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Vol. Vlll No. 3

May --

, ,

June 1990

_S!;;N0i _ 5-9097

The Southeast Asian Economies" Issuesand Prospects for NextDecade •


Southeast Asia, acc°rdingt°Dr-R°-t sario G. Manasan, Research Fellow at I

G. Manasan

that there is a shared concern about the ability of the so-called ASEAN 5 to sustain their enviable economic performance registered for 1987 to 1989. In this article, Dr. Manasan traces and analyzes the various factors that contributed to these economies _ 'robust growth' such as the domestic policy environment of the five countries and their past performance. From there, she considers the prospective directions of their economies based on their policy reforms and external environment. Among the issues noted in the article which may determine the prospects of these countries are the increasing trade protectionism in the US and EC countries; the opening up of Eastern Europe that is likely to lessen the export markets of Asian countries and even draw away foreign investors; and the different stages of development and industrializationachieved by the economies in the Asia-Pacific region. This issue also features the seminars which were conducted or jointly sponsored by the Institute with other institutions from March to June.


Consistent with the slight deceleration in the industrialized economies, this soeconomies


the Philippine Institute for Devel°P_ .ment Studies;hadthreeconsecutive: years of high growth. Yet, she notes



Southeast Asia, in particular, the original five ASEAN countries composed of Indonesia, Malaysia, the Philippines, Singapore and Thailand, continued to exhibit the robust growth that has earned them the shared reputation of being the new growth]pole




In 1989, the market


of the world.

called ASEAN

5 has, admittedly,


shown signs of amarginal slowingdown relative to the peak growth rates posted in the previous year. Brunei's (the latest addition to the ASEAN) 1989 growth, meanwhile, while decidedly lower than those of its co-members in the ASEAN, Please turn to page 2

This article was excerpted from "Performance and Prospe.cts of the Southeast Asian Economies: An Or_roiew" Manasan, published in Southeast Asian Affairs. Singa1?ore_.Institute of Southeast Asian Studies, 1990.

by Rosario G. ' , ,""'

tI _t


' i ,

The Southeast Economies.


the impetus to this development.

(from page 1) "" is expected to be at par with its own record in 1988. On the other hand, there are signs of increased liberalization of economic policies in the non-market economies of the region, namely: Burma, Cambodia, Laos, and Vietnam. Evidence to date suggests that these changes, which vary from mere noises to more concrete measures, have had some positive impact on the economic performance of the said grou p of countries, Given this overall perspective, it will perhaps be useful to discuss and analyze the various factors that underlie these past as well as prospective performances of these countries,


only engendered

ertheless, there is a shared concern in these countries about their ability to sustain the enviable economic performance that they have registered in 19871989. In like manner, the centrally planned economies of Southeast Asia all posted decent growth rates in 1989 although they continued to be plagued by serious bottlenecks in human and physical infrastructure, Any attempt to assess the prospects of these economies in the near to the medium term will have to start at the factors that contributed to the attainment of the enviable performance of the Southeast Asian countries not only in 1989 but also in the the last half of the eighties. Such an effort will indicatethenecessaryadjustmentsthathave to be made if these economies are to maintain their present growth paths,

ISSUES AND PROSPECTS To date, the market economies of Southeast Asia have had three consecutive years of high growth. The year 1989, however, witnessed a deceleration in most of these economies. (See Table 1.) It cannot be denied that the slowing down of the industrialized •countries in the year just past provided



a turnabout

from the

low or negative rates of growth exhibited by these economies in 1985 but have also improved the economic fundamentals in these countries so that they are now in a better position to face new challenges that may emerge in the world economy. The policy reforms initiated in the various countries cover a wide range of instruments and are by no means uniform. However, a cornmon feature of these reforms is the increasing reliance on market forces in the allocation of the scarce resources. Trade arid Industrial


Singaporehas thelowest tariffrates in the region (rarely exceeding 5 percent) and as early as 1986, it has cornpletelyeliminatednon-tariffrestrictions on its imports. On the other hand, the other ASEAN member countries have allreducedtheirtariffratesandrelaxed their non-tariff barriers in the eighties. The Philippines undertook a major reform of its tariff structure beginning in 1980. The objective of that program was the reduction in both the level and dispersionofnominalandeffectivetariff protection rates. This was followed by


In response to the relatively poor economicperformanceoftheSoutheast Asian countries in the first half of the eighties, these countries instituted a plethora ofstructuralandstabilization policyreforms. These changes have not

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Exports ffUS$Billion) (%Change)

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Ct_rrent ACcount Balance (US$ Billion) ' ' (%of GDP)

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an. import liberalization program wherein import restrictions were phased out and replaced by tariffs, Thailand and Indonesia likewise embarked on similar programs in 1982 and 1986, respectively, such that they have effectively lowered their tariff rates and abolished and/or relaxed their non-tariff barriers. Although Malaysia'stariffrates were considerably lower and its non-tariff barriers fewer than those of Indonesia, the: PhilippinesorThailand, ithasrediaced its tariff rates further in recent years, While these reform measures have markedly reduced the overall level and narrowed the range of effective protection rates across industries, significant trade distortions- still remain in theASEAN countries, with the.exception•of Singapore. SpecificaUy,, the effective protection rate for manufacturing in Indonesia, Malaysia, thePhilippinesandThailand, even after the tariff reductions, exceed the 13q4 percent average in South Korea and Taiwan and the 4 percent average in Hongkongand Singapore (James et al. 1989).

effective exchange rate has fluctuated somewhat and there is a general consensus that the peso remains overvalued. In contrast, in nominal terms, the ringgit did not suffer any major devaluation but was permitted to depreciate gradually in the eighties. In tandem with low rates of domestic inflation since 1985, these movements have led to the sustained depreciation of Malaysia'srealeffective exchange rate. Export processing zones, bonded manufacturing warehouses and duty drawback schemes were instituted in the ASEAN countries in the mid-1970s to provide exporters access to inputs at free trade prices. The first two mechanisms were used extensively in Malaysia while Thailand relied more on the duty drawback approach. On the other hand, in the Philippines, the bonded


