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Vol. XVI No. 1


hallenges are usually euphemisms for problems or weaknesses. For the Philippines, the challenges seem to have remained the same for the past many years. The country will continue to be plagued with trade gaps, low savings rate, and a negative fiscal sector. The implication is that, unfortunately, we have not been able to address these weaknesses decisively and convincingly. Thus, we have to work doubly hard in order to show that we

January - February 1998

ISSN 0115-9097

clined, from 40 percent in 1980-1985 to 35.4 percent in 1990-1992 to 34.8 percent in 1993-1995. An accompanying decline in the manufacturing sector, from 26.3 percent in 1980-1985 to 25 percent in 1993-1995, has likewise been experienced in what economists refer to as a “hollowing out” of the sector. [It is to be noted, though, that a slight increase had been seen in the 1996 figures, with the industry sector’s share to GDP registering at 35.7 percent and manufacturing’s at 25.3 percent.] The

Macroeconomic Challenges Facing the Philippines’ Industrialization Drive* are serious in confronting such problems.

State of the Economy Basically, the structure of the Philippine economy has not changed much. As shown in Table 1, the share of the industry sector to gross domestic product (GDP) has consistently de———————— * Presented during the Symposium in Honor of Dr. Gerardo Sicat and Dr. José Encarnación, Jr. as part of the 20th founding anniversary of the PIDS, September 23, 1997. ** Professor, School of Economics, University of the Philippines and member, PIDS Board of Trustees.

EDITOR'S NOTES There are a lot of challenges—both political and economic—that Filipinos will have to face in 1998. One such challenge is the continuing tragedy called the financial crisis which—since the third quarter of 1997—has caused the demise of a number of companies and banks. Then, on the political front, there is much anxiety in the face of the coming national elections on May 11. The winner in the coming elections has the enormous task of keeping the country afloat in the middle of the financial crisis which has affected many Asian countries. This first DRN issue for 1998 is therefore highly recommended as a reading material to newlyelected politicians who need to know the current situation of the country. In the cover story, Dr. Benjamin Diokno makes a modest forecast on the

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Benjamin E. Diokno


2 manufacturing sector’s employment share also went down from 12.0 percent in 1970 to 10.2 percent in 1995 as jobs were lost (Figure 1). Agriculture, nonetheless, continues to account for the biggest share of employment. Despite the two recent recoveries—in the first half of the Aquino administration followed by recession due to man-made (policy mistakes) and


3 4 7 8

The Asian Financial Crisis: A Case of Boon Turning to Bane Asian Currency Crisis: Lessons from Europe and Latin America Financial Sector: Overlooked in the APEC 1997 Meeting? Roles of Government in an Integrating Economy Toward Community-Building in the Asia-Pacific Region



apital inflows can be an engine for economic growth, if handled properly and used to augment the country’s real productive capital. Conversely, they can also be a possible cause for a crisis. This was the message underscored by international finance expert Dr. Robert Vogel in a recent PIDS Pulong Saliksikan where he discussed capital inflows as the major variable in the current financial crisis in Asia. The crisis has seriously affected six Asian local currencies, all of which are pegged to the United States (US) dollar.

Capital Inflows: Boon in Disguise? According to Vogel, a country that has achieved economic stability, complemented with financial and foreign exchange liberalization, and at the same time undergone structural adjustment, provides the basis for rapid growth and high rates of return which attract investors. Investors, of course, bring in much-needed capital that is crucial to the lifeblood of an economy. “A country, however, must be able to manage substantial inflows of capital or foreign exchange effectively,” noted Vogel as he observed that it is a known fact that accumulation of foreign capital/exchange— which means an increase in the supply of domestic money that balances the foreign exchange assets of the whole banking system—can cause inflation. If a government attempts to control an impending inflation by applying restrictive monetary policies, the inflation rates will just go up further and encourage still greater inflows of foreign exchange. And if the exchange rate is flexible, inflows of foreign exchange will push the exchange


rate even higher, thereby encouraging more investors and inflows due to expectations of a continuing appreciation of the exchange rate. Many economists recommend policies that encourage the spending of excess foreign exchange on real physical capital that can further enhance an economy’s productive capacity. But because capital inflows and increasing stockpiles of foreign exchange are usually interpreted as signs of positive conditions, few governments feel the need to implement policies that effectively deal with excessive capital inflows or which manage them well. Very often, the risks associated with large capital inflows are underestimated. Until it is too late...

