Public Finance - Public Debt

• The Philippines achieved independence from the United States in 1946
• The Philippines stayed linked to the US through treaties established post-war
• These treaties represent formal agreements between the Philippines and the US, documented in written contracts that outlined all the rules and expectations for the post-independence arrangement
• Being legally binding, these treaties required both countries to adhere to the agreed terms
• Through these treaties, the US received certain advantages in our country, such as maintaining their military bases and owning businesses
• For a time, the arrangement with the US was beneficial. We had the freedom to pursue economic development policies since our country was heavily "import-dependent" at that time
• We imported essential items like oil, machinery, and industrial raw materials, which were crucial for post-war rehabilitation and infrastructure projects, including schools and hospitals
• Additionally, we invested in education and focused on advancing military technology
• As a result, during those years, the Philippines was recognized as one of the fastest-growing economies in Southeast Asia
• Our heavy reliance on imports led to a trade deficit, meaning the government was spending more than it was earning
• To address this deficit, the government introduced import controls
• While this strategy limited consumer choices, it promoted domestic industrial growth
• In 1959, an election was held, and the Conservatives won several seats in the Senate, specifically the Nacionalista Party
• Conservatism


  A political ideology that generally supports traditional values, minimal government intervention in the economy, advocates for a free market, supports privatization, tax cuts, and reduced government spending
• When Diosdado Macapagal assumed office, he secured a loan from the IMF, which is heavily influenced by the US
• The IMF approved the loan but imposed conditions: first, the devaluation of the peso, and second, the removal of import controls
• Once import controls were removed, it attracted a significant influx of foreign capital
• When the Philippines removed import controls, it did attract significant foreign capital
• Though this isn't necessarily bad, it was said that if not managed effectively, it could lead to problems
• This led to a trade deficit, which happens when a country imports more than it exports
• To address the gaps caused by this trade deficit, the Philippines borrowed money, resulting in an increase in the country's external debt at the beginning of the Marcos regime
• The Philippines found it relatively easy to secure loans because in 1968, Robert McNamara, then president of the World Bank, increased lending to developing countries, including the Philippines
• It is said that this policy shift was driven by the Cold War. The USA and its allies wanted to prevent developing countries from falling under communist influence. They believed that lending money to promote economic growth was a way to keep these countries from being swayed by communist movements
• Marcos' "Revolution from the Center" and Economic Goals: Ferdinand E. Marcos launched a "revolution from the center" by declaring martial law with the promise of robust economic growth for all under an envisioned "new society"
• The idea implies that Marcos was supposedly aiming for radical change in the Philippines. However, instead of going through a traditional revolution, he sought to implement changes under his control
• He aimed for swift economic development under his rule, and Martial Law enabled him to control the economy and direct resources towards his preferred projects
• However, the developments during his term primarily benefited him and his cronies, rather than the country
• One example of such developments is the Bataan Nuclear Power Plant, which began construction in 1976
• The construction of the Bataan Nuclear Power Plant (BNPP) was funded by the US government and led by an American company
• It was alleged that Marcos, his cronies, and the American construction company financially benefited from the project
• Despite this, the power plant never became operational, never generated electricity, and was constructed in a hazardous location, leading to safety concerns
• The martial-law government forged a development alliance with the World Bank, which declared the Philippines as an "area of concentration"
• Together with the IMF, the World Bank formed a "Consultative Group" of bilateral and multilateral lending agencies whose primary purpose was to provide "development finance"
• The Consultative Group became the ally of the National Economic and Development Authority (Neda) in pushing for a shift in industrial policy, from ISI to labor-intensive export-oriented industrial (EOI) policy
• Export-Oriented Industrial (EOI) policy

  A policy that focuses on producing goods cheaply, often using labor-intensive methods, specifically for export to other countries. The main aims of EOI are to: generate foreign currency through exports, provide employment
• In the early 1980s, the national debt became unpayable due to the collapse of commodity prices for Philippine exports, oil price shock, banking crisis, political crisis triggered by the Ninoy Aquino murder, rising loan service payables, and yes, failure of the EOI program to deliver growth and jobs
• The Philippines received another loan of $200 million from the IMF, as part of its new Structural Adjustment Program (SAP)
• Structural Adjustment Program (SAP)


  Includes trade/investment liberalization, deregulation of various sectors of the economy, and privatization of government corporations, assets and services
• By the time of his ouster in 1986, the external debt of the Philippine government rose to $28 billion, which the Filipino will continue to pay till 2025
• The Philippine economy stagnated, then entered a huge recession, shrinking by more than 20 per cent in the mid-1980s; the debt hit 70 per cent of GDP by 1987