° it

denied best export





the first to


As early as oftheSou seventies, the marlies in the adoption ket economies theas t Asia have pursuedanexportpr0motionstrategy of a more liberal hand in hand with domestic market protection. Thus, thesecountries have • trade regime." attempted to offset the inherent anti___=: _ _:_..... ,i..:/: _,:_._ • export bias of their tariff protection structure with export incentives. Mamanufacturing warehouse system aclaysia, the Philippines, and Thailand counted for a big chunk of manufacall amended their investment incentured exports. In 1982,Indonesia joined tives legislation to explicitly include the other ASEAN countries in their exexport production in the list of proport promotion drive. The Export Cermoted activities that are •eligible to tificate Scheme, a tariff drawback avail of numerous tax exemptions, demechanism with a subsidy component, ductions and credits, was putin place but the subsidy porIndonesia and Thailand have action was dropped when the country tively used their exchange rate policy acceded to the GATT Code on Subsito support their export activities. The dies. rupiah Was devalued substantially in While these policy instruments 1984 and then again in 1986. Thebaht have undoubtedlyaccountedformuch waslikewiseallowedtodepreciateby of the success in these countries in a significant amount In 1984. In both stimulating the growth of manufaccases, since domestic price increases tured exports, it caimotbe denied that were successfully kept under control, the first best approach to export protheresulthasbeenhugeimprovements motion lies in the adoption of a more intheinternationalcompetitivenessof liberal trade regime, these countries' exports. Meanwhile, The eighties witnessed the conthe Philippine peso markedly slid tinuous deregulation of the investrnent down in value in 1983 and 1986 but environment in the ASEAN countries. since its domestic inflation rates were Malaysia, the Philippines and Thailand higher than those of its major trading have all modified their investment inpartnersin1984, 1985and 1989,itsreal centives codes to grant more generous

tax incentives than ever before in an attempt to remain competitive with one another. Indonesia, on the other hand, abolished its investment incentives in 1983. However, since 1.986, it has sireplified procedures and liberalized requirements for foreign investments. In 1989, it replaced its complicated investments priority list with a short negative list of activities that is effectively closed to new investors. In the meantime, the non-market economies in Southeast Asia. started to deregulatetheireconomiesin1988-1989. One development has been the increasing entry of the private sector to participate actively in more economic sectors in all of these countries than ever before. Cambodia, Laos and Vietnam have moved towards the decollectivization of the agriculture production structure. There has also been a greater reliance on market prices instead of political prices. Finally, a more liberal investments incentives code have been adopted by Laos and Vietnam in an effort to attract more foreign investments. Nevertheless, given the fact that these reform measures are of fairly recent vintage, it is difficult ascertain at this stage the extent of thetogovernments' commitment to these policy pronouncements. Finm_cial Financial policy reform in the Southeast Asian economies have centered on the mobilization of domestic savings and the improvements in the efficient allocation of these resources. Liberalization of the financial system has been the key word in these developmerits. In Singapore and Malaysia , the deregulation of the financial sector started in the 1970s so that at the start of the eighties, they already exhibit some degree of market orientation, although this characteristic is more pronounced in the former than in the latter. The floating of theSingapore and Malaysian dollar in 1973, the removal of exchange controls and the freeing of interest rates inthesucceedingyearsensuredthatdomestic interest rates follow the interna+ tional rates and that the real interest ratesare maintained at positive levels. Entryofnewdomesticandforeignbanks and other financial institutions has been deregulated in Singapore during the period butthe domestic bankingactivi/ .........

. ._..........



ties of these institutions have been restricted to avoid excessive competition in domestic banking (Tyabji 1989). In Malaysia, there appears to have been no entry restrictions to start with but priority sectors continued to receive differential treatment with regards to interest rates and credit allocation, In the eighties, financial reform in the Philippines and Indonesia have focused on the lifting of interest rate and credit ceilings, the removal of entry restrictions in the banking sector, and the elimination/contraction of subsidized credit programs. In Indonesia, however, interest rate on so-called priority loans remains under government control. In the Philippines, these measures were accompanied by a mocce

!_ _-June 1990

stricti0ns on market entry. This is particularly true in the cases of Burma and Vietnam. Fiscal Policy In most of the ASEAN member countries, fiscal policy reforms have generaUybeengearedtowardsincreasingtherevenueperformanceofthegovernment as well as instilling greater discipline on government spending. In Indonesia, the Philippines and Thailand, tax reform has also focused on the use of taxes that are less interventionist in character. The foremost example of thiswas theadoptionofthevalueadded tax in Indonesia and the Philippines.

towards the reduction of market segmentation in an effort to allow banks to enjoy economies of scale and thus reduce intermediation costs (Lamberte 1985). On the other hand, Indonesia hasalsointroducedchangesinthecapital equity market through simplified listingprocedures, allowingtheprivate sector to open private capital markets in key cities, and the imposition of a witholdingtaxoninterestatarateequal to the existing witholding tax on dividends. Thailand exhibited the slowest progress in terms of financial sector deregulation amongst the ASE_kN countries during the seventies and theeighties. Market entry and bank branching continues to be restricted until late 1989, resulting in the high degree of concentration in the banking sector, Similarly, interest rates on time depositsofoneyearorlongerwerefreedonly in June 1989. Otherwise, interest rate controls on other instruments and selective credit policies prevail, In general, the eighties witnessed an increase in prudential supervision and regulation in the market economies of Southeast Asia. Following current practice in international banking, capitalization requirements have been increased in all the countries except Thailand. Tighter lendinglimits to individual borrowers were instituted in Indonesia, Malaysia, and the Philippines while adequate loan loss provisions were put in place in Malaysia and Singapore (Tyabji 1989). In the centrally planned economies, financialmarket deregulation has taken the form of a relaxation in the re-

