Cory Aquino

Her Works



Reconstructing the Philippine Economy: Days of Freedom

Delivered at the John F. Kennedy School of Government, Harvard University
Septemter 29, 1992

The rest of the world may be more aware of the pain and the glory behind our efforts to restore democracy. Few realize that with these exertions went Herculean efforts to reconstruct a broken economy. These endeavors yielded no dramatic images of nuns kneeling before tanks, of priests meeting soldiers with outstretched arms, and of parents with little children gathered in the shadow of the guns.

The work of reviving the economy and setting it on a path of sustainable growth wasn’t dramatic because it was not compressed within four days in February. Rather, it was sustained across six difficult years. Years of great sacrifices by the common people, of unflagging efforts under constant carping, and of frustrating reversals and redoubled exertions to make up for gains that were lost in man-made and natural calamities.

But what these efforts may produce one day will be equally noteworthy: a country on its knees able to rise to its feet and take its place beside the vigorous economies of Asia.

How the Philippines was laid low and has tried to rise up again is what I would like to talk about with you, so as to round out the picture of my country after its better-known revolution.

The economy the government inherited had two things wrong with it: the first was that it was the wrong economy for the times; the second was that there was hardly anything you might call serious economic activity going on anymore.

The economic policy of import substitution protected once leading industries in the region from both competition and the motivation to keep pace with the world. By the 70s, we were outclassed in every kind of manufacturing. By the 80s we were virtually out of the competition. People felt that it was enough for government just to control the smuggling of superior products into the country. The effectiveness of the Bureau of Customs became the yardstick of government performance. Yet even by that standard, it failed.

All this time, the agricultural sector was neglected. No effort was made to modernize it as other countries in the region did. Advanced agricultural research done in the Philippines was used more fully in neighboring countries: A naturally fertile country of 40 million did not think of improving agriculture to support a nation of 60 million and growing.

In the mid-70s, the economy was hit by the Mideast oil crises. You experienced the impact on a big, oil-producing country; imagine its effect on mine. The veneer of Philippine capitalism, thin from the start, had been worn down to the wood. Now the wood was next.

The structural weakness of the Philippine economy – its protectionism, its parochial industrialism, the neglect of agriculture – was as nothing to the two decades of plunder by the Marcos dictatorship in bringing the economy to its knees.

At a time of acute economic distress, the Philippines had a government that was lending over P130 billion to its friends to set them up in business. Among those businesses were the much touted 11 major industrial projects – fertilizer, steel, whatnot. Only a few were completed – all of them went bankrupt. To give you a sense of what could be done with money of that magnitude, the total outstanding indebtedness of all the small farmers of the Philippines to a government lending program was P5 billion. That program was discontinued because of repayment difficulties on the part of small farmers, while billions continued to pour out for crony capitalism.

This was a new addition to the lexicon of capitalism. It meant that a man without a penny to his name instantly became a major capitalist with money lent to him by the government at the behest of the president, or by foreign banks on the president’s word that the country would answer for it. A lot of the money went to Swiss accounts.

Now, to be fair, this has happened elsewhere, but never on a scale so large and to a country that could so ill afford it.

In addition to the crony capitalists, and occasionally overlapping with them, were the Marcos monopolists.

Monopolies were ostensibly created to “rationalize” certain economic sectors, like sugar and coconut. Rationalization supposedly meant eliminating redundancies. Instead of coconut farmers or sugar planters and millers selling to middle-men, and middle-men to the domestic and foreign markets, they would sell their produce directly to a single body. This would avoid the duplication of the selling. But this also meant that instead of planters, millers and farmers each taking his proper profit, the Marcos monopolists would take the lion’s share. Admittedly, redundancy in profit-taking was avoided.

This was when prices were good. When they were bad, the rule changed. Losses passed only to the farmers. This sounds facetious but it is exactly how it worked. It is not surprising that Mr. Marcos and his friends earned the reputation of being “smarter than others.”

Under this arrangement, the spirit of enterprise which was never strong in agriculture simply died.

The cronies and monopolists did not pay the proper taxes, although they could raise the defense that in their time no one asked them to. Who had the temerity?

In one thing, though, both the Marcos men who were favored and the legitimate businessmen who were appalled were agreed. This state of affairs could not continue. Something had to give. Since the Marcos people had no intention of changing a career of constant taking, what would give was the economy. Private capital from legitimate and dubious sources alike fled the country. Thereby accelerating the economic collapse.

In February 1986, we took over a country in deep recession for three years running, starting from the assassination of my husband, Benigno Aquino, Jr., when he returned to the Philippines from Harvard. The Central Bank was exposed window-dressing its reserves. Panic spread among international bankers, who reacted as though they did not know they had been lending to a corrupt government. The Philippines called for a moratorium and asked for a rescheduling of its debts. The chickens had come home to roost. Philippine credit plummeted. The bottom fell out of the economy. I would remember that cause and effect, when I was asked to defy international finance on the foreign debt.

In three years, the gross national product shrank by a total of 15%. Filipinos lost a fifth of their real income. Inflation surged, and reached a peak of 63%. And then it dropped as the economy came to a virtual standstill. Everything was cheaper but who had money to spend?

