region VI d. Rehabilita tion of Riverbanks _'md Lakeshore Project--National Capital Region e. Eawironmental and_att_ral resource f. Water resources

developnrent

11,838,000 6,266,000

1,090,000 accoun_ag

69,750,000

,urd mmmgement

100,000,000

Subtotal Locally funded project(s) 2. Foreigp_a-assisted projects(s) a. Indus _rial Pollution

Control

10,000.000

19,194.000

169,750.000

9,807,000

16,516,000

36,124,000

357,639,000

187,553,000

162,754,000

5,050,000

4,305,000

8,500,000

15,915,000

18,300,000

16,273,000

392,031,000

228,840,000

235.121,000

402.031,000

248,034,000

404,871,000

i 4,326,644,000

4,761,084,000

4,635,254,000

36,568,000

40,908,000

45,819,000

Project

3,620,000

b. Natural Resources M,magement Progrmn c. Environment and Natural Resources--Sector Adjustment

Lotto Project

d. Pasig l_tver Rehabilitation e. Conservation f. Integrated

of Priority

Protected

Environmental

Sustainable g. National

Proiect .Areas Project

Management

for

Development lnt%n'ated

Protected

Progranr

(E'U Grant)

Subtotal,

Foreibm-assisted

Areas System 11,470,000

project(s)

Total, Projects Total, New appropriations II. National

Mapping

A. Pro_'ams 1. General

aa_d Resw.lrce Inforu'tation

achninistrative

a. Gener_

adnm_strative

b. Prod.uc6vity

services

m_d support

services

1,412,000

1,420,000

36.568.000

42,320,000

47,239,000

a. Water, coastal, and land surveys

45,294,000

91,87G000

141,184,000

b. Mapping

36,330,000

43,097,000

52,552,000

].1.,789,000

20,982,000

1.8,863,000

93,413,000

155.955.000

212.599.000

129,981.,000

198,275,000

259,838,000

Subtotal,

i_centtve

and support

Authority

benefits

Gen. administration

and support

2. Operations

c. Irdormation Subtotal, Total, Programs

and remote

sensing

maa_ageanent

and statistic_

services

Operations , i


Chapter 4: Intal and Medalla

95

Table 6. continued... 1996

1997

1998

B. P_:ojects 1, Foreign-assisted

project

a, Acquisition of two hydrographic/oceanographic vessekq (Iru_fituto de Credlto of the Kingdom

of

Spah_ and B_co Santander) Subtotal, Foreign-assisted project

B17.922.000 317.922,000

Total, Projects

317_92Z000

Tot,'fl, New ,_ppropriations

129.981,000

IlL Mines mrd Geosdences

198,275,000

57Z760.f100

16,136,000

57,683,000

Bureau

A. Programs 1. Gener_

admil"dstrsfive

a. General

admimstrative

b. Human

resource

¢. Productivity Subtotal, 2. Support

and support

services

development

hlcentive

General

servk:es

t_d support benefits

administration

and support

c. Research Subtotal, 3. Operations a. Mineral

m_d ptthlications

m_d development Support

to operations

lands adminis_ation

b. Geoscience development Subtotal Operations

and services

Total, Programs Total, New appropriations

Source:

tot_,

446,000

1,696,000

1,874,000

18,269,000

60.003.000

5,401,000 9,346,000

5,491,000 8,254,000

21,499,000

29,110,000

36,246,000

42,855.000

116,085,000

195,279,000

29,584,000 145,669.000

66,073,000 26L3522_

200,184_(100

364.210.000

200.184.000

364,210.000

5,159,543,000

5,577,224,000

to operations

a. Plara'th'tg and policy fonnulation b. Mh_eral eco_omics, fl'fformation

Grand

437,000

New appropriations

General

Appropriation

4,456,625,000 Act,

1996-1998,

percent mandatory reserve dramatically in real terms since 1996.

DBM.

accelerated

the drop in MOOE budget

Budget cuts are likely to be temporary and therefore their negative impact would also probably be short term. The Memorandum of Economic and Financial Policies submitted by the Philippine government to the IMF explicitly gives preference to social programs, especially on poverty alleviation for the 21 poorest provinces and 5th- and 6th-class municipalities. These programs are protected from the 25 percent mandatory reserve and are given top priority for budget restoration if the situation improves during the year. No such priority is accorded to budgets for natural regeneration programs.

resource

and environmental

protection

and


96

Economic

Table 7.

Budget,

Department

(In thousand

pesos

Particulars

of Enviranment at constant

crisis...

and Natural

Once more

Resources

1985 prices). I

1990

1991

1992

1,874,548

1_423,262

1,330,428

1,281,141

1,443,250

1,029,934

858,720

873,239

761,802

741,011

844,613

564,542

457,189

519,339

702,238

B. Capital outlays

1,373,919

828,829

524,611

559,650

572,985

Total

3,248,467

2,252,091

1,855,039

1,840,791

2,016,235

1995

1996

1997

A. Ct_rrent operating

expenses

1. Personal services 2. Maintenance and other operating Expenses

Particulars

1993

1994

1998 approved

A. Current

operating

expenses

1. Personal services 2. Maintenance and other operathlg expenses B. Capital outlays Total "_Approved

budget

b

1,252,010

1,410,734

1,462,821

1,656,252

1,525,439

765,861

855,721

914,062

1,132,998

1,132,998

486,148

555,013

548,758

523,254

392,441

189,935

341,376

466,872

342,420

239,446

1,441,944

1,752,110

1,929,693

1,998,672

1,764,885

(R.A. No. 8250).

b Approved budget less 25% of authorized regular appropriation (Administrative Order no. 372). Source: General Appropriations Act, 1990-98, DBM.

Impact

a adjusted

on the natural

resources

for nonpersonal

service

items

sector and the environment

Environmental indicators for the Philippines up to 1993 are shown in Table 8. The data indicate the seriousness of the environmental problem in the country. For example, total forest cover in 1993 declined to nearly half of the 1985 forest cover. Metro Manila's particulat e matter in 1993 was almost twice the national ambient standards, starkly in_ticating the serious air problem in the capital city. Dissolved oxygen in Laguna de Bay, the largest freshwater lake straddling Metro Manila and the provinces of Laguna, was 50 percent higher than the national ambient standard.

pollution country's Rizal and Rivers in

the Metro Manila area are even much more polluted or almost biologically dead. The country's coastal resources are also in serious trouble, with a substantial decimation of mangroves and serious overfishing in several major municipal or coastal fishery areas. Padilla and de Guzman (1994) estimate that actual fishing effort in small, surface-dwelling fishery has been twice that needed for maximum economic yield; as a result, actual fish catch is lower than the optimal yield despite twice the fishing effort. It is useful to examine whether or not the crisis would

further

exacerbate

the country's

environmental

problems.

For


Chapter

4: Intal

example, fisheries

and Medalla

there are indications intensified

during

97

that population the crisis

years

pressure

on coastal

of the early

and artisanal

1980s (Cruz

and Repetto

1992). It is not possible to assess this issue in relation to the East Asian crisis because of lack of data. Nevertheless, it appeared that this time, increased population

pressure

may be less pressing

because

of the apparent

migration of the population during the crisis. Another concern was the impact of the high depreciation

on private

environmental

Table

protection.

8. Environmental

Year

Forest cover (thousand ha)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

15,898.90 15,875.01 15,671.10 13s893.96 13,690.06 13,476.04 13,272.14 13,068.23 12,864.33 12,661.00 12,456.52 12,252.61 11,963.41 11,759.50 11,555.60 10,368.03 9,180.47 6,789.64 6,460.60 6,307.40 6,158,80 6,015.40 5,900.20 5,787.46

investments

in natural

For example,

indicators Particulate matter a (rag/Ncm) ........ ........ ........ ......... .......... 70.75 73.00 79.00 73.60 67.20 88.00 81 _50 86.25 93.00 84.00 ...... ...... 159.13 151.57 188.56 172.50 173.38 176.63 142.17

interest

resources

reforestation

urban-bound

regime

and peso

regeneration

programs

and

offer the most

in the Philippines. Sulfur dioxide a (ppm)

Carbon Dissolved monoxide b oxygen b (mg/Ncm) (rag/l)

0.040 0.025 0.024 0.026 0.028 0.018 0.022 0.016 0.027 0.014

4.70 4.70 4.18 4.40 3.75 3.83 4.43 3.98 4.00 8.10

0.007 0.013 0.011 0.011 0.013 0.008 0.012

------

Suspended solids b (rag/l)

-----_ 8.67 8.14 8.51 8.38 7.62 7.53 8.13 7.90 7.42 8.00 7.80 7.85 7.73 7.50

"Annual averages are only for Metro Manila. Annual averages are only for Laguna Lake. Notes: Ambient standards (source: Philippine Environmental Quality Report 1990-95). Particulate matter 90 mg/Ncm Sulfur dioxide 0.03 ppm Suspended solids - not available Dissolved oxygen 5 mg/L Carbon monoxide - not available Source: Rufo and delos Angeles (1996).

43.10 39.73 38.89 32.13 23.45 44.77 47.26 37.26 47.03 71.35 47.78 38.63 56.30 --


98

Economic

crisis... Once more

realistic way of increasing the country's depleted domestic supply (Niskanen and Saastamoinen 1996). Niskanen and Saastamoinen (1996) show that tree plantations, withvarious alternative management options including community forestry and intercropping, have substantially higher economic profitability (including environmental effects) than financial profitability In addition, improving the efficiency of wood processing

in the Philippines. in the Philippines

would likely improve the economic and financial profitability of mahogany tree plantations, similar to Thailand's experience in establishing teak plantations. High interest rates are expected to discourage private investments in reforestation government

and modernization continues subsidizing

of wood processing reforestation activities.

plants,

unless

the

In the medium term, exchange raty changes impact on the natural resources sector and the environment by influencing relative profitability of natural resource-based industries and the production structure of industries, which have different pollution intensities. To analyze the corresponding potential impact on the environment, this paper combines the results of the exchange rate and trade reform simulation discussed earlier with the ENRAP (Environment and Natural Resource Accounting Project) estimates of pollution abatement costs by industry. The different output structures implied by the different scenarios yield different average pollution intensities for the whole economy. The potential impact of the currency devaluation the difference in average pollution intensity associated scenarios.

is then indicated by with the different

To provide an indicator of environmental protection costs across activities, Table 9 presents estimates of pollution intensity (abatement cost per unit value of output) by sector derived from ENRAP results. In general, pollution (air and water) abatement costs areestimated using the valuation of waste disposal services needed to reduce pollution to a nondamaging level. Full installation and operation of pollution control devices are costed and an effective emission reduction

rate of 90 percent is applied. In agriculture

and forestry, environmental

protection costs pertain to costs of shifting upland agriculture to soil conservation technologies. The average abatement cost per unit of output for all activities is estimated at around

1.62 percent

using output

in domestic

prices as weights;

a lower

average of around 1.57 percent is obtained using output in border prices as weights. The higher average using domestic prices indicates that sectors with higher nominal protection tend to have higher pollution intensity. As such, trade reforms are expected economy.

to lead to a lower average

pollution

intensity

for the

Among the industries, "other metallic activities" had the highest pollution intensity at 32.9 percent followed by forestry activities with 28.8 percent (this included incremental costs of upland agriculture in forest lands shifting to less


Chapter

Table

4: Intal

9.

and

Pollution

PSIC

Medalla

intensity,

99

by sector

(In percent).

Industry and process

Agriculture, forestry, and fishery 11-13 11 Agricultural crops produclion 111 Palay production 112 Corn production 113 Vegetable production 114 Fruits and nuts (excluding coconut) production 115 Coconut production incl. copra-making 116 Sugarcane production 117 Tobacco production 118 Fiber cops production 119 Agricultural crops production 12 Livestock, poultry and other animal prod. 121 Livestock and livestock products 122 Poultry and poultry products 13 Agricultural services 14 Fishery 15 Forestry Mining and quarrying 21 Metallic ore mining 211-212 Gold ore mining 213 Copper ore mining 214 Nickel ore mining 215 Chromite ore mining 219 Other base metal ore mining 214-219 22 Nonmetallic mining and quarrying 221 Coal mining 222 Crude petroleum and natural gas exploration and production 223 Stone, quarrying, clay and sand pits 229 Other nonmetallic mining and quarrying 221,222,229 Manufacturing 31 311-312 313 314 32 321 322 323-324 33 331 332 34 341 342

Manufacturer od food, beverage, and tobacco Food manufacturing Beverage manufacturing Tobacco manufacturing Textile, wearing apparel and leather industries Textile manufacturing Wearing apparel Manufacturer of leather and leather products Manufacturer of wood and wood products including furniture and fixtures Manufacturer of wood and wood products Manufacturer and repair of furniture Manufacturer ofpaper and paper products: Printing and pub lishin g Manufacturer of paper and allied products Printing, publishing and allied industries

Pi 1.585 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 2.343 0.524 0,524 0.524 0.036 0.102 8.790

5,521 0,272 1.940 5.920 7.981 2.939 48.818 3.286 2.030 1.645 1.063 0.149 5.349

0.253 0.240 0.552 0.087 0.235 0,347 0.099 0.416 0.983 1.289 0,238 0.462 0.564 0.304


100

Economic

Table

crisis...

Once

more

9. continued...

PSIC

Industry and Process

35

Manufacturer of chemical and chemical products, petroleum, coal rubber and plastic products Manufacturer of chemicals and plastic products Petroleum refinery and manufacturer of miscellaneous products petroleum and coal Rubber products Manu/actut_r oFnon-metallic mh_eral products Manufacturer of pottery, china and earthenware Manufacturer of glass and glass products Manufacturer of cement

351,352,356 353-354 355 36 361 362 363 369 37 371 372 38

Pi

0.134 0.240 0.039 0.181 0.775 0.877 0.580 0.609

Manufacturer of other nonmetaU_c mineral prod. Basic metal industries Iron and steel basic industries Non-ferrous metal basic industries Manufacturer of fabricated metal products, machineries and equipment. Manufacturer of fabricated metalproducts Manufacturer of machinery except electrical Manufacturer of electrical machinery, etc. Manufacturer of transport equipment Manufacturer of professional and scientific and measuring and controlling equipment Manufacturer and repair of metal furnish, and fixtures

381 382 383 384 385 386 385,390 39 390

1.360 0.394 0.335 0.210 O.15_ 0,186 0.643 0.088 0.213 0.120 0.361 0.105 O.104 0.104

Other manufacturing industries Other manufacturing industries

Using domestic output (Qd) as weights. * Using border output (Qb) as weights.

erosive

technologies).

for gold

Other

and 11.9 percent

the average

with

low abatement

mining

activities

for copper.

1.6 percent.

cost ratios,

Manufacturing

with

were

Agriculture

all except

also high

with 10.3 percent

was only slightly industries

fo_ wood

registered

products

being

lower

than

relatively lower

than

I percent. These

estimates

production/output

of pollution structures

intensity

resulting

by sector

fro m earlier

are used

together

simulations.

with

Specifically,

the simulation results of the three scenarios Itogether with pollution intensity estimates, yield simulations of pollution intensity associated with four different cases: (a) pre-EO 264, (b) post-EO 264 under fixed exchange rate, (c) post-EO 264 with 10 percent exchange rate adjustment, and (d) post-EO 264 with 20 percent

exchange

rate adjustment.

Table 10 summarizes is associated

with

appears

trade

that

the results

the highest reforms

of thelexercise.

pollution under

intensity

EO 264

with

The pre-reform at around or without

scenario

1.57 percent. exchange

It rate


Chapter 4: Intal and Medalla

101

adjustment potentially reduces the average pollution intensity of the economy. The average pollution intensity decreases to around 1.53 percent without exchange rate adjustment, 1.49 percent with 10 percent adjustment, and around 1.45 percent with 20 percent adjustment in real exchange rate. The potential pollution intensity differs in scenarios with and without exchange rate adjustment. Table 5 indicates that the potential improvement in pollution intensity is higher with exchange rate adjustment. The pollution intensity associated with 10 percent real devaluation (at 1.49) is about 3 percent lower than that without devaluation. The reduction in pollution intensity with 20 percent devaluation Table 10.

I-O

is even higher at more than 5 percent.

Impact on average (In percent).

PSIC

pollution

28-37

15 Forestry 21-22 Miningand quarrying

38-169 31-39 Manufacturing 1-169

11-39 All sectors

by major grouping

Post-EO264 Pre-EO264 W/o exchange rate adjustment

Description

1-26 11-14 Agricultureand fishery 27

intensity,

Withexchangerate adjustment 10% 20%

1.359

1.374

1.388

1.388

28+790

28.790

28.790

28.790

9.299

9.377

9.379

9.379

0.269

0.270

0.270

0.270

1.567

1.535

1.4861i¢1

1.486

Note:Using high trade elasticities,based on 1988input-output structure.

Improvements as a result of trade

in production structure toward less pollutive industries reforms and real peso depreciation have increased the

production level of most sectors because of the favorable income and demand effects of the trade liberalization-cum-real exchange rate adjustment. Thus, pressure on the environment continues even if growth industries can invest in pollution abatement facilities. (The best example of growth industries with better capacity to invest in environmental protection is the electronics industry. In the Philippines, the industry comprises mostly multinationals, with plants/factories located mainly in industrial estates with waste treatment facilities.) For industries with large environmental impacts like mining and forestry and traditional manufacturing industries composed mostly of old firms or smalland medium-scale firms, real peso depreciation improves producer incentives, but at the same time increases

potential

adverse

effects on the environment.

The challenge is in instituting nonprice regulations and schemes that can maximize the potential benefits from the real peso depreciation and at the same


102

Economic

crisis... Once more

time minimize adverse impacts on the environment. For example, for forestry, the government may pursue increased taxation on logging outside of privately or community owned reforested areas, thereby encouraging investments in reforestation and discouraging the government may initiate

logging on Iprimary growth forests. Similarly, incentives for providing common treatment

facilities surrounding traditional industr!es Bulacan), in tandem with stricter enforcement

(e.g., tannery in Meycauayan, of pollution control rules, so that

increased domestic tannery, for instance w_uld not worsen further the quality of the environment (e.g., river in Meycauayan). Without complementary policies specifically addressing the pollution problem, the real exchange rate depreciation arising from the crisis could result in further environmental degradation. The East Asian financial sustainable development

crisis, E1 Nifio, and the challenge

of Philippine

There are three major broad challenges facing the Philippines in its drive towards sustainable development. The first is the reform of the industrial protection system and improvement of th e macroeconomic environment for sustainable development, in the Philippines, ireducing the pressure of population and poverty on agricultural land and natural resources requires that nonagriculture sectors, especially the industrial sector, take a larger role in employment creation. It is important therefore that the industrial protection system and the macroeconomic employment creation?

environment

encourage higher investments

and

The second is pricing and investing ior the future. Proper valuation of resources and the social cost of resource extraction, and clear delineation of property rights are essential for minimizing the trade-off between economic growth, social equity, and environmental/resource protection. This is easier said than done, however, because this involves a complex set of issues related to the design of implementing policies to encourage appropriate pricing, fair and effective property rights delineation, and private investments in resource regeneration and agriculture. As the Philippine experience shows, the political economy of pricing and property rights reforms is particularly difficult. Considering that the sustainability of rural development and poverty reduction requires appropriate resource pricing and prosperous agriculture, among the policy challenges needed for sustainabl E development are redirection of government expenditures and public investment toward providing infrastructure and technological requirements of sustainable agriculture rural roads, integrated pest management).

