erd working paper no. 64 - adb

23ERD WORKING PAPER SERIES NO. 64

ERD Working Paper No. 64

Empirical Assessment of Sustainabilityand Feasibility of Government Debt:

The Philippines Case

DUO QIN, MARIE ANNE CAGAS, GEOFFREY DUCANES, NEDELYN MAGTIBAY-RAMOS

AND PILIPINAS QUISING

February 2005

Duo Qin is an economist, Marie Anne Cagas and Geoffrey Ducanes are consultants, and Nedelyn Magtibay-Ramos andPilipinas Quising are economic analysts in the Economics and Research Department, Asian Development Bank. Theauthors thank W. Bikales, X-L. Liu, R. S. Ondrik, and other ADB colleagues for valuable comments on an earlier draft.

Asian Development BankP.O. Box 7890980 ManilaPhilippines

©2005 by Asian Development BankFebruary 2005ISSN 1655-5252

The views expressed in this paperare those of the author(s) and do notnecessarily reflect the views or policiesof the Asian Development Bank.

FOREWORD

The ERD Working Paper Series is a forum for ongoing and recentlycompleted research and policy studies undertaken in the Asian DevelopmentBank or on its behalf. The Series is a quick-disseminating, informal publicationmeant to stimulate discussion and elicit feedback. Papers published under thisSeries could subsequently be revised for publication as articles in professionaljournals or chapters in books.

CONTENTS

Abstract vii

I. Introduction 1

II. The Fiscal and Government Debt Situation in the Philippines 1

III. Theories of Government Debt Sustainability and Feasibility 5

IV. Empirical Tests of Government Debt Sustainability and Feasibility 8

V. Conclusions 19

Appendix: Data Description and Sources 20

References 21

ABSTRACT

This paper assesses empirically the sustainability and feasibility of thegovernment debt in the Philippines using the No Ponzi Game criterion. Bothhistorical data and forecasts generated by a quarterly macroeconometric modelof the Philippines are used in the assessment. Stochastic simulations are carriedout to mimic future uncertainty. The test results show that, up to the endof the present administration in 2010, the Philippine government debt isnot sustainable but weakly feasible, that the feasibility is vulnerable to majoradverse shocks, and that simple budgetary deficit control policy is inadequatefor achieving debt sustainability or strengthening feasibility.

I. INTRODUCTION

The huge public debt in the Philippines has raised serious and growing concerns about theability of the Philippine government to manage its debt obligations and the long-runsustainability of government fiscal policy. Several studies done on the Philippines have shown,

by detailed analyses of the fiscal position over recent years, how the country’s public debt hasbeen fluctuating from sustainable to unsustainable levels (see e.g., Paderanga 1995 and 2001,and Manasan 1997 and 2004).

The present paper extends these studies by subjecting the national government debt positionup to 2014 to an array of formal empirical tests based on available theories of long-run sustainabilityand feasibility of public debt. Two branches of theories are considered. One uses the No PonziGame (NPG) condition as the criterion for long-run sustainability within the framework of an infinite-horizon representative agent model (see Chalk and Hemming 2000, and Bergman 2001). The otherestablishes, within the framework of a stochastic overlapping generations model, the feasibilityconditions for Ponzi games in a situation where the government manages its bond portfolio toa lower debt rate than the market rate. (A government is said to be playing a Ponzi game whenit just keeps on paying old debt by issuing new ones. However, the government cannot continuouslyengage in a Ponzi scheme: its debt cannot grow indefinitely.) As both theories are explicitly expressedin terms of future debt and interest rate trends, stochastic forecasts are generated from a quarterlymacroeconometric model of the Philippines to extend the testing period to 22 years, i.e., 1993Q1–2014Q4. In addition, several shocks are also introduced during the forecasting period to examinehow vulnerable the government debt situation would be in the face of significant adverse risks.

The rest of the paper is structured as follows: Section II briefly describes the fiscal and publicdebt situation in recent years. Section III outlines the testable theories of public debt sustainabilityand feasibility. Section IV reports the empirical test results. The last section concludes.

II. THE FISCAL AND GOVERNMENT DEBT SITUATION IN THE PHILIPPINES

Chronic deficits have marked the Philippine government’s fiscal position since the early yearsof the country’s development.1 There was brief respite in the mid-1990s when the government’s fiscalposition improved enough to register a surplus of less than 1 percent for the period 1994-1997.The occurrence of the Asian financial crisis, however, pushed the fiscal balance back to the negativeplane when it fell to –1.9 percent of gross domestic product (GDP) in 1998, and then plummetedto –5.2 percent in 2002. In 2003, the deficit stood at 4.6 percent of GDP (see Figure 1).

1 In the 1960s, government was in deficit 8 out of the 10 years and fiscal deficit averaged about 1 percent of GDP forthe decade. In the 1970s it was in deficit 7 out of the 10 years and the fiscal deficit averaged about one-half of 1percent of GDP. In the 1980s the government was in deficit all 10 years and fiscal deficit averaged about 2.5 percentof GDP.

2 FEBRUARY 2005

EMPIRICAL ASSESSMENT OF SUSTAINABILITY AND FEASIBILITY OF GOVERNMENT DEBT: THE PHILIPPINES CASE

DUO QIN, MARIE ANNE CAGAS, GEOFFREY DUCANES, NEDELYN MAGTIBAY-RAMOS, AND PILIPINAS QUISING

The deterioration of the fiscal balance is mostly due to shortfalls in government revenues,especially tax revenues (which accounts for more than 85 percent of the total). The nationalgovernment’s revenue efforts have declined from a peak of 19.9 percent of GDP in 1994 to 14.6percent of GDP in 2003 (see Figure 2). From its peak of about 17 percent in 1997, the tax efforthas slid to 12.5 percent in 2003. Government expenditures, on the other hand, have been fairlystable, averaging about 18 percent of GDP for the period 1980-2003. Its growth has been keptto a minimum and has been on a downward trend since 2000. In particular, primary spending (i.e.,

1982

FIGURE 1GROWTH OF GDP AND RATIO OF FISCAL BALANCE TO GDP

8

6

4

2

0

-2

-4

-6

-8

-10

Perc

ent

1980 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

GDP Growth Fiscal Balance/GDP

Sources: National Statistical Coordination Board; Bureau of Treasury.

-5

25

20

15

10

5

0

-10

Perc

ent

19831980 1986 1989 1992 1995 1998 2001

Fiscal DeficitExpendituresPrimary Spending

RevenuePrimary Deficit

FIGURE 2FISCAL AGGREGATES

Source: Bureau of Treasury.


SECTION IITHE FISCAL AND GOVERNMENT DEBT SITUATION IN THE PHILIPPINES

2 Of note is the fact that infrastructure spending of the national government has remained repressed and has not exceeded2 percent of GDP. Indeed, the brunt of fiscal adjustment has primarily been absorbed by infrastructure and other developmentspending—expenditures developing countries like the Philippines badly need.

FIGURE 3NATIONAL GOVERNMENT EXPENDITURES, 2003 (PERCENT)

16

14

27

10

33

Personal Services

Interest Payments

Others

Maintenance and OperatingExpenses

Capital Outlays

Source: Department of Budget and Management.

national government spending net of interest payments) has been reined in, with its share to GDPfalling from 16.3 percent in 1999 to 14.0 percent in 2003. Capital expenditures have been reduced:after reaching its peak of more than a quarter of total expenditures in the early 1980s, it is downto 13.5 percent in 2003.2 In contrast, the amount spent for servicing of debt escalated. From anaverage of 4.6 percent in 1975-1979, it went up to about 7 percent in 1980-1983, ballooned toalmost 25 percent in 1984-1989, and has averaged more than 24 percent in 2000-2003 (Figure3).

A major threat to the national government’s fiscal position is the large stock of nationalgovernment debt and the associated costs of servicing that debt. In the 1970s and 1980s, largedebt inflows were used to stimulate the economy and to provide a cushion against external shocksthat had often plagued the economy in the early years of its development. Then in the 1990s italso became a means to service the liabilities of ailing government agencies. By this time, domesticresources have become a significant part of Philippine public debt reflecting the government’sstruggle to service its foreign debt while incurring fiscal deficits (Figure 4). From a peak of PHP95.4billion in 1994, primary balance (i.e., total revenues less nondebt expenditures) went into deficitin 2002 (PHP24.9 billion) before registering a surplus of PHP26.5 billion in 2003.

4 FEBRUARY 2005



The national government’s total outstanding debt stood at PHP3.36 trillion (which is 78 percentof GDP) at the end of 2003. Including contingent liabilities, this would amount to about PHP4.1trillion (or 94.5 percent of GDP). The consolidated public sector debt is much higher at PHP5.9trillion—a whopping 137 percent of GDP. All three are on an upward trend (Figure 5).

FIGURE 4NATIONAL GOVERNMENT OUTSTANDING DEBT

Domestic

1,000

4,000

3,500

3,000

0

500

In b

illio

n pe

so

19881986 1990 1992 1994 1996 1998 2000

1,500

2,000

2,500

2002

Foreign

Source: Bureau of Treasury.