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What is not so obvious are the efficiency gains from the simultaneous lowering of the tax rate and the broadening of the tax base with regards to both the individual and the corporate income tax in all these three countries, In contrast, MalaysiaandSingaporehad opted to cut their tax rates while like_ wise reducing their tax bases, resulting in the wider dispersion in the effective tax rates on competing activities (Asher 1988). On the expenditure side, fiscal restraint was the key word in the ASEAN countries with the exception of Singapore during the second half of the eighties (Manasan 1989). This has not only implied the more circumspect stance in the central government budgets but also the rationalization of the public enterprise sectors in these countries. Along this line, efforts have centered on the institution of an improved system of evaluating the performance of state-owned enterprises in Indonesia; Malaysia, the Philippines and Thailand. In contrast, government expendi-

tures an d government resource mobilization, to a large extent, appear to be unrelated. In tandem with these measures, privatizationbecameaprominentcomponent of the overall reform package in theASEANS, particularlyinthePhilippines and Malaysia, where there has been a strong pressure to reduce the leakage of fiscalresources to inefficient state-owned enterprises. Prior to 1989, privatization was a touchy issue in Indonesia. Despite the ongoing debate within the government circles, there are very strong indications that Indonesia will pursue privatization more actively as new guidelines on privatization were issued in the second half of 1989. In like manner, the vigorous liberalization in the non-market economies of Southeast Asia in the last couple of years has been largely concentrated in granting the private sector a greater role in the various



?:_att_a]. "_esot_rce and Zlw_I'o_ment_I


While the high rates of economic growth in the Southeast Asian economies in the last three decades, particularly in the last three years, have been the envy of developing countries all over the world, they have, at the same time, emphasized the question of sustainable development. Sustainable development may be defined in numerous ways but, simply put, it is "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (World Commission on Environment and Development 1987). The urgency of this issue becomes even more pronounced once one realizes: (1) the severity of natural resource depletion and overall environmental degradation in the region; and (2) the substantial contribution of the natural resource sector in the past economic performance of these economies and the continued importance of this sector in their prospective growth. The adverse effects of excessive deforestation, overfishing, air and water pollution and the general mismanagement of the natural resource base are vividly dramatized in the disastrous flooding in Thailand in 1988, the debili-

DEVELOPMENTRESEARCHNEWS tating water shortage in Indonesia, the Philippines and Thailand, soil erosion and sedimentation of the irrigation systems in the Philippines and Thailand, and the brown rice planthopper infestation in indonesia. The underlyingcauseof these environmental problems has been traced to a combination of market failures, policy induced distortions and inadequate development of human resources and employment alternatives (Panayotou 1988 and World Bank 1989). Given this perspective, policy reform in natural resource and environmental (NF, E) management should focus on: (1) the minimization, if not elimination, of policies that impose significant environmental cost or those that provide perverse incentives to sub-optimal levels of resource utilization and environmental deterioration; (2) the correction of market failures so as to encourage the efficient use of natural resources and the environment(3)(NRE); and of employment opthe creation portunities in the rural sectors so as to mitigate the population pressure on ourforest, fisheries, andwaterresources and environmental amenities, Essentially, this would require that policy reform "re-establish the link between resource scarcity and resource prices" (Panayotou 1989). In response 'to the challenge described above, the governments of the various Southeast Asian countries adopted a number of policy measures intended to improve the NRE management. Indonesia, the Philippines and Thailand have implementedlog export bans. However, poor enforcement as well as the unabated practice of shifting cultivation amongst the upland population has made this policy ineffective in Thailand and in the Philippines. In Indonesia, it has stimulated excessive investment in log processing capacity that has, in turn, led to higher logging rates than the pre-ban levels, In 1989, Thailand imposed an in_lefinite logging ban. This action is also being considered in the Philippines. Again, like the log export ban, the logging ban is not expected to yield significantimprovementsinresourceconservationbecauseofenforcementproblems and the lack of alternative eraployment in the uplands (Panayotou 1989).

Ma '. June 1990 Onthe otherhand, thewithdrawal of government subsidies to pesticide useinIndonesiacoupled withtheinstitutionalization of integrated pest management approach to pest control in 1986 has reportedly succeeded in loweringplanthopper populationatlower costs and higher yields, At the same time, the interface between macroeconomic as well as sector specific polices, on the one hand, and NREpolicies, ontheother, hasnotbeen fullyappreciatedbypolicyanalystsand policymakers alike. While it would be heroic to suggest that macroeconomic policies be tailor-made to meet environmental objectives, it is critical that their ramifications on the NRE sector be considered. The opening up of the non-market economies of Southeast Asia to foreign trade and investments in NRE-intensive sectors highlightsthe )otenfial conflict between NILE poli-

ward-looking import-substituting industrialization strategy to one which is outward-oriented and exportqed. Diversificationofexportproductsandmarketshavealsobeenenhanced. Increased efficiency in resource mobilization in both the public and private Sector has been promoted. Increasingly, the primacy of the private sector in the productive sectors has been established. Perhaps the most important impact ties in the transformation of the Southeast Asian countries into more resilient economies relative to their own position in the firsthalfof the eighties. Thisisnot to say that all policy gaps have been addressed adequately in the past. Although the massive inflow of direct foreign investments in these countries in recent years have provided the much needed boost to their traditionally low and inadequate levels of domestic savings, it shouldbe emphasized, at this point, that whatever excess capacity was presen t in the wake of the de-

a, the

pressed 1985 have beeneconomic exhaustedconditions by now. in Thus, there is an urgent need to expand pro-

_q_erkap _'a _ important lies


mation east


impact the of

transfol the





into more resilient economies • • • " cies and trade and industrial policies (Pearson 1989). On the other hand, the continued protection of industry relative to agriculture and the tendency of policies to promote large scale, capital intensive and regionally concentrated industries in Thailand and the Philippines (despite the limited success of programstoliberalizethetraderegimes in these countries), has resulted in the failure of the industrial sector to create new jobs to alleviate the population pressure on the NRE sector and the reduced incentives for NI_ conservation. Future