January - February 1998

inflows forever to finance a trade deficit raises the possibility of attempting to benefit from a correction. However, knowing when the actual timing of the correction will take place is difficult to predict. When the correction actually and finally comes, what should an investor do? Liquidate one's holdings in that country or simply ride out the correction with a largely unchanged portfolio? This, noted Vogel, depends on whether the correction is likely to become a crisis. Based on the Mexican and Latin American experiences, a correction depends on the foreign exchange position of the banking system. A balanced foreign exchange position is necessary to avoid risks. That is, assets denominated in foreign currency should be adequate to balance foreign

The Asian Financial Crisis: A Case of Boon Turning to Bane Handwriting on the Wall The combination of inflation and an overvalued exchange rate hinders exports and makes the export industry—the key to rapid economic growth—less competitive. The balance of trade then turns negative even if the balance of payments (which includes capital flows as well as goods and services) continues to be positive since capital inflows continue unabated. Such condition signals an impending correction.

When Correction Turns to Crisis According to Vogel, knowing that a correction will eventually occur because a country cannot use capital

currency liabilities. When dollar inflows are deposited as dollars in the country’s banking system, bankers and regulators understand the need for dollar-denominated assets and these have typically taken the form of loans denominated in dollars. If the loans go to exporters or producers of tradeable goods, they will benefit from the devaluation, which is the essence of the correction. On the other hand, if the loans go to the nontradeable sector like urban real estate, then the borrowers will have a hard time repaying their loans after devaluation.




here are lessons that can be learned from previous financial crises such as those in Europe and Mexico which may help prevent more currency crises from happening in the future. This was the observation of Dr. Henk Jager, professor of Economics at the University of Amsterdam and economic advisor of the Dutch Ministry of Foreign Affairs, when he spoke late last year in a roundtable discussion jointly sponsored by the Philippine Institute for Development Studies (PIDS) and the Philippine Economic Society (PES).

The European Crisis According to Jager, huge speculations against the currencies of the countries of an integrated Europe triggered the currency crisis in the region which came in two waves, 1992 and 1993. The first crisis inevitably led to the second. Several factors may explain this situation. One , the reunification of Germany in 1990 led to a demand boom in the former East Germany, raising inflation and leading to high interest rates not only in Germany but also in the other European countries as they chose to maintain a restrictive monetary policy and fixed exchange rate in response to inflation. Speculators then began to test the financial markets to see, if by breaking the rigidity in maintaining a fixed exchange rate in some countries, said countries will decide to change their policy priorities. Tw o , another factor was the result of the Danish and French referendums, showing the people’s negative reaction to the Maastricht Treaty signed previously by the European heads of state, which called for the setting up of the European Monetary Sys-


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Asian Currency Crisis: Lessons from Europe and Latin America tem (EMS). The EMS was perceived to give much importance to the policy of low inflation at the expense of that of full employment. And since the system espoused a fixed exchange rate policy, the people equated this with lesser flexibility on the part of their respective governments and thereby the loss of economic autonomy. Given this critical political factor, speculators tested the currency markets of some of the EMS countries, eventually causing Italy and the United Kingdom to leave the exchange rate system, and Spain and Portugal to devalue their currencies in the system. Lastly, the crisis may also be attributed to the so-called “convergence play” or the Walters critique (named after the former economic advisor of former British Prime Minister Margaret Thatcher who opposed Britain’s entry to the EMS) which notes that prolonged higher inflation, in combination with fixed exchange rate, will gradually damage a country’s competitiveness. At a certain point, then, currency speculators will see this as an unsustainable situation and thereby test a country’s willingness to defend the growing unattractive position of its tradable sector. This kind of test was applied on Spain which was overwhelmed with huge capital inflows after it joined the system in the late 1980s, burdened with a relatively higher inflation rate than the existing EMS members. The result included

high interest rates and a strong currency which lowered the country’s competitiveness.

The Mexican Crisis In reference to the Mexican financial crisis of 1994-1995, meanwhile, Dr. Jager reviewed the conditions of this Latin American country prior to the crisis. According to him, all the necessary “good” elements for capital inflows were present in Mexico: a successful structural economic reform, an ongoing trade and financial liberalization, and a low debt service. The average economic growth rate was 3.1 percent for the period 1989-1994, inflation rate was in the single digit range for the first time in 20 years and there had not been a fiscal deficit since 1991. Such conditions were attractive to investors who entered Mexico with their massive capital portfolio. As a consequence, the Mexican peso appreciated and the country’s competitiveness suffered. The Mexican peso thus became vulnerable to the loss of investor confidence. It is an irony that when investors first arrive in droves to a successful country, the outcome may not always be positive. In Mexico’s case, it developed a huge current account deficit brought about by a high investments rate and a low savings rate. There were also other reasons which caused the Mexican currency

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Financial Sector: Overlooked in the APEC 1997 Meeting?


