From crisis to crisis: The Philippines amid the global turmoil

The Philippines, anchored on an export-oriented and foreign investment-led model, was already hard hit by the 2007 crisis. Worse may come with the new global crisis that is brewing, says Sonny Africa.

AFTER declaring late last year that recovery was under way, the International Monetary Fund (IMF) now says that the world has entered a 'dangerous new phase'. The inability of the Fund to maintain its earlier optimism underscores the deep problems of the global economy. Yet despite this, many governments of the Third World, such as in the Philippines, persist with long-discredited globalisation policies instead of the radical reforms that their economies and people so desperately need. This in turn points to the urgency of directly challenging the domination of big foreign powers and domestic elite interests for things to even just start changing for the better.

The Philippines is in the geographic middle of South-East Asia and has a population of 102 million people. It is the 12th largest country in the world by population - second only to Indonesia in South-East Asia - but only the 45th largest by gross domestic product (GDP) and 124th by GDP per capita (both in nominal terms).

Because of decades of globalisation policies, the country was actually already deep in crisis by the time the global financial and economic turmoil erupted in 2008. This turmoil appeared to have relatively less impact on the Philippine economy than its neighbours in the region with, for instance, low but still positive economic growth. The government and many mainstream economists distorted this as indicating 'resiliency' and 'solid economic foundations'. The reality, however, is that the impact of the turmoil was on top of what was already a very difficult situation to begin with.

The Philippines upon the crisis in 2008

Globalisation policies have been implemented since 1979 when the Philippines became the second country in the world, after Turkey, to enter into a structural adjustment programme (SAP) with the World Bank. Since the 1980s, tariffs have been reduced deeper and faster than in most countries in the region (with perhaps the exception only of Singapore). Regulations and restrictions on foreign investment were removed wholesale and 100% foreign ownership has been allowed in all but a few sectors since 1991. In short the country aggressively globalised throughout the 1980s and 1990s and quickly became among the most formally open economies in East Asia (i.e., in terms of policies if not outcomes). This of course did not lead to real development.

Certainly some economic results were played up by the government and the international financial institutions (IFIs): larger exports, rising foreign investment and rapid growth. The country had $8.2 billion in exports equivalent to 27.5% of GDP in 1990 which rose to average over $40 billion annually in the period 2000-2008 (some 46% of GDP). Foreign investment in turn rose from $3.3 billion (equivalent to 7.4% of GDP) in 1990 to $21.8 billion in 2008 (13.0% of GDP). Economic growth was also relatively rapid and the 7.1% clip in 2007 was hailed as the fastest in three decades.

But these are not the economic results that matter. In contrast, local manufacturing and agriculture were in decline. The manufacturing sector was shrinking throughout this globalisation period and the sector was reduced to as small as it was in the 1950s as a share of GDP and of total employment. Agriculture meanwhile fell to its smallest share of GDP and employment in the country's history. Domestic food production per capita is lower than in the early 1970s and import dependency has worsened across the range of basic commodities. The highest average increases in food prices have been in the case of rice and corn, which greatly contributes to the declining purchasing power especially of the country's poor.

The collapse of the country's two most important productive sectors explains why joblessness was high and rising even before 2008. The average unemployment rate of 11.1% in the decade before the crisis was already the worst period of sustained high unemployment in the country's history. Real wages, taking inflation into account, were lower in 2008 than at the start of the decade. All this had forced record numbers of Filipinos abroad for work to sustain their families; some 4,000 Filipinos were already leaving the country every day, leading to some nine million Filipinos overseas by the time the crisis erupted in 2008 - the largest number of whom were in the United States and other hard-hit centres of global capitalism.

Poverty was consequently already widespread and far more than the low 28 million official estimate before, which was less than a third of the population. The government arrived at this figure using an absurd official poverty line of just 41 pesos (PhP) per person per day - or the price of a 1.5-litre bottle of Coca-Cola - with which the government expects a Filipino to meet all of his or her basic needs for food, clothing, housing, utilities, education and health.

Using a more reasonable poverty line of PhP104, however, would count some 65 million Filipinos, or some seven out of 10 Filipinos, as poor. This aggregate figure does not even capture how the poorest 30 million people struggle with just PhP22 or PhP35 or PhP45 per day. Inequality is also virtually unchanged from decades ago - in 1988 and today, the poorest half of the population accounts for less than 20% of household income, while the richest 20% of families hold more than 50% of household income.

Impact of the crisis in 2008

The long period of globalisation policies defined the situation of Filipinos when the crisis hit in late 2008 as well as the main channels of its impact. The global turmoil worked its way through the economy in three main ways: weaker exports, slowing overseas worker remittances and volatile investments.