These reforms have, in no small measure, resultedintheincreased cornpetitiveness within and across these countries. There has been a marked shift from the severely limiting in-

duction capacityaswellasthesupporting physical and human irffrastructure to prevent said economies from overheating. The present high levels of external debt in most of these countries pose a serious constraint on the ability and the wisdom of relying on external sources to finance these demands. This implies that the pressure on national government budgets to increase their development expenditures will be intensifi ed with the concommitant pressure to improve the revenue performance of the public sector. In this regard, public sector reform which was not as widely pursued as the other economic reforms, except perhaps in Indonesia and the Philippines, should play a more prominent role in the near term if sustained economic development is to be attained. Furthermore, although substantial progress has already been achieved in terms of trade liberalization, the trade regimes in theSoutheast Asian economies (with the exception of Singapore) still remain more distorted than those of the newly industrializing countries (NICs). At the same time, greater stress on "getting prices right" in NRE management as well as a fuller integration of NRE considerations in the formulation of macroeconomic and sector specific policies is likewise criti-


cal for ensuring that the glowing economic performance of the Southeast Asian economies in recent history remains unbroken, Finally, it should also be stressed that the unfaltering commitment to the present direction of economic reforms is extremely essential. Policy reversals or backsliding could easily undo the success story of the last three years. In this regard, Indonesia stands out for having exhibited what is perhaps the most concerted and resolute effort towards the creation of a market-oriented economy. On the other hand, mixed policy signals and the seeming lack of a long term vision have tended to stall sustained economic growth and recovery in the Philippines. In this light, the increasing liberalization in the last couple of years in the nonmarket economies of Southeast Asia is expected to greatly enhance their economic performance in the future as more and more activities are subjected to the discipline of the market place. The extent of the improvement will depend on the degree of act_tal liberalization that will take place and the ability to keep such reform in place. In turn, political stability will largely determine the success in this regard,

Emerging International Environment Increasing


Despite the approaching conclusion of the Uruguay Round of multilateral trade negotiation under the General Agreement on Tariffs and Trade (GATT), there are signs that protectionism is still on the rise in the rest of the world. For instance, starting in January 1989, the United States (US) has withdrawn the generalized system of prefere, nces (GSP) privileges whichit has previously extended to Singapore. The US is likewise exerting pressure on Thailand to adopt stricter measures on the enforcement of intellectual propertyrights. The former also unilaterally fixed quotas on 13 categories of textiles from the latter in the early part of 1.989. Thailand, how, ever, was able to get temporary reprieve from the textile body in Geneva. There were frictions,

May- JUne1090

too, between the European Community (EC) and Thailand with regards to exports of sunflower oil. On the other hand, Indonesia implemented, starting in the second half of 1989, a bilateral copyright protection agreement covering computer software with the US. At the same time, the Indonesian legislature enacted a patent law in another efforttoaddresstheissueofintellectual property rights. These changes may be viewed as part of the evolving perception in Indonesia that tends towards increased protection of intellectual properties so as to encourage increased technology transfer and to prepare itself to meet the demands for improved enforcement of intellectual property rights inbilateral as well as multilateral negotiations involving the US and the EEC. In a similar vein, Malaysia has



unfaltering camto the present


direction of economic reforms is extremely essential. Policy reversals backsliding










the last



announced that it has no ambitions to become the next NIC (Far Eastern Economic Review, 7 September 1989, p.96), Apparently, this is not due to any moderation inits ambitionsbut is rather calculated to parry increasing protectionism from its developed country trading partners undecthe graduation clause of the GATT rules. However, it is not clear just how much developing country concerns will be met in. the ongoing round of the GATI" talks, Opening Planned

up c,f the Economies


The opening up of Eastern Europe is also a major cause of concern for the Southeast Asian countries. Eastern Europe spells competition. First, Eastern Europe being more accessible to the EC is likely to eat into the export markets of the Asian countries. Second,

EasternEuropewilldrawawayforeign investors from the Southeast Asian region. If the EC grants GSP treatment to the Eastern European countries for political and other considerations, the newly industrializing economies of Asia,na'mely,Singapore, Hongkong, South Korea and Taiwan may be induced to establish manufacturing joint ventures there to gain easier access to theEC. The less developed countries of Southeast Asia, in the aggregate, stand to be losers rather than gainers in this gameinthemediumterm. However, in the long run, they are likely to benefit from the growing market that higher growth in Eastern Europe implies. In contrast, the greater market orientation of the non-market economies of Southeast Asia presents both an opportmtity and threat to the ASEAN countries. On one hand, the very act of opening up on the part of Burma and the Indochinese states as well as the prospectiveincreasedeconomicgrowth in these countries because of the ongoing drive towards increasing deregulation maybe viewed as the harbinger of increased trade between said countries and the market economies of Southeast Asia. This development should be mutually beneficial between the two groups attempted oftocountries. establish aThailand, headstart has in this area. On the other hand, the liberalization of the entry of foreign capital into Burma and Indochina is likely to result in the increased inflow of foreigndirect investment at the expense of the ASEAN. Shifting International Specialization in the AsiaPacific Region In recentyears, perhaps as a result of the different stages of development and the varying rates o f industrialization in the various economies in the Asia-Pacific region, it was observed that the progress of development in the area may be described in terms of a "multilayer catching-up process" (Lo et al., 1989). Specifically, a number of studies show that there has been a shift in the pattern of international specialization whereby Japan has moved into high tech industries while the NICs have


May- June 1000

graduatedorareabouttograduatefrom labor-intensive goods to the more capital-intensive goods. In turn, the comparative advantage of the ASEAN 4 countries (Indonesia, Malaysia, thePhilippines and Thailand) has veered towards the former category of products, It should be pointed out that, in this sense, there is a great deal of complementaritybetweenJapan, theNICsand the ASEAN 4. This ongoing process of

this Ixend on their respective economies, the Southeast Asian nations could encourage greatertradeamongst themselves and the other countries in the Asia-Pacificregion. Ourearlierdiscussion indicates that the underlying economic fundamentals in the region are conducivetosuchadevelopment. Nevertheless, a more open trade environment in the region will intensify these tendencies. This does not, however,

structural transformation has engendered increased interdependence amongst the countries in the region as evidencedbytheincreasedflowoftrade and foreigninvestments amongst them. Furthermore, this trend was reinforced by the currency realignment that occurred after 1985. The strongyen (and NIC currencies) has stimulated the Japanese and NICs capital to locate overseas. The ASEAN 4 was the choice for the location,

mean that multilateral approaches to the world trade problems should be abandoned inasmuch as in the ultimate analysis, overall welfare can be better served by an open multilateral trading system (ADB 1989).