he 1997 APEC meeting in Vancouver did not fully integrate the finance ministers' agenda into the three mutually supportive pillars that aim to address regional challenges and opportunities of APEC member-economies. Trade and investment liberalization, business facilitation, and economic and technical cooperation—the pillars to which the APEC discussions were centered—do not seem to respond comprehensively to other concerns brought about by APEC's aim toward economic synergy and globalization. These were the observations of Dr. Federico Macaranas, Chair of the 1996 APEC Senior Officials Meeting (SOM) and current president of Clemente Holdings, Phils., in his keynote speech delivered on the occasion of the Second Annual SymposiumMeeting of the Philippine APEC Study Center Network (PASCN) spearheaded by the Philippine Institute for Development Studies (PIDS) and the University of the Philippines (UP). Macaranas expressed his concerns over the mere peripheral inclusion of financial sector issues in the Vancouver meeting. A focus on the currency turmoil, for instance, is one area which "APEC 1997 attempted not to do." Though it may have occupied a bigger portion

of the leaders' declaration, "it was not a major concern of ministers who are responsible for continuously updating the Manila Action Plan for APEC 1996 (MAPA)." In pointing out the reason why finance should be integrated into the three pillars of APEC, Macaranas explained that the sequencing of liberalization and deregulation efforts in various production areas of agriculture, industry and services is an issue intimately related to exchange rate setting in open economies as well as to the long-term role of volatile portfolio investment flows, hedge funds and speculation in development finance. Relatedly, he said that it is strongly probable that due to the slower exposure of production sectors to global forces, financial liberalization may have released resources to less productive areas in Southeast Asian economies. As an example, he cited the apparent weakness in the banking institutions of some of these economies which may have imprudently extended short-term dollar loans to the real property sector, which in turn led to a real estate development glut in Thailand. In conclusion, Macaranas pointed out the need for the financial sector to be integrated with the trade sector. APEC at present does not provide such an integrated set-up since trade ministers meet separately from

January - February 1998

finance ministers. There is apparently a need to thresh out which should be liberalized first, both in the goods sector and the financial sector. The financial sector should not be looked upon as homogenous and has to be equally prioritized in the area of economic liberalization. DRN

Asian Financial Crisis... From page 2

“Any lending in dollars to nontradeable sectors is essentially unhedged, hence, it is highly risky,” Vogel stated. Large and unhedged foreign exchange positions through dollar loans to nontradeable sectors can easily drive banks to insolvencies which mean higher interest rates. This, in turn, will have fiscal repercussions to the government that will ultimately be borne by taxpayers. Thus, the correction has become a crisis.

Trying to Resolve the Crisis As the Asian financial crisis continues to evolve, corrective actions are being set into motion, some with the help of the World Bank and the International Monetary Fund. What is unclear, however, is whether the corrections being done are based on adequate information. Vogel is specifically concerned about the implicit foreign exchange positions of the affected countries’ banking systems and the extent of the knowledge of bank supervisors on foreign exchange risks. Thus, he recommends an undertaking of a series of case studies to look into these two elements that may help in putting a stop to the crisis. DRN


January - February 1998


Table 1 Percent of GDP by Industrial Origin

Macroeconomic Challenges... From page 1

1980-85 1986-89 1990-92 natural (Pinatubo eruption and earthquake) disasters, and during the Ramos administration which, by all indications, shows that growth has peaked last year and is going down— a slower growth in GDP at 4.9 percent is expected this year and an even slower one next year (1998) at 4.5 percent. What accounts for this relatively slow growth despite the recent economic recovery? There are a number of weaknesses that could be mentioned, a number of which may be drawn from the kind of structure the Philippine economy has exhibited and remained to be. First, while the economy is driven by a rapid growth of imports, it is unaccompanied by a strong growth in exports (Figure 2). Second , the growth of manufacturing, as already mentioned, has been slowing down. As such, jobs that are released from agriculture could not be absorbed by industry. Third , there are not enough high-paying jobs created.



























Figure 1 Employment Shares

(Percent of total employed) 1970 services 26.0%

1995 manufacturing 12.0%

services 40.5%

manufacturing 10.2%

others 10.0% agriculture 52.0%

Fourth , the country’s savings rate remains weak, especially for households and unincorporated enterprises. And because of the scarcity of resources, the country’s infrastructure needs are largely unaddressed. Finally, the sustainability of fiscal balance is questionable as there remains Figure 2 a number of big problems in both the exterExports, Imports and Trade Balance (As percent of GNP) nal and fiscal sectors. As shown by various indicators, the Philippine economy’s basic fundamentals are not that strong. For instance, in the fourth quarter of 1996, net imports as percent of gross national product (GNP) were huge and still

others 5.9%

agriculture 43.4%

growing. On an annual basis since 1986, the trade deficit has been large and widening, explaining the fact as to why there is a need to adjust the Philippine currency or why speculators attack the Philippine peso. The growth rates of some industries, as gleaned in Table 2, have been slowing down although some have continued to grow largely because of the liberalization policy of the government in sectors like transportation and communication, and banking and finance. Still, the fact remains that this growth cannot be sustained unless there is growth in agriculture and industry. In the 1970s, the nation was one of the top savers in Asia. The Philippines was better than Thailand, Indonesia and South Korea insofar as sav-