FIGURE 5CONSOLIDATED PUBLIC SECTOR DEBT AND NATIONAL GOVERNMENT DEBT

NG Outstanding Debt

Consolidated Public Sector DebtNG Total Debt

19881986 1990 1992 1994 1996 1998 2000 2002

In b

illio

n pe

so

3,000

4,000

5,000

6,000

7,000

2,000

1,000

0

Note: NG means national government. Simple regression of the consolidated publicdebt on the NG outstanding debt using data from 1993 onward shows a relativelyconstant relationship between the two, with the slope coefficient estimate of 1.7.

Sources: CEIC Data Company Ltd., Bureau of Treasury.


SECTION IIITHEORIES OF GOVERNMENT DEBT SUSTAINABILITY AND FEASIBILITY

The growth of public debt has been very high, averaging above 15 percent between 1999and 2003. The national government debt has been growing at a higher rate for the same period,with the increase largely attributed to the continuing national government deficits. However, anequally sizeable amount (about 37 percent) of the increase in debt is due to nonbudgetary itemsand assumed liabilities of government corporations (see Figure 5), underscoring the continuouspractice of condoning inefficiency and irresponsibility of government-owned and controlledcorporations (GOCC).

Warnings of the public debt problem have recently been voiced at an increasing volume byeconomists and institutional investors in the Philippines as well as internationally (e.g., see De Dioset al. 2004). However, most of these are based on case analyses rather than rigorous empirical tests.This paper attempts to fill in this gap.

III. THEORIES OF GOVERNMENT DEBT SUSTAINABILITY AND FEASIBILITY

The key consideration for any government to resort to debt is the availability and feasibilityof debt financing. This consideration underlies the theoretical approach to determine the debtsustainability on the lenders’ constraint, which is commonly expressed by the present value constraint(PVC).

Under the highly idealistic assumptions of an economy with one sector, in steady state andon a dynamically efficient growth path, the PVC-based theory of government debt results in the long-run condition of No Ponzi Games. The theory starts from the government debt accounting identity.With respect to the Philippine case, this identity results in:

1111 ++++ ++= ttttt LDBqB (1)

where Bt denotes the government debt at time t; qt the one-period interest rate factor, e.g.,

tt rq += 1 , with rt being the equilibrium interest rate with respect to the marginal rate of substitutionderived from the optimization of consumers’ preference function; Dt is the primary fiscal deficit,i.e., budget deficit excluding interest payment; and Lt denotes the off-budget account deficit, duemainly to the contingent liabilities of GOCCs.3 Forward substitution of (1) yields:

( )

∏∑

∏=

+

+

∞→

∞

=

=+

+ ++−

= ττ

τ

1

1

1

lim

jjt

t

jj

iit

jtt

q

B

q

LDB

(2)

Since the first term on the right-hand side of (2) is expected to balance out in general, the lenders’constraint results in the NPG condition:

3 Notice that the term Lt is absent in the standard debt accounting identity, where only net debt is considered (e.g., seeLebow 2004).

6 FEBRUARY 2005



0lim

1

=

∏=

+

+∞→ τ

ττ

jjt

t

q

B

(3)

The limit in (3) defines the necessary condition for the long-run debt sustainability. It impliesthat government debt cannot grow faster than the average interest rate in the long run.

A popular alternative is to examine the sustainability condition in terms of the debt-to-incomeratio, instead of debt alone, based on the argument that all the budget variables are highly dependenton the macroeconomic situation (see for example Cuddington 1996). Let us define the debt ratioby ttt YBb /= ; the primary deficit ratio by ttt YDd /= ; and the off-budget account deficit ratio by

ttt YLl /= , where Yt is the aggregate income and often represented by GDP or gross national product(GNP). Equation (2) can be rewritten as:

( )( ) τ

τ

τ += +

+

∞→

∞

=+

= +

+ ∏∑ ∏ ++−

= t

j jt

jt

jjt

j

i it

itt b

q

gld

qg

b11 1

lim (4)

where gt is the growth factor: ttt YgY 11 ++ = . The NPG condition corresponding to (3) becomes:

0lim1

=+= +

+

∞→∏ τ

τ

τ tj jt

jt bq

g(5)

Equation (5) highlights the importance of the dynamic efficiency assumption, since it is necessaryto have the interest rates larger than the economic growth rates for the nontrivial case of 0≠+τtb

in (5).4

Empirical tests of the debt sustainability conditions (3) or (5) entail knowledge of the time-series properties of the variables in these equations, since these conditions require us to infer theasymptotic properties of the limit functions from finite data samples. In particular, it is crucial toknow the time-series properties of the debt or debt ratio series, as the interest rate and the economicgrowth rate are normally expected to be either stationary or nontrended random walk.5 FollowingBergman (2001), we assume that the government debt be generated by a first-order autoregressive,i.e., AR(1), process:6

∑∑−

=−

−

=

−

++=

++=1

0101

1

010

110

t

kkt

ktt

k

k

ttt

B

BB

εαααα

εαα

(6)

4 The assumption is embodied in the infinite-horizon representative consumer model (Bohn 1995).5 A number of empirical tests are built on the time-series relationship between the fiscal deficit and the debt series

(Quintos 1995, Bohn 1998). However, this approach is not applicable here since there is an off-budget deficit componentin the Philippine government debt.

6 This is a testable assumption. The results below can be extended to an AR(n) process when n>1.


where et is a zero-mean stationary process. When 11 <α , the NPG condition (3) is satisfied. When

the debt series is nonstationary, i.e., 11 ≥α , the NPG condition (3) can be examined by combiningit with (6):

++

= ∑∑∏∏

−+

=−+

+−+

=

=+

∞→

=+

+∞→

1

0101

1

010

11

1limlim

τ

ττ

τ

ττττ

τεαααα

t

kkt

ktt

k

k

jjt

jjt

t Bqq

B

(7)

The NPG condition now becomes:

0lim,0lim

1

1

1

010

==

∏∏

∑

=+

∞→

=+

=∞→ τ

τ

ττ

τ

τ

ααα

jjt

jjt

k

k

qq (8)

Condition (8) requires that the degree of explosiveness in the roots of the debt series beno larger than what the compounding interest rates could dampen out in the long run.

The same approach applies if empirical tests are based on the debt ratio. Starting from anAR(1) process:

ttt bb νββ ++= −110 (9)

where νt is a zero-mean stationary process, and combining it with (5):

++

= ∑∑∏∏

−+

=−+

+−+

== +

+

∞→+

= +

+

∞→

1

0101

1

010

11

limlimτ

ττ

ττ

ττ

τ

τνββββ

t

kkt

ktt

k

k

j jt

jtt

j jt

jt bq

gb

q

g, (10)

we obtain the following convergence conditions:

0lim,0lim 110

101

== ∏∑∏= +

+

∞→== +

+

∞→

ττ

τ

ττ

τβββ

j jt

jt

k

k

j jt

jt

q

g

q

g(11)

It is a widely known fact that government bonds normally enjoy significantly lower interestrates than the market equilibrium rates. Moreover, many governments utilize the bond market toreduce their debt interest payments by issuing bonds of different maturities to roll over governmentdebt (Bohn 1995 and 1998). As a result, the aggregate interest rate of the government bond portfoliois normally lower than the growth rate of the economy, making the simple NPG scheme (5)implausible (Blanchard and Weil 2001). Under this situation, the issue then becomes to what extentthe government can violate the present value budget constraint and make it feasible to play debtPonzi games.

SECTION IIITHEORIES OF GOVERNMENT DEBT SUSTAINABILITY AND FEASIBILITY

8 FEBRUARY 2005



In a recent paper, Barbie et al. (2004) investigate this issue by means of the stochasticoverlapping generations model. They establish the necessary and sufficient conditions of thefeasibility of government debt Ponzi games under a scenario where the government utilizes rolloverbond issuance strategies.7 Their conditions essentially boil down to the nondivergence of the ratioof the aggregate interest rate of the public bond portfolio to the economic growth rate underall kinds of stochastic shocks:

∞<∏= +

+

∞→

τ

τ 1 )(

)(lim

j jt

jtb

zg

zq(necessary condition) (12)

∞<≤

∑ ∏∞

= = +

+ φτ

1 1 )(

)(

jj

j jt

jtb

zg

zq (necessary and sufficient condition) (13)

where bq denotes aggregate interest rate factor of the government bond portfolio, z denotesthe state of random shocks, and f is a finite positive bound representing the credit constraintfaced by the government. Conditions (12) and (13) show that government Ponzi games wouldnot be possible unless the government could obtain debt finance at a lower interest rate thanthe average economic growth rate in the long run. Barbie et al. (2004) refer to the ratio, gqb / ,as the real interest rate of debt payment, and to φ as setting a fixed upper bound for the debtratio. The latter is not difficult to see if we assume (5) converges to a positive number insteadof zero when the interest rate is the lower-than market bond rate, i.e.:

∏∏= +

+

∞→+

∞→+

= +

+

∞→=⇒>=

τ

ττττ

τ

τλλ

11

limlim0limj jt

bjt

ttj

bjt

jt

g

qbb

q

g, (14)

provided that ∏=

+

∞→≠

+

τ

τ 1

0limj

bjt

jtq

g.