6 This paragraph

and the next two paragraphs

are largely taken from Intal (1992).

the (e.g.,


Chapter 4: Intal and Medalla

103

The third sustainable development institutions, and governance structures,

challenge is investing in people, and mechanisms for sustainable

development. This involves improving policies and government programs to support investments in human capital formation especially of the rural poor, strengthening national and local linkages in natural resource management in tandem with increased reliance on local communities and organizations in monitoring and maintaining the natural resources stock, and the integration of environmental and equity considerations in decision making at the national and local levels. The East Asian

crisis

is related

primarily

to the first sustainable

development challenge. In this regard, the crisis does not only present problems but also offers opportunities. While there are short-term costs and problems arising from the macroeconomic adjustment process, the real exchange rate correction that the crisis engendered for the Philippines is an important complement to he redesign of industrial protection policies being pursued by the government during the past decade. With trade and investment liberalization and real exchange rate adjustment, the overall incentive structure is more conducive to greater allocative efficiency and export orientation. This is also consistent with the country's comparative advantage, especially in semiskilled labor. As a result, the country's nonagriculture sectors in general and the industrial sector in particular will likely be more important generators of employment in the future. The East Asian crisis brought

out the importance

of strengthening

the

prudential, transparency, and corporate governance environments in concerned countries. Improvements in such areas will contribute to a more sustainable and robust economic growth in the region in the future. As the Philippines becomes more economically integrated with the rest of the region, it is clear that improved policy and institutional regimes in its partner countries also augur well for its economic prospects. Similarly, as the country further pursues internal reforms in the fiscal and monetary sectors in response to the crisis, the Philippines also strengthens its macroeconomic environment for sustainable development. And as the economy grows steadily and the country's demographic transition accelerates (i.e., lower fertility rate), the country's domestic savings rate will likely rise, further strengthening the macroeconomic fundamentals for sustainable development. 7 The E1 Nifio phenomenon has brought out inadequacies in the country's poverty monitoring and emergency food mechanism. 8 It also pointed to the importance of improving policy and institutional regimes on water use and 7The Philippines has the lowest East Asian "miracle' is fotmded economies. This is discussed

in chapter

savings rate among major East Asian developing countries. The partly on high domestic savings rates among high-performing

15 of this book.


104

Economic

crisis... Once more

investments. The tragic death of several starving tribal people indicated that they, especially those in the uplands, had been left out in the poverty monitoring and social safety net mechanisms; they are in a sense the "great neglected." The E1 Nifio phenomenon, while largely outside the control of the government and populace, shows the importance of addressing issues related to water pricing and water resources development. The water shortage in Metro Manila since 1997, while immediately attributable to the E1Nifio phenomenon, is fundamentally linked to the lack of appropriate pricing for raw water. As a result, the development of appropriate dams has rested on the public sector and has depended on governmen t budgetary largesse and official development assistance. The net result is that water supply has been erratic and inadequate for the growing industrial, commercial, household, and agricultural needs. Similarly, investments in irrigation facilities, especially small-scale systems relying on groundwater, have been inadeqOate. Water resources development has also been neglected because institutional arrangements within the bureaucracy have been weak and diffused. The Presidential Task Force on Water Resources Management has been studying i_sues and concerns and is finalizing recommendations to address institutional, informational, and incentive inadequacies in the water resources sector. The current E1 Nifio phenomenon may have some international dimension.

Its severity may be related to th_ unusual

global warming

in 1998.

Preventing its severe effects in the future thus calls for addressing the global warming problem. Since developed countrie s mainly contribute to this problem, it is important that they undertake more ambitious measures to reduce their contributions to greenhouse gas production and global warming. There is also some international dimension to the restructuring of the industrial protection system and improvement of macroeconomic management for sustainable development in developing Countries like the Philippines. This includes improving trade and sector policies of developed countries to be more supportive of reform efforts of developing countries. This will help them make their economic development more consistent with their evolving comparative advantages. Two specific areas for reform lin developed countries are worth highlighting here, namely, agricultural trade and subsidy policies, and protection policies on labor-intensive manufacturing. Also, there may be a need to address the potentially destabilizing effects of international capital flows under a regime of imperfect information and inadequate regulatory institutions, as brought out in the East Asian crisis.


Chapter 4: Intal and Medalla

105

Conclusions Sustainable

development

has turned

out to be the overarching

and

unifying framework for sound development policy and equity-oriented institutional arrangements. The fundamental issue, however, is whether there is sufficient political will, both domestically and internationally, to effect reforms in policies and institutions consistent with the demands of sustainable development (Intal 1992). Finally, it is apparent that the path to sustainable development is long, difficult, and multifaceted. Despite efforts by the government to address sustainable development challenges, much remains to be done in the future to ensure that Philippine development is indeed sustainable.


106

Economic

crisis.,. Once more

Bibliography Bautista, E. 1992. A study on Philippine mor_etary and banking policies. Working Paper Series No. 92-11. Makati City: Philippine Institute for Development Studies. Bidani, B., F. Ferreira, M. Walton and V. Ahuja. 1997. Everyone's miracles? Revisiting poverty and inequality in East Asia. Washington, D.C.: World Bank. Cruz, W.D. and R. Repetto. 1992. The environmental effects of stabilization and structural adjustment programs: the Philippine case. Washington, D.C.: World Resources Institute. Cruz, M.C., C_Mayer, R. Repettor and R. Woodward. 1992. Population growth, poverty, and environmental stress: frontier migration in the Philippines and Costa Rica. World Resources Institute. I

Garnaut,

R. 1998. The financial crisis: a watershed in economic thought about East Asia. Mimeo (to be published in Asian-Pacific Economic Literature).

Gerson,

P. 1998. Poverty, income distriblttion, and economic policy in the Philippines. IMF Working Paper 91_/20. Government of the Philippines (GOP). 19_,8. Memorandum of economic and financial policies of the Philippine Government., Mimeo. Hicklin, J., D. Robinson, and A. Singh. 1 797. Macroeconomic issues facing ASEAN countries. IME 18 July. Intal, P, 1992. Sustainable development: international perspective. In Brownsey, K.L, J.W. Langford, H.E McKenna, and J.R. Nethercote (eds.). 1992, Sustainable economic growth and development: implications for governance in the Asia-Pacific Region. Canberra Bulletin of Public Administration, No. 69. Intal, P. 1994. The state of poverty in the Philippines: an overview. In Intal, P. and Bantillan, M.C. (eds,). Understanding poverty and inequality in the Philippines. Manila: NEDA/UNDP. Krugman, P. 1998. What happened to Asia? Online edition in Roubini N. The Asia Crisis Homepage. i Nasution, A. 1998. Improved management Of the financial sector: a case study of Indonesia. Paper presented at the ESCAP Seminar on Improved Management of the Financial Sector, Bangkok, 20-22 May. National

Economic and Development Authority (NEDA). 1998. Social impact of the currency crisis. Discussion points for the Director-General,

Donors' Meeting, Asia Development Forum, 6 March. Nidhiprabha, B. 1998. Improved management of the financial sector: a case study of Thailand. Paper presented at the ESCAP Seminar on Improved Management

of the Financial Sector, Bangkok,

20-22 May.


Chapter 4: Intal and Medalla

107

Niskanen, A. and O. Saastamoinen. 1996. Tree plantations in the Philippines and Thailand: economic, social and environmental evaluation. Research for Action Research.

30, UNU/World

Institute

for Development

Economics

Padilla,

J.E. and F. de Guzman. 1994. Fishery resources accounting in the Philippines: applications to small pelagics fishery. In: IRG and Edgevale Associates. ENRAP III: Technical Appendices. Radelet, S. and J. Sachs. 1998. The onset of the East Asian financial crisis. Online edition in Roubini N. The Asia Crisis Homepage. Stiglitz, J. 1989. Financial markets and development. Oxford Review of Economic Policy 5(4)59-68. Stiglitz, J. 1998. Sound finance and sustainable development address at the Asian Development Forum, Manila.

in Asia. Keynote


5 The Impact of the East Asian Financial Crisis on the Philippine Manufacturing Sector* Maffo B. Lamberte, Margarita

A

Caesar B. Cororaton,

E Guerrero,

plethora

and Aniceto

C. Orbeta, It.

of studies already exists

on

the poor performance

of the Phil-

M ippine economy in the wake of the East Asian currency crisis. 1 Most, if m nmnot all, of these studies, however, examined the impact of the crisis from a macroeconomic perspective. Certainly, the crisis will have differential impacts on various economic sectors or sizes of firms, which, in turn, will have different responses to the crisis. Fairly detailed and accurate knowledge of these issues can greatly help in fine-tuning government policies and programs designed for staging a rapid economic recovery in the short term. This, however, requires good, firm-level survey data. This study, therefore, tries to fill this gap. It attempts to analyze the impact of the East Asian financial crisis on the Philippine manufacturing sector and study its initial response to the crisis to survive

using firm-level survey data collected from a sample of firms. The next section gives a brief description of the survey of Philippine industry and key characteristics of sample firms. The third section examines issues pertaining to the impact of the crisis on firms surveyed and their views on the causes of the crisis. The fourth section discusses issues related to the firms' main sources of funding, debt structure, transparency, and policy environment, while the fifth section briefly discusses the firms' assessment of the prospects of their business in the short term. The last section presents some concluding statements and suggests some policies.

*The survey of sample firms conducted by the National StatisticsOffice (NSO)and this report prepared by the Philippine Institute for Development Studies (PIDS)were funded by the World Bank.The authors are grateful to Ms.Ofelia M.Templo,assistant director general of the National Economicand Development Authority,for providing direction to the research team. The authors thank Ms. Ma. Chelo V. Manlagfiit and Ms. Hope A. Gerochi for research assistance and Ms. Juanita E. Tolentino for secretarial assistance. For example, see Virtucio(1998)and Chapter 11 of this book.


110

Economic

Description of the survey The Survey of Philippine

Industry

(SPIndAFC) covered establishments industries:

crisis... Once more

and the Asian

engage d in the following

Sector code

Financial

Crisis

manufacturing

Description

1

Food products

2

Textiles

3

Wearing apparel and footwear

4

Chemical and rubber products

5

Electrical machinery

More detailed descriptions of each sector in terms of the 1994 Philippine Standard 7ndustrial Classih'cation are given in Annex A. These particular manufacturing sectors are among the top 10 contributors to manufacturing output. In addition, the electrical machinery sector, which includes semiconductors and electronics, and the food products sector rank high among both import-dependent and export-oriented industries. Standard sampling methodology for Philippine establishment surveys uses a List of Establishments (LE)compiled and updated by the National Statistics Office (NSO). The sampling frame of the SPIndAFC was the 1997 updated version of the LE, which included about 3,800 establishments belonging to five sectors covered by the survey. Food products (32%) and wearing apparel and footwear (29%) comprised 61 percent of the total number of relevant establishments. In terms of employment size_ 68 percent is listed as having less than 100 workers. Over half of sample establishments are located in the National Capital Region (NCR). Based on the list, an approximately equal number of establishments were independently selected for each sector. The number of engaged workers (NEW) was used as a stratification variable, wRh more samples selected from establishments with more than 100 workers. A simple random sample was drawn from each stratum. Annex B shows the percentage distribution of establishments by sector and NEW classes _n the frame and in the resulting sample. The SPIndAFC questionnaire consisted of two separate forms. Form 1 was designed to elicit responses from interviews with chief executive officers (CEOs) of enterprises who own the establishments. Form 2 was designed as a self-accomplishing schedule for personnel officers, production managers, and/


Chapter 5: Lamberte et al.

111

or financial managers. Questionnaires were fielded from September 1998 to January 1999 by the NSO. This report is based on the responses of 541 establishments out of a targeted 750. Food products, wearing apparel and footwear, and electrical machinery sectors are about equally represented in this set of respondents, with textiles and chemical products having half that number (Table 1). This was because most establishments in these two sectors were contacted much later and retrieval rate was thus lower. Table 1. Profile of responding By Size

firms.

By Export Orientation

By Volume of ExportS

Large Small Exporters Non export. Small Medium

High

By Foreign Control None Some Total

Aver. No Employees Total

SECTOR l- Ft_od 2- Textiles

59 28

78 49

51 39

82 37

24 14

8 4

19 21

113 58

13 8

11 11

384 242

137 77

3_ Wearing al._pam[ 4- Chemicals 5- Elet_tricalreachilvery

61 47 59

62 40 58

78 38 70

42 49 46

30 19 17

4 7 3

44 12 50

78 62 62

16 8 9

29 17 46

331 250 643

123 87 117

AGE New Old

71 183

105 182

98 178

77 179

39 65

2 24

57 89

96 277

19 35

61 53

330 413

176 365

LOCATION NCR Others

113 141

125 162

105 171

131 125

34 70

19 7

52 94

188 185

22 32

28 86

429 342

238 303

Total

254

287

276

256

104

26

146

373

54

114

388

Source:

Survey

Philippine

Industry

and

the Financial

Crisis,

1998.

Responding firms had an average of 388 employees in 1996. Small establishments (defined as having less than 150 employees) dominated the food products and textiles sectors with 57 and 64 percent, respectively. Wearing apparel and footwear, and electrical machinery sectors were both equally represented in terms of size. Sixty-seven percent of the firms were located outside the NCR. More than half (65%)of respondent firms were "old" or were established before 1990. Establishments in the electrical machinery/electronics sector employed more workers than any other sector, averaging about 643. "Older" firms had more employees than new ones; establishments located outside the NCR had more employees than those in the NCR. Exporters comprised 51.9 percent of sample respondents. For "new" firms and those located outside the NCR, there were more exporters (56%and 58%, respectively) than nonexporters, but both groups were evenly represented in "older" firms. Among the manufacturing sectors, food products and chemicals had more nonexporters; the reverse is true for wearing apparel and footwear, and the electrical machinery sectors.


112

Economic crisis... Once more

About 53 percent may be considered as high-volume exporters, with exports comprising more than 50 percent of sales. Except for the food products and chemicals sectors where more firms_ were small- or medium-volume exporters (with exports comprising less _than 50% of sales), high-volume exporters dominated in all sectors. This' is most evident in the electrical machinery sector, which includes the electronics sector with 71 percent highvolume exporters. A firm has "no foreign control" if its foreign equity comprises less than 10 percent; if foreign equity accounts for at least 50 percent, the firm is said to be under "total foreign control." About 21 percent of responding firms were under total foreign control. For all sectors, a larger proportion of firms had "no foreign control." Only 8 percent of the food products sector but a higher 39.3 percent of the electrical machinery sector were under total foreign control. A larger proportion of new firms compared with old firms had large foreign equity. Because most industrial estates and technoparks are located outside the NCR, it is therefore understandable that there were more firms outside the NCR with large foreign equity. Analysis of the impact of the crisis on finns Changes in capacity utilization and proFitability before and alter the crisis Capacity utilization The period 1996 to the first hal5 of 1998 saw a continuous decline in capacity utilization rate in all sectors covered by the survey. From an average high of 78 percent for all sectors in 1996, capacity utilization rate declined to an average of 69 percent in the first half of 1998 (Fig. la). Performance varied across sectors. Of the five manufacturing sectors, the wearing apparel sector attained the highest capacity utilization rate of 82 percent in 1996, whereas the food and textile sectors registered the lowest at 75 percent. In the first half of 1998, the capacity utilization rates of all sectors dropped. From a high of 82percent in 1996, the highest capacity utilization rate declined to only 71 percent (chemical sector) in the first half of 1998. Similarly, the lowest capacity utilization rate dropped from 75percent in 1996to 66percent (food sector) in the same period. The same figure also shows the umeasonalized percentage changes in capacity utilization of the different sectors. Capacity utilization rate significantly declined (-3.4% relative to 1996 average for!all sectors) during the first half of 1997, with wearing apparel and leather as t_e worst performer experiencing a -5.5 percent change. Food products also did poorly, reducing its capacity utilization rate by 5.1 percent during the first half of 1997. Although the decline in capacity utilization rate continued in the second half of 1997, it was not as deep as in the first half. On the average, capacity


Chapter

5: Lamberte

et al.

Figure

la. Capacity

113

utilization

by sector.

90

zo

6O

} 50 4O

Sector 1

Sector 2

'm1996 Io-T'_" 1st half I

75 71

75 73

82 77

1[319981st half

71 66

72 69

75 70

73 71 _

79 79

75

76 68

73 69

Percent Change

I

utilization year.

2

3

4

5

6

0.00 -6.81 -5.12 -3.98

-2.16 -3.71 -2.11 -2.66

-3.55 -5.73 -4.94 -5.54

-3.06 -3.26 -2.09 -2,80

-3.41 -10.83 -4.75 0.00

-2.30 -6.49 -3.37 -4.05

rate dropped

Results on

1

seemed

the Philippine

utilization

by only 2.3 percent*gelative to suggest

industrial

rate declined

to the first half of the same

that the recessionary

sector

on the average

during

by 6.5 percent

period. The worst performer was the electrical utilization rate shrank by 10.8 percent.

effect had taken its toll

the first half maghi_ry

of 1998.

relative I_ctor

Capacity

to the previous whose

capacity


116

Economic crisis... Once more

Profi"tability The financial crisis has indeed generated substantial negative impact on firms' net pl"ofitability. From a high of 12.1 percent in 1996, net profitability of sample firms dropped dramatically to 3.5 percent in 1997 and to 2.1 percent in the first half of 1998 (Fig. 2). The average profitability of firms classified according to export orientation and size showed a consistently declining trend for the last 2 1/2 years. Differences in net profitability between large and small firms and between exporters and nonexporters, however, are evident. In particular, large firms and exporters appeared to have higher profitability than small firms and nonexporters throughout the period indicated. Of the five sectors, the food and electrical machinery sectors exhibited a consistently declining net profitability in the last 2 1/2 years, while that of the textile, wearing apparel, and chemical sectors fluctuated. The food sector appeared to be the most profitable among the five sectors; still it was not spared by the recent financial crisis. Sectoral performance versus broader sector performance Table 2 presents indicators of the general macroeconomic environment in the Philippines during the period of analysis. Real GNP growth reached a peak of 7.8 percent in the third quarter of 1996, then decelerated thereafter until it started to contract in the second quarter of 1998. In the fourth quarter of 1998, real GNP contracted by 1.2 percent. The overall output of the manufacturing sector started to contract in the second quarter of 1998. By the fourth quarter of 1998, it declined by 3.4 percent. In terms of sectors covered by the study, only wearing apparel registered an improvement in real growth in gross value added. In particular, this sector peaked at 18.2 percent in the second quarter of 1998. The other sectors slowed down considerably. The electronics sector reached a peak of 43.6 percent in the fourth quarter of 1997. Since then its growth decelerated considerably, although it did not contract. Based on these indicators, survey results confirmed the general slowdown in the manufacturing sector during the crisis period. Perceived causes of slowdow_ The survey identified 10 major causes of output decline: (1) decline in domestic demand; (2) decline in foreign demand; (3) insufficient credit extended by suppliers; (4) insufficient credit for working capital from banks; (5) insufficient credit for expansion from banks; (6) high interest rates; (7) high cost of raw materials due to the peso depreciation; (8) increases in labor cost; (9) shortages in raw materials; and (10) nondelivery of goods by suppliers hurt by the crisis. If reduced capacity utilization implies reduced output level, then these reasons could also be the cause for the drop in capacity utilization rate discussed earlier.


Chapter

Figure

5: Lamberte

2. Net

et al.

117

profitability

overtime.