Macroeconomic Challenges... From page 5

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Table 2 GNP and GDP by Industrial Origin (Select Industries)

1994-1995 1995-1996 1996-1997 ings rate was concerned. BeQ1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 cause of this, there were heavy investments since investment Agriculture 1.8 -0.7 1.2 1.0 1.9 5.9 3.6 1.6 3.7 3.0 depends on resources which are not consumed. This condiIndustry 8.9 7.9 7.2 5.9 6.1 6.4 5.8 5.9 4.0 6.7 tion, however, has deteriorated Manufacturing 8.6 8.3 6.4 6.0 4.9 6.2 6.3 4.8 2.3 5.3 over time. In the 1980s, there Utilities 7.4 16.0 18.6 10.0 10.0 5.5 6.6 7.9 3.2 4.2 were not enough resources that Service 4.7 5.0 5.2 5.2 5.4 5.5 6.4 8.7 6.4 6.2 could be invested since savings Transportation 6.2 5.3 5.7 6.0 6.5 7.2 7.9 8.0 8.9 8.3 were low. Thus, the Philippines Trade 5.2 5.7 5.7 5.6 5.5 5.4 5.7 5.5 4.9 4.3 was outperformed by other Finance 6.1 7.2 7.7 8.3 11.7 12.5 14.4 16.3 15.6 12.7 countries as seen in Table 3 GDP 4.7 4.8 5.2 4.4 4.8 5.9 6.0 5.2 5.0 5.7 where the data show that these countries were investing alGNP 5.0 4.0 6.0 4.9 6.6 8.0 6.7 6.2 5.8 6.0 most twice the rate at which GNP-GDP 0.3 -0.8 0.8 0.4 1.8 2.1 0.7 1.0 0.8 0.3 the Philippines was investing. In the 1980s up to the present, select Asian countries have invested more, resulting in their growing much Table 3 faster. In a recent study, the World Gross Domestic Investment as Percent of GDP Bank estimated that we need about US$48 billion to make up for 1971-1980 1981-1990 1992 1993 1994 1995 underinvestment and to address the infrastructure needs of the future. Philippines 27.8 21.9 21.3 24.0 24.0 22.3 Translated into peso, this means that Thailand 25.3 26.9 40.0 40.4 41.0 40.0 we should invest at least 6.8 percent Indonesia 19.3 30.4 32.4 33.2 34.0 38.3 of GNP for the next 10 years or at the current exchange rate, about P1.5 trilMalaysia 24.9 30.7 33.6 35.1 38.7 40.6 lion, to be able to catch up. South Korea 28.6 30.5 36.6 35.1 35.9 36.6

What to Expect: A Second Look at the Figures In the latest Medium-Term Philippine Development Plan, the target for the GDP growth for this year is 8.5 percent and for next year, 10 percent. In terms of the inflation target, the Plan cited 5 percent for last year and for this year, 1997. For 1998, it targets an inflation level of 4 percent. Unfortunately, such an inflation target may not take place because of three reasons, namely: one , the scheduled presidential election in 1998; two, the El Niño phenomenon; and three, the full impact of the

devaluation which will be felt next year. Realistically speaking, a 6.5 percent inflation rate may be a more probable number while a 4.9 percent GDP growth rate is more credible (Table 4).

NEDA’s “Rosy” Targets On the whole, given the scenarios in the world economy today, the targets indicated by the National Economic and Development Authority (NEDA) in the medium-term development plan may look quite “rosy.”

Why so? First, such targets are based on the assumption that the world economy will experience a broadbased 4.2 percent growth. However, with less growth in Asia due to the currency problem and higher growth for the Eastern European countries, such assumption may not hold true. Second , because of the problems we are having in agriculture, the un-


certainty in the land reform program, and the deterioration in the quality of soil due to heavy use of fertilizer during the last two decades, a 3.7 to 3.9 percent growth in agriculture may seem impossible.

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Table 4 1997 Economic Indicators: Planned, Revised and Likely Outcome

Agriculture Industry Service GDP GNP Inflation Rate

The following are some recommendations for establishing a competitive Philippine economy:


NEDA Revised

Likely Outcome

3.0 - 3.8 8.0 - 9.7 9.0 - 9.8 7.4 - 8.5 7.5 - 8.5 5

3.7 - 3.9 – – 7.1 - 7.8 7.0 - 8.0 6.5

2.0 4.0 6.0 4.9 5.0 6.5

*Medium-Term Philippine Development Plan

Third , the sharp decline in the spot price of crude oil to about US$17.94 may not mean much.

a GDP rate of 4.9 percent and an inflation rate of 6.5 percent are more probable.