IV. EMPIRICAL TESTS OF GOVERNMENT DEBT SUSTAINABILITY AND FEASIBILITY

In this section, empirical tests are conducted on the Philippine national government debt. Ideally,the tests should be conducted on the consolidated public debt. But this series is available only atannual frequency. As the consolidated public debt is roughly 1.7 times the national government debt(see the footnote in Figure 5), the conclusions that we draw from the empirical tests on the nationalgovernment debt should be also applicable to the consolidated public debt.

Almost all the empirical tests of government debt sustainability in the literature have beencarried out using historical time-series data (Bohn 1998, Chalk and Hemming 2000). However, amajor weakness of these tests is that the past results may not be directly projected into the future,where all the PVC theories are really focused on. This can be especially worrisome considering thatthe dynamics of the government debt tends to be highly susceptible to the macroeconomicenvironment in a small and open economy like the Philippines.

7 Notice that the condition for feasibility is weaker than that for sustainability (Barbie et al. 2001).


Here, we conduct the tests using a quarterly time-series sample combining historical data withfuture data forecasted by a quarterly macroeconometric model of the Philippines built by the AsianDevelopment Bank (we refer to this model as the ADB Philippine model). The model contains over80 variables and is estimated using the data sample from 1990Q1 to 2004Q2, although some dataseries are shorter, e.g., the government fiscal account series, including the debt series to be usedin our tests, start from 1993Q1 (see Ducanes et al. 2005 for more detailed description of the model).The forecast period is 2004Q3–2014Q4. Forecast values of some exogenous variables are partly basedon forecasts from the OECD Economic Outlook and Oxford Economic Forecasting World Model; otherwise,the forecasts of an exogenous variable are extrapolated from its present time path. During the forecastperiod, a large number of stochastic simulations are computed using the bootstrap method for shockgeneration.8 This method enables us to empirically mimic the z component of equations (12) and(13) in accordance with the random patterns of the ADB Philippine model residuals. Quantiles arecalculated from the large set (200 in our experiments) of the simulation results to illustrate thedistribution of the stochastic forecasts. In particular, values at 2 and 97 percent quantiles are usedas the approximate 95 percent confidence band of the simulation mean values. Below, we refer tothe data series of the simulation mean values as the “mean” data series and the other two as the“upper” and “lower” data series, respectively. Figure 6 shows the debt and debt ratio series withthese forecasting bands.

Let us first examine the simple time-series properties of the government debt and debt/GDPratio series respectively. As shown from the unit-root test results in Table 1, both series exhibitstrong nonstationary properties, with the debt series showing certain explosive tendency. The testresults are also reflected in the ensuing regression analysis. We start by running an AR(4) modelfor the debt and debt ratio series in order to test the assumption of AR(1) in equations (6) and

8 The method randomly draws shocks from single equation residuals over a specified historical sample period and addsthem to each forecast period. For more details, see Pierse (2001).

FIGURE 6DEBT, , AND DEBT/GDP RATIO, ; HISTORICAL DATA PLUS FORECASTS BY STOCHASTIC SIMULATIONSB Bt t

10000000

8000000

6000000

2000000

4000000

01993 1996 1999 2002 2005 2008 2011 2014

Perc

ent

4

3.5

3

2.5

2

1.51993 1996 1999 2002 2005 2008 2011 2014

BtBt

Note: The solid lines are the mean data series; the dotted lines are the upper and the lower series forming approximately 95%confidence interval.

SECTION IVEMPIRICAL TESTS OF GOVERNMENT DEBT SUSTAINABILITY AND FEASIBILITY

10 FEBRUARY 2005



(9). As visible from Table 2, the assumed AR(1) process is accepted for the debt ratio series inboth the full-sample and subsample estimations, whereas the debt process is captured by an AR(3)in the full-sample estimation and by an AR(1) only in the subsample estimations. Moreover, the one-lag coefficient estimates for the debt ratio exhibit stronger time invariance than those for the debtseries, conforming to what was expected in the previous section.

In view of the regression results, we have conducted the sustainability tests on the debt ratio

only. It is discernible from the recursive 1β̂ of (9) in Figure 7 that this coefficient drifts below

unity in the aftermath of the Asian financial crisis and converges to unity during the forecastingperiod of the sample, even though the unit value is within the 95 percent band for the entire sample.

Considering the finite-sample uncertainty in 1β̂ , two versions of condition (11) are tested, one using

the full sample estimate 1β̂ and the other the recursive jt +,1β̂ :

∏∏∏=

+= +

+

= +

+ττ

ττ

ββ1

,11

11

ˆ,ˆj

jtj jt

jt

j jt

jt

q

g

q

g(11’)

The condition relating to the intercept term is disregarded here because its estimates are insignificant,as shown in Table 2.

In the NPG theories, government bonds are assumed to bear the same rate as the equilibriuminterest rate. However, this assumption seldom holds in reality. Thus, in order to examine the differenteffects of interest rates, we consider three rates: market lending rate, 91-day Treasury bill (TB)rate, and government debt portfolio rate derived from the government debt interest payment andthe debt series. As seen from Figure 8, the government rates are remarkably lower than the marketrate. More interestingly, the derived portfolio rate is far smoother than the TB rate, possibly reflectinggovernment efforts in debt portfolio management to minimize and stabilize the debt cost payment.

TABLE 1UNIT ROOT TESTS BY AUGMENTED DICKY-FULLER (ADF) TEST

DEBT SERIES

AUGMENTED LAGS ADF-TEST ��FOR YT-1 T-VALUE OF SIGNIFICANCE LEVELLONGEST LAG OF LONGEST LAG

3 2.03 1.01 -0.52 0.602 2.00 1.01 4.49 0.001 4.78 1.02 -1.55 0.120 4.52 1.01

DEBT RATIO SERIES

3 -0.74 0.98 0.91 0.372 -0.66 0.99 -1.83 0.071 -0.86 0.98 -0.06 0.950 -0.88 0.98

Note: The null hypothesis is ��= 0. The critical values of ADF tests are: -2.90 at 5% and -3.51 at 1%. The sample covers 1994Q1- 2014Q4. Seasonal dummies are added in the debt ratio test, as the series exhibits significant seasonal feature inherent from GDP.


1996

1.5

1.0

0.5

1998 2000 2002 2004 2006 2008 2010 2012 2014

FIGURE 7RECURSIVE ESTIMATES OF �� in Equation (9)

Note: The dotted lines are 95% confidence intervals.

TABLE 2AR(4) ESTIMATIONS FOR THE MEAN SERIES OF DEBT AND DEBT RATIO

COEFFICIENT LAG 1 LAG 2 LAG 3 LAG 4 INTERCEPT

Full Sample: 1994Q1 to 2014Q4

Debt 0.9410 0.5521 -0.5482 0.0630 26180(0.1087)* (0.1485)* (0.1516)* (0.1209) (13810)

Debt Ratio 0.9950 -0.2063 0.2951 -0.1004 0.0474(0.1102)* (0.1511) (0.1514) (0.1102) (0.0632)

Subsample: 1994Q1 to 2009Q4

Debt 1.0037 0.2291 -0.1526 -0.0629 8866(0.1243)* (0.1783) (0.1807) (0.1274) (13270)

Debt Ratio 0.9875 -0.0895 0.1760 -0.0874 0.0401(0.1274)* (0.1745) (0.1749) (0.1271) (0.0776)

Historical data: 1994Q1 to 2004Q2

Debt 0.9432 0.0138 0.0968 0.0117 -47302(0.1544)* (0.2053) (0.2064) (0.1624) (25420)

Debt Ratio 1.0462 -0.0173 0.1146 -0.1995 0.1385(0.157)* (0.225) (0.2272) (0.1582) (0.1339)

Note: The statistics in parentheses are standard errors. Those marked by * are significant at 5%. Seasonal dummies are addedin the AR(4) model for the debt ratio.


12 FEBRUARY 2005



To check whether the chosen rates represent adequately the market rates for the government bonds,Figure 9 plots these rates together with the JP Morgan bond yield of the weighted Philippinesovereign bonds for the period of 2000Q1–2004Q2. Discernibly, the 91-day TB rate and the portfoliorate are a bit lower than the JP Morgan bond yield while the lending rate is higher. This suggeststhat the test results from the three rates should provide us with a fairly good confidence region.