The wide-ranging economic reforms undertakenby the market economies of Southeast Asia in the last dec-

Year 2000." In Miyohei Shinohara and Fu-chen Lo. eds. Global Adjustment and the Future of the Asian Pacific Economy. Japan: Institute of Developing Economies and Asian and Pacific Development Center,1989. Manasan, Rosario. "A Review of Fiscal Policy Reform in ASEAN Countries in the 1980s." Paper presented atthe 14th Annual Conference of the Federation of the ASEAN Economic Associations, Manila, 16-18 November 1989.

In this regard, it cannot be denied that the individual countries in the ASEAN 4 are competing against each other for a greater share of the investments from and trade with Japan and the NICs. To a large extent, their domesticpolicieswilldeterminetheirrelative success in riding the swelling tide arising from the changing pattern in theinternationaldivisionoflabor.What is clear, though, is that this develop-

ade have erd_anced the region's ability to respond to the numerous problems that are emerging from both the domestic and the international environment. These reforms have provided the ASEAN countries and, to a lesser extent, the non-market economies of Burma and the Indochinese states the positive fundamental necessary to translatethemostdifficultofchallenges into a rich opportunity for further

Panayotou, Theodore. "Thailand Management of Natural Resources for Sustainable Development: Market Failures, Policy Distortionsand Policy Options." Harvard Institute for InternationalDevelopment, Massachusetts,1988. . "Natural Resources and the Environment in the Economies of Asia and the Near East: Growth, Structural ChangeInstitute and Policy Reform." Harvard for Inter-

ment is an important factor in the historical (and prospective) high rates of growth in the Asia-Pacific region. The weakening of the yen in 1989 will not hinder the catching-up process of regional economic restructuring that is well on its way though it is likely to soften earlier expectations.

growth. Perhaps the greater challenge liesinthepoliticalwilltounremittingly pursue the market-oriented economic policies embodied in the various reform measures,

national Development, Massachusetts,1989. Pearson, Charles. "Observations on Trade and Sustainable Development." Paper presented at the Joint ESCAP-ADB Meeting Trade and Sustainable Development. Manila. 23-27 October 1989. Tyabji, Amina. "Financial Reform in ASEAN." Paper presented at the 14 th Annual Conference of the Federation of ASEAN Economic Associations, Manila, 1.6-18 November 1989. World B ank.Forestry, Fisheries and Agricultural ResourceManagementStudy (Philippines). Report No. 7388-PH. Washington, D.C.: World Bank, 1989. World Commission on Environment andDevelopment.OurCommonFuture. Oxford: Oxford University Press, 1987.


World Trade

The emergence of a multi-polar trading system worldwide poses another challenge to the economies of Southeast Asia. The US-Canada Free Trade Agreement, the US-Mexican Understanding, the Australia-New Zealand Agreement, and the pending unification of the EC market in 1992 are all expected to result in some trade diversion that could lessen the share of the Southeast Asian nations in world trade in varying degrees. To minimize the adverse effects of



Asher, Mukul. "ASEAN Tax System: Salient Features, Recent DevelopmentsandImplicationsforInvestment Flows." Journal of Regional Policy 8, No.3(1988). Asian Development Bank. Asian Development Outlook 1989. Manila: ADB,1989. Balakrishnan, N. "Malaysia: TheNext NIC," Far Eastern Economic Review, 7 September 1989, p.96. James, William, Seiji Naya and Gerald Meier, eds. Asian Development: Economic Success and Policy Lessom, Madison: University of Wisconsin Press, 1989.

Lamberte, Mario B. "Financial Liberalization and the Structure of Capital Markets: The Philippine Case." Staff Paper Series No. 85-07. Manila: Philippine Institute for Development Studies,1985. Lo, 1;u-chen, Kamal Salih and Yoichi Nakamura, "Structural Interdependence and the Outlook for the Asia-Pacific Economy Towards the



The latest estimates of the basic parametersusedinshadowpricingsuch as shadow exchange rate (SER). marginal productivity of capital (MPK) and opportunitycost of labor or the shadow wage rate were presented during the seminar on "Reestimation of Shadow Prices of the Philippines" held last 28 May 1990 at the Operations Room of the NEDA sa Makati Building. Dr. Erlinda M. Medalla, PIDS Research Fellow, presented the estimates as well as the other issues in the study she did with co-authors Cecile M. Del Rosario, Virgilfia S. Pineda, Rosario G. Querubin and Elizabeth S. Tan, all Research Associates of PIDS. For the MPK, the new estimate given was 10 percent rate of return as compared to the previous estimate of 14.5 percent. For the shadow wage rate,meanwhile, the new estimate is

results, will be reduced, if not removed altogether, Itwas alsosuggestedto usethedifferential discount rates in the monitoring of public investments and in the evaluation of costs and benefits, particularly as they apply to the environmental sector, One of the main points raised in theopenforumwasthedifficultyindepicting appropriate shadow price of capital. Dr. Medalla replied that specific values are difficult to pinpoint, particularly as they apply to certairt projects. Thus, the values indicated in the study should be considered more as guidelines rather than fixed values. Dr.Medallaalsocitedthetendency of researchers to use the traditional approach when dealing with social rates of discount and the shadow price of investment. If the non-traditional ap_