And last, the minimal decrease in the inflation rate of developed countries at 2 percent in 1996 and 2.1 percent in 1997 again may not mean much because there is no great deviation from the projection. As already stated,

Old Challenges, New Approaches Based on the foregoing discussion, how should we respond to the challenges of making the Philippine economy more competitive in its industrialization drive?

Roles of Government in an Integrating Economy v

Better management of the economy: focus should be on fiscal balance, trade balance, higher domestic resource mobilization, and long-term price stability.


Reform the tax system: increase tax yield, develop further indirect taxation because of higher mobility of labor and capital, raise property taxation for efficiency and equity reasons.


Strengthen the domestic economy especially the agriculture sector: better performance in agriculture has positive effects on wages, inflation and saving. Government should concentrate first on the basics before launching into policies and programs like polevaulting.


Better governance: give the people more value for their money by focusing on public goods (law and order, administration of justice, enforcement of property right), basic social services, and public infrastructure.


Redesign government: focus should be away from regulation and toward promotion and effective enforcement of rules. Government should not be in the business of choosing winners and losers. Such activity is both costly and inefficient (misallocation of resources).


Decentralize: give local governments more taxing authority and spending responsibility. DRN

v Meet infrastructure needs while keeping fiscal position manageable. If the government wants to have more competitive firms and agribusinesses, then it should address infrastructure needs and make sure that the fiscal sector of the government does not deteriorate; v Close the trade gap; v Increase domestic savings; v Create more high quality jobs at home by expanding exports and industrial output for the domestic market; and v Modernize agriculture to reduce food prices and minimize pressure for higher wages. Needless to say, it is very important to pay attention to the agriculture sector since 53 percent of the typical Filipino’s budget is spent on food. Compared to Thailand’s 30 percent, such proportion is quite substantial. It is difficult to raise savings when half of one’s money goes to food. Hitherto, if food prices are reasonable, then there will be less pressure for the government and private sector to raise wages. Finally, if we are to succeed in addressing these challenges, we have to make sure that the government plays its roles well in an integrating economy. Certainly, the government has to continue to manage the economy well through the maintenance of fiscal balance, closer attention to the trade deficit, greater push for domestic resource mobilization, and establishment of long-term price stability. More important, though, is that there should be a better government to ensure better efficiency. [Note: The details of these various role(s) of government in an integrating world are listed in the sidebox.] DRN



espite initial reluctance of some key member-economies of the Asia-Pacific Economic Cooperation (APEC) to include community-building programs in the agenda, there has been consistent interest on the part of many developing economies in APEC to make community-building the third leg—in addition to trade and investment liberalization, and trade and investment facilitation (TILF)—of APEC. Thus, APEC declarations in Bogor, Osaka, and Subic have consistently referred to technical and economic cooperation for community-building as an essential item of the APEC agenda.

TILF: Only the First Step The consistent interest on community-building is inspired by the initial goal set forth in the APEC Leaders Meeting in Seattle: to build a community in the Asia-Pacific region that is committed to free and open trade and investments. Free and open trade and investments represent the pragmatic first steps in unifying a region as diverse as APEC. They are, in fact, crucial and necessary steps. However, the Economic Leaders made it clear that TILF merely represents steps toward a much broader goal of building a community (or a big family of economies) in the Asia-Pacific region. TILF is necessary but is not a sufficient factor for community-building. It is necessary in a region where the most obvious, currently relevant, and commonly appreciated relationships are in trade and investment. Economic growth and development, which can be promoted and accelerated through free and open trade and investment, are goals which bring the diverse economies of APEC together in deeper and wider cross relationships with each other.


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Toward Community-Building Once economies deal with each other more openly and freely, though, they set a stage for broadening and widening their relationships to other spheres as well. Economic partners, who build intense mutual interests from the closer and tighter economic interdependence, are more likely to make peace than war. They are also likely to expand their relationships to other areas broader than economics such as politics and civics. Politics and civics combined with economics make up the basic building blocs of community-building, the legs on which a community stands. The complication of bringing in the other legs of community-building at a time when APEC is short of accomplishments in the two major items of the APEC agenda has, however, caused anxiety among other member-economies. Thus, caution has been advised so as not to load APEC with so many items that will only dissipate resources and distract attention from TILF, the core “home work” for APEC. The fear is that APEC may lose focus in its program of work and may be influenced by those who wish to go slow on the first agenda and substitute token programs on economic and technical cooperation to real, substantive actions on TILF. Looking at APEC’s short-term process, such fear may be well grounded. Those who worry about the long-term progress of APEC, however, worry that narrowing the APEC agenda too much may eventually take the steam off even from the initial goals of TILF. They note that if APEC focuses only on the process toward TILF, it

Jesus P. Estanislao* may get bogged down in endless details, thereby losing sight of the larger vision.