Three pairs of the series in (11’) are calculated, each using one of the three interest rates.The results are plotted in Figure 10. Noticeably, the results using the full-sample coefficient estimateshow significantly higher values than those using the recursive results. This is due to the fact that

1β̂ exceeds its subsample estimates for over one third of the sample period, as shown in Figure

7. However, the full sample 1β̂ should be relatively reliable for out-of-sample inference based on

the recursive results as it converges to a highly constant value with the sample size. Notice thatthe lending rate appears to provide the only case where the NPG condition is likely to be satisfied

4

8

FIGURE 8INTEREST RATES

1993

20

15

10Perc

ent

0

5

1996 1998 2000 2002 2005 2007 2009 2011 2014

PortfolioTB rateLending

7.6

7.0

6.3

5.7

5.01993 1996 1998 2000 2002 2005 2007 2009 2011 2014

1993 1996 1998 2000 2002 2005 2007 2009 2011 2014

16

12

Perc

ent

4

01993 1996 1998 2000 2002 2005 2007 2009 2011 2014

12

20

16

Perc

ent

8

Per

cent

Mean series Portfolio rate

TB rate Lending rate

Note: TB rate denotes 91-day Treasury bill rate. The solid lines are the mean data series; the dotted lines are the upper andthe lower series forming approximately 95% confidence interval.


Portfolio RateLending Rate91-Day TB RateJP Morgan Asia Bond Weighted Yield

of Philippine Sovereign BondsPe

r ce

nt

0

12

16

Mar-01 Sep-01

4

8

Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04

FIGURE 9INTEREST RATES AND YIELD OF GOVERNMENT BONDS

Note: JP Morgan Asia Bond Weighted Yield of Philippine Sovereign Bonds comes fromDatastream.

in the infinite future, as it gradually decreases with time. The series based on the portfolio ratealso appears to be converging very slowly and is estimated to be approximately zero around 2020,indicating that a government Ponzi game is present during the current regime.9

To directly assess the feasibility of the Ponzi game, we calculate the test series of (12) and(13) using the portfolio rate and the TB rate, respectively, and plot them in Figure 10. The resultsshow that only the necessary condition is satisfied up to 2014, not the sufficient condition. Thisindicates the feasibility of the debt Ponzi game played by the government to be near the borderlineof becoming infeasible for the foreseeable future. Nevertheless, the sufficient condition (13) is likelyto hold for the infinite future as both test series under (12) show a downward trend toward zero.Noticeably, the series for the necessary condition using the portfolio rate shows a visibly slowerconverging speed than that using the TB rate, suggesting that the government bond portfolio facesa tighter credit constraint than short-term bills. This suggests the increasing risk that investors attachto the government bonds of longer terms.

Indeed, practical concerns over the future uncertainty of the debt situation is asymmetric, i.e.,investors are far more watchful of those uncertain situations when the sustainability or feasibilityof government debt is at risk of being violated than vice versa. The worry is warranted by a numberof government debt default crises triggered by adverse shocks in small and open economies withweak governments, such as Argentina and Brazil.10 Since the feasibility test results in Figure 10indicate that the present debt situation in the Philippines is about marginally feasible, we runa model simulation to examine how much an adverse shock would worsen the government debtsituation. The simulation assumes the adverse shock to be a currency crisis occurring in 2005Q4–2006Q4, with the peso-dollar exchange rate devaluing 40 percent in total (see Figure 11).11

9 The next election year is 2010.10 Calvo et al. (2003) demonstrate how a mismatch in the public debt composition led to a crisis in Argentina triggered

by its currency devaluation shock; Razin and Sadka (2002) show how the then forthcoming October 2002 electionin Brazil, which indicates expected regime change, could trigger a debt crisis even though the debt ratio is relativelylow and the fundamentals are sound.

11 The exchange rate is exogenous in the Philippine model. Since the model also assumes world trade demand as exogenousthe simulation does not reflect the possible reactions of this variable to the devaluation shocks.


14 FEBRUARY 2005



0.0

1.5

2.0

0.5

1.0

1996 1998 2000 2002 2004 2006 2008 2012 20142010 1996 1998 2000 2002 2004 2006 2008 2012 20142010

0.3

1.2

1.5

0.6

0.9

0.0

1996 1999 2002 2005 2008 2011 2014

0.2

0.8

1.0

0.4

0.6

0.0

1996 1999 2002 2005 2008 2011 2014

0.2

0.8

1.2

0.4

0.6

0.0

1.0

1996 1999 2002 2005 2008 2011 2014

0

30

40

10

20

Portfolio Rate Sum (Products)

1996 1999 2002 2005 2008 2011 2014

0

45

60

15

30

TB Rate Sum (Products)

FIGURE 10TESTS OF (11’), (12) AND (13)

Portfolio Rate Products TB Rate Products

Full-sample Constant ��

Recursive ��

Portfolio rate Lending rate TB rate

Necessary Condition (12)

Sufficient Condition (13)

Note: It takes about 6 more years for the portfolio rate series in (11') to converge to zero. The solid curves in (12) and (13) are meanseries and the dotted lines are the lower and upper series forming a 95% confidence interval. The portfolio series in (12) would takeabout 4 more years to converge to zero.


Both the sustainability test (11’) and the feasibility tests (12) and (13) are recalculated usingthe simulation results for the forecasting subsample, see Figure 12. In comparison with Figure10, the sustainability results (11’) are now in a visibly worse state, especially with the disappearanceof the downward trend in the series based on the portfolio rate and the lending rate; the test resultsusing the portfolio rate no longer hold for either (11’) or (12), illustrating that the currently feasiblestate of the government debt is indeed fragile and highly susceptible to adverse external shocks.

Given the severity of the government debt situation, we run another simulation to examinewhether fiscal policy adjustments would help improve the situation. We set the simulation as achievingzero deficit by 2010, in accordance with the target of the current government. Experimenting withvarious schemes of curbing fiscal expenditure and raising tax revenue, we find that this targetis achievable by having the tax revenue increase by 11 percent per annum12 together with a cappedannual growth at 5 percent of the government expenditure net of interest payment for six years,i.e., 2004Q4-2010Q3. Figure 13 shows the dynamic path of the budget deficit under this simulationas compared with that of the default simulation (the left panel), and the impact of this simulationon GDP growth as well as interest rate (the right panel). Noticeably, the fiscal target leads to promptdeficit deterioration post the target period and a persistent slowdown of the economy during thetarget period, suggesting that such a severe target is highly likely to incur grave fiscal burdenfor the next regime while depressing the overall economy during the present regime. This kindof policy consequence is hardly surprising in view of the already undersized public sector in thePhilippines, as described in Section II. What is surprising are the simulation test results, whichshow no chance of achieving the sustainability condition or the feasibility condition within thepresent regime (see Figure 14), in spite of the heavy policy cost. Our finding reveals the inadequacyof designing fiscal policy around controlling budget deficit alone in order to achieve debtsustainability. Much more comprehensive policies are required.

12 Notice that increase in tax revenue does not necessarily depend on raising tax rates. In the Philippine case, improvementin taxation efficiency and promotion of faster economic growth are the paramount factors.

50

80

90

60

70

2004 2006 2008 2010 2012 2014

FIGURE 11ASSUMED EXCHANGE RATE DEVALUATION (PESO/US$)

Solid line: default values; dotted line: assumed shock values


16 FEBRUARY 2005



2.0

5.0

3.0

4.0

1996 1998 2000 2002 2014

0.0

1.0

2004 2006 2008 2010 2012 1996 1998 2000 2002 20142004 2006 2008 2010 2012

0.6

1.5

0.9

1.2

0.0

0.3

1996 1999 2002 2005 2008 2011 2014

0.4

1.0

0.6

0.8

0.0

0.2

Portfolio Rate Products

1996 1999 2002 2005 2008 2011 2014

0.3

1.2

0.6

0.9

0.0

TB Rate Products


10

40

20

30

0

1996 1999 2002 2005 2008 2011 2014 1996 1999 2002 2005 2008 2011 2014

15

60

30

45

0


FIGURE 12TESTS OF (11’), (12) AND (13) UNDER EXCHANGE RATE SHOCK SIMULATION

Sustainability Condition (11’)Full-sample Constant �� Recursive ��


Necessary Condition (12) for Feasibility

Sufficient Condition (13) for Feasibility

Note: In this simulation, the exchange rate devalues by 11, 14, 10, and 5 percent for the consecutive four quarters starting from2005Q4; recovers by 5 percent in 2006Q4; drops by 2 percent in 2007Q1; and stays constant afterward. Convergence to zero isunachievable for the portfolio rate series in (11') and (12).