Net profitability

over time, All

12.07

15

[]1996 U1997 [] Firs t half of 1998

10 3.53 5

0

] Net profitability

over time by Sector

5O 45 40 35 3O 25 20 15 10 5 0 [] 1996 [] 1997 half of 1998

Sector 1

Sector _

44.65 10.74 6.17

0.79 1.82 0.20 Net profitability

Sector 3 4.22 0.69 2.19

Sector 4 0.39 0.91 0.19

over time by Size

25 2O 15 10 5 0 [] 1.996 ,,,1997

half of 1998 Net profitability

Small

Large

2.01 0.84 0.46

19.99. 5.91 3.51

over time by Export Orientation

10. 0, []1996 []1997 DHrst half of 1998

Exp

Non-Eテ用

19.64 5.16 3.18

2.47 1.51 0.59

Sector 5 4.17 2.63 0.77


118

,Economic

Table 2. Macroeconomic

indicators, Q1

I

Q4

Q1

Q2

Q3

Q4

National

Product

7.3

8.7

7.8

5.1

5._

5-3

5.2

5-3

2.0

(0.3)

(0.0)

(1.2)

Gross

Dornestic

Product

5.3

6.1

6,9

4.9

5,_

5,6

4.9

4.8

1_6

(0.85

(0.7)

(1.9)

2.9

6-8

7,9

(055

4.9

1,8

0.4

4.1

(3.85

(11.5)

(3.1)

(7,8)

5,8

5.5

7.0

6.5

5,1

7,6

6,4

5,6

1.6

(0.2)

(3_5)

(3.3)

3,1

(13.1)

(1.01

1-8

23,9

17.5

5,7

0-3

Agriculture Industry

Fishery

and Fo1_astry

Sector and Quanying

Mioing

4.6

Manufacturing

Chemicals, Electronics

plastic I

Export

6.3

4,9

2,_

5-3

4,3

4,7

2.0

(0.9)

(1.5)

5,2

7,8

3-4

2,7

(0,65

(1.9)

5,7

(3-9

1.5

(3.1)

(6,1)

7.4

(8,0)

(14.1)

(6.8)

(0-1)

4,6

(4,1)

(8,5)

(8,8)

4-3

(417)

(4,5)

(23.3)

(14,0)

4.3

6.2

719

513

18.2

9.1

(2,1) 14,9

6.5 17.9

11,0 14,3

6.6 12.3

10,2 21.8

2.7 20,6

10.0 33.7

6,1 46,3

(5.6) 2L9

(2.1) 7,3

(0.3) 7.9

7.6

9.3

12,8

13.8

21-3

18.5

18.1

7,6

(5,0)

(1,8)

(15,65

6.1

6.3

6,5

6,7

6.1

5.7

5,6

4.6

4,5

3.6

2.7

5.3

8.7

8,6

15.2

17.6

14,5

13,4

3.7

3-7

8-5

(8.2)

Sector _

12,9

ll.3

Garments

11.6

(12,9)

(6,4)

(13.9)

Semiconductors

25.4

14,3

(2.55

3.5

3.6

21.1

43.6

'11.6

10,5

7,0

4.8

4.8

4.5

4.8

13-i)

12,8

11,5

11.5

10.1 b

10,5

15.3

lnl:latio_

Rate

91- Tl-easut'y

Sill Rate "_

Q1

6.2

Construction Service

Q4

10.1

l,_ather

nlbber,

Q3

3.3

Textiles apparel,

Q2

4.9

Food

Wearing

(19.25

Q3

growth rates (In percent).

Gloss

i iffr

Q2

crisis... Once more

(7,2)

(5,8)

9.9

(9-6) 413

(0,15

(4.4) (16,0) (3,4) .

(10.0) 3.3

25.4

15,1

1,6

6.0

7.0

8.0

10,4

10,6

17,7

16.6

14.0

13.8

13.4

Chemicals only In Real Peso Value Note: Details for Mfg: 1985constant prices 91-TBillsiEnd of period was used. Inflation rate was computed using the average consumer price _ndex. 3Level of T-bills

Figure 3 shows how exporters and nonexporters perceive the possible causes of output decline. In the survey, I means no contribution, while 5 means major contribution. Thus the higher the number, the bigger the contribution to the decline in output and capacity utilization. For both exporters and nonexporters, the biggest contributor to the slowdown in output was the increase in input costs due to the peso depreciation. The effect of the currency depreciation was slightly bigger for nonexpot:ters (3.88) than for exporters (3.66). While a peso depreciation would be favorable to all exporters, nonetheless it would adversely affect some of them because of the relatively high import content of their pro ducts. For exporters, rates. On the other decline in domestic factor perceived by was the third factor

the second major cause Iof the slowdown

was high interest

hand, for nonexporters! the second major factor was the demand. Changes in foreign demand were the third major exporters to cause the slowdown, while high interest rates for nonexporters.

For both exporters

and nonexporterS,

the fourth

and fifth factors were

the same, that is, labor cost and access to cap!ta!, respectively. For exporters, the sixth and last factors in the list were locall demand and access to credit for


Chapter 5: Lamberte

et al.

119

Figure 3. Perceived

causes of current output decline. Perceived

Causes of Current Output Decline

I Exporters + Non-exporters

M

Local demand Perceived

Foreign demand

r

Accessto capital

Depmciatloninput costs

[

.......

Laborcost

High interest rates

Rawreaterials shortage

Ca uses of Current Slowdown

Peso DepreCiation - Input Costs Higher Interest Rates Foreign Demand Labor Cost Acess to Capital Local Demand Access to credit for Expansion

Exporters

Rank

3.66 3.26 3.21 3,08 2.68 2,49 2.40

1 2 3 4 5 6 7

Nonexpor

ters

Rank

Paso Depreciation - Input Costs Local Demand Higher Interest Rates Labor Cost

3,88 3.72 323 3,11

1 2 3 4

AcesS to Capital Raw Material Shortage Access to credit from suppliers

253 2.50 2,33

5 6 7

expansion. For nonexporters, the sixth factor was raw material shortage, while the last in the list was access to credit from suppliers? From the point of view of a firm facing a perfectly competitive market, these results may suggest that the simultaneous drop in demand and increase in average cost during the crisis period squeezed the firm's profit. Results also seem to suggest that firms did not have much problem in accessing credit, although they had to pay a higher interest on it. 3 2 The detail 3 This

issue regarding below. issue

will

the impact

be discussed

of the crisis

in greater

detail

on the firms" in succeeding

access pages.

to capital

is discussed

in greater


120

Economiccrisis...

ComFetJtor's

Once more

grodHe

Figure 4 shows that the biggest and major competitors of firms selling in the domestic market were other local inveStors/owners or producers, jointventure companies and multinationals were considered far less of a threat in the domesti¢ market, iI Figure

4. Competitor's

profile. Domestically 6O 4O 20

0_,. r

ic it

"lDomesticproducers , _ i Do_lesticjoint venturea _

, 1996

1.997

1.998

50.35 9.01

44.14 10.87

40,10 11.41

.:/t1_

Internationally 15 ... .10

..... _ u,. t i Low C_)stPr_xt_I_ers. i Nei -hborin Co_tl'lt_is '

1996 9.89 12.37

D NI,.Cs _ _ []OECD Countrie,s ' ,_ J

8.83 6.54

1

1997 :' 11_88 14.43 i ,_

8.66 6.96

1998 13.00 13.95 %51 8.40

4

Note: Low Cost Producers = f'.l_ in Vietnam,China, _ambodia, Laos,Myanmar Neighboring Countries = firm¢ia Malaysia,Indonesia,_hailand NICs = firms in Korea, TaiWa__Ong, Singapore ' OECDCountries = firms"!n"Id_,_, .Europe


Chapter 5: Lamberte et al.

121

In the international market, the biggest competitors of local exporters were firms from neighboring countries, such as, Malaysia, Indonesia, and Thailand. Not too far from the first group were firms in low-cost producing countries like Vietnam, China, Cambodia, Lao PDR, and Myanmar. The third group of firms Which posed competition in the international market were those in newly industrialized countries or NICs (South Korea, Taiwan, Hong Kong, and Singapore). The last group of firms considered as competitors were from Organization for Economic Cooperation and Development (OECD) countries. Level of employment before and after the crisis Share of h'rms with fewer workers About two-fifths of sample firms reported operating with fewer workers after the crisis struck in July 1997 (Fig. 5). Firms in the wearing apparel and leather sector had the highest (49%) proportion that reduced the number of workers in the wake of the crisis, followed by the electrical machinery sector (44%). Nonexporters had ahigher proportion of firms (46%)with fewer workers after the crisis than exporters (38%).More large firms (44%)operated with fewer workers after the crisis than small firms (39%).Finally, more firms (43%)with no foreign control had fewer workers after the crisisthan firms with some foreign control (41%) and those controlled by foreigners (35%).

Figure 5. Percent of firms with fewer workers.

I :ta _

i

.

â&#x20AC;˘

41 38

' "

m

1(_

40 7

......

%_

Profile ofjobs Survey newer (Table capital. Also, appointments

37.7

43.4

'_

38.7

4L4 [

_

./;/V/ "

,

,

lost results showed that workers who left firms were younger and 3). This was expected because firms invested little on human many newly hired workers may not have had permanent yet.


122 Table 3. Profile

Economic of workers

leaving

crisis... Once more

the plant.

Average age (years) 30 or less 31-50 above 50 % % i % By Sector Food products Textiles Wearing apparel, leather Chemicals,rubber, plastic Electricalmachinery Total

43 51 59 49 7:l 55

42 38 36 42 26 37

15 10 5 9 3 9

By ExportOrientation Exporters Non exporters Total

58 51 55

34 40 37

8 8 8

By Size Small Large Total

58 52 55

35 38 37

7 10 9

Average tenure (years) 3 or less 4-10 above 10 % % %

"â&#x20AC;˘

40 41. 50 44 53 46

31 35 29 31 36 32

30 24 21 25 11 22

49 43 .46

30 35 32

21. 22 21

51 41 46

31 33 32

18 26 22

Source:Survey of Philippine Industry and the Financial Crisis,1998.

More than half (55%) of workers who left were 30 years old or below. About 37 percent was between 31-50 years old. Many of the younger and newer workers who left were from the electrical machinery sector, exporting firms, or small firms. Almost half of the employees had been with their companies for 3 years or less, whereas about one-third had been With the company for 4-10 years. Share ol:[irms retrenching workers or uMng other methods of reducing labor Some 39 percent of sample firms filled their vacancies as workers left (Table 4). Twenty-nine percent of sample firms, however, laid off workers as a result of the crisis. Sixty-one percent gave severance pay or benefits to workers who were separated, from work. While the wearing apparel sector (42%) and chemicals sector (43%) had more firms that filled their vacancies, they also had more firms (34% and 37%, respectively) that laid off workers as a resu!t of the crisis compared with the other sectors. More firms from the electrical machinery sector (48%), textile sector (54%), and wearing apparel sector (55%) gave severance pay or benefits. More exporting firms than nonexporters filled their vacancies, whereas more nonexporting

firms laid off workers.

Both exporters

and nonexporters


Chapter 5: Lamberte

et al.

123

Table 4. Responses

to crisis: labor.

Are fi]ingup vacancies

Laying-off workers

Pay severance

%

%

%

By S_c|or Food prc)d ucta Textiles

39 31

21 29

68 65

Wearing apparel, Jeather Chemicals, r_lbbe_,plastic Electrical machinery "]_tal

42 43 38 39

34 37 29 29

St-, 7(} 47 61

By Export Orientation Exporters Non exporters Total

47 30 39

29 3'1 30

By 51ze Small

33

Large Total

45 39

Cutdown ot_hours

Compressed workweek

Forced vacation

Flx-_ze salary:

F_ze salary:

Salary ¢tlt:

Salary etlt

%

%

r,_k & file %

mgt. %

rank & file %

mgt. %

35 3,5

16 17

26 20

27 29

32 37

2 1

4 9

43. 33 40 38

20 Ig 22 19

23 23 25 24

27 33. 28 28

29 29 27 31

6 4 3 3

7 2 4 5

59 62 60.

34 43 38

20 18 19

26 22 24

25 32 28

29 33 3"1

3 4 3

5 5 5

27

59

37

17

16

29

31

4

5

32 29

62 61

39 38

20 19

32 24

27 28

31 31

2 3

4 3

%

Source:Survey of PhilippineIndustry and the FinancialCrisis, 1998,

had almost the same proportion off workers.

of firms that gave severance

benefits

More large firms than small firms filled their vacancies

to laid-

and laid off

workers. Large and small firms, however, had almost the same proportion gave severance benefits to laid-off workers.

that

Aside from laying off workers, firms resorted to other measures to cope with the economic crisis, including: (1) cutting down on hours/days of hourly/ daily paid workers; (2) compressing workweek for monthly paid workers; (3) applying forced vacation leaves; (4) freezing salary increases of rank and file workers and/or management; and (5) cutting salary of rank and file workers and/or management. Almost two-fifths of sample firms cut down on work hours/days, about one-fifth implemented a compressed work week, about onefourth used forced vacation, and close to one-third froze salary increases of rank and file employees and management. Only a small proportion of sample firms implemented salary cuts for rank and file (3%) and management personnel (5%) (Table 4). More firms belonging to the wearing apparel/leather sector cut down on working hours in response to the crisis, whereas the electrical machinery sector had the most firms that compressed the workweek for employees. Forced vacation, on the other hand, was enforced by more firms in the food and electrical machinery sectors than in other sectors. More firms in the textile and electrical machinery

sectors froze salary increases

of rank and file employees

than other

sectors. Freezing salary increases of management personnel was employed more firms in the food and textile sectors than in other sectors.

by

The proportion of firms resorting to compressed workweek and forced vacation was higher for exporters than for nonexporters. On the other hand,


124

Economic

crisis... Once more

the proportion of firms that cut down on work hours/days, and froze salary increases of both rank and file and management personnel was higher for nonexporters than for exporters. More large firms cut down on work hours/days, compressed workweek, and resorted to forced vacation than small firms in response to the crisis. On the other hand, more small firms froze salary increases of rank and file workers than large firms. Membership of workers in unions was mentioned by 41 percent of sample firms (Table 5). Compared with other sectors, the electrical machinery sector had the lowest proportion (23%) of workers who were union members. Most workers from exporting firms (43%) and large firms (53%) were union members. Fifty-two percent of sample firms claimed to have formal training activities for their workers (Table 5). More than half of the firms in the food, chemical, and electrical machinery sectors reported having training activities. More exporting firms (61%) and large firms (67%) had training activities for workers than nonexporting and small firms.

Table 5. Human

resources

and training. Memberworkers of union %

With formal training %

Decreased amount of training %

By Sector Food products Textiles

45 43

51 44

26 21

Wearing apparel,, leather

48

44

38

Chemicals, r ubbel, plastic

49

59

24

Electrical machinery Total

23 41

62 52

18 25

Exporters

45

61

22

Non exporters

37

42

31

Total

41

52

25

Small

27

38

25

Large

55

67

25

Total

41

52

25

By Export Orientation

By Size

I

Source: Su,:vey of Philippine

Industry

and

the Fmanoali

Crisis, 1998.


Chapter 5: Lamberte et al.

125

Of the number of firms with training activities for workers, one-fourth reported that they were planning to reduce the amount of training for workers due to the crisis. The wearing apparel and leather sector had the most firms that planned to reduce training activities. Nonexporters had a higher proportion of firms that intended to reduce training activities. One-fourth of the large and small firms planned to decrease their training activities. Financial position of firms before and after the crisis Sources of [unds Firms raised short- and long-term funds from internal and external sources. Income from sales, which is an internal source of funds, and loans from local banks, which is an external source of funds, were the two main sources of short-term and long-term funds for sample firms before (i.e.,January to June 1997) and during the crisis period (Fig. 6). The structure of sources of shortand long-term funds of sample firms hardly changed at all since the onset of the East Asian financial crisis. Firms" reliance on debt The long-term stability of a firm can be gauged from various indicators, one of which is the debt-equity ratio, which measures the relative amounts provided by creditors and owners of the firm. Highly leveraged firms are bound to be more vulnerable to sudden negative changes in conditions of financial markets than less leveraged firms. The average debt-equity ratio of sample firms in 1996 stood at 2.274(Fig. 7). It inched up to 2.46 in 1997but dropped to 2.04 in the first half of 1998. This pattern was true for large and small firms, for exporting and nonexporting firms, and for all but the electrical machinery sector, whose debt-equity ratio already started to decline in 1997. These results seem to suggest that firms reduced their debt as they began to feel the effects of the East Asian financial crisis in 1998.s However, the degree of adjustment in the debt-equity ratio, varied by type of firm. More specifically, the decline in the debt-equity ratio in the first half of 1998 was much larger for nonexporting firms than for exporting firms.Small firms made more adjustments in their debt-equity ratio than large firms during the same period. Among the five sectors, the food and chemicals sectors experienced a much larger decline in the debt-equity ratio compared with the other three sectors. On the other hand, the textile sector made the smallest adjustment in the debt-equity ratio in the first haft of 1998. In 1996, the electrical machinery sector obtained the highest debt-equity ratio, followed by the wearing apparel and leather sector. This ranking was reversed in the first half of 1998. 4 This is based on the median. s See below for a discussion on the credit crunch.


126

Economic

crisis...

Once more

The shares of short-term and long-term debt in total financing could serve as a good indicator of the vulnerability of firms to sudden tightness in the credit market. Short-term debt comprised almost one-third of the total financing of firms (Fig. 8). The share of or degree of reliance of firms on short-term debt changed very little from 1996 to the first half of 1998. Large firms showed much larger changes in the share of their short-term debt than small firms during the indicated period. In the first half of 1998, large firms' share of short-term debt stood at 33 percent compared with 31 percent for small firms. various

Some differences in the pattern of the share of short-term debt among sectors can also be discerned. The food, chemicals, and electrical

machinery sectors exhibited an inverted U-shaped pattern of share in shortterm debt between 1996 and the first half of 1998. On the other hand, the textile and wearing apparel sectors showed a rising share in their short-term debt. The wearing apparel sector stood out prominently among the five sectors with its short-term debt accounting for 44 percent of total financing. When firms were classified according to export orientation, the share of short-term debt of nonexporting firms declined to 29 percent in the first half of 1998 from 33 percent in 1997, whereas that of exporting firms remained the same at 34 percent. The share of long-term debt to total financing of sample firms declined from 23 percent in 1996 to 21 percent in 1997, and stayed at that level in the first half of 1998 (Fig. 9). Large and small firms have almost the same level and pattern of share in their long-term debt during the indicated period. Exporters and nonexporters showed a similar pattern, but the former's share of longterm debt was lower. Among the five sectors, the textile and wearing apparel sectors experienced a significant decline in the share of their long-term debt to total financing from 1996 to the first half of 1998, while the other three sectors experienced

very little change. In the first half of 1998, the textile and chemicals

sectors showed sectors,

a much

higher

share in lopg-term i

debt than the other three

i

Results suggested that the decline _ the debt-equity ratio experienced by firms in the first half of 1998 can be attributed to the drop in both their shortand long-term debt during that period. AwHabillty

of crvdft

Almost half of total sample firms pointed

out that domestic

banks were

renewing or extending new loans to them (T_ble 6). A larger proportion of large firms (60%) and exporters (55%) made thi_claim than small firms (37%) and nonexporters (42%). Among the five sectols , the electrical machinery sector had the lowest proportion of firms that made the same claim. Only 9 percent of total respondents mentioned that foreign b_nks were renewing or extending new loans to them. This was because only! a handful of sample firms (18%) availed of services of foreign banks.


Chapter 5: Lamberte Table 6. Denied

et al.

of bank

131 loans

(In percent).

June 30, 1997 January1-

Category

[

December 31, 1997 July1-

1

in 1998 so far

By Sector Food products Textiles

6.31 6.15

16.22 9.23

11.71 15.15

Wearing apparel, leather Chemicals, rubber, plastic Electrical machinery Total

7.48 6.49 5.61 6.42

15.89 10.26 7.55 12.21.

17.59 15.38 6.54 12.98

By export orientation Exporters

6.61

11.98

14.34

Non exporters Total

6.28 6.45

12.56 12.26

11.61 13.03

By Size Small

5.24

8.66

11.16

Large Total

7.56 6.42

15.68 12.21

14.77 12.98

Source: Survey

of Philippine

Respondents

Industry on the Financial

were asked

whether

Crisis, 1998.

banks

or finance

companies

had

declined to grant them a loan before and during the crisis. Only 6 percent answered positively to this question before the East Asian financial crisis, that occurred from January to June 1997 (Table 6). During the crisis, the proportion of firms denied bank loans had doubled. This proportion was slightly higher for exporters (14%) than for nonexporters (12%), and for large firms (15%) than small firms (12%) in the first half of 1998. The electrical machinery sector was the least affected by the crisis when it came to access to bank credit. Only 6 percent of the electrical machinery firms were denied bank credits in the first half of 1998. On the other hand, 18 percent of the wearing apparel firms were denied bank loans in the first half of 1998, up from only 7 percent in 1996. Although the percentage of firms that were denied loans by a bank or finance company doubled during the crisis period, it is still much smaller than what was generally expected considering the economic uncertainty as a result of the East Asian currency meltdown. A great majority of sample firms had continued access to credit from a bank or finance company during the crisis period. Firms typically buy inputs on credit. Seventy-four percent of sample firms confirmed this practice (Table 7). The proportion of firms engaging in this practice did not significantly differ among the different categories. Results suggested that access of firms to suppliers' credit during the crisis seemed not to have diminished. Eighty-one percent of sample respondents said that their input suppliers

still extended

credit after July 1997 (Table 7). The proportion

of


132

Economic

Table 7. Access to suppliers' Category

crisis... Once more

credit (In percent).