The Philippine export sector has grown in the last decades but is still relatively smaller than in its neighbouring countries, at just some 45-50% of GDP in recent years. Out of around 37 million jobs in the country only some 250,000 are in manufacturing for export, a sector which consists mainly of low-value-added electronics exports; electronics account for over two-thirds of exports but 85-90% of their value is estimated to be imported. Merchandise exports fell 22% in 2009 to $38.4 billion from $49.1 billion in 2008.

By the middle of 2009 the Department of Labour (DOLE) had noted 164,831 manufacturing workers in 717 establishments affected by the crisis - consisting of 63,216 'displaced' and 101,615 forced into 'flexible work arrangements'. These manufacturing workers accounted for some 85% of all workers affected by the crisis, with the remainder found in real estate (3.3%), mining (2.5%), trading (1.0%) and others.

Overseas worker remittances from some nine million Filipinos abroad totalled $18.8 billion in 2010 and are equivalent to some 10% of GDP. Monthly year-on-year growth in remittances was reaching peaks of 35-40% in the period 2005-2008 but this fell to just between 7-10% from 2009 to the present and at one point even slowed to just 0.1% growth (January 2009). Remittances from the US in particular actually fell by some 6.4% or $502 million in 2009, from $7.83 billion in 2008 to $7.32 billion in 2009; this only weakly recovered to $7.86 billion in 2010. It is also increasingly likely that the limits of the migration-and-development hype are being reached, with the share of remittances in GDP apparently reaching a plateau in the last five years, especially with so many other countries having been pushed onto the migration-and-development bandwagon.

Foreign direct investments are generally erratic on a year-on-year basis but, nonetheless, the decline after 2008 is evident. Total foreign equity investment was at $2.0 billion in 2007 - largely in manufacturing, utilities and mining - then fell to $1.2 billion (2008), $1.7 billion (2009) and $848 million (2010).

All of this was reflected in overall economic growth rates, with GDP growth falling from 7.1% in 2007 to 3.7% (2008) and 1.1% (2009). The impact of the crisis was also evident in a 2.2% quarter-on-quarter GDP contraction in the first quarter of 2009, which was the most drastic contraction since seasonally-adjusted quarterly growth rates were recorded. There has been a notable rebound to 7.3% annual GDP growth in 2010 but this has been largely attributed to temporary election-related spending and the unsustainable pseudo-recovery globally following massive stimulus programmes.

Overall unemployment also increased by 244,000 to 4.4 million in 2009 (from 4.2 million in 2008) and the number of underemployed by 357,000 to 11.1 million (from 10.7 million in 2008). Gross domestic fixed capital formation meanwhile fell from 14.9% of GDP in 2008 to 12.9% in 2009. The national government deficit also drastically worsened from being equivalent to 0.9% of GDP in 2008 (at PhP68.1 billion) to 3.9% of GDP in 2009 (PhP298.5 billion).

Signs of worse to come

The recent US credit rating downgrade is just the latest sign that the global crisis which erupted in 2008 has not been resolved and will continue for years to come. The Philippine government and its economic managers are unfortunately oblivious to this reality in their medium-term planning and budgeting for 2012, which undermines the country's prospects for development.

The historic credit rating downgrade of the US was dramatic, sending a shock through global financial markets, but still only symptomatic of a deeper problem. The world economy is still struggling to find sources of growth to replace the merely debt- and speculation-driven growth of the 1990s and early 2000s. The US downgrade is at the same time significant for highlighting the unravelling sovereign debt crisis which is the next financial flashpoint for the world economy.

A semblance of stability and recovery was manufactured in the last two years only because of massive fiscal and monetary stimulus especially by the big economic powers. The total value of this stimulus reaches $10.8 trillion if we count all new financial support measures including bailouts, public loans and guarantees, public assumption of private sector debt and other liabilities, and nationalisation of private capital - this is equivalent to almost a fifth of global GDP. The US's two rounds of 'quantitative easing', for instance, totalled $2.3 trillion.

The benefits, however, are clearly shortlived. The global economy is slowing again as of the third quarter of 2011, with world economic growth projected by the IMF in its September 2011 World Economic Outlook to be just 4.0% in 2011 compared to 5.1% last year.

The slowdown is also not just in the advanced capitalist economies but also in the supposed alternative growth centres - China's growth is projected to fall from 10.3% in 2010 to 9.5% in 2011, India's from 10.1% to 7.8%, and Brazil's from 7.5% to 3.8%; only Russia, which is less than one-fourth the size of China, is seen to grow slightly from 4.0% to 4.3%. These countries are still dependent on the major capitalist centres for a large part of their demand, exports and investments, aside from also having their own internal economic troubles.