between 65-70 percent of the minimum market wage rate versus the previous


The presentation estimate of 60 percent, also clarified and explained the different approaches used




proach is used, a higher premium on investment is necessary to offset the lower discount rate. In practice, in the use of social discount rate, the approach utilized, i.e.,whether traditionalor nontraditional, mightnotsignfificantlymatter. However, in the case of the income distribution parameters, the approach used is crucial to the analysis. The seminar was attended byrepresentafives from the Office of Energy Affairs, Department: of Trade and Industry (DTI), Board of Investments (BOI), National Power Corporation (NPC), Maritime Industry Authority (MARINA), United States Agency for International Development (USAID), National Economic and Development Authority -Training and Development Issues (NEDA-TDI), Philippine Daily Inquirer (PDI) and PIDS, among others. Illlllli _


ml lille IIIi lie King

PIDS,,-, Resear ch-- A dvi s ory --o-, : t,0mmmee Meets

in cost-benefit analysis, namely, the traditional versus the new approaches. The traditional approach, also known as the efficiency approach because it maximizes income and consumption, treats all individuals the same, considers the social discount rate as simply the marginal productivity of capital, and does not differentiate between consumption and saving. The new approaches, meanwhile, give importance

Ne_ research thrusts were idew tiffed whil e existing relevant priorities were strengthened when the Research Advisory Committee (RAC) ofthePiDSmetlastl4-!SJunel990a t the Manila Hotel. : The RAC is composedofworld: renowne d economists andlsocial scientist s who ar e invited by the Insti-

to a project's distributional impact as well as its impact between saving and consumption on different terms. These approaches aim to differentiate individuals by giving premium to lowerincome groups. More premium is also given to savings (hence investment), thereby making a distinction between

tute to advise it on thedirecti0n of its research and other activities. : Among the topics discusscK1 in themeeting :were: a)the r01e and impact of PIDSinthe country's pollcymaking process; b) the PIDS Research Program, and e)the possible areas of CollabOration between PIDS

consumption and investment, Some of the points raised during the seminar included the matter of factoring in the distributional weights, the

and other research institutions. Thememl0ersoftheResearchAdvisory Committee are: 1) Dr. ROmeo M. • Bautista ,

arbitrarinessinvolvedinassessingprojects, particularly those with non-viable



Research Institute (IFPRI) 2) Dr. Rudiger Dombusch Massachusetts Iustitute of Technology (MIT) 3) Dr. Louis Emmerij Organization for Economi c Cooperation and Development (OECD) : ',¢ , ' _1) Dr. Josd F.ncamaclon, Jr. University of the Philippines' ` School of Economics 5) Dr. Albert Fishlow : University of California at Berkeley 6) Dr. Ryokichi Hir0no Seikei University, Japan 7) Dr: Helen Hughes


National Center for DeveloPment Studies,Australian National University (ANU) ,, ,









(Please turn to page i2) :


Ma ,,. June1990

Uruguay Round briefing held for Philippine legislators and gov't officials A roundtable discussion and a seminar on the "Uruguay Round of the GATI" Multilateral Trade Negotiations (MTN)" were held for Philippine legislators and officials, and for technical-level officials on March 19, 1990 and March 20-21, 1990, respectively, at the Central Bank Multi-Storey Building. GeneralAgreementonTariffsand Trade (GATT) officials led by Deputy Director General Ambassador Charles Carlisle briefed government policymakers and officials, and their technical staffs on the objectives, scope,

forms of agreement and.their implications to the Philippines, the prospects of the Uruguay Round, specifically the pace of negotiations including the difficulties encountered, and the steps to be taken prior to the conclusion of the Uruguay Round. The roundtable discussion and seminar-workshop were jointly sponsored by the National Economic and Development Authority (NEDA), Department of Foreign Affairs (DFA), Department of Trade and Industry (DTI), Central Bank of the Philippines (CBP), and the PIDS.

structure, recent developments, and prospects, including tariff issues of interest to the Philippines, of the UruguayRound. The first day of the discussions provided a venue for informing and updating members of the Philippine legislature on the status ofnegotiations under the Uruguay Round talks. The Honorable Narcisa Escaler, the Philip•pines'permanentambassador to GATr, briefedthelegislatorsontheworkdone and are being done by the Philippine government in relation to the talks. Among the legislators who attendedtheRoundtableDiscussionwere Senators Vicente Paterno, Alberto Romulo and Mamintal Tamano, and Congressmen Emigdio Tanjuatco, Jr., Jose De Venecia and Ramon Bagatsing, Jr. Secretary of Socioeconomic Planning and NEDA Director-General Cayetano Paderanga,Jr.and Tradeand


Aside from the legislators and executive department secretaries, representatives from the Department of Agriculture (DA), Department of Environrnent and Natural Resources (DENR), Department of Foreign Affairs (DFA), Department of Finance (DOF), DTI, NEDA, CBP,National Statistics Office (NSO), Tariff Commission (TC), Securities and Exchange Commission (SEC), Bank of the Philippine Islands (BPI), Center for Research and Communications (CRC), and PIDS attended the seminar.