Buying inputs on credit

Suppliers still extending ,credit (after July ,1997)

Selling products on credit

Still extending credit to buyers (after July 1997)

By Sector Food proditcts Textiles

71,43 72.73

82.30 84,06

80.45 83.12

84.96 "81+16

Wearing apparel, leather Chelrticals, rubber, plastic

69.42 7558

75,45 82.72

55.37 86.05

59.63 90.00

Electrical, mac}finery Total

80.00 73.68

8333 81 29

80.00 75,94

79.25 78.20

By export orientation Exporters Non exporters Total

72.89 75.10 73-95

84.34 77.92 81.25

77,.79 80.63 76,05

74.39 82.17 78.15

69.96 77.91 73.68

75,31 87.19 81.29

75.27 76.71 75,94

76.37 80.00 78.20

By Size

"

Small Lazge Total

i

Source:

Survey

of Philippine

Industry

and

the Financial

i

Crisis,

1998

firms which maintained this view did not significantly differ among the various categories. Firms also typically sell their products to customers on credit. About three-fourths of sample firms were doing this before the crisis. During the crisis, a little over three-fourths of sample firms claimed to have continued selling their products on credit to their customers. The proportion of firms that extended credit to their customers appeared to be higher for nonexporters than for exporters. More big firms extended credit to their customers than small firms. Among the five sectors, the chemicals sector had the most firms selling products on credit, while the wearing apparel and leather sector had the lowest proportion. Firms were asked which loan or credit sources had become more restrictive in granting credits since the onset of the regional financial crisis in July 1997 (Fig. 10). Domestic banks were the !most frequently mentioned credit source by respondents, followed by input suppliers. Thirty-six percent mentioned that availability of credit from their usual source had remained the same. The same response patterns were observed when respondents /

were broken

down by size and export orientation. When sample firms were classified according to sector, however, the electrical Imachinery sector had a different pattern of responses from the rest of the sectors. Half the firms in this sector claimed that their access to credit had not changed at all during the crisis period. Only a little over one-fifth said that their access to bank credit had become more restrictive.


Chapter 5: Lamberte et aL

133

Sample firms were also asked whether they currently had adequate liquidity to finance their production. About fi'tree-fourths of the total sample claimed to have no liquidity problem during the interview (Table 8). The proportion of large firms that made the same claim did not significantly differ from that of small firms. The same can be said of exporters and nonexporters. The textile sector had the lowest proportion of firms with no liquidity problem. Among those who said that they had inadequate liquidity to run their operations, a little over half singled out low revenue as the major reason (Table 9). A little over one-third mentioned low collection rate and insufficient loans as the major reason for encountering a liquidity problem during the interview. Table 8. Adequate liquidity to finance production (In percent). Category

Yes

By Sector Food products Textiles Wearing apparel, leather Chemichls)_ubber, plastic Electrical maclmxery Total

75.00 67.57 73.28 80.95 82.88 76.22

By export orientation Exporters Non exporters Tot_

79_77 72.18 76.08

By Size Small ' Large Total

74.36 78.33 76.22

Source: Survey

of Philippine

Industry

and

the Financial

Crisis, 1998

Transparency Financial statements, collaterals, and guarantees â&#x20AC;˘ The problem of asymmetric information, wherein lenders know less about borrowers and their prospects for repayment than borrowers, is pervasive in the finance process and prevents lenders from lending freely. This problem can be reduced if lenders have adequate informationabout the business performance of borrowing firms and if they have a strong and effective recourse in case of default, such that loans are adequately covered by collateral and lenders can quickly seize the collateral when borrowers default. Accounting information, such as, balance sheets and income statements, is one instrument that can make firms transparent to lenders. The value of this accounting information can be enhanced if it is certified by an independent auditing firm. Coming out with audited accounting reports regularly can greatly facilitate the job of lenders in monitoring borrowers to minimize the moral hazard problem.


134

Economic

Table 9. Causes of inadequate Category

liquidity

Low revenue

crisis... Once more

(In percent).

Insufficient loans

Insufficient credit from suppliers

Low collection rate

Others

By Sector Food products Textiles

44.83 50-00

32.26 28.57

24-14 20.00

37,93 33.33

13,33 6,67

Wearing apparel, leather Chemicals, _lbbel_ plastic Electrical machinery Total

60.71 40.00 66.67 52.63

60.71 14.29 14.29 34.26

25.00 1538 6.67 20.00

30.77 50,00 28.57 35.58

28.57 40.00 22.22 21.43

By export orientation Exporters Non exporters To td

52.08 53.03 52.63

32.61 35.48 34.26

16.28 22.58 20.00

19.05 46.77 35.58

29,63 16-28 21.43

By Size SmaU Large "Ibtal

59.09 43.75 52.63

35.48 32.61 34.26

25.00 13.33 20.00

38.33 31.82 35.58

22.73 19.23 21.43

Source:

Survey

of Philippine

Philippine

Industry

and

the Financial

firms and banks are required

Crisis,

1998.

to maintain

appropriate

financial

records that observe standard and generally accepted accounting and auditing principles and procedures. In practice, however, some firms, especially small ones, do not regularly prepare balance sheets and income statements, and if they do, financial statements are not audited by an auditing firm, Of the total sample firms, 88 percent claimed to have financial statements audited by an independent auditing firm. As expected, the proportion of firms with audited financial statements was lower for small and nonexporting firms (both 82%) than for large and exporting firms (93%). The rigor involved in competing in the international market is perhaps one of the compelling reasons for exporters to have audited financial statements. Of the five sectors, the textile sector had the lowest proportion by food-producing percent. In general,

of firms with audited financial statements firms (83%). The rest had: proportions

Philippine

banks require 10an applicants,

(80%), followed

ranging

from 89 to 92

especially

business

enterprises, to submit financial statements ias part of documents needed to evaluate the credit worthiness of their borrowers. Whether they accept audited or unaudited financial statements is a different matter. Results showed that despite the fact that 88 percent of total sample irespondents

for this study claimed

that their financial statements were auditedlby independent auditors, only 65 percent said that they typically needed audlted, financial statements to apply for and receive a bank loan (Table 10). As expected, large firms reported a higher proportion (71%) than small firms (60%) that were required to submit audited


Chapter 5: Lamberte

et al.

135

financial statements when applying for a loan. The difference was less significant between exporters (68%) and nonexporters (63%). Among the five sectors, the electrical machinery sector reported the lowest proportion (56%) of firms that were required to submit audited financial statements when they applied for and received a loan. Usually, the longer the maturity of the loan, the more the banks require collaterals from their borrowers. Survey results supported this observation. Almost half of total respondents said that they typically provided a collateral when borrowing for 12 months or longer, whereas only 24 percent and 27 percent said that they provided a collateral when they borrow for less than 6 months, or 6 months or longer, respectively (Table 11). There was not much difference when respondents were grouped by export orientation or by size. When classified by sector, the textile sector had the highest proportion of respondents who claimed that they were required to present a collateral for loans with less than 6 months' maturity period. On the other hand, the electrical machinery sector showed the lowest proportion of firms that were required to present a collateral for long-term loans. Of those who said that they were required by their banks to present collateral, 87 percent mentioned land and buildings, while 65 percent reported machineries and equipment. Only 24 percent mentioned stocks being used as collaterals for their loans. In some cases, banks required borrowers to have guarantors for their loans, especially if borrowers could not present an acceptable or adequate collateral. Twenty-nine percent of total respondents mentioned getting guarantees on their financing. More large firms and exporters obtained guarantees for their loans than small and nonexporting firms. A large proportion (60%) mentioned stockholders as their usual guarantors (Table 12). One-fourth mentioned other banks as guarantors. Short-run

prospects

Sample firms were not optimistic about the economy, in general and their situation, in particular, in the next 6 months. Almost half thought that their capacity utilization rate, which already significantly dropped to a certain level since the onset of the East Asian financial crisis, would remain the same, while one-fourth expected a further decline (Fig. 11). Only 27 percent were optimistic, expecting a rebound in their capacity utilization rate in the next 6 months. In terms of export orientation, results showed that nonexporters were more pessimistic than exporters; they expected capacity utilization rate to decline further or remain the same in the next 6 months. Small firms were more pessimistic than large firms. The wearing apparel sector was the least pessimistic, whereas the textile sector was the most pessimistic about prospects of business in the short term.


136

Economic

Table

10.

Submission (In

of audited

]

Required

By Sector Food products Textiles

66.67 63.08

Wearing apparel leather Chemicals, rubber, plastic Electrical machinery Total

64.81 78.48 55.96 65.25

By export orientation Exporters Non exporters Total

67.48 62.95 65.32

By Size Small

59.48

Large Total

70.83 65.25

Source: Survey

11.

statement

to apply

Once

for

of Philippine

Requirement

Industry

and

of a collateral

the Financial

for

loan

Category

loan

Crisis, 1998

(In percent). L O A N

Less than

6 months

12 months

6 months

or longer

or longer

By Sector Food products Textiles

22.77 37.29

25.77 41..38

50.00 55.00

Wearing

25.25

29.90

50.49

18.67

19.18

56.41.

17.65 23.39

21.00 26.59

35.64 48.65

Exporters

21.97,

25.00

45.6i

Non exporters Total

24.641 23.27!

28.02 26_48

51.87 48_64

Small

23.561

25.49

46.98

Large Total

23.25! 23.39

27.60 26.59

50.22 48.65

Chemicals,

more

percent). Category

Table

financial

crisis...

apparel., leather rubber, plastic

Electrical Total

machinery

By export

orientation

By Size

Source: SurVey of Philippine

Industry

and

the Financial

Crisis, 1998


Chapter 5: Lamberte

et al.

Table 12. Guarantor

137

(In percent).

Category

Other Banks

Affiliated Films

By Sector Food products Textiles Wearing apparel, leather Chemicals, rubber, plastic Electrical machinery Total

20.83 20.00 10.00 50.00 16.67 24.24

12.50 21.43 20.00 25.00 38.10 23.23

0.00 7,14 10.00 10.53 11.76 7.53

66.67 66.67 69.57 45.83 50.00 60.00

0.00 23.08 0.00 0.00 0.00 3.30

39.13 23_08 16.67 11.11 13.33 21.84

By export orientation Exporters Nc_n exporters Total

23,64 25.58 24.49

23.64 20_93 22.45

8.00 4.76 6.52

62.71 58.00 60.55

4.08 Z44 3.33

17.02 27.50 21.84

By Size Small Large Total

28.57 21.05 24.24

22.73 23.64 23.23

10.00 5.66 7,53

51.11 66.15 60.00

5.13 1.92 3.30

36.36 12.96 21.84

Source: Survey

Conclusions

of Philippine

Industry

and

Finance Cornpanies

the Financial

Stockholder

Government

Others

Crisis, 1998

and recommendations

This study examined the impacts of the East Asian financial crisis on Philippine manufacturing industries and their responses to such a crisis. Data were collected from a sample of 541 establishments representing five sectors, namely: food products; textiles; wearing apparel and leather; chemicals, rubber, and plastic products; and electrical machinery. Survey results clearly showed that the capacity utilization rate of manufacturing firms started to decline even before the crisis struck in July 1997, and that it continued to drop as the crisis worsened. The recent drop in capacity utilization rate can be attributed to the slowdown in both domestic and foreign demand for goods and the sudden rise in input costs, especially imported inputs, and interest rate, which squeezed the firms' profits. The earlier drop in capacity utilization rate was probably due to overinvestment in building additional capacity under a more liberal and cheaper access to external fund sources. Thus, the current low capacity utilization rate may be attributed to both cyclical and structural factors, which call for demand management and industrial restructuring policy measures. As the crisis deepened,

there seemed to have emerged

a consensus

that

firms were facing a credit crunch, that is, institutional lenders had stopped lending to them due to the highly volatile economic situation. Study results did not provide a clear evidence of the existence of a supply-side credit crunch


Chapter 5: Lamberte

et al.

139

during the crisis period. Majority of fir,_,s still had continued access to institutional loans, albeit at a much higher interest rate. While banks are now much more discriminating in lending to the business sector, the decline in total loan growth in 1998 could also be attributed to the lower demand for credit brought about by the sharp reduction in demand for goods produced by firms during the crisis period. The significant drop in capacity utilization rate and output of firms during the crisis period would have required a large labor layoff. To minimize labor layoffs, however, firms resorted to means, such as reducing workweek or days, applying forced vacation leave, and freezing salary increases, to save some jobs. Although this study generally confirmed the adverse impact of the financial crisis on the manufacturing sector, it also yielded some positive signs which the government can use as a platform for formulating policies and programs to stage a rapid economic recovery. First, most of the firms surveyed were still earning profits, although these declined in the last 2-1/2 months. If the worst of the crisis had already passed, then these firms can quickly rebound, partly using their profits to finance their growth. Second, most of the firms still had access to credit, although at a relatively higher price. Reduced interest rates will surely help during the recovery period. Third, although firms resorted to some cost-cutting measures, most of them still preferred to preserve jobs, a strategy they think would pay off once the crisis fades away. With most core staff intact and excess capacity readily available, a resurgence in demand will certainly be welcomed by them. The most appropriate policy the government could adopt would be an expansionary one to stimulate aggregate demand. Both monetary and fiscal policies are required to support such an expansionary policy. There is still some room for relaxing monetary policy. First of all, inflation rate already started to come down in February 1999. The agricultural sector, particularly the crop subsector, which suffered a large decline in 1998 as a result of E1 Nifio, was expected to rebound in 1999. In fact, the price of rice, which constitutes a large component in the consumer price index, already softened in the last few weeks. Second, the reserve money level during the February 1999 test period was P30 billion below the level agreed upon by the government and IMF under the existing standby arrangement program. Relaxing monetary policy, which will push interest rate down, can accomplish four things. One is that it will lighten the debt-service burden of enterprises, freeing some resources that can be used to meet increased demand for goods. It can also reduce the cost of debt restructuring, whenever resorted to by both enterprises and banks. Still another benefit is that it can stimulate consumer spending and revive the sagging consumer durable sector. Finally, it


140

Economic

crisis... Once more

can help arrest the appreciation of the peso vis-a-vis the US dollar and improve the competitiveness of the export sector, which has been pulling the economy up during this crisis period. There is a limit as to how much monetary policy can accomplish the task above. Pushing the interest rate further down and exhorting banks to lend to private enterprises would not be sufficient to stimulate growth unless demand for goods is pulled upward with the helpl of fiscal policy. Thus, on the fiscal side, pump-priming measures should continue in 1999, focusing on critical sectors of the economy, specifically agriculture, which has the most extensive linkages

with the rest of the economy, and the social sectors, such as health,

education, and housing. There are, however, two important programs the governmen t could launch to directly help the labor and manufacturing sectors. One is to provide skills training programs for those who have been laid off as a result of retrenchments

in the wake of the crisis. These programs

can be offered

in various regions to spread the benefits. Those who were laid off were usually younger, most probably less experienced, and less skilled, but highly trainable. The government can give incentives to those firms that had resorted to reducing work hours/days to encourage them to offer unused facilities and slack time of senior staff for training. The other is for the government

to stimulate

the housing

sector, which

has direct short-term economic and social impact. There is still a huge backlog of housing units in the country today, especially for the lower middle class and poor households. One way to meet this shortage is to beef up the resources of the Home Insurance Guarantee Corp. (HIGC) so that it will have additional resources to provide guarantees to bonds issued by local government units (LGUs) for financing mass housing projects in their respective localities. Of course, the government housing finance system has to be reformed quickly so that it can efficiently provide services for the public. To support its pump-priming measures in 1998, the government tapped foreign fund sources to avoid crowding out the private sector and also to secure foreign exchange to beef up the country's international reserves. Since private sector demand for funds is still down and interest rate has already come down to the precrisis level, it would be worthwhile for the government to secure funding for its pump-priming measure_ for! 1999 from the local market, which now stands cheaper than foreign loans. ! Finally, the recent crisis has underscored

the importance

of keeping

a

flexible exchange rate policy. However, evefi if a flexible exchange rate policy is pursued and corporate governance is improved, the level of foreign capital inflows experienced by the country before the East Asian crisis is unlikely to be attained in the near term unless additional measures are put in place. One way is to liberalize further the entry of foreign banks into the country, preferably


Chapter 5: Lamberte

et aL

141

allowing foreign banks to wholly own domestic banks either by establishing new subsidiaries or buying existing ones, especially those that are not well capitalized. The presence of more foreign banks in the country can certainly breathe new life into the banking system and make additional capital available to Philippine industries.


142

Economic

crisis... Once more

Annex A. I Sector

Industry

Codes

Description I

1

2

3

Food products 1512 1513

Production, Processing seafoods

1514 1515 152 154 156 157 158, 1593, 1594

Processitag and preserving of fruits and vegetables Manufacture of vegetable and animal oils and fats Manufacture of dairy products Manufacture of starches and starch products Manufacture of bakery produc_ Manufacture of sugar Manufacture of coconubbased products

1591 1592

Manufacture Manufacture

1.595

farinaceous products Coffee roasting and processing

1599

Manufacture

of other food products,

171 172

Spin_lilag, weaving add fhaishing Mare.fracture of other textiles

173, 174

Manufacture Manufactufe

Wearing

apparel

nec (eg, soup, vhaegar,

nuts)

Ready-lrtade Manufacture Manufacture

Chemical

of textiles

of haitted and crocheted of elrtbroidered fabrics

fabrics

and artides;

& footwear

products,

garments manufacturing of wearing apparel, r_ec of fodi_wear

rubber

241.1

Manufacture compounds

2412 242_3

Manufacture of plastics in primary forms ,and of synthetic rubber Manufacture of pah'_ts, varnishes and. similar coatings, . printing ink mad mastics Manufacture of pharmaceuticals, medicinal chemicals mad botanical products

2424 2425

'

of basic chemicals

except fertilizers

mad ni_ogen

243

Manufacture of soap and detergea_ts, clemaing and polishing preparatiors, perfumes and toter preparatior_s Manufacture of other Chemical products, nec (eg, matcb_s, ink, glues and adhesives) Martu facture of man-made fibers

251 252

Manufacture Mannfacture

of rubber products of pl_tic products

311

Mm'tufacture

of electric

312, 313 321,322

Manufacture Mm'tufacture Manufacture

of electricit_ distribution and control apparatus; of insulatedwire mrd cables of electronic valves artd tubes; Mmrufacture of

323, 324

semiconductor Mm_ufacture

devices and other electronic components of t¢:16vision and radio transmitters and apparatus

2429

5

of cocoa, chocolate and sugar confectionery of macaroni, noodles, couscous and similar

Textiles

181 189 192 4

proce ._/ng and preserving of meat and meat products and preserving of fish and fish products and other

Electrical

machinery motors,

generators

and tralasformers

for

line telephony mad line t61egraphy; Manufacture of television and radio receivers, so,.md or'video recording or reproducing apparatus, and associated goods


Chapter 5: Lamberte et al.

143

Annex B. ATE Class

Ir_dustry Stratum/Sector TOTAL

Food products

Textiles

20-49

50-99

Frame

46.9%

Sample

19.3%

% frame % sample

>=200

21.1%o

15.7%

16,4%

100,0%

17.2%

18.0o/o

45.5%

100,0%

54_1%

21.0%

11.5%

13.3%

32.0%

18-1%

17.4%.

19.6%

44.9%o

22.0O/,,

40.1%

24.1%

16.3%

19.5%

10.0%

21,3%

23.2%

18.5%

37.0%

18.0%

% frame

46,8%

19.7%

15.8%

17.7%

20.0%

% sample

15.6%

12.5%

13.7O/o

58.2%

22.0o/o

% frame

46.3%,

22.1%

19-4%

12,2%

23.0%

% sample

20.3%

15.2%

16,9%

47,6%

20.0o/o

% frame

21.8%

19.0%

21.8%

37.5%

6.0%

% sample

21.8%o

19.0%

21.8%,

37,5%

18.0%

% frame % sample

Wearing apparel & footwear

Chemical products, rubber

Electrical machinery

% of total

100-199

"


144

Economic

crisis... Once more

References Lamberte, M.B. and J.T. Yap. 1999. Scenarios for economic recovery: the Philippines. Discussion Paper Series No. 99-05. Makati City: Philippine Institute for Development Studies, March. Lamberte, M.B. and G.M. Ltanto. 1995. A study of financial sector policies: the Philippine case, in: Shahid N. Zahid (ed.). Financial sector development in Asia. Manila: Asian Development Bank. Virtucio, EK. 1998. Social implications of the Asian financial crisis: the Philippine case, in EDAP Joint Policy Studies No. 9: Social Implications of the Asian Financial Crisis. Seoul: Korea Development Institute.