2004 2006 2008 2010 2012 2014

50000

-50000

0

Budget deficit:Solid line: fiscal simulation; dotted line: default values

-100000

-150000

2004 2006 2008 2010 2012 2014

5.0%

0.0%

2.5%

-2.5%

FIGURE 13FISCAL SIMULATION IMPACT: BUDGET DEFICIT AND GDP GROWTH

Differences between fiscal simulation and default:Solid line: GDP growth rate; dotted line lending rate


18 FEBRUARY 2005



1996 1998 2000 2002 20142004 2006 2008 2010 2012

2.0

1.5

1.0

0.5

0.01996 1998 2000 2002 20142004 2006 2008 2010 2012

1.5

1.2

0.9

0.6

0.0

0.3

1996 1999 20052002 20142008 2011

0.0

0.2

0.4

0.6

0.8

1.0

Portfolio Rate Products TB Rate Products

1.2

0.9

0.6

0.0

0.3

1996 1999 20052002 20142008 2011

1996 1999 20052002 20142008 2011

0

10

20

30

40


1996 1999 20052002 20142008 2011

0

15

30

45

60


Sustainability Condition (11’)

FIGURE 14TESTS OF (11’), (12) AND (13) UNDER FISCAL SIMULATION

Full-sample Constant �� Recursive ��


Necessary Condition (12) for Feasibility

Sufficient Condition (13) for Feasibility

Note: In the model simulation, tax revenue is assumed to increase by 11% annually and government noninterest expendituregrowth is controlled to not exceed 5% annually during 2005-2010. It takes about 2 more years for the portfolio rate series toconverge to zero in (11'). It takes over 5 more years for it to converge to zero in (12).


V. CONCLUSIONS

This paper assesses empirically the sustainability and feasibility of the government debt situationin the Philippines. The assessment is based on the NPG criterion and mainly carried out on the debt-to-GDP ratio using both its historical data and forecasts generated by a macroeconometric modelof the Philippine economy.

Our assessment shows that the government debt situation is not sustainable as far as thepresent regime is concerned. One key reason for the existing high government debt is the factthat the government still enjoys lower bond rates than the market lending rates. In other words,the Philippine government bonds are still perceived as having relatively low default risk. Ourassessment also shows that the Philippine government is playing a weakly feasible debt Ponzi game.The debt strategy satisfies the necessary condition but fails the sufficiency condition for feasibilityup to 2014, although it might satisfy both conditions for the infinitely remote future. These resultsindicate the vulnerability of the debt situation.

The vulnerability is further confirmed by our experiment of a shock simulation using thePhilippine model. We find that the government debt no longer satisfies the debt feasibility conditionunder a hypothetical exchange rate crisis. This result shows that the government is facing a highrisk of running into a debt crisis in the event of a major adverse shock to the economy.

Our findings provide strong support to the warnings about the critical government debtsituation and highlight the difficulty and the urgency of improving the government’s fiscal positionin the present Philippine economy. Indeed, our model simulation shows that the simple fiscal policyof medium-term budget deficit control alone is inadequate for reversing the unsustainable debtsituation. This underscores the importance of studying the dynamic interaction between proposedcorrective policies to control public debt and the underlying macroeconomic variables. Any policyaimed at addressing the debt sustainability problem must take into account not just its effect ondebt but also its effect on other economic variables, such as interest rates and the overall economicgrowth, which are themselves factors that determine debt sustainability. What is highly neededare more comprehensive and well-coordinated policies aimed at promoting sustained economicgrowth, increasing resilience to exogenous shocks as well as improving debt management.

The results further point at the nonevadable responsibility that public debt creditors anddonors should take in helping the heavily debt-burdened country to avoid a debt crisis. In particular,large institutional creditors must review lending policies to ensure that their loans and accompanyingprovisions are carefully based on the debt sustainability of the country concerned as derived fromits macroeconomic framework. If loan provisions are not based on market perceived risk or if debtservice can largely be covered by grants, aid, or debt relief, then the government will have littleincentive to pursue sound macroeconomic policies and increase its capacity to pay (IMF and IDA2004).

What would therefore be the optimal policy strategy to attain debt and fiscal sustainabilityfor the current regime? The solution is beyond the scope of the present study, but the results, hopefully,would help policy making move toward the right direction.

SECTION VCONCLUSIONS

20 FEBRUARY 2005



APPENDIXDATA DESCRIPTION AND SOURCES

DATA SERIES DESCRIPTION SOURCE1

91-day Treasury Bill Rate Weighted averages per annum CEIC Data Company Ltd., BSP, ADB(%) Philippine Model

Bond Yield JP Morgan Asia Bond Weighted Yield Datastreamof Philippine Sovereign Bonds

Capital Outlays In billion pesos DBM

Consolidated Public In million pesos CEIC Data Company Ltd., BtrSector Debt

Expenditure In million pesos CEIC Data Company Ltd., Btr

Fiscal Deficit Revenue less expenditure BTr

Gross Domestic Product Current price (in million pesos) CEIC Data Company Ltd.,ADB Philippine Model

Interest Payments Current price (in million pesos) CEIC Data Company Ltd., BTr,ADB Philippine Model

Lending Rate (%) Weighted averages per annum. Annual CEIC Data Company Ltd., BSP,rates are averages of monthly rates. ADB Philippine ModelMonthly rates are annual percentageequivalent of all commercial banks’ actualmonthly interest income on their peso-denominated loans to the totaloutstanding levels of their peso-denominated loans, bills discounted,mortgage contract receivables andrestructured loans.

MOOE In billion pesos DBM

National Government In million pesos CEIC Data Company Ltd., BtrDebt

National Government Outstanding Domestic Debt + CEIC Data Company Ltd., BTr,Outstanding Debt Outstanding Foreign Debt, ADB Philippine Model

Current price (in million pesos)

Personal Services In billion pesos DBM

Portfolio rate (%) Interest payments/National CEIC Data Company Ltd., Btr,government outstanding debt ADB Philippine Model

Primary Deficit Revenue less primary spending BTr

Primary Spending Expenditure less interest payments BTr

Revenue In million pesos CEIC Data Company Ltd., Btr

BTr means Bureau of Treasury.DBM means Department of Budget and Management.1Actual data are sourced from CEIC Data Company Ltd. and/or official sources. Forecast data are sourced from theADB Philippine Model.


REFERENCES

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Blanchard, O.-J., and P. Weil, 2001. “Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games underUncertainty.” The B. E. Journal in Macroeconomics. Available: http://www.bepress.com/cgi/viewcontent.cgi?article=1031&context=bejm.

Bohn, H., 1995. “The Sustainability of Budget Deficits in a Stochastic Economy.” Journal of Money, Credit,and Banking 27:257-71.

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Chalk, N., and R. Hemming, 2000. Assessing Fiscal Sustainability in Theory and Practice. IMF Working PaperNo. WP/00/81, International Monetary Fund, Washington, DC.

Cuddington, J. T., 1996. Analyzing the Sustainability of Fiscal Deficits in Developing Countries. GeorgetownUniversity Working Paper No. 97-01. Available: http://www.worldbank.org/html/dec/Publications/Workpapers/WPS1700series/wps1784/wps1784.pdf.

De Dios, E. S., B. E. Diokno, E. F. Esguerra, R. V. Fabella, Ma. S. Gochoco-Bautista, F. M. Medalla, S. C. Monsod,E. M. Pernia, R. E. Reside, Jr., G. P. Sicat, and E. A. Tan, 2004. The Deepening Crisis: The Real Score onDeficits and the Public Debt. Discussion Paper DP2004-09, School of Economics, University of the Philippines.

Ducanes, G., M. A. Cagas, D. Qin, P. F. Quising, and N. Magtibay-Ramos, 2005. A Small Macroeconometric Modelof the Philippine Economy. ERD Working Paper 62, Economics and Research Department, Asian DevelopmentBank.

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Manasan, R. G., 1997. Fiscal Adjustment in the Context of Growth and Equity, 1986-1997. Discussion PaperSeries 1998-11, Philippine Institute for Development Studies, Manila, Philippines.

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Paderanga, Jr. C., 1995. “Debt Management in the Philippines.” In R. V. Fabella and H. Sakai, eds., TowardsSustained Growth. Institute of Developing Economies, Tokyo.

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No. 16 Emerging Tax Issues: Implications of Globalizationand Technology—Kanokpan Lao Araya

May 2003No. 17 Pro-Poor Growth: What is It and Why is It

Important?—Ernesto M. Pernia

May 2003No. 18 Public–Private Partnership for Competitiveness

—Jesus FelipeJune 2003

No. 19 Reviving Asian Economic Growth Requires FurtherReforms—Ifzal Ali

June 2003No. 20 The Millennium Development Goals and Poverty:

Are We Counting the World’s Poor Right?—M. G. Quibria

July 2003No. 21 Trade and Poverty: What are the Connections?