2.6 million workers were unemployed. The country was in debt for $27 billion. In the next six years we would pay out $18 billion to service that debt, and still be left with $30 billion to pay. That is how things stand today.

It is said that the economy did Marcos in. No, it was his greed.

The problem being economic, the solution we adopted was political.

We took an inventory of what was lost to graft, less to fix the criminal responsibility, as to learn from it. We devised controls to prevent its repetition. We appointed a Commission on Audit so strict at times it would block developmental efforts. But we believe it is better to sacrifice an opportunity for growth than invite again a suspicion of corruption on the government. A lost opportunity can be recouped somewhere else; a lost name is irretrievable. The strength of a government is in its reputation for honesty. The people will forgive policy mistakes but not dishonesty. That causes loss of trust, which is the spirit of the cooperation so important between state and citizen.

The Supreme Court was revamped; only justices of integrity and competence were retained; new appointments filled the vacancies. We should have made a more thorough-going purge, but this was a sensitive area. It involved a co-equal branch of government. It was the only one left standing after I assumed legislative power for a year and a half. The parliament, which had proclaimed Marcos after the Snap Election, had asked for permission to go on existing. In exchange, it would proclaim my victory. But the people had already done that; to add the endorsement of such a parliament would have tarnished their deed. I abolished the parliament.

With such powers in my hand, I could do anything. And so I imposed upon myself the usual constitutional limitations on power, including a Supreme Court that could strike me down if I exceeded by self-imposed limits. Meanwhile I prepared the ground for a new constitution and the elections for a new Congress.

These acts seem like a diversion, but the Philippine economic problem had its roots in politics. Its industry was obsolete because powerful economic interests got government protection. Its finances were in shambles because influential men got government favors. The Philippine economy was in a bad way because its politics were bad.

The two state banks that were victimized by “behest loans” were rehabilitated, and the policy announced and firmly implemented never to allow them again. For the first time, these banks would start remitting profits to the national government.

Agricultural monopolies, including that on fertilizer, were dismantled. Fertilizer prices dropped 33%, agricultural productivity jumped the following year.

State-owned enterprises were put on the auction block. Many of them were not set up by the state but taken over in foreclosures. So they were in the worst shape imaginable when the state began to run them. Let me say that the state ran them better that their former owners. But that could not change our campaign pledge to get government out of business.

There was public apprehension of fire sales of these businesses, and strong resistance to their disposal; but in the end we sold off two-thirds of them without questions of impropriety.

We trimmed the bureaucracy, cut back on government regulation, and streamlined procedures for government approvals.

We stanched the bleeding, but had yet to heal the wound and make the patient strong.

GNP rose from a negative rate to 1.5% within the first year, jumping to 5.7% the next. We removed price controls but inflation remained low. That made us pause. It was both good news and bad. For it could mean that there just wasn’t enough money in the system. We would have to pump prime the economy.

The first and second orders of business were to restore Philippine credit abroad and inject some life into the economy at home. The first sent us back to conservative prescriptions; the second would reveal a new, unconventional approach to development.

The collapse of communist economies in Europe proved what we suspected, that you cannot survive outside the mainstream of progressive economies. We have grievances with the foreign banks, which had lent so recklessly to the dictatorship. But you shouldn’t cut your nose to spite your face. The first dent in my popularity came when I announced that I would honor the foreign debt and take the conservative approach to the problems it created.

This unleashed a firestorm of protest. But what could I do? Take the path of Peru?

In the debt negotiations, we tempered our rhetoric, moderated our demands but pressed hard for them. We fought to lower interest rates, to capitalize interest payments, and stretch out grace periods and maturities. We sought out debt conversions and partial debt condonation, all under voluntary, market-driven arrangements with our creditors.

The nominal cash flow savings w were able to secure for the country were substantial, but every step we took in this conservative approach stirred a hornet’s nest at home. We persisted and obtained all the trade credits we required, a respectable additional amount of long-term credit and all the concessional financing that we could use. I ended my term with a final agreement already in place which would enable the Philippine government to stand on its own in the financial markets by the end of 1992, almost a decade after we became a rescheduling country.

The debt burden was heavy, but the country had no alternative but to grow stronger to carry it. There was no way to shrug it off, as passionate advocates demanded. The debt was a monkey on our back, you might say, but it had the grip of a gorilla. The future of our international credit depended on how well we handled our debts from the past.

The only way to make the debt burden easier to bear was to make the economy stronger to carry it. Creditors were certainly not going to reduce it.

This meant having to observe strict fiscal discipline and keep budget deficits within prudent levels: a way of ensuring that as the economy would pick up speed, inflation would not spin it out of control. Despite the hue and cry at every step of the way, despite delays caused by democratic debate, we made significant strides towards our fiscal objectives. Towards the end of my term, the deficit to GDP ratio held at a conservative 2.5%, the tax revenue to GDP ratio had risen to close to 15% (from less than 11% in early 1986), tax collection efficiency measures were in place, and serious tax reform was underway.