6 Impact of the East Asian Financial Crisis on Households Celia M. Reyes, Rosario G. Manasan, and Genero$o de Guzman

Aniceto

C. Orbeta, Jr.

years of the financial turmoil continue to linger. The crisis, together with the after the phenomenon, financial crisis had hit East Asia economic in July 1997, the effects E1 Nifio weather caused contraction, increased unemployment, and higher prices. These have had adverse social Three

consequences and forced many affected families and individuals to make adjustments especially in their consumption and spending patterns. The government, faced with huge revenue shortfalls, adopted austere measures that caused reductions in spending in several economic and social services. While this helped in minimizing the deficit, it aggravated the situation as it tended to weaken rather than strengthen the government's capability to provide assistance to those adversely affected by the crisis. This study in general takes a closer look at the impact of the East Asian financial crisis on households in the Philippines. More specifically, it aims to identify the various groups affected by the crisis, assess the differential impact on them at the microlevel, and document their responses or coping mechanisms. Unlike similar studies done earlier, this study benefits from being able to use official statistics that were made available only recently and from data gathered specifically for the purposes of this study. A participatory assessment approach was the primary tool used in determining the social impact of the financial and economic crisis specifically on vulnerable groups and in identifying coping mechanisms adopted by households in response to the crisis. Focus group discussions (FGDs) were conducted in January 1999. This timing was deemed appropriate as it provided a more complete picture of the impact of the crisis on Philippine households. The FGD covered 57 communities (barangays or villages) all over the country representing fishing, farming (upland, earners.

sustenance,

and commercial),

urban poor, and middle income/wage


146

Economic

crisis... Once more

In addition, a key informant survey and a household survey were conducted to provide supplementary data. The key informant survey covered 31 out of the 57 FGD communities and tried to elicit views from communitybased leaders regarding the impact of the crisis on the community. Key informants included the barangay chair, health worker, nutrition scholar, principal or head teacher, and social worker. Additional respondents, such as the municipal accountant, budget officer, health officer, and social welfare officer, were also interviewed The household

in municipalities where these barangays are situated. survey consisted of 430 households in the same 31

communities. Sample househoids were selected based on spatial and sectoral dimensions. The spatial grouping considered four broad divisions: Metro Manila, Luzon, Visayas, and Mindanao while the sectoral divisions were based on the dominant economic characteristics of the community. Secondary data were also obtained from1 the following: (1) administrative reports of various government agencie ; (2) budget data of national and local governments; and (3) surveys done by the National Statistics Office (NSO). Administrative reports of the Department of Education, Culture and Sports (DECS), Department of Health (DOH), and :Department of Social Welfare and Development (DSWD) were used. Budget and expenditure data from the Department of Budget and Management (DBM), Commission on Audit (COA), and selected local government units (LGUs) provided data on national and local government spending. The NSO data included those obtained from the quarterly Labor Force Surveys (LFS), triennial Family Income and Expenditures Surveys (FIES), and the 1998 Annual Poverty Indicators Survey (APIS): Impact on households This section examines

the impact

of the East Asian financial

employment; household income; household purchasing distribution; poverty; health, nutrition and population; vulnerable groups. !

crisis on

power; income education; and

Employment The regional financial crisis and the abnormal weather pattern adversely affected the employment situation in the Philippines. Firms resorted to retrenchments, temporary lay-offs, and reduced working hours as demand slackened and production costs increased. Workers in the agricultural sector, meanwhile, had to contend with higher underemployment due to drought. Although massive lay-offs were not noted, the crisis and the drought prevented the economy from absorbing neW entrants to the labor force. This contributed to a higher unemployment rate_ which was already considerable even before the crisis.


Chapter 6: Reyes et al.

147

The labor force participation rate (LFPR) declined from 65.7 percent in July 1997 to 64.9 percent in July 1998. However, starting October 1998, the labor force participation rate increased slightly relative to the same quarter of the preceding year. The decline in the LFPRs was more pronounced in the 15-19 and 20-24 age groups, which could be attributed mainly to the increase in number of individuals in these age brackets opting to go to school rather than joining the labor force. This could be because of the belief that there was no work available for them. When the regional financial crisis struck in July 1997, the unemployment rate stood at 8.7 percent. Since then, the unemployment rate for the next six quarters rose higher than the corresponding quarters of the previous year. The largest percentage increase in the unemployment rate was observed in April 1998 when it rose to 13.3 percent from 10.4 percent a year ago, due to the combined effect of the financial crisis and the E1 Nifio weather phenomenon. The unemployment rate rose to 8.9 percent in July 1998, 9.6 percent in October 1998, and 9 percent in January 1999 (Table 1). This translates to a pool of 2.8 million unemployed Filipinos in 1999. Based on the October rounds of the LFS, the underemployment rate rose from 19.4 percent in 1996 to 20.8 percent in 1997 and to 23.7 percent in 1998. Workers had to settle for less working ti.-Le than be laid off. Moreover, displaced workers and the rest of the population, particularly the poor, tried to find some form of employment, even part-time work, to generate some income. The financial crisis and E1 Nifio exacted tolls on both the urban and rural labor markets. The unemployment rate in the urban areas rose to 12.1 percent in the fourth quarter of 1998, representing 1.8 million unemployed, while that for rural areas rose to 7.4 percent in the same quarter, which translates to 1.2 million jobless persons. The underemployment rate surged to 20.6 percent in urban areas and 26.3 percent in rural areas in the same period. The older and presumably more skilled workers were better able to hold on to their jobs. The proportion of employed persons who were in the 15-19, 2024, and 25-34 age groups fell while the proportion of employed persons in the older age groups increased. In July 1997, the proportion of workers who were in the 15-34 age bracket was 46.5 percent; this declined to 45.5 percent in July 1998, and went down further to 45.1 percent 3 months later. The regional

financial

crisis had adversely

affected

the deployment

of

overseas Filipino workers (OFWs). Th Knumber of OFWs deployed increased slightly by 1 percent from 747,696 workers in 1997 to 755,684 in 1998, which was much lower than the 13 percent growth registered in 1997. The number sea-based OFWs grew by 2.6 percent. On the other hand, the total number land-based OFWs increased by 0.6 percent.

of of


q_ oo

Table

1. Labor

force,

status,

urban-rural,

1995-98.

Q2 1995Q3

Q4

Q1

Q2 1995Q3

Q4

(_1

(_2 1995(_Y3

(_4

(_1

_)2 1995_3

Q4

t_)q

27619 13530 14089

29259 14209 15051

28602 14027 14574

28040 13542 14497

28924 14129 14795

30713 14975 15738

29657 13841 15816

29637 13826 15811

29631 13738 15893

31368 14596 16772

30154 14145 16009

30265 14180 16084

30240 14212 16027

32111 15112 16998

30593 14363 I6230

31278 14733 16545

31168 14720 I6448

25194 11964 13230

25724 12103 13621

26090 12379 13710

25698 12045 13652

26527 12637 13890

27358 12883 14475

27419 12478 14941

27442 12505 14937

27335 12423 14912

28105 12748 15357

27531 12523 15008

27888 12688 15200

27689 12658 15031

27837 12790 15046

27856 12680 15176

28262 12947 15315

28368 12963 15405

2425 1566 859

3535 2106 1430

2512 2342 1648 1497 8(::L4 845

2397 1492 9_k5

3355 2238 2092 1363 1'2,6._ 875

2195 1321 874

2296 1315 981

3263 1848 1415

2623 1622 100_

2377 1492 88_

2551 1554 996

4274 2322 1952

2737 1683 1054

3016 1786 1230

2800 1757 1(143

8.8 11.6

t2.1 14.8

8.8 11.7

8.4 11.1

8.3 10.6

10.9 14.0

7.5 9.8

7.4 9.6

7.7 9.6

10.4 •12.7

8.7 11.5

7.9 10.5

8.4 10.9

13.3 15.4

8.9 11,7

9.6 12.1

9.0 I1.9

6.i

9.5

5.9

5,8

6.1

8.0

5.5

5.5

6.2

8.4

6.3

5.5

6.2

11.5

6,5

7.4

6.3

18.6 14.6 22.2

20.3 17.3 23.0

21.3 19.1 23.3

19.8 17.3 22.0

21.0 18.5 23.2

22.2 19.9 24.3

21.5 18.1 24.4

19.4 14.4 23.6

21.1 16.9 24.5

23.4 20_2 26.1

23.1 19.1 26_3

20.8 16.9 24.1

21.6 17.7 24.9

21.0 17.1 24.3

20.8 17.3 23.8

23.7 20.6 26.3

22.1 18.6 25.1

rate

Rural Underemp[oyment Philippines Urban Rural Source: National

employment

[ Q1

Labor force Philippines Urban • Rural Employed Philippines Urban Rural Unemployed Philippines • Urban Rural Unemployment Philippines Urban

by

rate

Statistics

Office.

_" _. "_

C3


Chapter 6: Reyes et al.

149

The marginal increase in land-based OFWs could be traced to fewer job opportunities in Asia. Deployment to Asia dropped by 6percent in 1998. Crisishit countries such as Hong Kong, Singapore, and Malaysia, which are among the top destinations of OFWs, were forced to cut back on the hiring of new workers as a result of the regional financial crisis. More specifically, the number of Filipino workers sent to Hong Kong fell by 18.3 percent, Singapore by 16.7 percent, and Malaysia, 65.7 percent. Meanwhile, deployment to the Middle East, which regained its position as the top destination, grew by 2.6 percent. Although deployment to America, Europe, and Africa increased, still these were not enough to compensate for the decline in deployment experienced in Asia. Although remittances of OFWs declined by 13.4percent from $5.15billion â&#x20AC;˘in January-November 1997 to $4.46 billion during the same period in 1998, the peso value, however, went up by 20 percent. Although massive layoffs were not observed, loss of gainful employment was noted among many communities as reflected in the FGD results. Construction, real estate, manufacturing, and agriculture seemed to be among the hardest hit sectors. Loss of jobs was felt largely in fishing communities, and urban poor and middle-income communities. FGD participants reported that the crisis and the E1 Nifio weather phenomenon forced many farmers and fisherfolk to abandon their jobs (whether temporarily or permanently) for more viable sources of livelihood. Two major reasons were cited. One was the lack of control over prices at which they sold their produce to traders. The other was the crisis-driven increases in costs of basic inputs. The diminished use of farm/fishing inputs resulting from price increases (along with such elements as poor irrigation facilities, competition with commercial fishing vessels, and weather disturbances) contributed to lower farm yield/fish catch. In Kalanganan, Cotabato, for instance, serious flooding destroyed fishponds, which were the main source of income of most residents. Repairing the damage became difficult for many because of high input prices. As a result, many small fishpond owners had to sell their fishponds to big fishpond owners. Daily wage laborers especially FGD participants in Baguio and Benguet were among the hardest hit. With the onset of the crisis, opportunities to work, which from the start were already irregular, became even scarcer and more difficult to access. Communities that were largely dependent on employment were directly hit by the retrenchment program initiated by the business sector. Of this, 39 percent came from the middle-income, 43 percent from the urban poor, 23 percent from farming, and 50percent from fishing communities. Factory closures affected 31 percent of middle-income communities. Forty-three percent of urban


150

Economic

crisis... Once more

poor communities complained of huge unemployment problems due to the slowdown in real estate and construction industries which resulted in slack demand for construction workers and other semiskilled and unskilled laborers (Table 2).

Table 2.

Impact of the crisis and E1 Nifio on employment (Percent of communities). Impact

No effect Retrenchment Closure

Middle income 15 39 31

'

and labor market

I I Urban poor

Fishing

I

Farming

43 14

50 13

18 23 9

Large-scale unemplyment Slack demand for laborers

8 15

29 43

13

9 5

(esp. construction workers) Longer working hours Job rotation Contractualization

8 31 8

57 14 57

13 25 13

9 5 5

15

14

13

8

29

13

Below minimum wage employment Reduced business operation

Sources:SocialImpact of the Regional FinancialCrisis, 1999,and Focus Group Discussionsl Household

incomes

Incomes declined for many households during the Asian financial crisis. More households seemed to have been adversely affected compared with those who benefited from the crisis. Available data also suggest that the poor suffered more. Simulations done by Reyes (1998) using the Micro Impact of Macroeconomic Adjustment Policies (MIMAP) models show that the economic slowdown due to the financial would have resulted in declines The percentage declines ranged and a high of 7.3 percent for the Results

crisis and the E1 N_o weather phenomenon in the average income for the different deciles. from a low:of 4.6 percent for the richest decile poorest deCile (Table 3).

of the 1998 APIS and the 1997 FIES tended

to support

the

simulation results obtained by Reyes, except for the richest decile. The data show that per capita income declined by 3._ percent in nominal terms and by 12.1 percent in real terms (Table 4). Moreover, the average family income of all deciles except for the richest decile decreased (Table 5). The percentage decline is greatest for the lowest income decile at 29 percent.


Chapter 6: Reyes et al.

151

The 1998 APIS also revealed that 17 percent of families experienced reduced wages. The richest 60 percent seemed to have been more affected as 18 percent of the families in this group had reduced wages compared with 15 percent of families in the poorest 40 percent. Household survey results indicated that 53 percent of households did not experience a change in income during the crisis. Thirty percent suffered reduction in incomes, while 17 percent had higher incomes during the crisis period. Half of the households in upland communities and 40 percent of households in subsistence farming communities had lower incomes. On the other hand, less than 20 percent of households in middle-income communities â&#x20AC;˘ experienced a decline in incomes. The major reasons cited for the decline in incomes were poor harvest mainly due to bad weather (38%), lower price for their produce (18%), reduced number of earning members (12%), reduced financial support from relatives (8%), and retrenchment from work (6%). Farming and fishing communities ranked poor harvest (52%) as the number one cause for the decrease in their Table 3.

Impact 1998.

of the financial

crisis on income

of households,

Decile

Percent change in income

1 2 3

-7.28 -7.08 -6,82

4 5 6 7

-6.65 -6.30 -5.87 -5,50

8 9 10

-5,06 -4.88 -4.64

by decile,

Sources: 1998Annual Poverty Indicator Survey,National StatisticsOffice. Table 4. Per capita income using

_orainal Real Sources: National StatisticsOffice.

the 1997 FIES and 1998 APIS. 1997 FIES 24,840 19,909

1998 APIS 23,949 17,494

Growth rate (3.6) (12.1)


152

Economic

Table 5.

crisis... Once more

Comparative annual income per family using the 1998 APIS and 1997 FIES, by income decile.

Income decile

I

1997Family Income

I and ExpenditureSurvey

Phihppines

123,008

Firstdecile Second decile Thirddecile Fourthdecile Fifth decile Sixthdecile Seventhdecile Eightdecile Ninth decile Tenthdecile

20,659 33,064 42,611 53,101 66,291 83,224 106,919 141,394 199,891 482,927

1998Annual Poverty Percentagechange Indicator Survey _] 121,438 14,644 26,852 36,689 47,211 60,176 76,641 100,170 135,051 196,018 520,928

1997-98 (1.28) (29.12) (18.79) (13.90) (11.09) (9.22) (7.91) (6.31) (4.49) (1.94) 7.87

Sources: 1997FIESand 1998APIS,National StatisticsOffice. income.

Households

from middle-income

communities,

on the other hand,

considered the reduction in number of earning members (61%) as the principal factor that contributed to the deterioration in their income. Among urban poor communities, reduction in financial support from relatives (35%) and retrenchment experiencing

from work (26%) were reduction in income.

the two most important

reasons

for

Seventeen percent of households claimed that during the period under review, their income had in fact increased. Among households in middle-income communities, 23 percent claimed an increase in household income. The major reasons that contributed to the increase in household income were job promotion (22%), increased number of earning members (14%), new or additional work (12%), favorable prices for their outputs (6%), and increased harvest coupled with good weather condition (3%). About 25 percent of households from upland communities claimed that part of their additional income was derived from winnings in gambling. A few households from the middle-income (6%) and urban poor (7%) communities, on the other hand, said that they availed of some credit to augment their income. In the middle-income community, over 60 percent of households said that their additional income came

primarily

from job promotion.

NeW or additional

work

(29%) and

increased financial support from relatives i36%) were the two most important factors that contributed to improvements in income of households from urban poor communities. Household

purchasing

power

Prices of goods and services increased significantly due to the drought and the financial crisis. Many FGD participants lamented that such sharp


Chapter 6: Reyes et al.

153

increases in prices were not matched by corresponding increases in incomes. Thus, the net result was a weakened purchasing power and a decrease in households' access to basic necessities. The focus group discussions and the household survey provided the following more detailed information on how households were affected by the increase in prices: a. There was a widespread spiraling of prices; some households were forced to forego buying/consuming some goods. The crisis forced more than 42 percent of households to refrain from buying certain goods they used to enjoy before. Ninety-three percent cited high prices as the single major reason that prevented them from buying these item_ (Table 6). b. In general, households maintained three full meals a day. Despite the hard times, 98 percent of households was able to maintain three regular meals daily. The decrease in the number of meals taken was in fact, more of an exception (Table 6). No one from the farming and fishing communities reduced the number of meals taken. Meals were reduced to two in 4 percent of urban poor communities and 2 percent of middle-income communities. Two percent now have irregular meals (Table 7). More than half of those who reported reducing the frequency of regular meals said that they were forced to do it since over a year ago. Thirty percent had been doing it for about a year. The rest were equally divided between those who were forced into it 6 months ago and those who went into it only a month ago (Table 6). c. There were major alterations in the household budget (Tables 6 and 7). tYome-larepared load. Forty percent said that the cost of preparing food for the household had increased. Sixty percent of the households from subsistence farming and 32 percent from middleincome communities shared this opinion. Majority said that the increase in food price in the market caused a 25 percent rise in household food budget. About a fifth believed that it was much higher. Half of commercial farming communities said that it increased by 10 percent. About 48 percent of upland communities thought it went up by 25 percent. Thirty percent said that it did not go beyond 10 percent. Others noted a 50 percent increase. In subsistence farming communities, 36 percent noted a 10 percent increase. However, an equal number said that it increased by up to 50 percent. On the other hand, 18 percent said that their food budget actually decreased. Most had 25 percent reductions. Many households from middle-income communities cut their food budget by 50 percent.


154

Economic

Table

6. Changes in household consumption communities, January 1999.

Item Stopped consuming some goods due.to High prices Not available Lost interest Others When reduced All times Sincelast monflx About 6 monflls ago About a year Over a year , Changes in number of full meals One in 1997 and now Two in 1997 One now Two now Three now Tkree In 1997 Two now Thzee now Irregular now Irregular in 1997 and now No reply Changes in household expenditures Dining out Not aware No d_ange hlcreased at most 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% up to 75% over 75% No reply Food prepared at home Not aware No change Increased at most 10% up to 25% up to 50% over 50% Decreased

I Percent respondents of Total 41,6 93.3 2.2 0.6. 3.9

100,0 6.7 6.7 33.3 53.3

0,2 3.7 6.3 75,0 18,8 93.5 1.2 98.3 0.5 0.2 2.3

100.0 23.0 37.2 9.3 52,5 25.0 â&#x20AC;˘ 22.5 17,7 14.5 19.7 30.3 1415 21.1 12.8

crisis... Once more

and expenditures,

Item

I

Percent respondents of Total

at most 10% up to 25% up to 50% No reply

27.6 40,8 31,6 4.0

Children's clothing Not aware

100,0 6,0

No change Increased at most 5% up to 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% over 50% No reply

35,1 28.8 23.4 40,3 22.6 13,7 18,6 23.g 20,0 38.8 17.5 11.4

Adults"dothing Not aware No dmnge Increased at most 5"/0 up to 10% up to 25% up to 50% Decreased at most 10% up to 25% up to 50% over 50% No reply children's transportation Not aware No change Increased at most 5% up to 10% up to 25% over 25% Decreased at most 10%

100,0 4.4 44,9 22.3 28.1 43.8 17.7 10.4 20.5 23,9 15.9 35.2 25,0 7.9 100.0 12.6 29.5 34.0 20.5 28.8 38.4 12,3 3.3 35.7

100.0 1.2

up to 25% over 25%

14.3 50.0

34.9 42.3 39,0 33.5 22.5 4,9 17.7

No reply

20,7

Others' transportation Not aware No change Increased at most 5%

all

100.0 9,3 23,0 29,5 21.3


Chapter

Table

6: Reyes

et al.