—Douglas H. BrooksJuly 2003

No. 22 Adapting Education to the Global Economy—Olivier Dupriez September 2003

No. 23 Avian Flu: An Economic Assessment for SelectedDeveloping Countries in Asia—Jean-Pierre Verbiest and Charissa Castillo March 2004

No. 25 Purchasing Power Parities and the InternationalComparison Program in a Globalized World—Bishnu Pant March 2004

No. 26 A Note on Dual/Multiple Exchange Rates—Emma Xiaoqin Fan May 2004

No. 27 Inclusive Growth for Sustainable Poverty Reductionin Developing Asia: The Enabling Role ofInfrastructure Development—Ifzal Ali and Xianbin Yao May 2004

No. 28 Higher Oil Prices: Asian Perspectives andImplications for 2004-2005—Cyn-Young Park June 2004

No. 29 Accelerating Agriculture and Rural Development forInclusive Growth: Policy Implications forDeveloping Asia—Richard Bolt July 2004

No. 30 Living with Higher Interest Rates: Is Asia Ready?—Cyn-Young Park August 2004

No. 31 Reserve Accumulation, Sterilization, and PolicyDilemma—Akiko Terada-Hagiwara October 2004

32 The Primacy of Reforms in the Emergence ofPeople’s Republic of China and India—Ifzal Ali and Emma Xiaoqin Fan November 2004

33 Population Health and Foreign Direct Investment:Does Poor Health Signal Poor GovernmentEffectiveness?—Ajay Tandon January 2005

27

MONOGRAPH SERIES(Published in-house; Available through ADB Office of External Relations; Free of charge)

EDRC REPORT SERIES (ER)

No. 1 ASEAN and the Asian Development Bank—Seiji Naya, April 1982

No. 2 Development Issues for the Developing Eastand Southeast Asian Countriesand International Cooperation—Seiji Naya and Graham Abbott, April 1982

No. 3 Aid, Savings, and Growth in the Asian Region—J. Malcolm Dowling and Ulrich Hiemenz,

April 1982No. 4 Development-oriented Foreign Investment

and the Role of ADB—Kiyoshi Kojima, April 1982

No. 5 The Multilateral Development Banksand the International Economy’s MissingPublic Sector—John Lewis, June 1982

No. 6 Notes on External Debt of DMCs—Evelyn Go, July 1982

No. 7 Grant Element in Bank Loans—Dal Hyun Kim, July 1982

No. 8 Shadow Exchange Rates and StandardConversion Factors in Project Evaluation—Peter Warr, September 1982

No. 9 Small and Medium-Scale ManufacturingEstablishments in ASEAN Countries:Perspectives and Policy Issues—Mathias Bruch and Ulrich Hiemenz,

January 1983No. 10 A Note on the Third Ministerial Meeting of GATT

—Jungsoo Lee, January 1983No. 11 Macroeconomic Forecasts for the Republic

of China, Hong Kong, and Republic of Korea—J.M. Dowling, January 1983

No. 12 ASEAN: Economic Situation and Prospects—Seiji Naya, March 1983

No. 13 The Future Prospects for the DevelopingCountries of Asia—Seiji Naya, March 1983

No. 14 Energy and Structural Change in the Asia-Pacific Region, Summary of the ThirteenthPacific Trade and Development Conference—Seiji Naya, March 1983

No. 15 A Survey of Empirical Studies on Demandfor Electricity with Special Emphasis on PriceElasticity of Demand—Wisarn Pupphavesa, June 1983

No. 16 Determinants of Paddy Production in Indonesia:1972-1981–A Simultaneous Equation ModelApproach—T.K. Jayaraman, June 1983

No. 17 The Philippine Economy: EconomicForecasts for 1983 and 1984—J.M. Dowling, E. Go, and C.N. Castillo,

June 1983No. 18 Economic Forecast for Indonesia

—J.M. Dowling, H.Y. Kim, Y.K. Wang,and C.N. Castillo, June 1983

No. 19 Relative External Debt Situation of AsianDeveloping Countries: An Applicationof Ranking Method—Jungsoo Lee, June 1983

No. 20 New Evidence on Yields, Fertilizer Application,and Prices in Asian Rice Production—William James and Teresita Ramirez, July 1983

No. 21 Inflationary Effects of Exchange RateChanges in Nine Asian LDCs—Pradumna B. Rana and J. Malcolm Dowling, Jr., December 1983

No. 22 Effects of External Shocks on the Balanceof Payments, Policy Responses, and DebtProblems of Asian Developing Countries—Seiji Naya, December 1983

No. 23 Changing Trade Patterns and Policy Issues:The Prospects for East and Southeast AsianDeveloping Countries—Seiji Naya and Ulrich Hiemenz, February 1984

No. 24 Small-Scale Industries in Asian EconomicDevelopment: Problems and Prospects—Seiji Naya, February 1984

No. 25 A Study on the External Debt IndicatorsApplying Logit Analysis—Jungsoo Lee and Clarita Barretto, February 1984

No. 26 Alternatives to Institutional Credit Programsin the Agricultural Sector of Low-IncomeCountries—Jennifer Sour, March 1984

No. 27 Economic Scene in Asia and Its Special Features—Kedar N. Kohli, November 1984

No. 28 The Effect of Terms of Trade Changes on theBalance of Payments and Real NationalIncome of Asian Developing Countries—Jungsoo Lee and Lutgarda Labios, January 1985

No. 29 Cause and Effect in the World Sugar Market:Some Empirical Findings 1951-1982—Yoshihiro Iwasaki, February 1985

No. 30 Sources of Balance of Payments Problemin the 1970s: The Asian Experience—Pradumna Rana, February 1985

No. 31 India’s Manufactured Exports: An Analysisof Supply Sectors—Ifzal Ali, February 1985

No. 32 Meeting Basic Human Needs in AsianDeveloping Countries—Jungsoo Lee and Emma Banaria, March 1985

No. 33 The Impact of Foreign Capital Inflowon Investment and Economic Growthin Developing Asia—Evelyn Go, May 1985

No. 34 The Climate for Energy Developmentin the Pacific and Asian Region:Priorities and Perspectives—V.V. Desai, April 1986

No. 35 Impact of Appreciation of the Yen onDeveloping Member Countries of the Bank—Jungsoo Lee, Pradumna Rana, and Ifzal Ali,

May 1986No. 36 Smuggling and Domestic Economic Policies

in Developing Countries—A.H.M.N. Chowdhury, October 1986

No. 37 Public Investment Criteria: Economic InternalRate of Return and Equalizing Discount Rate—Ifzal Ali, November 1986

No. 38 Review of the Theory of Neoclassical PoliticalEconomy: An Application to Trade Policies—M.G. Quibria, December 1986

No. 39 Factors Influencing the Choice of Location:Local and Foreign Firms in the Philippines—E.M. Pernia and A.N. Herrin, February 1987

No. 40 A Demographic Perspective on DevelopingAsia and Its Relevance to the Bank—E.M. Pernia, May 1987

No. 41 Emerging Issues in Asia and Social CostBenefit Analysis—I. Ali, September 1988

No. 42 Shifting Revealed Comparative Advantage:

28

No. 1 International Reserves:Factors Determining Needs and Adequacy—Evelyn Go, May 1981

No. 2 Domestic Savings in Selected DevelopingAsian Countries—Basil Moore, assisted by

A.H.M. Nuruddin Chowdhury, September 1981No. 3 Changes in Consumption, Imports and Exports

of Oil Since 1973: A Preliminary Survey ofthe Developing Member Countriesof the Asian Development Bank—Dal Hyun Kim and Graham Abbott,

September 1981No. 4 By-Passed Areas, Regional Inequalities,

and Development Policies in SelectedSoutheast Asian Countries—William James, October 1981

No. 5 Asian Agriculture and Economic Development—William James, March 1982

No. 6 Inflation in Developing Member Countries:An Analysis of Recent Trends—A.H.M. Nuruddin Chowdhury and

J. Malcolm Dowling, March 1982No. 7 Industrial Growth and Employment in

Developing Asian Countries: Issues and

ECONOMIC STAFF PAPERS (ES)

Experiences of Asian and Pacific DevelopingCountries—P.B. Rana, November 1988

No. 43 Agricultural Price Policy in Asia:Issues and Areas of Reforms—I. Ali, November 1988

No. 44 Service Trade and Asian Developing Economies—M.G. Quibria, October 1989

No. 45 A Review of the Economic Analysis of PowerProjects in Asia and Identification of Areasof Improvement—I. Ali, November 1989

No. 46 Growth Perspective and Challenges for Asia:Areas for Policy Review and Research—I. Ali, November 1989

No. 47 An Approach to Estimating the PovertyAlleviation Impact of an Agricultural Project—I. Ali, January 1990

No. 48 Economic Growth Performance of Indonesia,the Philippines, and Thailand:The Human Resource Dimension—E.M. Pernia, January 1990

No. 49 Foreign Exchange and Fiscal Impact of a Project:A Methodological Framework for Estimation—I. Ali, February 1990

No. 50 Public Investment Criteria: Financialand Economic Internal Rates of Return—I. Ali, April 1990

No. 51 Evaluation of Water Supply Projects:An Economic Framework—Arlene M. Tadle, June 1990

No. 52 Interrelationship Between Shadow Prices, ProjectInvestment, and Policy Reforms:An Analytical Framework—I. Ali, November 1990

No. 53 Issues in Assessing the Impact of Projectand Sector Adjustment Lending—I. Ali, December 1990

No. 54 Some Aspects of Urbanizationand the Environment in Southeast Asia—Ernesto M. Pernia, January 1991

No. 55 Financial Sector and EconomicDevelopment: A Survey—Jungsoo Lee, September 1991

No. 56 A Framework for Justifying Bank-AssistedEducation Projects in Asia: A Reviewof the Socioeconomic Analysisand Identification of Areas of Improvement—Etienne Van De Walle, February 1992