Indeed, the shortlived benefits have created new fiscal and financial sector imbalances. Sovereign debt problems are particularly marked, with advanced capitalist countries facing huge burdens that are leading to greater austerity and further depression of growth. The IMF also estimates that US gross public debt is going to reach $15.2 trillion or 99.5% of GDP in 2011. Other important economies have even bigger projected debt burdens in 2011, including Japan (229.1% of GDP), Greece (152.3%), Italy (120.3%) and Ireland (114.1%). For others it is relatively smaller but still considerable: France (87.6%), the United Kingdom (83.0%), Germany (80.1%) and Spain (63.9%).

Growth remains not just imbalanced but weak around the world. Economic activity is slowing and the risks are, if anything, increasing, as the US downgrade, to take a particular instance, shows. The situation is still very fragile despite repeated claims in the last two years of the world having dealt with the crisis and now slowly, if unevenly, recovering.

The biggest dampener on growth is the persistently high global unemployment and persistently weak productive investment (i.e., non-financial). At the same time, the mounting sovereign debt troubles mean fiscal austerity which further dampens demand especially in the US, Europe and Japan. This also makes the political situation in these countries volatile. The clash in early August between the Republican and Democratic parties on the US debt ceiling is only just one example, and is less explosive than the upsurge of protests by citizens across Europe, the Middle East and North Africa.

The US credit downgrade is meaningful not yet for any immediate impact but for possibly marking the start of another severe economic slowdown or new stage of recession there. A worsening of the US economic situation will quickly impact on the Philippines in terms of weaker remittances, lower exports, and more problematic investments.

The problem with the US downgrade is not just in the immediate financial terms of an impact on interest rates, the foreign exchange rate, Philippine debt and the stock market. More importantly, it shows the depth of the long-term problems of the US and the other advanced capitalist powers. They are all facing slowing growth due to public debt troubles, austerity, high unemployment and the lack of productive domestic investment opportunities. Other economies such as the so-called BRICS (Brazil, Russia, India, China and South Africa) and even the Philippines have roughly the same problem and every country is looking for sustainable sources of growth.

All is not well for the world economy and this is the single most important economic feature in the current world situation. The Philippine government's Philippine Development Plan (PDP) 2011-2016 and national government budget for 2012 however seem oblivious to this and assume a world economic situation that is long past. They are anchored on an export-oriented and foreign-investment-led model that is no longer viable.

The PDP 2011-2016 is the government's development blueprint and cannot but strongly reflect the dominant economic and political forces in the country. And because these elite forces remain entrenched, the government's economic plan cannot but be recycled and anti-development. The plan merely affirms and continues past policies of globalisation by now familiar to all: trade and investment liberalisation, privatisation and deregulation. There are only two additional stresses: first, more extensive and deeper privatisation (through public-private partnerships, or PPPs), and, second, covering up failures of globalisation with multi-billion-peso anti-poverty gimmickry (especially conditional cash transfers, or CCTs).

Privatisation is intensified with even greater incentives for big business, especially foreign investors, through so-called regulatory risk guarantees. Its coverage is also greatly expanded into health, education and housing - reducing these vital social services into opportunities for profit and foreshadowing making them unaffordable and inaccessible to the country's poor and poorest. It does not seem that any area of the economy will be spared PPPs and the administration's list is long: power, telecommunications, information technology, highways, roads, railways, ports, airports, transport systems, irrigation, canals, dams, water supply, sewerage, markets, warehouses, slaughterhouses, government buildings, land reclamation, tourism and industrial estates.

The administration of President Benigno Aquino and its PDP is forced to acknowledge the unavoidable consequences of decades of globalisation: low and volatile growth, record joblessness, falling incomes and growing poverty. However, rather than deal with the roots of the problem, it instead seeks to merely cover up for these with a multi-billion-peso CCT programme that is expensive, debt-driven and unsustainable aside from being prone to abuse, patronage and corruption. There are also already reports of CCTs being used less for anti-poverty than counterinsurgency.

And more than just relief without reform, the CCT programme actually seeks to use the relief precisely to cover up for the lack of reform. Families may receive PhP9,000 to as much as PhP15,000 a year for a maximum of five years but the question remains: after five years will they have jobs, steady incomes, steady livelihoods and decent public education, health and housing?

The sooner the country's economic directions are focused on building the domestic economy, the better. Job creation and poverty reduction will not happen if the same failed globalisation policies of previous administrations are retained. There must instead be more democratic income, asset and wealth reform and greater assertions of economic sovereignty in the country's international trade and investment relations.        

Sonny Africa is head of research at IBON Foundation, a research, education and advocacy organisation based in the Philippines.

*Third World Resurgence No. 253, September 2011, pp 34-37