155

6. continued... Item

I Percent of Total respondents

Item

I

up to 10% up to 25% over 25% Decreased at most 10% up to 25% over 25% No reply

33.1 37,8 7.9 3,5 46.7 13.3 40.0 34,7

School fees and related expenses Not aware No change Increased at most 10% up to 25% up to 50% over 50%

100.0 12,1 6.3 48.1 38.6 42.5 16.4 2.4

Decreased at most 20%

3.0 61,5

over 20% No reply

38.5 20.5

Medical expenses Not aware No change Increased at most 10% up to 25% up to 50% over 50% Decreased at most 10% up to 50% over 50째/,, No reply

100.0 5,6 25,3 55.1 38.8 39.7 17,3 4.2 6.0 50.0 38.5 11.5 7.9

House rent, repair, and maintenance Not aware No change increased at most 10% up to 25% up to 50% over 50% Decreased at most 10% over 10% No reply

100.0 11.2 47.2 25.1 41.7 30.6 20.4 7.4 1.4 66.7 33,3 15.1

Utilities Not aware No change Increased at most5% up to 10%

100.0 3,5 24.0 62.1 15.0 40.8

Source : Social Impact of the Regional

Financial

I Percent of Total I rcspondents

up to 25% up to 50o/째 over 50% Decreased at most 10% over 10% No reply

27.7 11.6 4,9 2.8 58.3 41.7 7,7

Leisure Not aware No change Inc_ased at most 10% up to 25% up to 50% over 50% Decreased at most 10%

100.0 17.9 39,8 11,2 45.8 33,3 12,5 8,3 13.7 20.3

up to 50% over 50% No reply

47,5 32.2 17.4

Gambling Not aware No change Inc_ased at most 20% over 20% Decreased at most 10% up to 50% over 50% No reply

100.0 38.1 23.7 4.4 57.9 42.1 7.4 40.6 18.8 40.6 26.3

Food Education Medical Clothing TranSportation Housing Leisure

1997 1998 46,3 47.3 10.0 10.3 7,9 8,1 7.0 5.9 7.2 7.3 5.0 5.2 2.8 2.1

Crisis, Household

Survey.


156

Economic

crisis... Once more

Table 7. Changes in household consumption and expenditures, by type of community, January 1999 (Percent of total household respondents). Item

Commercial

" Upland

Subsis_nce

Pishing

Middle

.... Stopped conauming High prices Not available Lost interest

some goods due to

Others Changes

25,0 95`3

40,0 95.8

48,3 _3 10.3

45.8 88,9 3,7 ,3.7

6.7

4.2

10,3

3.7

100,0

100,0 1,7

100.0

100,0

38.6 100.0

II poo, 50.0 97.8

2,2

in number of full meals

All meals One in 1997 and now

100.0

100,0

Two in 1997 One now

5.0

8.3

3.4

1.0

4,5

Two now

33,3

lot20

50.0

100.0

100.0

Three now Throe in 1997

66,7 90,0

83.3

50.0 94,9

99-0

93,3

100.0

2.0 96,0

$.6 96.4

Two now Three now

100.0

100.0

98,3 100.0

Irregular now Irregular ill 1997 and now No reply

20 1.1 5,0

6.7

1.7

1.7

100,0 23,3

100.0 31.7

100,0 26,7

100,0 37-3

100,0 14,9

100,0 14,4

no change Increased at most 10%

35.0 15,0 66,7

33,3 8,3 40,0

28,3 16,7 60,0

39,0 1.7

39.6 8.9 44,4

45,3 6.7 30.0

tip to 25% up to 50% Decreased

22,2 11,1 5.0

40,0 20,0 10,0

20,0 20.0 18.3

100.0 10,2

22,2 33.3 30,7

16,7 35,3 21.1

182 #5.5

16.7 50,0

19.4 22.6

_3

16.7

32.3

21,1

15.7

19.4 6,3

1_8 57..9

Changes

in household

Dining out Not aware

expenditures

at most 10% tip to 25%

33.3

up to 50%

33.3

66,7

273 9.1

33,3

16.7 16.7

up to 75% over 75% No reply

1,1

21.7

16.7

10.0

11,9

5,9

14.4

100,0 1.7 33.3

100.0 5.0 25.0

100,0

]00,0

100.0

20.0

25,4

53,5

100,0 1.1 37,8

40.0 .qO.O

45.0 29,6

60,0 36.1

47.5 35,7

31.7 43.8

38,9 40.0

Lip to 25% LIp to 50% over 50%

33,3 167

48. 2 14.8 Z4

22.2 36.1 5,6

32,1 14,3 1Z9

3Z5 18.8

31,4 28.6

Decreased at most 10%

20,0 58,3

18,3 18.2

18,3 182

27.1 " 18,8

11.9 16,7

15,6 35.7

up to 25% up to 50%

16.7 25,0

45.5 36.4

63,6 18,2

50.0 31,3

33,3 5.0,0

35,7 28,6

Food prepared at home Not aware No change Increased at most 10%

5-0

6,7

1.7

3,0

6.7

Children's clothing Not aware

No reply

100,0 5,0

100,0 13.3

100.0 8.3

100.0 3,4

100,0 5.0

100,0 3,3

No change Increased at most 5%

33,3 33,3 30.0

26,7 23.3 35.7

30.0 31.7 21.1

37.3 30.5 22-2

41,6 26,7 18,5

36.7 28,9 19.2

up to 10%

2$0

50.0

36.8

33,3

40.7

5.3.8

up to 25%

25.0

I4.3

36.8

11,I

29.6

l,q..4

up to 50% Decreased

20.0 13.3

26,7

5.3 25.0

3t3 25,4

11,1 13,9

11.5. 13.5

at most 10%

25.0

25.0

20.0

20.0

14.3

41,7

up to 25% tip to 50% over 50%

5(7.0 125 12.5

18,8 37.5 1g.8

26.7 533

66.7 13,3

28.6 28.6 28.6

8.3 167 33,3

15.0

10.0

5.0

3.4

12.9

17.8

No reply


Chapter 6: Reyes et al.

157

Table 7. continued...

Transportation/or Not aware No change Increased at most 5%

children

up to t{_Yo up to 23% over 235% Decrea_nd at most 10%

100.0 11.7 30.0 30.0 33.3

1C0.0 183 33,3 23.3 11-8

100,0 21.7 13.3 45.0 2Z2

100.0 8:5 44,1 40,7 42

100.0 11.9 23.8 3"_7 21.2

3._3 33,3

11.8 _.

_.6 _7 Z4 10,0 50.0

3Z5 41.7 16,7 5,1 33,3

2Z3 27.3 2,1.2 2-0 S_0

13

up to 25% over25% No reply

1C0.0 6.7 34.4 30,0 _.6 2_,6 _._P $4,8 2.2

233

100.0 18,3

l&7 3G,3 10.0

_.7 1.7

_0 -29,7

I00,0 26.7

100.0 3.0

100.0 11-7

100.0 18.3

100.0 5.1

100.0 6,9

100.0 10.0

No change Increa_i at most 5%

31.7 23.3 3,q7

31.7 21.7 2.,tl

21.7 40.0 16.7

30.5 30.5 33.3

11.9 333 11.8

23.0 26.7 20.8

up to 10% up to25% over 25% Decrear_d at m_t 10%

28,6 2& 6 ZI 1.7

IS# 482 1_4 5,0 _7

¢,_8 37.5

278 389

2_S .1,4,1 a"_6 3,0 6d-_'

5_0 29..2

Transportatlon for others Not aware

up to 23%

-

or.,23% School fees end related expen_r. Not aware

5,1

33 C_-2'

_

._0

33,3

_

._s

._.3

38,3

30-0

16.7

285

44.6

40.0

100,0 10.0

100.0 10.2

100.0 13.9

100,0 8.9

7.9 47,5 27-I

14.4 47.8 &¢8

41,7 2_0 63 2.0

27,,9 1_0 23 1,1

lOO, o

No reply

33 ,_,0

100.0 133

100.0 16.7

No change Increased at most 10%

23.3 40.0 333

23.3 35.0 _i

20.0 51,7 29,0

13,3 67,8 3_0

up to 25% up to 50% over 50% Decreased at most 20% over 20%

,15.8 2_8 3,3 ,_0 _7.0

,?_6 1_3

,.¢_1 12,9

83 _.0 _,0

1,7 100,0

52.5 1_0 23 3,4 100,0

No reply

233

_0.0

10.0

3,4

282

27-8

100.0 5.0

100,0 16,7

100.0 3.3

100.0 6.8

100,0 2.0

1C0.0 33

No change Increased at most 10%

21.7 53,3 3Z5

20,0 45,0 37.0

18.3 61.7 4_6

27.1 57.6 3_2

35.6 $35 31._

233 58.9 41,$

up to 25% up to 50% over 50% Decreased at most 10%

375 1_6 9.4 6.7 ._0

2_6 I_ 14lB 83 400

32.4 1.89

_1 I_" 317 2.0 7000

41.5 17.0

15-0 W.d

41.3 176 _,,9 5-1 33-3

2_0 .

60,0 .

33.3 2Z2

M.3 33.3

13.3

10.0

12

3A

100.0 10.0 46,7 15.0 _2

IOID.O 23.3 433 183 27_

1[_1.0 6.7 60.0 233 3_7

3&4 36.4

_0 14.3

1.7 11_0.0

33 $0.0 _").0

Medical expends Not aware

Including medicine

up to 50% over 50% No reply Houserent, repair, and maintel_n_ Not aware NOchange lnc_a_ed at mo_t 10% up to 25% up k_5if'A., over50% Decrea_d at m(_t 10% over10%

ILl 44.4 22-2

100.0

100.0 153 49,2 273 4_8 4_8 12=¢

85

l_l_O

33 333 66,7

. 6.9

11.1

100.0 5.0 42,6 38.6 _2

100.0 11.1 4_,6 21-1 _-K

2,._6 IZ9 10.3 1,0 100.0

No reply

283

13.3

6.7

Utilities Not aware

100.0 33

100.0 5.7

100,0 1.7

1410,0 3,4

100,0 3,0

12.9

21,1 I,E8 10-5 2,2 _0.0 319.0 20.0 1_,0 33

No change In=:rea'_i at mo_t _%

20,0 (_3.3 13,2

40-0 40.0 ,2"9.2

23.3 71.7 2.3.3

27,1 66.1 1(L3

175 67.3 .K_

2111 61.1 l&2

up Io 10% up to 23% up to 50%

34.2 ,_L3 1_8

2._0 2_0 1_;

34,9 2._6 I¢0

53.8 23.1 Z7

4ZI 30,9 103

,R_0 3_9 RI


158

Economic crisis... Once more

Table 7. continued...

Decreased at mo_t 10% over 10% No reply

1.7 ]O/).O 11,7

3.3 100.0 10.0

Leisure Not aware No change Increased at most 10% up to 25% up to 50% over50% D_cr_ased at most 10% up to 50% over_l_, No reply

100.0 18-3 36,7 5,0 66.7 33.3

10,0 16.7 66,7 1_ 30.0

100.0

Gambling Not aware No change

100.0 38.3 23,3 1,7

Increased at mo_t 20% over _'Y,, Deo_a_ed at most 10% up to 50% over ..=0% No reply

100.0 1.7

100.0 28,3 43.0 6.7

1,7 100.0

3.4

I00.0 32.2 38.6 3.4 100.0

18.3

15,0 22_2 44.4 333 510

22.0 1_ 4 46,2 31iS 6.8

100.0 40.0 23.0

100.0 40.0 41,7

100.0 5Z5 23.7

3,3 ._0 ._0 6.7 7.,i0

5,0 _7. M,3 3.3 100.0

3.4 1(]0.0

2,_0 1.7

100,0

-2.$,0

35,0

25,0

8,9

3.3 66,7 33,3 11,1

100,0 7.9 343 19.8 450 3aO 1_0 10,0 18,8 26,3 47.4 2_3 18,8

100.0 13,6 36.7 13.3 SaO 1_7 2._0 8_ 12.2 1_2 3¢L4 _$ 22,2

180,0 36,6 14.9

100,0 2%8 21.1

3.0 80.0 20.0 3,0 2_.3

6.7 33.3 E_7. 17.8 3Z5

6a.7.

125 50,0 26,7

1,7 100.0 13.3 55,0 11.7 42.9 57.1

7ÂŁ0

3-0 100.0

100.0

10.0

10.2 1_7 1_7 65,,7 10.2

40,6

Source: SocialImpactoftheRegiortalFinancialCrisis,HouseholdSurvey. Over 50 percent of households from middle-income communities reported that despite the crisis, they were able to maintain their usual food budget. About 30 percent of the rest of the communities concurred with this view. Dining out. There were big cuts in dining-out expenses. About 18percent claimed that they decreased their budget for dining out. A fifth in this group reduced their budget by as much as 75 percent. Over 30 percent of households from middle-income communities and 21 percent from urban communities reported significant cuts in their budget for dining out. About a third said that reductions were up to 50 percent, while over a fifth claimed a more than 50-percent cut. Fifty-eight percent of urban poor communities cut their dining out expenses by more than 75 percent, Clothing. While over 30 percent of households said that they were able to maintain the same level of budget for clothing, some .29 percent averred that the budget for children's clothing increased. About 40 percent thought that the increase was between 5-10 percent. Over a third felt that the budget _creased by more than 10 percent. Meanwhile, about 19 percent of the households reported a decrease in their budgets for clothing. Thirty-nine percent reduced clothing expenditure budget by as much as 50 percent.


Chapter 6: Reyes et al.

159

Schoo//ees. Forty-eight percent had to shell out more for their children's education. Some 42 percent of the total households made 25-percent increases. Sixty-eight percent of fishing households allotted â&#x20AC;˘ more money. Of this, 53 percent increased budget for education by 25 percent. Fifty-six percent of urban poor households only made up to 10percent adjustment. Very few reported reducing their expenditures for this. Transportation. As much as 45 percent of households from â&#x20AC;˘ sustenance farm communities said that they had to increase the allocation for transportation of their children. Forty-one percent in this group and 33 percent from the middle-income group claimed to have increased their budget for their children's transportation by more than 25 percent of their precrisis budget. Medical expenses. Fifty-five percent of households had to increase their budget for health care to cope with increased costs of medicine and medical fees. About 40 percent increased their health care budget by up to 25 percent. Another 39 percent claimed a 10percent increase. Housing. At least 47 percent of all households had to appropriate additional money for housing expenses including monthly rental fees. Forty-two percent in this group said that they made up to 10 percent adjustment, while 30 percent claimed that they had to add up to 25 percent. Ut21ities.Among all expenditures, that for utilities was adjusted by the highest proportion of households. Sixty-two percent of all households said that they had to increase their budget for this expense item; 41percent claimed up to 10percent adjustment, while 28percent reported an increase of up to 25 percent. Among farming communities, at least. 15 percent provided up to 50 percent more than what they used to set aside before the crisis to pay for electricity, water, and fuel. Income distribution The combined effects of the financial crisis and E1Nifio reduced household incomes and contributed to a further worsening of the income distribution. Income inequality had increased as shown by the increase in the GINI ratio from 0.451 in 1994 to 0.496 in 1997based on the 1994 and 1997 FIES. The share of the poorest quintile to total income declined from 4.9 Percent to 4.4 percent during the same period. Meanwhile, the share of the richest quintile rose from 51.9 percent to 55.8 percent. The ratio of the richest quintile to the poorest quintile went up from 10.6 in 1994 to 12.7 in 1997.


160

Economic Simulations

crisis... Once more

done by Reyes (1998) show that the financial

crisis and the

E1Nifio weather phenomenon would have resulted in declines in average income for the different deciles but the percentage declines were greater for the lower income groups (Table 3). The lowest four decries experienced contractions in income ranging from 6.7 percent to 7.3 percent, with the poorest decile obtaining the biggest percentage reduction. The higher income groups were not spared either, although the richest decile suffered the lowest contraction of 4.6 percent. Consequently, the GINI coefficient increased, indicating greater income inequality. This pattern was also supported by!data from NSO. Notwithstanding differences in methodology, the 1998 APIB and the 1997 FIES showed that incomes of all deciles declined between 1997 and 1998 (Table 5). Furthermore, the share to total income of the lowest 90 percent decreased, while the share of the richest decile increased. The share of the poorest quintile went down from 4.4 percent to 3.4 percent, while the share of the richest quintile rose from 55.6 percent to 59.0 percent (Table 8). In 1998, the ratio of the richest quintile to the poorest quintile increased further to 16.4. Table 8.

Income

Comparative average monthly 1997 FIES, by income decile.

decile

1997 Family Income Value

and Expenditure Percent

(in P1,000)

iSurvey

using the 1998 APIS and 1998 Annual Poverty Value

Indicator Survey Percent

(in P1,000)

Philippines

145,482,668

100_0

145,429,030

100.0

First decile

2,443,310

1.7

1,753,661

1.2

Second

3,910,487

2.7

3,215,663

2.2

Third decile

5,039,661

3.5

4,393,773

3.0

Fourth

6,280,286

4.3

5,653,844

3.9

Fifth decile

7,840,237

5.4

7,206,445

5.0

Sixth decile

9,843,010

6.8

9,178,194

6.3

12,645,437

8.7

11,995,918

8.2

Eight decile

16,722,746

11.5

16,173,106

11.1

Ninth

decile

23,641,295

16.3

23,474,261

16.1

Tenth decile

57,116,200

39.3

62,384,166

42.9

decfle

decile

Seventh

Source:

Po

income

decile

National

Statistics

Office.

vel_

Income reduction and price increase i were expected to worsen further the poverty situation. While there had beeft a reduction in poverty incidence from 35.5 percent in 1994 to 32.1 percent in ]1997, the absolute number of poor _: families increased by 22,217 to 4.6 million fainilies. More than 70 percent of the poor or 3.3 million families lived in the rural areas.


Chapter 6: Reyes et al.

161

The household survey conducted as part of this study revealed an increase in self-rated poverty from 40 percent just before the crisis to 43 percent in January 1999. Some households sank below the poverty threshold while others moved above the threshold. Of those households who considered themselves poor in January 1999, about 10.3 percent were not poor before the onset of the crisis. Of those who were not poor after the crisis, 2.5 percent were poor before the crisis. More than half of households in fishing and upland communities rated themselves poor. Forty-eight percent of households in urban poor communities considered themselves poor. Only 21 percent of households in middle-income communities considered themselves poor in 1999. Thirty-eight percent of households indicated that their well being improved since June 1997; 30 percent said that there was no change; and 31 percent claimed that they were worse off. Sixty-two percent of households in upland communities said that they were worse off now. The corresponding figure for households in fishing communities was 53 percent and in urban poor households, 43 percent. The least adversely affected were the middle-income communities where only 20 percent were worse off. The surveys of the Social Weather Stations (SWS) also indicated an upward trend in self-rated poverty between 1997 and 1998. In the April, June, and September 1997 rounds, 58 percent of respondents considered themselves poor. In December 1997, the proportion rose to 63 percent and went up further to 64 percent in March 1998. In September 1998, self-rated poverty was 62 percent. While the increase in self-rated poverty incidence seemed small (3 percentage points based on the household survey for this study and 4 percentage points based on the SWS survey), it is still a cause for concern since poverty incidence was already high to begin with. Health,

nutrition, and population Expenditures in health are motivated by both consumption and investment motives. The consumption motive is driven by the fact that good health is necessary to enjoy other goods and services. Better health and nutrition are known to raise labor productivity as well as improve the performance of students (Behrman 1990). These considerations underlie the investment motive. Essentially, for almost identical reasons that people invest on education, people also invest in their health and that of their children. Fertility, on the other hand, has a direct impact on the health of the child and the mother, and is likewise affected by the health and nutrition status of the mother. In times of a crisis, people tend to become shortsighted and are prone to foregoing expenditures when benefits accrue only over the longer term. For instance, preventive care and expenditures on public health is often sacrificed in favor of curative care.