No. 57 Medium-term Growth-StabilizationRelationship in Asian Developing Countriesand Some Policy Considerations—Yun-Hwan Kim, February 1993

No. 58 Urbanization, Population Distribution,and Economic Development in Asia—Ernesto M. Pernia, February 1993

No. 59 The Need for Fiscal Consolidation in Nepal:The Results of a Simulation—Filippo di Mauro and Ronald Antonio Butiong,

July 1993No. 60 A Computable General Equilibrium Model

of Nepal—Timothy Buehrer and Filippo di Mauro,

October 1993No. 61 The Role of Government in Export Expansion

in the Republic of Korea: A Revisit—Yun-Hwan Kim, February 1994

No. 62 Rural Reforms, Structural Change,and Agricultural Growth inthe People’s Republic of China—Bo Lin, August 1994

No. 63 Incentives and Regulation for Pollution Abatementwith an Application to Waste Water Treatment—Sudipto Mundle, U. Shankar,and Shekhar Mehta, October 1995

No. 64 Saving Transitions in Southeast Asia—Frank Harrigan, February 1996

No. 65 Total Factor Productivity Growth in East Asia:A Critical Survey—Jesus Felipe, September 1997

No. 66 Foreign Direct Investment in Pakistan:Policy Issues and Operational Implications—Ashfaque H. Khan and Yun-Hwan Kim,

July 1999No. 67 Fiscal Policy, Income Distribution and Growth

—Sailesh K. Jha, November 1999

Perspectives for the Coming Decade—Ulrich Hiemenz, March 1982

No. 8 Petrodollar Recycling 1973-1980.Part 1: Regional Adjustments andthe World Economy—Burnham Campbell, April 1982

No. 9 Developing Asia: The Importanceof Domestic Policies—Economics Office Staff under the direction

of Seiji Naya, May 1982No. 10 Financial Development and Household

Savings: Issues in Domestic ResourceMobilization in Asian Developing Countries—Wan-Soon Kim, July 1982

No. 11 Industrial Development: Role of SpecializedFinancial Institutions—Kedar N. Kohli, August 1982

No. 12 Petrodollar Recycling 1973-1980.Part II: Debt Problems and an Evaluationof Suggested Remedies—Burnham Campbell, September 1982

No. 13 Credit Rationing, Rural Savings, and FinancialPolicy in Developing Countries—William James, September 1982

No. 14 Small and Medium-Scale Manufacturing

29

Establishments in ASEAN Countries:Perspectives and Policy Issues—Mathias Bruch and Ulrich Hiemenz, March 1983

No. 15 Income Distribution and EconomicGrowth in Developing Asian Countries—J. Malcolm Dowling and David Soo, March 1983

No. 16 Long-Run Debt-Servicing Capacity ofAsian Developing Countries: An Applicationof Critical Interest Rate Approach—Jungsoo Lee, June 1983

No. 17 External Shocks, Energy Policy,and Macroeconomic Performance of AsianDeveloping Countries: A Policy Analysis—William James, July 1983

No. 18 The Impact of the Current Exchange RateSystem on Trade and Inflation of SelectedDeveloping Member Countries—Pradumna Rana, September 1983

No. 19 Asian Agriculture in Transition: Key Policy Issues—William James, September 1983

No. 20 The Transition to an Industrial Economyin Monsoon Asia—Harry T. Oshima, October 1983

No. 21 The Significance of Off-Farm Employmentand Incomes in Post-War East Asian Growth—Harry T. Oshima, January 1984

No. 22 Income Distribution and Poverty in SelectedAsian Countries—John Malcolm Dowling, Jr., November 1984

No. 23 ASEAN Economies and ASEAN EconomicCooperation—Narongchai Akrasanee, November 1984

No. 24 Economic Analysis of Power Projects—Nitin Desai, January 1985

No. 25 Exports and Economic Growth in the Asian Region—Pradumna Rana, February 1985

No. 26 Patterns of External Financing of DMCs—E. Go, May 1985

No. 27 Industrial Technology Developmentthe Republic of Korea—S.Y. Lo, July 1985

No. 28 Risk Analysis and Project Selection:A Review of Practical Issues—J.K. Johnson, August 1985

No. 29 Rice in Indonesia: Price Policy and ComparativeAdvantage—I. Ali, January 1986

No. 30 Effects of Foreign Capital Inflowson Developing Countries of Asia—Jungsoo Lee, Pradumna B. Rana,

and Yoshihiro Iwasaki, April 1986No. 31 Economic Analysis of the Environmental

Impacts of Development Projects—John A. Dixon et al., EAPI,

East-West Center, August 1986No. 32 Science and Technology for Development:

Role of the Bank—Kedar N. Kohli and Ifzal Ali, November 1986

No. 33 Satellite Remote Sensing in the Asianand Pacific Region—Mohan Sundara Rajan, December 1986

No. 34 Changes in the Export Patterns of Asian andPacific Developing Countries: An EmpiricalOverview—Pradumna B. Rana, January 1987

No. 35 Agricultural Price Policy in Nepal—Gerald C. Nelson, March 1987

No. 36 Implications of Falling Primary CommodityPrices for Agricultural Strategy in the Philippines—Ifzal Ali, September 1987

No. 37 Determining Irrigation Charges: A Framework—Prabhakar B. Ghate, October 1987

No. 38 The Role of Fertilizer Subsidies in AgriculturalProduction: A Review of Select Issues—M.G. Quibria, October 1987

No. 39 Domestic Adjustment to External Shocksin Developing Asia—Jungsoo Lee, October 1987

No. 40 Improving Domestic Resource Mobilizationthrough Financial Development: Indonesia—Philip Erquiaga, November 1987

No. 41 Recent Trends and Issues on Foreign DirectInvestment in Asian and Pacific DevelopingCountries—P.B. Rana, March 1988

No. 42 Manufactured Exports from the Philippines:A Sector Profile and an Agenda for Reform—I. Ali, September 1988

No. 43 A Framework for Evaluating the EconomicBenefits of Power Projects—I. Ali, August 1989

No. 44 Promotion of Manufactured Exports in Pakistan—Jungsoo Lee and Yoshihiro Iwasaki,

September 1989No. 45 Education and Labor Markets in Indonesia:

A Sector Survey—Ernesto M. Pernia and David N. Wilson,

September 1989No. 46 Industrial Technology Capabilities

and Policies in Selected ADCs—Hiroshi Kakazu, June 1990

No. 47 Designing Strategies and Policiesfor Managing Structural Change in Asia—Ifzal Ali, June 1990

No. 48 The Completion of the Single European CommunityMarket in 1992: A Tentative Assessment of itsImpact on Asian Developing Countries—J.P. Verbiest and Min Tang, June 1991

No. 49 Economic Analysis of Investment in Power Systems—Ifzal Ali, June 1991

No. 50 External Finance and the Role of MultilateralFinancial Institutions in South Asia:Changing Patterns, Prospects, and Challenges—Jungsoo Lee, November 1991

No. 51 The Gender and Poverty Nexus: Issues andPolicies—M.G. Quibria, November 1993

No. 52 The Role of the State in Economic Development:Theory, the East Asian Experience,and the Malaysian Case—Jason Brown, December 1993

No. 53 The Economic Benefits of Potable Water SupplyProjects to Households in Developing Countries—Dale Whittington and Venkateswarlu Swarna,

January 1994No. 54 Growth Triangles: Conceptual Issues

and Operational Problems—Min Tang and Myo Thant, February 1994

No. 55 The Emerging Global Trading Environmentand Developing Asia—Arvind Panagariya, M.G. Quibria,

and Narhari Rao, July 1996No. 56 Aspects of Urban Water and Sanitation in

the Context of Rapid Urbanization inDeveloping Asia—Ernesto M. Pernia and Stella LF. Alabastro,

September 1997No. 57 Challenges for Asia’s Trade and Environment

—Douglas H. Brooks, January 1998No. 58 Economic Analysis of Health Sector Projects-

A Review of Issues, Methods, and Approaches—Ramesh Adhikari, Paul Gertler, and

Anneli Lagman, March 1999No. 59 The Asian Crisis: An Alternate View

—Rajiv Kumar and Bibek Debroy, July 1999No. 60 Social Consequences of the Financial Crisis in

Asia—James C. Knowles, Ernesto M. Pernia, and

Mary Racelis, November 1999

30

No. 1 Estimates of the Total External Debt ofthe Developing Member Countries of ADB:1981-1983—I.P. David, September 1984

No. 2 Multivariate Statistical and GraphicalClassification Techniques Appliedto the Problem of Grouping Countries—I.P. David and D.S. Maligalig, March 1985

No. 3 Gross National Product (GNP) MeasurementIssues in South Pacific Developing MemberCountries of ADB—S.G. Tiwari, September 1985

No. 4 Estimates of Comparable Savings in SelectedDMCs—Hananto Sigit, December 1985