I m[]_llmllmmlllmmlllml


What is GATT? The General Agreement on Tariffs and Trade (GATr) is theonly multilateral treaty which sets the agreed rules for international trade. It is both a code of rules and a forum wheremember-countriesdiscusstheir trade problems and negotiate to increase world trading opportunities. GATT was established in 1948 initially by 23 countries which later increased to 96 members, of whJ•ch the Philippines belong. At present, there are 28 countries applying the rules of the GATF on a de facto basis, Altogether, GATrmembersrepresent nearly 90 percent of world trade. The Geneva-based GATT Secretariat which oversees its activities is composed of nearly400 personnel headed by Director General Arthur Dunkel from Switzerland. The GATT's

lateral 1) 2) 3) 4) 5)

folthe the

budget for 1990 is some 73 million Swiss Francs with member-countries contributing in proportion to their

ber 1988. The final approval of the agreements in this eighth round is expectcKt to be held in Brussels, Bel-

status of negotiations in the Uruguay Round, especially the issues of interest to developing countries and the positions of both developed and developing countries in various negotiating groups. Also discussed were the final

share of world trade, GATT aims to liberalize world trade in order to contribute to economic growth, development and welfare of the people. It has already

gium in December 1990. The past two decades have been witness to GATT's concern over the needsofdevelopingcountries, whid/ account for more than two-thirds of

IndustrySecretaryjoseConcepcion, were also present to represent the ecutive branch of government. The two-day seminar that lowed, meanwhile, attended by technical-level officials, discussed

Jr. ex-

_ ; i ! ]


seven "rounds"

of multi-

trade.negotiations as follows: 1947 in Geneva; 1949 in Annecy, France; 1951 in Torquay, England; 1956 in Geneva; 1960-'61 in Geneva, the Dillon Round; 6) 1964-'67 in Geneva, the Kennedy Round; 7) 1973-'79 in Geneva, the Tokyo Round (so called because the negotiations began at a Ministerial meeting in the Japanese capital in September 1973); 8) 1986 - presently ongoing, the Uruguay Round. The present round, The Uruguay Round, was launched in Punta del Este, Uruguay, in September 1986. It was followed by a mid-term review in Montreal, Canada in Decem-

(Please turn to page 12)



May- June 1090

Bacani, Estanislao urge liberalization of the banking system Agriculture Secretary Senen C. Bacani and Finance Secretary Jesus P. Estanislao gave the keynote speech and the closing remarks, respectively, during the seminar-workshop on "Rural Savings and Informal Credit in the ContextofFi1_ancial Liberalization" last 7-8 June 1990 at the Central Bank Multi-Storey Building. The PIDS and the Agricultural Credit Policy Council (ACPC)-sponsored seminar-workshop featured various 4tudies on financial liberalization, rural savings mobilization and informal credit markets, AccordingtoAgricultureSecretary Bacani, one of the leading concerns in rural finance is the availability of credit to the farmers and fishermen. Past government macroeconomic policies made credit inaccessible to the small farmers and fishermen. Thehighriskin crop failure and costly transaction expensesinlendingmadebanksshyaway fromsmallborrowers.Thus, whenloans are inadequate or not available, farmers and fishermen borrow from private informal lenders. Due to this, Bacani noted, the private sector orinformal lenders have been the principal suppliers of credit to agriculture. Studies have shown that government--subsidized credit is not the most critical factor in increasing farmers' productivity and income. Bacanirecommended thatproduction technology like the use of proper fertilizer, post-harvest infrastructure and market facilities should likewise be provided. He pointed out that instead of the heavy regulation of the financial system which is self-defeating, the goverument should develop a strong and independent rural banking system supportive of rural and agricultural sector's needs. Related to this is the setting o f interest rates on loans which must be sufficient enough to cover the cost of funds and lender's expenses. Financial institutions, he said, are likely to be more viable in the long-run if they are encouraged to actively mobilize say-

ings in addition to lending functions, predominate the fiscal sector should be The government, Bacani urged, removed. These exemptions and privishould also provide increased basic soleges only cater to the big corporations cial services and an environment that is at the expense of the small farmer, and conducive to public investments and thesmall-andmedium-scaleindustries, entrepreneurship. The research and he said. extension system should also be iraEstanislao also called for the liberproved as well as rural infrastructure alizationoftradeandinvestmentwhich and post-harvest facilities, today are biased against the agriculAccording to Bacani, the Central tural sector. All quantitative restricBank had already begun the rehabilitation s that afflict the Philippine industry tion program of the rural banks. It has and imports should be removed, he liberalized its rules for bank branching said. According to him, if the country policiesanditscriteriafornewbankaprestrictstheinflowofmorethan60perplicants. Bacani also encouraged pricent of commodities included in the vate banks to lend to rural areas espePhilippine Standard Classification of cially to organized groups such as coCommodities, there wiil be no tax reveoperatives. One incentive for banks to nues. Even with these restrictions, the lend to smali borrowers is for theLegiscountry cannot completely prevent lative Body to phase out gross receipts these goods from coming in because taxandeliminatethe20percentwitholdthey are smuggled in. In either case, the ing tax on interest income, country is not gaining revenues from Bacaniemphasizedtheimportance all oftheserestrictedimports. Thus, libof private savings deposits which eralizing our trade and investment should be optimally used in order to policies is strongly recommended. decrease the dependence on governEstanislaoalsourgedthatexchange m ent subsidies, markets be liberalized. As it is, only a Finally, with the increasing role of very small amount is allocated by the the informal credit markets, he said Central Bank in its trading operations that it is high time to look into the _ in the free market. Asaresult, ordinary operations of this sector and draw lespeople which include the "balikbaysons to improve the performance of the ans" look for black markets where they formal financial system, can avail of a higher exchange rate, and In his closing remarks, Finance avoid formal banking system which Secretary Jesus P. Estanislao reiterated favors big corporations. Finally, the the call of Secretary Bacani to liberalize government should provide an envithe banking system. He said that beronmentwhichisconducivetoexpandcauseoftheoverregulationofthebankingcredit.Thisconduciveenvironment ing system, the country has, in effect, is crucial in extending agricultural "cartelized" the money market, where credit so that the efforts to stimulate agmarket principles are supposed to opricultural investment in the countrycrate in a banking system but where side will be successful, he said. the structures are not conducive to the The paper presentors were staff of operations of these principles. He said the National Economic and Developthat the number of banks should not be ment Authority (NEDA), Agricultural limited because the banking system in Credit and Policy Council (ACPC), and the country has been strengthened and PIDS. proventowithstandshocksintheeconThe seminar-workshop was also omy. attended by representatives from the Estanislao urged government to government, private sector, non-govliberalize fiscal policies. The set of tax ernment organizations and the acaexemptions and fiscal privileges that deme.


lllltlllll ! , _ _,


I_ r. June1000




S_dies Presented Duringthe Seminar.Workshop on "Rural Savings and Informal Credit in the Context

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Two research associates of the Institute served as resource speakers in a seminar-workshop on "Research Design and Statistical Tools and Techniques"

An Assessment of Policies Affecting the Financial Sector, 1986-1988

Dr. Mario B. Lamberte and Mr. Julius R. Relampagos

Interest Rate Deregulation, Deposit Liabilities and Loans of Philippine Rural Financial Institutions

Dr. Ambrosio K Quii_ones Jr.