TILF Approach as Model Indeed, TILF, as an approach toward greater openness among APEC member-economies, presents itself as a model for the other approaches necessary to promote greater openness in other sectors. As in TILF, the other approaches need to remove barriers for a free interaction and freer flow among key sectors in APEC member-economies. Such interaction will eventually make us understand each other better, and emphatize better with each other’s mental and intellectual paradigms. Nowhere is this best illustrated than in the area of education where there is already some interaction, albeit a little lopsided in most cases among APEC economies. In order to ensure that benefits between economies are mutual and that opportunities converge at some point, there is a need to remove barriers that constrict a freer flow in education. We therefore need to end the current practice of limiting the hiring of administrators and faculty in selected APEC educational institutions to nationals of a given economy. There is a need to facilitate the flow of faculty and students, and the sharing of research resources through substantive cooperation in research, teaching and extension programs. Education is used as an illustrative case because it is strategic and fun-



in the Asia-Pacific Region damental to community-building. It is one of many sectors where the TILF approach to interdependence can be applied and adapted. Education is also the main avenue through which peoples of different nationalities can have a freer exchange of ideas, an open discussion about values, and an unimpeded spread of skills. Ideas, values, and skills are the major determinants which enable peoples to shape their goals. Once shared, they widen opportunities in the APEC region which could help the residents arrive at mutually beneficial and common goals for the entire region. Shared goals are the beginnings of the spirit of a community.

values within the civil society framework.

Nevertheless, while ideas and skills may be unifying, values among APEC member-economies today are divisive. For many years now, the differences between eastern and western values have been highlighted and debated upon. And in these debates, many of the protagonists are from APEC member-economies.

Then, every civil society stresses community involvement through some mechanisms that must function more effectively and more openly. Local government units (LGUs), which draw strength and authority from the constituency they serve, observe a clearly instituted process for public accountability and present common concerns and interest. Intermediate organizations, which run parallel to LGUs and address specific concerns, contribute to the common good. Thus, they will need to be invested with freedom and responsibility. These organizations represent diverse needs and interests and must be accountable to the public on their actions. Through this concept of public accountability, their intent and capability to take care of the welfare of their constituents should be tested.

But as in trade issues, difference in values should not be swept under the rug. They will have to be faced. Thus, instead of concentrating on the differences—without forgetting, of course, that they exist—focus should be on those values that unite and bring us together. This is the operationalization of the TILF model as used in trade and investment. It is an approach that may be used in other sectors.

Values Education In building a strong civil society in our respective economies, we discover that there are many common

First and foremost, everyone accepts that rights and duties of individuals go together. While some may prefer to put greater accent on rights, others prefer to put greater weight on duties. Still, everyone agrees in putting the accent on “and,” thereby acknowledging the correlation and essential linkage between rights and duties of every individual. We also wish to stress the unity of the family, since it is the basic unit of society. Strong and united families make for strong and united societies.

Moreover, broader networks which go beyond national borders need to bring individuals and institu-

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tions that address regional and global community concerns together. Through these networks, greater cooperation in dealing with transnational issues may be fostered, thereby deepening one’s appreciation of the demands of interdependence. The values of dignity of an individual, family unity, civic responsibility, and regional and global solidarity can be spread through education and the media. If values education is to be undertaken, however, it has to be fully integrated into the entire educational process which, in every society, is tasked with the major burden of instilling community spirit and building a strong and progressive community. It is imperative, therefore, that a culture of excellence is propagated through values education by highlighting quality in the basic subjects of mathematics and science, language and culture, and civics and history, with a view toward openness in the context of the region and the world. In the pursuit of quality education, there should be parental involvement in the holistic formation of their children’s personalities. Similarly, the community should concretize lofty ideas and concepts and give opportunities to those in need so that they can help themselves. Fostering deep interest in sports and the arts will allow the community to meet heavier challenges and greater possibilities for enrichment. Thus, the basic values that need to be stressed in building a civil society are promoted—from nation to subregion to region, and lastly, to the entire world. Such openness calls for a different mindset. Community-building in the past was equated, in most in-

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Toward Community-Building... From page 9

stances, with nationbuilding. The nation was the focus of attention, effort, and heroic sacrifices. But in a world where borders are getting narrower, where the challenge of broader interdependence is becoming more real each day, there is a need for a radical paradigm shift from the narrow confinement of national borders to the broader subregional, regional, and global scope of community-building.