No. 5 Keeping Sample Survey Designand Analysis Simple—I.P. David, December 1985

No. 6 External Debt Situation in AsianDeveloping Countries—I.P. David and Jungsoo Lee, March 1986

No. 7 Study of GNP Measurement Issues in theSouth Pacific Developing Member Countries.Part I: Existing National Accountsof SPDMCs–Analysis of Methodologyand Application of SNA Concepts—P. Hodgkinson, October 1986

No. 8 Study of GNP Measurement Issues in the SouthPacific Developing Member Countries.Part II: Factors Affecting IntercountryComparability of Per Capita GNP—P. Hodgkinson, October 1986

No. 9 Survey of the External Debt Situation

STATISTICAL REPORT SERIES (SR)

in Asian Developing Countries, 1985—Jungsoo Lee and I.P. David, April 1987

No. 10 A Survey of the External Debt Situationin Asian Developing Countries, 1986—Jungsoo Lee and I.P. David, April 1988

No. 11 Changing Pattern of Financial Flows to Asianand Pacific Developing Countries—Jungsoo Lee and I.P. David, March 1989

No. 12 The State of Agricultural Statistics inSoutheast Asia—I.P. David, March 1989

No. 13 A Survey of the External Debt Situationin Asian and Pacific Developing Countries:1987-1988—Jungsoo Lee and I.P. David, July 1989

No. 14 A Survey of the External Debt Situation inAsian and Pacific Developing Countries: 1988-1989—Jungsoo Lee, May 1990

No. 15 A Survey of the External Debt Situationin Asian and Pacific Developing Countries: 1989-1992—Min Tang, June 1991

No. 16 Recent Trends and Prospects of External DebtSituation and Financial Flows to Asianand Pacific Developing Countries—Min Tang and Aludia Pardo, June 1992

No. 17 Purchasing Power Parity in Asian DevelopingCountries: A Co-Integration Test—Min Tang and Ronald Q. Butiong, April 1994

No. 18 Capital Flows to Asian and Pacific DevelopingCountries: Recent Trends and Future Prospects—Min Tang and James Villafuerte, October 1995

No. 1 Poverty in the People’s Republic of China:Recent Developments and Scopefor Bank Assistance—K.H. Moinuddin, November 1992

No. 2 The Eastern Islands of Indonesia: An Overviewof Development Needs and Potential—Brien K. Parkinson, January 1993

No. 3 Rural Institutional Finance in Bangladeshand Nepal: Review and Agenda for Reforms—A.H.M.N. Chowdhury and Marcelia C. Garcia,

November 1993No. 4 Fiscal Deficits and Current Account Imbalances

of the South Pacific Countries:A Case Study of Vanuatu—T.K. Jayaraman, December 1993

No. 5 Reforms in the Transitional Economies of Asia—Pradumna B. Rana, December 1993

No. 6 Environmental Challenges in the People’s Republicof China and Scope for Bank Assistance—Elisabetta Capannelli and Omkar L. Shrestha,

December 1993No. 7 Sustainable Development Environment

and Poverty Nexus—K.F. Jalal, December 1993

No. 8 Intermediate Services and EconomicDevelopment: The Malaysian Example—Sutanu Behuria and Rahul Khullar, May 1994

No. 9 Interest Rate Deregulation: A Brief Surveyof the Policy Issues and the Asian Experience—Carlos J. Glower, July 1994

No. 10 Some Aspects of Land Administrationin Indonesia: Implications for Bank Operations—Sutanu Behuria, July 1994

No. 11 Demographic and Socioeconomic Determinantsof Contraceptive Use among Urban Women inthe Melanesian Countries in the South Pacific:A Case Study of Port Vila Town in Vanuatu—T.K. Jayaraman, February 1995

No. 12 Managing Development throughInstitution Building— Hilton L. Root, October 1995

No. 13 Growth, Structural Change, and OptimalPoverty Interventions—Shiladitya Chatterjee, November 1995

No. 14 Private Investment and MacroeconomicEnvironment in the South Pacific IslandCountries: A Cross-Country Analysis—T.K. Jayaraman, October 1996

No. 15 The Rural-Urban Transition in Viet Nam:Some Selected Issues—Sudipto Mundle and Brian Van Arkadie,

October 1997No. 16 A New Approach to Setting the Future

Transport Agenda—Roger Allport, Geoff Key, and Charles Melhuish

June 1998No. 17 Adjustment and Distribution:

The Indian Experience—Sudipto Mundle and V.B. Tulasidhar, June 1998

No. 18 Tax Reforms in Viet Nam: A Selective Analysis—Sudipto Mundle, December 1998

No. 19 Surges and Volatility of Private Capital Flows toAsian Developing Countries: Implicationsfor Multilateral Development Banks—Pradumna B. Rana, December 1998

No. 20 The Millennium Round and the Asian Economies:An Introduction—Dilip K. Das, October 1999

No. 21 Occupational Segregation and the GenderEarnings Gap—Joseph E. Zveglich, Jr. and Yana van der MeulenRodgers, December 1999

No. 22 Information Technology: Next Locomotive ofGrowth?—Dilip K. Das, June 2000

OCCASIONAL PAPERS (OP)

31

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2. Mongolia: A Centrally Planned Economyin TransitionAsian Development Bank, 1992$15.00 (paperback)

3. Rural Poverty in Asia, Priority Issues and PolicyOptionsEdited by M.G. Quibria, 1994$25.00 (paperback)

4. Growth Triangles in Asia: A New Approachto Regional Economic CooperationEdited by Myo Thant, Min Tang, and Hiroshi Kakazu1st ed., 1994 $36.00 (hardbound)Revised ed., 1998 $55.00 (hardbound)

5. Urban Poverty in Asia: A Survey of Critical IssuesEdited by Ernesto Pernia, 1994$18.00 (paperback)

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2. Gender Indicators of Developing Asianand Pacific CountriesAsian Development Bank, 1993$25.00 (paperback)

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1. Improving Domestic Resource Mobilization ThroughFinancial Development: Overview September 1985

2. Improving Domestic Resource Mobilization ThroughFinancial Development: Bangladesh July 1986

3. Improving Domestic Resource Mobilization ThroughFinancial Development: Sri Lanka April 1987

4. Improving Domestic Resource Mobilization ThroughFinancial Development: India December 1987

5. Financing Public Sector Development Expenditurein Selected Countries: Overview January 1988

6. Study of Selected Industries: A Brief ReportApril 1988

7. Financing Public Sector Development Expenditurein Selected Countries: Bangladesh June 1988

8. Financing Public Sector Development Expenditurein Selected Countries: India June 1988

9. Financing Public Sector Development Expenditurein Selected Countries: Indonesia June 1988

10. Financing Public Sector Development Expenditurein Selected Countries: Nepal June 1988

11. Financing Public Sector Development Expenditurein Selected Countries: Pakistan June 1988

12. Financing Public Sector Development Expenditurein Selected Countries: Philippines June 1988

13. Financing Public Sector Development Expenditurein Selected Countries: Thailand June 1988

14. Towards Regional Cooperation in South Asia:ADB/EWC Symposium on Regional Cooperationin South Asia February 1988

15. Evaluating Rice Market Intervention Policies:Some Asian Examples April 1988

16. Improving Domestic Resource Mobilization ThroughFinancial Development: Nepal November 1988

17. Foreign Trade Barriers and Export GrowthSeptember 1988

18. The Role of Small and Medium-Scale Industries in theIndustrial Development of the PhilippinesApril 1989

19. The Role of Small and Medium-Scale ManufacturingIndustries in Industrial Development: The Experience ofSelected Asian CountriesJanuary 1990

20. National Accounts of Vanuatu, 1983-1987January 1990

21. National Accounts of Western Samoa, 1984-1986February 1990

22. Human Resource Policy and EconomicDevelopment: Selected Country StudiesJuly 1990

23. Export Finance: Some Asian ExamplesSeptember 1990

24. National Accounts of the Cook Islands, 1982-1986September 1990

25. Framework for the Economic and Financial Appraisal ofUrban Development Sector Projects January 1994

26. Framework and Criteria for the Appraisaland Socioeconomic Justification of Education ProjectsJanuary 1994

27. Guidelines for the Economic Analysis ofTelecommunications ProjectsAsian Development Bank, 1997

28. Guidelines for the Economic Analysis of Water Supply ProjectsAsian Development Bank, 1998

29. Investing in AsiaCo-published with OECD, 1997

30. The Future of Asia in the World EconomyCo-published with OECD, 1998

31. Financial Liberalisation in Asia: Analysis and ProspectsCo-published with OECD, 1999

32. Sustainable Recovery in Asia: Mobilizing Resources forDevelopmentCo-published with OECD, 2000

33. Technology and Poverty Reduction in Asia and the PacificCo-published with OECD, 2001

34. Asia and EuropeCo-published with OECD, 2002

SPECIAL STUDIES, COMPLIMENTARY (SSC)(Published in-house; Available through ADB Office of External Relations; Free of Charge)

erd working paper no. 64 - adb

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