Not all our fiscal measures passed Congress, but the top priority we were giving the fiscal issue was evident to our foreign creditors and the international community. We weren’t rich but we were dependable. We were a good credit again.

But fiscal responsibility meant cutting back on basic services to the public. We wouldn’t get a free ride. Although we had expectations of it at the beginning, because of the goodwill generated by the dramatic quality of our people-power revolution, we didn’t hold our breath long.

The strengthening of the economy followed a broad liberalization program. This was risky but necessary. The economy was weak yet we opened it up to international competition. It had to be done sooner or later. Philippine businesses asked if we could buy time for them; but time didn’t seem to bring industrial improvement. Better now than never, we decided, and opened up the economy. First was the foreign exchange market where controls for the free movement of foreign exchange were removed (the program was completed within 60 days after my term). Second, we put in place a 3-year program of reducing the average tariff rate and simplifying the tariff structure.

We decided on this two-pronged program at probably the most uncongenial period for radical reform in Philippine history, at a time when we were deep into a stringent stabilization program. But we wanted to send out the signals that major reorientation towards exports would not wait for better times. The signals were received only too well. Confidence in the Philippine peso got such a strong boost that it has appreciated so strongly to the dollar that the export sector has threatened to stop exporting. It has asked the Philippine government to protect the dollar.

A Foreign Investments Act has increased allowable foreign equity in more areas of the economy. We would open the door wider to foreign investments if the Constitution allowed it. But we have convinced the public that foreign investments in the local economy do not mean a reduction of national sovereignty. Wider access will follow.

Within two years of the new government, existing industrial capacity was used up and power-generating capacity exhausted. Additional power projects met stiffer resistance from environmental groups. There remains strong resistance to the operation of the Westinghouse nuclear power plant because of principal opposition to nuclear power and the anomalies connected with the plant’s construction.

Power outages struck. They had an extremely debilitating effect on economic activity. The silver lining is the unexpected discovery of large deposits of oil and gas.

It is easy to miss the significance of the measures we had taken, especially since their impact has been blunted and obscured by the extreme difficulties the country had to face. The December 1989 coup attempt was crushed but with such effort that investors until recently, held back. The prospect of a return of military-backed authoritarian government, and a resurgence of popular resistance, was uninviting.

A series of natural calamities followed. An earthquake shook the length of the country and cut off for a while the northern part from the capital. Typhoons swept the country. And in 1991, a dormant volcano erupted with such mass and force that its debris has lowered the temperature of the planet and delayed the greenhouse effect on the world.

Before you thank me, le me say that lowering the lead content in gasoline is a better way to go about it. When I left the Philippines two weeks ago, volcanic mud 15 meters high cascaded through some places.

These distractions notwithstanding, I believe that the premises of future progress have been laid. The economy is poised for higher longer term growth.

Inflation is down to single-digit levels. Domestic interest rates have also come down, although they remain high enough to attract Philippine deposits abroad. Capital flight has reversed, international reserves have reached historic heights, the Philippine peso has become too strong. This will correct itself.

In the second year of my term, GNP rose to 7.6 percent. The upward trend continued until the country suffered the last spasm of militarism in the December 1989 coup attempt. However, the smooth democratic transition last June 30, when I handed power to my successor, has restored confidence in the long-term stability of the society. The new government has started talks with the communists, with a view to settling the longest running communist insurgency in the world. I have said that the last communists in Europe are the exiled leaders of the Philippine community party in Utrecht.

I mentioned our effort to pump prime the economy in our first year. The idea was to send money down the pipeline to perk up demand and get things moving again in the economy. But some of the money stuck in the pipes – going to the pockets of lower officials down the line. A lot more was absorbed by the bureaucracy. It took more money to get money to the communities than actually reached them. It became increasingly clear that the best way to get government to the people was to organize them to come to the government. Thus arose the idea of depending on non-governmental organizations of NGOs to do more of the work of development.

The most successful school building program was funded by the government, but implemented by NGOs, in record time and with extraordinary economy. NGOs were allowed to carry money saved on one project over to another. Remarkably, this did not produce larceny, but an unprecedented efficiency in the allocation and expenditure of public funds.

This is pump-priming as it should be. A little money going a long way and producing two valuable results: a greater sense of independence and responsibility and an enhanced ability on the part of the people to get things done themselves. My term, however, was coming to an end.

After the February people-power revolution, I came back to Boston to visit again the house where I lived so happily with my husband. I gave a speech at Harvard. It never occurred to me that I ever would. My husband was so proud of the intellectual tradition of this school. I spoke about the astonishing speed of the people-power revolution. So many events were compressed in four days – from the rout of a military revolt, the tentative gathering of a few people around the military camps, to the giant concourse of a nation determined to seize the occasion to be finally free. How it happened was explained by me with equal parts of history and theology, for the event was nothing short of miraculous.

I might have regaled you again with the story of that exciting event. But this is the school of government, and not the department of theology or history. Now you have seen that freedom won in the night when the dictator fled, must wake up to the light of the day and its long tasks and heavy duties.

Then faith might sustain you in the long, hard pull, but only work and study and more work will get you through. Thank you for inviting me here again.



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