162

Economic

crisis... Once more

Using macroqevel data, Lira (1998) pointed out that infant mortality is positively correlated with inflation rate and negatively correlated with GNP per capita. General mortality rate, on the other hand, is positively correlated with unemployment rate and negatively correlated with a 4-year moving average of GNP. These imply, Lim pointed out, that the crisis, which is characterized by decline or stagnation in GNP and higher unemployment, higher infant and overall mortality rates.

meant

Using household data, Orbeta and Alba (t999) have computed larger income and price elasticities of demand for outpatient care for poorer households compared with richer ones. This means that a price increase (one of the primary effects of the financial crisis) will adversely affect the demand of the poor for outpatient care more than the rich households. In addition, home care and public clinics have income elasticities that are negative, which means that households consider these sources of care as inferior. Thus, a decrease in income Clue to the crisis clinic. crisis home crisis.

is expected to increase dependenc e on home care and in public/charity Using this model, Reyes and Mandap (1999), simulated the impact of the on the choice of outpatient care: The study ,pointed out fhat demand .for care and health care public/charity clinics will increase because of the This meant that more resources are needed in public clinics to meet this

increased demand. Using a similar model for food demand in Orbeta and A1ba (1999), Reyes and Mandap (1999) simulated the impact of the crisis On nutrition. They found that the crisis had a negative impact on macronutrient availability. Hence, prevalence of.mah3utrition is expected to increase because of the crisis. FGD results showed that participants believed that in response to the crisis, households had given less priority to health care. In particular, participants had observed the following: (1) an increase in malnutrition or a decrease in "nutritional status" among children, (2) a trend of decreasing weight among children, and (3) an increase in illness and a general weakening of resistance and vulnerability

to illnes s. It was also mentioned

that parents often left children

to fend for themselves because of the pressing need to work. Other participants, however pointed out that children were often times shielded from adjustments that households

needed

to make, particular!y, in terms of food intake.

The FGD also pointed out deterioration in health services as one of the key effects of the crisis. One of the primary iaspects of this was the absence of medicine that used to be more abundant land free at local health centers. Accordingly, this had rendered these institUtions virtually useless except for prescribing pain relievers and referring patients to hospitals that they could illafford. In addition, facilities became even more poorly maintained, feeding programs were suspended, longer free.

and some serviqes (e.g., pregnancy

tests) were no


Chapter 6:Reyes et al.

163

Household survey results, on the other hand, indicated that health centers continued to be accessible. Only 3 percent of all households believed that health services had worsened while 26percent reported improvement in service. More households in poorer communities stated that government health services had improved: 33 percent, 27percent, and 26 percent,respectively, among subsistence farming, fishing, and urban poor communities compared with 18 percent in middle-income communities. In addition, households reported that health workers continued to be available and even increased in some areas.Households, however, agreed that prices of medicine and medical fees had increased. Respondents estimated that the price of medicine increased by 20 percent on the average. For medical fees, they estimated some 50 percent increase in hospital and private clinics. Key informant interview results showed that the number of immunized children and pregnant women given tetanus toxoid vaccination did not decline on the average. If ever there were any declines, these were experienced mostly in depressed communities such as upland, subsistence farming, fishing, and urban poor communities. The number of health facilities and personnel were mostly not affected. The observation in the FGDs that more people were getting sick was also shared by key informant interviews although they differed in their assessment of the availability of health facilities and personnel. Finally, the key informant interview confirmed that cost of medicine and medical services had increased. In terms of nutrition, key informant interviews showed a couple of surprises. First,the number of malnourished children declined contrary to the impression highlighted in the FGDs. This was true in urban poor and upland. communities, but not in subsistence farming and fishing communities. This was surprising because food-producing areas were expected to have less malnutrition. Second, the number of baranga.y scholars supported by communities increased rather than decreased in all communities. Again, this was contrary to the observations made in the FGDs. To give a broader view of the problems highlighted by primary data sources, monitoring data using the DOH Field Health Services and Information System (FHSIS) were also gathered for regions covered by the FGDs. Many of the regions, however, were not able to submit complete data for the whole 1998. For the immunization program, six of the 12 regions covered by the FGDs were able to complete their 1998 report. Five of the six regions reported a decline in immunization coverage even if three of these five reported increases in the number of immunized children (Annex A). The crisis may have affected the ability of the system to respond adequately to increasing demand for immunization even if some were able to increase the number of fully immunized


164

Economic

crisis... Once more

children. These were insufficient to improve on previous immunization coverage records. This failure to push forward the immunization coverage could be a sign of the decline in health services due to the crisis highlighted in the FGDs. For the nutrition program, the FHSIS 1998 data was complete for six of the 12 regions covered by the FGDs. Of these six, only two regions (CAR and Region 7) reported increases in both number and proportion of moderately and severely malnourished among children 6-59 months old (Annex B). This corroborated results of the household survey and key informant interviews and did not support the common impression given in the FGDs that malnutrition among children has increased. The effects of the crisis on family planning

practices

were not discussed

in the FGDs nor were these covered in the key informant interviews or household surveys. The only information source that can give an indication on what happened to family planning practices during the crisis were the National Demographic Surveys (NDS) done by NSO and Macro International in 1993 and 1998 and the Family Planning Surveys (FPS) done by NSO in 1996 and 1997. Table 9 shows a declining trend in contraceptive prevalence rate (CPR) from 1996 to 1998. It is therefore difficult to attribute the decline in CPR between 1997 to 1998 to the crisis. However, it is clear from Table 9 that while the overall

Table 9. Contraceptive prevalent rate for currently married women, years old, 1993, 1996-98 (In preCent). Overall

By type

1993

40.0

Modern 24.9

1996 1997 1998

48.1 47.0 46.5

30.2 30.9 28.2

I

Traditibnal L 1511 17i9 1611 18.3

I

15-49

By locality Urban 43.0

Rural 36.8

50.7 50.0 50.7

45.5 44.1 42.2

I

Sources:

1993National DemographicSurvey,NSOand MacroInternational; 1996,1997FamilyPlanningSurvey,NSO_and 1998 NationalDemographicand Health Survey,NSOand MacroInternational.

CPR was declining from 1996 to 1998, the proportion using modem methods was rising until 1997 before it declined in 3998. On the other hand, while the proportion of those using traditional methods was declining between 1996 and 1997, it increased in 1998. In terms of locality, while the CPR in urban areas was stable at around 50 percent, it declined slightly in rural areas between 1996 and 1997 and sharply between 1997 and 1998, IAlthough some of the differences may be due to methodological difference._ in the two surveys, these results


Chapter 6: Reyes et al.

165

pointed to two possible impacts of the crisis. One, the crisis had prevented households from using modem methods of contraception. ] Two, there was a drastic decline in contraceptive use in rural areas. For the family planning program, the FHSIS data for 1998 was complete for four of the 12 regions covered by the FGD. Of these four regions, three reported either a decline in current users or new acceptors or both (Annex C). This generally corroborated the results of the NDS and FPS, which showed that contraceptive prevalence rates had declined. In spite of conflicting data from various sources, the effects of the crisis on the health, nutrition, and population sector can be summarized as follows: (1) immunization coverage was adversely affected; (2) even if household eating pattern was affected, this did not result in a universal increase in malnutrition rate, particularly among children; (3) the use of modem family planning method had been adversely affected and contraceptive prevalence in rural areas had declined. Education The role of education in development has not been questioned. It is well known that education improves both the market and home productivity of individuals. Investment in education is also critical in poverty alleviation (Behrman 1990). Besides these private benefits, there are also large public benefits (particularly for basic education) in having an educated populace. However, these returns are evident only over longer time horizons. In times of economic crisis people tend to become more shortsighted and put less weight on those activities whose benefits only accrue after longer periods. This is exemplified by parents who ask their children to quit school and help augment sagging family incomes. Not only are households oftentimes shortsighted, policymakers likewise frequently fail to see beyond the short term. Several studies have related schooling indicators with variables that are affected by the crisis. For instance, based on regression estimates using aggregate data, Lim (1998) pointed out that enrollment rate in all levels is positively correlated with GNP per capita. In addition, elementary enrollment is positively correlated with real education expenditure of the government. Finally, college enrollment is positively correlated with unemployment rate. The crisis is expected to reduce income per capita and increase unemployment. Therefore, the crisis is expected to reduce enrollment in elementary and secondary levels. The impact on college enrollment, on the other hand, will depend on the relative magnitude of the effect of GNP per capita and unemployment rate. Based on 'The 1998 National Demographic and Health Survey reports that as much as 26.3 percent of respondents get theirmodern contraceptivemethod supplies fromprivate medicalsources,notably private hospitals/clinics (15.4%)and pharmacies (8.1%).


166

Economic

crisis... Once more

the larger share of elementary and secondary enrollment to total enrollment, Lim (1998) expects that the net effect of the crisis on human capital accumulation will be negative. Using household survey data, Orbeta and Alba (1999) also found a significant, albeit small, impact of income on enrollment rates of children 7q4 years old even among those belonging to the bottom 30 percent Ofthe population. In addition, the study also found that enrollment of this group is highly responsive to pupil-teacher ratio that is obviously dependent on government expenditure on education. Using the Orbeta and Alba (1999) model to simulate the impact of the crisis on enrollment, Reyes and Mandap (1999) pointed out that the negative effect of the crisis on income had a detrimental effect on school attendance. This result was validated by a special survey of schools in Metro Manila by DECS which revealed an increasing number of students dropping out of school and DSWD's observation of an_increasing number of street children. Of course, this study will later point out that this is not only true for Metro Manila but for the whole country as well, particularly at the secondary level. In the FGDs, participants identified decline in enrollment, higher dropout rates, increased absenteeism, and decreases in student participation in special school activities as negative impacts of the Crisis. Many families were reported to have difficulty coping with increases in tuition fees and other school expenses (school materials, uniforms, food, and trans )ortation money). The reasons cited for increases in absenteeism included: (1) he need for children to help out in farm work to save on labor costs; (2) need For children to watch over younger siblings while parents were at work; and 3) lack of basic school supplies and money for allowances, transportation, an lodging. Absences were noted to have resulted in poor grades and poor qual: ty education. Attendance in special school activities, such as scouting, also declined because it meant additional expenses. Finally, the decline in food and transportation money resulted in skipping of breakfast and sometimes children walking to school. All of these, participants added, contributed to the decline in children's interest in school. The household survey showed that the proportion of those quitting school due to financial reasons was 60 percent. This proportion ranged from 8.3 percent for commercial farm communities to 55.6 percent for urban poor communities (Table 10). Those who quit school to 1oo14for employment ranged from 4.8 percent for middle-income communities t6, 13.6 percent for commercial farm communities. Other reasons such as helping in the farm or helping in household chores were mentioned by less than 10 percent of households. Thus, financial difficulties had forced many households postpone schooling.

tO ask their children to either quit or


Chapter 6: Reyes et el.

167

Table 10. Reasons for changing school, by type of community, (In percent). Commercial

-

Financial Graduation

I to higher grade

8.3 75,0

Change of residence Source:

Social

Impact

Upland

Subsistence

40,0 60.0

40.0 60.0

I I

[

16.7 of the Regional

The household

Fishing

40,0 50.0

I

Middle income

10,0

Financial

Crisis,

Household

January 1999

25.0 10,0 65.0

Urban poor

I

55.6 33.3 11.1

Survey.

survey also revealed that more households

expected that

enrollment in public schools would increase and that in private schools would decrease. Many survey participants also expected that there would be more school dropouts although more than half had no opinion about this issue. Among the primary reasons cited in the FGDs as the cause of higher dropout was the high out-of-pocket costs. Substantial proportions of these outof-pocket expenses were for transportation costs and school projects. This observation was confirmed by estimates from a 1995 FAPE survey cited in Maglen and Manasan (1998). percent of total expenditure per respectively. FGD participants were inaccessible. For instance,

Transport costs comprised 16 percent and 27 student in private and public secondary schools, also mentioned that public secondary schools it was mentioned that students had to walk as

far as 7 kilometers to reach the highway and paid P20 for a round-trip fare to go to school. While FGD participants volunteered to give estimates on the extent of decline in enrollment and dropout, these were deemed less reliable so data on enrollment and dropout _ in the locality were taken via key informant interviews and administrative reports of the city, provincial, regional, and national offices of DECS. Key informant interviews covered schools in the locality where FGDs were conducted. Key informant interviews showed that total elementary school enrollment rate increased in all but one community between school year (SY) 1997 and SY 1998. Total elementary enrollment even grew faster than the growth in Grade 1 enrollment (4.7% vs. 3.4%) indicating that households postponed entrance of children to the school system for better times. Even if there was almost an even growth in number of boys (3.1%) and girls (3.6%) entering Grade 1, still the growth in enrollment rates for boys (6.4%) was higher than those for girls (2.9%) for the total elementary grades. Declines in enrollment rate were observed in urban poor communities (-10.0%), whereas middle-income communities showed positive enrollment growth (15.4%). At the high school level, the total enrollment rate increased by less than 1 percent, with girl's Because of the small magnitude, dropout rates gathered reliable. Hence, these were not included in the discussions.

at the

school

level

were

deemed

less


168

Economic

crisis... Once more

enrollment even declining by 1.6 percent. Again, localities showing declines in enrollment growth in secondary schools were depressed ones such as fishing (-10.6%) and upland (-11.9%) communities. The 1998 APIS asked households about their responses to the crisis. Survey results showed that a small proportion (6.9%) of households had taken their children out of school. This proportion Was higher for the bottom 40 percent (7.5%) compared with the upper 60 percen_ (6.4%). Based on administrative reports from DECS, total enrollment in elementary schools continued to increase by 2.0 percent between SY 1997-98 to SY 1998-99 (Table 11). This was lower than the growth rate of enrollment, which was usually about the same as population growth. Growth in enrollment in Grade 1, however, declined by 2.0 percent indicating that families had postponed the entrance of their children into the school:system. This was true in all regions except for Region 4. Only total enrollment in public schools increased, with private school enrollment declining. At the secondary level, while enrollment growth between SY 1997-98 and SY 1998-99 was positive and higher than the growth between SY 1996-97 and SY 1997-98, this was lower than its historical average.

Only enrollments

in public secondary

schools increased

while total

enrollment in private secondary schools declined by an average of 5.4 percent. Positive growth in private secondary school enrollment was seen in only two regions (CAR and APaMM). However, considering that enrollment in private secondary schools had been declining since the enactment of the Free Secondary Education Act in 1988, it was difficult to att]:ibute this decline in enrollment in private secondary schools to the financial cycle, there was a decline in enrollment indicated that households were also secondary enrollment while postponing

crisis. Again, similar to the elementary growth in first year high school. This allo_ing older children to continue the enrollment of new entrants.

Dropout 3 data showed that the crisis!may have affected only the public secondary grades (Tables 12 and 13). Elementary grade dropout rates declined for both public and private schools. For secOndary level, dropout rate declined for private schools but increased by 15.6 percent for public secondary schools. Even if figures from different data Sources did not match, still it was clear that the crisis had the following effects! (1) enrollment in both elementary and secondary school levels had increase d at a lower than usual rate, (2) households had allowed older children already in the system to continue, but postponed the enrollment of new entrants both at the elementary and secondary levels, (3) dropout rate of those already i_ school was not affected in the elementary and private secondary school but increased in public secondary i schools, and (4) children

had smaller food _nd transportation allowances. i 3This consists of the proportion of enrolled students Who did not continue to finish the school year,


Table 11. Percentage change in elementary enrollment, by region, 1996-99. Percentage change Public Region I II III IV V VI VII VIII IX X XI XII XIII NCR CAR ARMM Total

1996-97 to 1997-98 Private

Total

Grade 1 Total (1-6)

Grade I Total(1-6)

.ox 1997-98 to 1998-99â&#x20AC;˘ Private

Public

Grade I

Total (1-6)

-3-3 -3.0 0.0 0.8 0.6 -2.2 -3.5 3.6 0.4 -0.9 12.2 -21.6 2.1 1.2 -125 2.1

0.8 2.4 2.8 4.9 1.6 4.2 0.5 2.1 2.7 4.7 15.6 -19.9 4.1 325 225 45

4.0 -2.3 5.4 5.9 -2.6 11.7 -1.3 -2.1 325 -7.3 7.0 1025 16.8 0.4 -6.0 94.8

4.0 3.0 6.9 7.2 0.1 11.5 3.2 1.0 525 -1.6 9.5 14.6 6.1 1.9 -7.9 3Z6

-3.0 -3.0 0.4 1"2 025 -1.7 -3.4 3.5 0.5 -1.2 11.9 -20.5 2.5 1.0 -1.9 2A

1.0 2.4 3.2 5.1 I25 45 0.7 2.I 2.8 4.4 15.2 -l&4 4.1 3.1 1.6 4.7

-1.7 -1.5 -1.7 -0.1 -0.2 -2-3 -2.6 -4-3 -4.4 -2.4 -1.6 0.2 -5.6 -0.4 -4.0 -2.4

0.9 1.6 225 2.8 2.7 025 2_q 1.9 -0-3 2.9 2.0 2.7 1.5 3.4 1.6 6.2

-3.2 -1A 1.8 325 1.8 3.8 -17.9 4.9 8.1 -3.8 -1.4 -11.9 -23.0 -10.7 -1.9 -30.9

-0.2

3.1

3.3

4.6

0.0

3"2

-1.8

2.2

-425

_prelim/nary, as of 3 June 1999. Source: Department of Education, Culture and Sports.

Grade 1

Total (1-6)

Grade 1 Total (1-6)

_.r_

Total Grade I

Total (1-6)

2.6 43 3.7 7-3 2.4 2.4 -4.9 11.7 9-3 -0.6 1.9 -16.4 -8.1 -5.4 1.4 3.0

-1.8 -125 -I.4 03 -0.1 -2.0 -3.4 -4"2 -4.1 -225 -1.6 -0.4 -6.1 -2.7 -3.9 -2.7

1.0 1.7 2.6 3_3 2.6 0.6 1.9 2.1 0.0 2.7 2.0 125 1"2 1,3 1.6 6.1

-0.I

-2.0

2.0


Table

12. Percentage

change

in high

school

enrollment

by region,

1996-99.

Percentage change 1996-97 to 1997-98 Public

1997-98 to 1998-99"

Private

Total

Public lstyear

Private

Total(I-IV)

lstyear

Total

Region

lstyear

Total(I-IV)

lstyear

Total(I-IV )

lstyear

Total(I-IV)

Total(I-IV)

!styear

Total(I-IV)

I lI IU IV V VI VII XllU IX X XI XII XIU

-014 1.5 3.1 4.1 1.6â&#x20AC;˘ -0.1 6.3 4.4 -6.4 10.2 13.8 -15.6 12.8

1.6 3.7 4.1 Z9 -1.9 0.4 7.7 &3 -83 6.6 1Z I -l&l 11.4

-4,8 -9.9 4.9 -2.8 4Z2 -53 -1.1 -6.6 11.6 -11.0 8.6 -2&9 -2.1

-3.7 -6.0 -4.8 -1.5 -10.2 -3.7 -0.5 -4-4 20.3 -7.1 14.4 -18.1 1.6

-1,2 -1.1 0.5 1.9 -1.1 -1.0 4-2 2.7 -3.8 3.6 12,7 -19.2 9.5

0.5 1.2 0.8 1.3 -3.8 4).4 5.0 -0-6 -3.5 1.8 12,7 -1&1 8.9

2.1 1.4 2.4 4,5 4.6 -82 5.0 4)_2 -1,2 1.1 4,7 Z9 12,4

1.6 1.6 3.8 6.2 6.2 -6.3 8.4 3.4 0.2 4.3 7.3 2.9 15.0

-1.6 -4.7 -2.8 -5.9 -6.0 -2&4 -2.5 -5.1 -24.8 -2.5 -4.8 -11.4 -5.3

-2.8 -6.2 -3.1 -4.8 -7.1 -16.7 -2.4 -6.6 -22_3 -2.8 -11.9 -11.0 -5.1

1.4 0.2 0.8 1,3 2.7 -10.3 3.0 -0.9 -5.2 0.1 2.8 -0.5 8.9

0.7 -03 1.4 23 33 -8.3 5.1 1.7 -4.5 2.0 2.4 -1.1 10.3

NCR CAR ARMM

-0.1 -1.8 21.2

0.2 -2.8 13.7

-4.4 -1t.3 5.7

-3.I -7.3 -0.1

-1.5 -4.7 18.3

-0.9 -4.3 10.9

-1,0 7.7 -1.4

1.1 9.6 0.7

-9.6 3.5 -5.4

-2.0 5.8 7.8

-1.8 6.5 -2.1

0.0 8.4 2.0

2.6

1.9

-4.9

-2.6

0.7

0.6

1.7

3.4

-5.8

-5.4

-0.1

0.9

_ _. _"

_. Total

*preliminary, as of 3 June 1999. Source: Source: Department of Education, Culture and Sports.