Tools for Broader Community-Building To broaden the minds that had been focused on narrow nationalism would require appropriate tools and language is one of the most important tools there is. For pragmatic reasons, non-English users have been trying hard to learn English as a second language since it is the accepted lingua franca. Although it is now imperative for many to learn English, it is also important for everyone to learn a language other than his/her own. Through language, we are better able to understand the minds—and possibly the hearts—of other peoples. Indeed, by learning a second language, we become more sensitive to the needs of other people, and our interests are likely to include those aspects and facets important to other people. Both sensitivity and open interest are crucial for genuine dialogues that may lead to mutual appreciation and deeper understanding. In today’s world, information technology (IT) keeps everyone in close touch with one another. It seems that every APEC member-economy


already has a national IT program aimed to strengthen and improve their own civil society. It will not be long before there will be an initiative for a synchronized IT program at the subregional level. It takes very little imagination to conceive of an APEC space in cyberspace where we can create a thousand points of light to fire up the community spirit in the Asia-Pacific region. There can be spaces for the intellectual and academic minds, professionals, and interest groups with diverse concerns and causes, among others. Thus, instead of APEC being only a free and open market place for goods, services, and investment options, it can also become a venue for ideas and a whole range of other interests. When ideas and interests are interconnected, concerns and goals are more likely to be shared. Thus, the region becomes more ready to evolve into a true community. This readiness can be employed by those who want to lead us toward becoming a community of kindred spirits. Direct people-to-people contacts can be promoted. A more constructive engagement in each other’s affairs can be undertaken to a point where a thin line separates active interest and subtle intervention. The fact is that neighbors and partners end up influencing each other in many ways than both dare to admit. However, the essential requirement for good neighborliness and positive communitybuilding is a relationship that is open in several ways. It should never go only one way.

Conclusion The TILF approach has a rightful place in APEC. It can be used to open up other sectors outside of trade and investment so that APEC membereconomies can begin the long process toward building one big community

January - February 1998

of economies in the Asia-Pacific region. Community-building requires a mindset that is radically different from the narrow confines of nationalism. The process demands openness and genuine interest in each other. It calls for the building of shared values that will allow us to reach a higher common ground where we can stand together to reach out toward common goals. This will, however, remain a dream unless values are promoted and a commitment to quality and excellence is instilled through education. Through the operationalization of this commitment, we can promote openness and interest in them—those whom we can directly cooperate with or directly compete against. Fortunately, we have the right tools such as information technology— which has already connected, on a nationwide basis, most APEC economies—that will allow the creation of wider and more dedicated subregional and regional spheres in the cyberspace where we operate. This would enable us to light up thousands of points of interconnection which cater to a wide variety of interests and whose scope covers the common concerns within the community that we hope will evolve naturally. DRN ———————— *Dr. Estanislao is currently the President of the University of Asia and the Pacific (UA&P). He served as Secretary of Finance of the Republic of the Philippines during the Aquino Administration. He was a member of the Eminent Persons Group of the AsiaPacific Economic Cooperation. Notes for this paper were originally prepared for a presentation at the Meeting of a Panel of Independent Experts in Singapore last August 7, 1997. The paper, however, was finally written for the PIDS Symposium in Honor of Dr. Gerardo Sicat and Dr. José Encarnación on September 23-25, 1997 in Manila.



cial international monetary reserves. It reached a point that government reserves practically became zero.

Asian Currency Crisis... From page 3

crisis. The unexpected policy shocks brought about by political upheavals like the Chiapas uprising and the assasination of the presidential candidate of the ruling party put tremendous pressures on the government. Unfortunately, the Mexican government failed to come up with an ad-

Zoom-in to the Present: Is there a Crisis in the Philippines? Since the Thai baht’s fall middle of last year, there had also been a fall in the Philippine peso as seen in Table 1. However, the fall had been lower compared to the other Asian countries’ currencies, giving a notion that perhaps, there is a delinkage of the Phil-

Table 1 Comparison of Forex Rates, 1996 and 1997 Nov. 12 1996 % Change Forex Rate Forex Rate Philippines
















January - February 1998

Table 2 Declines in Stock Markets since December 31, 1996, in Percent

ippines from Asia with regards to the current financial crisis. The crisis in the country, according to Jager, is more of a contagion. Since In Local Currency In Dollar there was a problem in other Philippines -41.9 -54.2 countries such as Thailand when its currency devaluMalaysia -44.7 -57.6 ated, the Philippine comThailand -43.6 -61.8 petitiveness necessarily de[Netherlands +30.3 +16.1] clined in view of the similarities of the country’s exports with those of the equate policy response, thereby, exac- former. However, there is already a erbating the situation. Official re- compensation in the peso devaluation serves, instead of capital inflows, were between July and November 12, 1997. used to cover for the current account Compared to Mexico during its crisis deficit. Interest rates were not allowed in 1994, the Philippines may be conto rise for fear of bankruptcies. Thus, sidered as still in a better position. The the central bank sterilized the foreign Philippines experienced a decrease in exchange market interventions leading its inflation from a double-digit in the to a prolonged need for the use of offi- beginning of the 1990s to just slightly