Comparative Saving Behavior of Rural and Urban Households: The Philippines, 1985

Dr. Romeo Bautista and Dr. Mario B. Lamberte

held a t the University of the PhilippinesVisayas (UPV) in Iloilo on 25-28 April 1990. Ronald Antonio Q. Butiong and Teodoro S. Untalan, both research associates at PIDS, lectured on the topics cor-

Deposit Mobilization in Rural Banks: The Impact of Alternative Strategies

Ms. Jocelyn Alma R. Badiola and Dr. V.Bruce J. Tolentino

relation/regression analysis and analysis of variance (ANOVA), and statistical inference, respectively. The seminar was divided into three modules, namely:

The Saving and Deposit Performance of Philippine Rural Households: Advanced vs. Backward Areas

Ms. Raquel Clar de Jesus and Dr. V. Bruce J, Tolentino

Income, Savings and Deposit Performance: Evidence Among Rural Households in the Philippines

Ms. Fierida C. Chan and Dr. V. Bruce J. To!entino

Interest Rates and Savings Mobilization: Empirical Evidence from the Philippines

Ms. Marife Magno and Dr. V. Bruce J.Tolentino

Dependency, Education, Attitudes

Ms. Jocelyn Alma R. Badiola




and Household Savings: Empirical Evidence from the Philippines Summary of Results of the Rural Savings Mobilization Research Project

Dr. V. Bruce J. Tolentino

Research Methodology,, StatisticalTools, and Technical Writing. The seminarworkshop, which was spearheaded by the UPV School of Development Management (SDM), was partly a response to PIDS" earlier regional visits wherein collaborative activities between PIDS and regional research institutions were explored. Participants to the seminar were junior faculty members of the UPV who conduct research in-between their teaching assignments. Ap art from this type of institutional linkage being worked out with different research institutions in the country, the PIDS is also discussing with various regional institutions cooperative efforts such as the translation of the results of

Credit Unions: An Underrated Mode of Mobilizing and Allocating

Dr. Mario B. Lamberte, Mr. julius R. Relampago:,

Resources in Rural Areas INFORMAL CREDrF MARKET:

and Dr. Douglas Graham

policy-oriented PIDS studies into "layman's language" for wider readership

Overtime Changes in the Structure

Dr. Ernesto D. Bautista

among the regions

and Operation of Rural Informal Credit Markets in the Philippines

and Ms. Marife Magno

'_ t

Microeconomic Behavior of

Dr. Ernesto D. Bautista

InformalL_nders inRural Credit Markets Collateral Substitutes in Informal Credit Markets




in the country. i_]_ I_i N _

CSC actively encourages public sector unionism

Mr. Emmanuel F. Esguerra What are the mechanics

Land Pawning: Evidence from the Philippines Market Interlinkage and the Demand for Informal Loans


Ms. Geetha Nagarajan Dr. Ma. Piedad S. Geron

in the for-

mation of employees unions in the public sector? This was the topic of an in-house staff seminar on "Public Sector (Please turn to page 12)

PIDS research advisory...


i What is GATT-- From page 9 ] its membership, l Both the Tokyo and the Uru] guay Rounds give emphasis to the _ promotion of trade interests of de-

(from page 8)

8) Dr. William Hyde US Department of Agriculture 9) Dr. Seiji Naya

rules have been ineffective or are nowinadequateforthetradingrealities of the1980s and1990s. Thereare also possible institutional changes

i , !

East-West Center in Hawaii 10) Dr. Gustav Ranis

veloping countries. The Tokyo Round covered important tariff

Yale University 11) Dr. Jeffrey D. Sachs Harvard University 12) Dr. T. Paul Schultz Economic Growth Center

reductions, produced a Series of The Roundtable Discussionnew agreements covering nonSeminaron the Uruguay Round held tariff measures, new agreements apin Manila on March 19-21, 1990 was plyingto tradeindairyproducts, bo- _ a way of informing our officials on vine meat, civil aircraft and an irathediscussionsoftheproceedings0f proved legal framework for the conthe Round which is scheduled to be

f I i i i 1

Yale University 13) Dr. Amartya Sen

duct of world trade, The Uruguay Round,

i !

Harvard University The RAC members

becauseofthenewmultilateralagreement on trade in services.

finalized 1990.

on the

in Belgium

in December

other hand, aimed not only to further liberalize trade, but also to

and Trade,

Geneva:GATTInformationand Media

who were able



to attend the meeting were joined by the PIDS Board of Trustees members



Source: 'GeneralAgreement

and possibly revise GATT especially

where existing



What it is.


on Tariffs What it does.



. tions Division, 1990_



headed by Dr. Cayetano W. Paderanga, Jr., Secretary of Socioeconomic Planning and NEDA Director-General; and Dr. Gelia T. Castillo, Professor at the University of the Philippines at Los Banes; Dr. Benjamin E. Diokno, Undersecretary of the Department of Budget and Management (DBM); Dr. Edita A. Tan, Professor at the University of the Philippines School of Economics; and Dr. Filologo Pante Jr., PIDS President, during the discussions. In addition, the Institute's senior staff officers and research fellows also attended

the meeting.

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Bacani, Estanislao Urge Liberalization of Banking System