: O


.e,. Table 13. Elementary

dropout

rate, by region,

1995-1998

(In percent).

Q

Level 1995 -96

1996 -97

Region

Public

private

Total

Public

[ I] IlI IV V VI VII VIII

3,26 7.10 4.22 4.72 7.08 10.20 7.52 9.25

4.50 7.07 3.39 7_25 10.94 3,22 4.03 7.56

3.18 7.09 4.15 4-50 7.19 9,92 7,35 9,7.2

10.82 6.66 8.72 11.29 11.70 4.11 7.77 22.96

5.35 14.95 3.13 3.55 12,27 0.43 6.93 3.54

7.66

2.90

IX -X XI XII XIII NCR CAR ARMM Total ,Source:

Source:

Department

Percentage 1997-98

1995-96 to 1996-97

change 1996-97 to 1997-98

Total

Public

Private

Total

Public

Private

Total

Public

4.77 7.42 4.99 6.91 8.26 10,16 5.75 11,50

4.59 0,07 2.76 3,44 :3,84 2.77 9.42 3.96

4.76 7.20 4.79 6.59 8.14 9.87 5,96 11.38

4.71 6,83 5,24 4,39 7.00 7,39 9,32 10.65

4.48 5.64 1.90 1.80 5.29 6.25 6,98 8,37

4.70 6.79 4.95 4.15 6.96 7.34 9.19 10.61

46.32 4,51 18.25 46.40 16`67 43,39 -23.54 24,32

2.00 -99,01 -18.58 52,89 --64.90 -13,98 133_75 47,62

49.69 1,55 15.42 46.44 13.21 -0,50 -18.91 23,43

-1.26 -7.95 5.01 -36.47 -15.25 -27.26 62.09 -7.39

-2.40 7957.14 -91.16 -47.67 37,76 125,63 -25.90 111,36

10,68 7,10 8.37 10,97 11.72 3,17 7.69 22.80

13,2I 9.92 9.85 12"40 7.51 4.6t 6.98 21,10

1.57 4.20 8,88 6.87 5.05 3,81 2.24 7,48

12.96 9.65 9.79 12.17 7.44 4.41 6.58 20.98

12.69 8.03 10.33 9.60 8.15 4.51 7.64 19.79

4.61 8,04 1.58 1.50 6.09 3,90 12.72 23.69

12.51 8.03 9.78 9.26 8.09 4.36 8,07 19.82

22.09 48.95 12,96 9.83 -35.81 12.17 -10.17 -8.10

-70.65 -71.91 183_71 93.52 -58.84 786.05 -67.68 111 ._0

21,35 35.92 16.97 10.94 -36.52 39.12 -14.43 -7.98

-3,94 -19,05 4.87 -22.58 8.52 -2.17 9.46 -6.21

193.63 91.45 -82,21 -78.17 20.59 2.36 467.86 216.71

-3.47 -16.79 -0.10 -23.91 8.74 -1,13 22.64 -5.53

7,31

8.37

4,22

8,06

7.70

3.93

7.42

9,27

45.52

10.26

-8.(_

-6.87

-7.94

of Education,

Culture

Private

_"

Private

Total

-_

-1.261 -5.69 9.34 -37.03 -14.50 -25,63 54.19 -6.77

and Sports.

,,q


172

Economic

crisis... Once more

Vulnerable groups Farming comm unf ties Farming communities

had to absorb 'the impact of two crises: the Asian

financial crisis and the E1Nilio weather phenomenon. Farmers largely attributed the significant reduction in the volume of their output to the E1 Nffio weather phenomenon. Although the upland and rain-dependent farmers were the hardest hit, even irrigated farms were not! spared. Many irrigation facilities failed to deliver water to farms due to the 10w level of water supply. A coconut community like Bogo, Tomas Oppus in Southern Leyte, observed that before the E1 Nifio, 150 kilograms of copra from 500 nuts was normally produced. Because of El Nifio, their 500 nuts could only give them 6070 kilograms of copra. Thus, they missed the opportunity to benefit from the very attractive copra price of P17 per kilogram compared with the P7 a kilogram in June 1997. The crisis had the following effects on the participating barangays,: 1. Prices of farm inputs increased--fertilizers, pesticides, animal feeds, farm labor, and equipment rental. The FGDs reported that price increases varied from 15 percent to 100 percent, with animal feeds and farm labor registering close to 100 percent increases. The cost of fertilizer during the last year and a half reportedly increased anywhere between 30 percent to as much as 60 percent. Farmers also observed an increase in transportation costs. Palay farmers from Bantol, Marilog, Davao City noted that because of poor road conditions, hauling a 50-kilogram sack of palay from the farm to the poblacion, which is less than 10 kilometers awa)_ was costly. The rate was P20 for transportation plus P10 for labor. To save money, some of these people made their wives and children do the work. Con sequentl_ school-aged children were forced to either absent themselves from classes or completely drop out from school. 2.

Price increases, coupled with the lack of sufficient capital (raised through savings or credit), led to the decline in the use of farm inputs, which contributed to the decrease in agricultural production. The increase in cOsts of farm inputs forced farmers to reduce the use of these inputs in their fie_ds. Some FGD communities even reported that farmers did not apply fertilizer at all. This might have caused the significant drop in agricultural output. In Sorsogon, for example, percent.

barangays

claimed

their production

went down

by 40


Chapter 6: Reyes et al. 3.

4.

5.

6.

173

Many families chose to temporarily abandon their fishing/farming activities to engage in odd jobs thatcould provide alternative sources of income, as reported by at least 20 percent of the upland and subsistence farming communities. Therewas selling of farmlands and other household assets, although others said this was not widespread. Insome FGDcommtmities close to urbancenters, there was an observed increase in land conversion or sale of farmlands. For example, in Barangay Opol, Malanang, Misamis Oriental, participants expressed their concern over the 1,897 hectares of timberland in their barang'ay which may soon be converted to agricultural land because the lease contract made by the government with farmers already expired last year. Residents had heard that the Department of Environment and Natural Resources was planning to award this land to some farmers. They said that once the area is declared alienable and disposable, the ecological balance in the area would most likely be adversely affected. Almost all farmers claimed that they could not sell their produce at good prices. FGD participants reported that the very unfavorable prices for farmers' produce further compounded their problems. As is the practice, landowners and/or traders were the ones dictating selling prices. The regional financial crisis further weakened the farmers' power to dictate prices for their produce. The government's decision to import huge volumes of rice and corn had been identified in many FGDs as the main reason for the very low buying price of palay and corn in 1998. Corn farmers, for example, said that before the importation, traders bought corn for at least P5.30a kilogram. During the last major harvest in September, however, corn was priced at only P4-4.50 a kilogram. Ev.en some big wholesale buyers in Mindanao stopped purchasing corn altogether. In Davao Cit_ palay prices went down from P6 per kilogram in 1997 to P4.30 per kilogram in 1998. Farmers also suffered from poor marketing strategies. At least 23 percent of all FGD farming communities said that their main problem in increasing farm income was either the absence of the market that would absorb their produce or the lack of information on efficient marketing systems. Most farming communities relied solely on their su/_'or traditional traders as their main market.


174

Economic

crisis... Once more

l_'slu'ng communities The recent financial crisis had a larger impact on the input and operating costs of fisherfolks. This was exacerbated by the already depleted traditional fishing grounds and the consolidation of resources in favor of the elite in the fishing industry. 1. Fisherfolks benefited from better market prices but this was more than offset by higher maintenance costs. For the positive effect, fisherfolks participating in the FGDs said that with the increase in prices came the increase in the market price for fish. This meant added income for the same level of output they used to get from their traditional fishing grounds. The negative effect, however, was that while the price for a kilogram of fish had increased, the cost of maintaining fishing vessels and gears also increased. The costs of oil and other intermediate inputs had increased accordingly. Most fishing communities said that the

2.

3.

increase in price offish could not compensate for the increase in cost of inputs. The higher cost of oil and gasoline prevented fisherfolks from expanding into new fishing grounds. Fisherfolks could no longer catch the same volume because the fish stock in traditional fishing grounds had been depleted. And, because of the increase in oil price, they could not venture into new fishing grounds. In some cases, the crisis also contributed various

economic

resources

to the consolidation

of

at the hands of the elite---endowed,

as

they were, with the financial capability to maintain such resources in productive use. Forty percent of small fishpond owners in Barangay Kalanganan, Cotabato City, sold ttleir fishponds to big pond owners. With the high prices of labor and fishing inputs brought about by the crisis, small fishpond owners found it impossible to repair fishponds destroyed by floods in 7998 and were consequently forced to sell out to.bigger fishpond owners. This widespread selling of ponds virtually altered the pattern production within the industry.

of ownership

of the means

of

Children and youth The efforts of poor families to cope with the crisis had serious effects on the welfare of children and the youth, compromising not only the health, education and over-all development of these young individuals, compromising the country's "social capital," the next generation the future of the country depends.

but possibly upon which


Chapter 6: Reyes et al.

175

Unhealthy changes in the diet caused malnutrition and weakened resistance among children. About three-fourths of the depressed FGD communities reported that their children, high school and college, left school either to look after younger siblings while parents worked or to become additional income earners. Young girls would work as salesladies or domestic helpers often in cities like Manila or Cebu. Young men would work as farm hands, or migrate to the cities to look for odd jobs. In the Bicol region, many of these children were recruited as household helpers in Manila and other urban areas. FGD participants expressed apprehension over the physical dangers that such young income-earners were exposed to. WoI'11 e_l

The crisis appeared to have reinforced women's proverbial "multiple burdens" forcing more women to take on, in addition to the role of wife/ mother/homemaker, the role of secondary income-earner doing odd jobs. Women were also additionally saddled with the need to stretch meager household budgets, tap various sources of credit, and find money to pay past loans. Trying to make both ends meet had also put tremendous strain on husband-wife relationships. Two FGD groups reported cases of domestic violence resulting from fierce disagreements or not.

as to whether the wife should work

Households' responses and mechanisms for coping withthe crisis This section discusses the responses of households to the East Asian financial crisis. Employment In general, workers affected by the crisis took two major courses of action: got government jobs perceived to provide a more stable employment, or struck on their own through formal and informal business ventures. A big shift in favor of government work was noted in farming communities. Before the crisis, only 4 percent of respondents were in government service. At the time of the surve_ close to 12 percent were already working in government offices. Increases of about 4 percentage pointswere also observed for those who entered household-operated activities, transport and utility industries, and factories (Table 14). Government and factory workers from fishing communities surged from zero during the precrisis period to 9 percent of the respondents after the crisis. An increase of 18 percentage points in the number of employed persons was also noted in the informal sector. Similarly, those engaged in business and personal services increased from 9 percent to 36 percent.


"-4 Ox

Table 14. Distribution of persons, 15 years and over, who changed work in the past work and type of community, as of January 1999 (In percent).

Place of work All sector Government Private office, bank Factory Informal sector Owner, household-operated Transport, utilities Store, business and personal service Commun/ty services (school, hospital) Others, rLe.c.

[

Former

Farming

Present

[

Former

100.0 3.8 7.7 3.8 7.7 7.7 7.7 23.1

I00.0 11.5 7.7 7.7 7.7 11.5 11.5 26.9

100.0

9.1

3.8 34.6

15.4

63.6

9.1 18.2

F_shing

Present

[

2 years, distribution by place of

Former Present Middle income 100.0 4.3 8.7

[

Former Present Urban poor

100.0 9.1

100.0 4.3

9.1 27.3

_

17.6 5.9 17.6 5.9

36.4

17.4 21.7 4,3 8.7 17.4

8.7 21.7

11.8

23.5 5.9 23.5

13.0 13.0

21.7

18.2

41.2

17.6

8.7

100.0

100.0 17.6 ll.8

{5 Source: Social

Impact of the Regional Fdnandal

Crisis, Household

Survey

_.

0


Chapter 6: Reyes et al.

177

In the urban poor communities, before the crisis nobody worked in government offices. During the crisis period, 18percent of the employed labor force had government jobs. There was also a 12-percentage point increase in business and personal service industries and a 6-percentage point addition to the informal sector. Affected workers in the middle-income communities took entrepreneurship as a survival route. Table 14 shows a 22-percentage point increase in the number of persons engaged in household-operated activities. Others moved to community service and business and personal service industries. FGD participants claimed that businesses like motor repair shops, appliance repair, and personal services (beauty and barbershops), felt a slump in business operations. Some entrepreneurs who used to operate in town or in business centers were forced to close shop because of the escalation in rent, increase in transport, and other operating costs. Some decided to conduct their businesses in their residences to cut down on overhead costs. About 25 percent of all household survey respondents cited the desire to change work as the majorreason for job shifting. Twenty percent cited the search for better pay and job stabilit_ Fifteen percent said that they changed work because they were either retrenched, dismissed, or their factory or place of work closed shop. Twelve percent said that their change of residence triggered the change of work. On the other hand, 10percent said that the irregularity of their former work compelled them to look for other jobs (Table 15).

Table 15. Reasons for leaving last job, all communities, January 1999. Reason Retrenched/dismissed/closure Seasonal Desire to change work Change of residence For better pay/job stability Others

[

Percent 15.1 9.6 24.7 12.3 20.5 17.8

Households with relatives working elsewhere received large financial support. About 28 percent of these households derived at least 50 percent of their income from relatives' remittances. Another 26 percent received anywhere from 25 percent to 50 percent of their income from these remittances. In upland communities, some 38 percent of households with relatives abroad said that at


178

Economic

crisis... Once more

least 75 percent of their income regularly came from relatives abroad (Table 16). Although remittances of these OFWs had remained the same, however, FGD participants had observed remarkable improvements in their lifestyles due to the peso devaluation. Extra money was usually spent for the home, either for the renovation of current residences or for the purchase of new ones. It was also observed that while most households had problems in supporting children's education, families of OFWs even sent their _children to better-known schools. In many instances, invested

these families

started

their own small businesses.

Some

their money i n real estate.

Table 16. Distribution of households getting financial support from migrant family members by percent share to total household income, all communities, January 1999. Share in household income

iI

i

Total

Percent 100.0

at most 5%

12.2

over over over over

18.4 15.3 26.5 13.3

6-10% 11-25% 26-50% 51-75%

over 75%

14.3

Source: Social Impact of the Regional

Financial

Crisis, Household

Surve)_

The increase in prices of consumer goods, and--in the case of farming/ fishing familiesmthe increase in prices of farm/fishing inputs, combined with low harvest and fish yield, and low selling prices, forced families to look for other sources of income by letting children or housewives work for a fee (Table

17).

Table 17. Household response to employment and labor market problems, January 1999 (Percent of commullities). Response

Middle income

'Urban poor

Fishing

Farming

Increased child labor

31,

71

75

59

Working housewives Seek employm_mt elsewhere Shift to home-based operations

46 15 8

29 14 14

50 25 1,3

18 18 9

l lri

Source: Social Impact

of the Regional

Financial

Crisis, Household

Stu'vey.


Chapter 6: Reyes et al.

179

tYousehold expenditures FGD participants reported various ways in which people coped with the crisis, particularly with the increase in prices of consumer items and other basic necessities. Some of the coping mechanisms included reduction and reaUocation of expenditures, borrowing, and selling of assets to compensate for reduced income. As a result of the financial crisis, household respondents were forced to make some adjustments in their budget (Table 18). Adjustments reflected the priority attached to a specific item of expenditure. Food received the largest upward adjustment to catch up with price increases of basic food items such as meat, vegetables, cooking oil, sugar, and other processed food items. Households also made upward adjustments in the budget for education, medical/health, transportation, and housing expenses. They sacrificed clothing and leisure in the process. In spite of the bigger allocation for food, households still had to adopt some changes in food consumption patterns. Many households did away with nonessentials such as softdrinks, ice cream, meat, coffee, etc. Others resorted to having only one viand per meal, and generaU)_ less meat and more of the cheaper food items such as dried fish and vegetables. Some resorted to backyard food production to augment food supply. Apparently because of poor harvest and unattractive prices for agricultural products, upland farm communities had to make the largest adjustment in food budgets. Respondents from these areas reported a 4-percent increase in the food budget. Fishing and middle-income communities made a 2-percent increase. Sustenance farm and urban poor households managed to keep their budget. Commercial farming communities reduced their food budget by 2 percent. To cope with the increased cost of schooling, majority of households in all communities increased the allocation for education. Subsistence farming communities made the largest adjustment of 0.6 percent. Fishing and upland communities had 0.5 percent. Commercial farming communities made a 0.2percent adjustment. Urban poor and middle-income households registered the lowest adjustment of 0.1 percent. The surge in medicine and medical fee costs also resulted in budget changes. Middle-income communities made a 0.6-percent upward adjustment in the budget for medicine. Urban poor communities made a 0.5-percent increase. Upland and fishing communities made a 0.4-percent upward adjustment. Two communities reduced their budget for medicine. Commercial farm community households scaled down their budget by 1 percent, while subsistence farming community

households

managed to shave off 0.4 percent.


180

Economic crisis... Once more

Table 18. Percent changes in household budgeting and poverty and wellbeing assessment, by type of communist, 1997-98. Item Household budget Food

[ Commercial

[ Upland

1997 1998 Education

48.0 46,3

49.5 53.3

50,7 50.4

49.9 52.0

38.5 40.4

46.4 46.7

1997 1998 Medical

11.6 11.8

9,8 10.3

13.1 13,7

10.9 11.4

9.4 9.5

7.1 7,2

1997 1998 Housing

8.8 7.8

8.1 8.5

8.8 8_4

8.7 9A

7.3 7.9

6.9 7.4

1997 J998 Clothing

2.9 2.9

2.9 3.1

2.9 2_8

5.1 5_3

9.1 9.5

4.5 4.6

1997 1998 'l'ranspca'tation

6,9 6.3

7.5 6.0

8.1 6.7

5.1 4.1

6.8 6.4

7,5 5.9

1997 1998 LeLsut'e

6.3 5.7

6.6 6.9

7,9 8.1

6.7 7.1

7.6 8.3

7.4 7.1

1997 1998

1.3 1.4

0.S 0,6

3,2 2.0

3.1 1.6

4.3 3- I

3.4 2.8

31.7 94.7 5.3

60.0 83-3 16,7

41.7 100.0

69.5 87.8 12,2

47,8 95.3 4.7

65.0

36.7

56.7

27.1

20.8 76,2 19.0 4.8 76.2

100.0

12.5 87.5

2.2 97.8

3.4

1.3 98.7 1.0 2_0

Poverty

amessment

Poor now Poor in 1997 Middle income in 1997 Rich in 1997 Middle income now Poor in 1997 Middle income in 1997 Rich now arid 1,997 No reply self rating Worst Worse Bad Neutral Go_M

of change

5.1 94.9

Social

Impact

3.3

3,3 i

8.3 11,7 10.0 41.7 23.3

20.01 20_0! 21.7 23.3 H,-7

1.7 11.7 20.0 51.7 10,0

5.1 11_9 35.6 22.0 16.9

4.0 4.0 11.9 25_7 30.7

12.2 12,2 18.9 2¢.4 24.4

5.0

3.31

1.7 3,3

8.5

16.8 6.9

7.8 -

in well-being

Bette_Much hnpr oved _ource:

100.0

of the

Regional