Vol. XVI No. 1

January - February 1998

Editorial Board Dr. Ponciano S. Intal, Jr. President Dr. Mario B. Lamberte Vice-President (on leave) Mr. Mario C. Feranil Acting Vice-President and Director for Project Services and Development Ms. Jennifer P.T. Liguton Director for Research Information Ms. Andrea S. Agcaoili Director for Operations and Finance Atty. Roque A. Sorioso Legal Consultant

Staff Jennifer P.T. Liguton Editor-in-Chief Genna J. Estrabon Issue Editor Corazon P. Desuasido, Barbara B. Fabian, Edwin S. Martin and Liza P. Sonico Contributing Editors Valentina V. Tolentino and Rossana P. Cleofas Exchange Delia S. Romero, Galicano A. Godes, Necita Z. Aquino, Lilet L. Lamayo and Federico D. Ulzame Circulation and Subscription Jane C. Alcantara Lay-out and Design

over 5 percent this year. He considered the inflation drop a real success. Jager added, “I would hardly use the word currency crisis here.” How-

= 12


Asian Currency Crisis... From page 11

ever, he said the stock market is a different story. The Asia-Pacific region is a different picture, especially from Europe. In Table 2, for instance, one can see that the declines in the Asian stock market had been larger when compared to, say, the Netherlands whose stock market is relatively strong.

Lessons to Learn The previous financial crises in Europe and Mexico have lessons for other countries which may help them in resolving their own problems or prevent such a catastrophe from happening to them. For the Philippines, Jager recommended that attention be given to certain aspects of the Philippine economy, one of which is the country’s financial sector. For instance, a measure of nonperforming loans which is an important criterion in measuring the weakness of banks may be of use to the banking sector and investors in the future. Thus, it should be monitored regularly. Jager likewise suggested that the financial market, including currency traders, must not be given sovereignty or control of the markets. As to the inflation issue, he added that based on experience, “it is very good to have a wage and price freeze” to stop inflation pressure. However, support from the country’s citizenry, political parties, and labor unions is necessary, if this freeze is to be realized. Meanwhile, he noted that an increase in the interest rates should not bother the country very much. More-

January - February 1998


20 Years

Editor's Notes... From page 1

of Service through Research

performance of the Philippine economy in 1998 based on the developments in the past years as well as on those anticipated in the coming months.

over, he cautioned the decisionmakers not to rely on the sustainability of huge capital inflows, particularly short term capital. He suggested that government reserves should not be used or if unavoidable, only to a small extent.

Much have been said about the present financial crisis in this part of the world, with many of the movements in the Asian and Philippine economy attributed to it. In this issue, we have two international economists, Dr. Henk Jager and Dr. Robert Vogel, adding their analyses on the crisis and offering some lessons that may be learned to prevent similar occurrences in the future.

He concluded that the combination of an increase in interest rate and a floating currency during a certain period of time to get a new equilibrium would have been the solution since the crisis happened toward the end of the year. “A smooth adjustment process several months later will have saved the situation and will have prevented a currency crisis.” DRN

Two other articles, meanwhile, are focused on issues related to the Asia-Pacific Economic Cooperation (APEC). Dr. Federico Macaranas notes that economic leaders failed to incorporate relevant issues in the financial sector in the agenda and resolutions of the APEC meetings in Vancouver while Dr. Jesus Estanislao suggests that community-building be included as the third leg of APEC to facilitate the true unification of the Asia-Pacific region.

DEVELOPMENT RESEARCH NEWS is a bi-monthly publication of the PHILIPPINE INSTITUTE FOR DEVELOPMENT STUDIES (PIDS). It highlights the findings and recommendations of PIDS research projects and important policy issues discussed during PIDS seminars. PIDS is a nonstock, nonprofit government research institution engaged in long-term, policy-oriented research. This publication is part of the Institute's program to disseminate information to promote the use of research findings. The views and opinions expressed here are those of the authors and do not necessarily reflect those of the Institute. Inquiries regarding any of the studies contained in this publication, or any of the PIDS papers, as well as suggestions or comments are welcome. Please address all correspondence and inquiries to: Research Information Staff Philippine Institute for Development Studies Room 304, NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, 1229 Makati City, Philippines Telephone numbers 892-4059 and 893-5705 Telefax numbers (632) 893-9589 and 816-1091 E-mail address: Re-entered as second class mail at the Makati Central Post Office on April 27, 1987. Annual subscription rates are: P150.00 for local subscribers; and US$20.00 for foreign subscribers. All rates are inclusive of mailing and handling costs. Prices may change without prior notice.

Asian Currency Crisis: Lessons from Europe and Latin America  

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Asian Currency Crisis: Lessons from Europe and Latin America  

2 The Asian Financial Crisis: A Case of Boon Turning to Bane January - February 1998 ISSN 0115-9097 State of the Economy Benjamin E. Diokno...