the philippine economy in reviewdevelopment research news 3 july - august 1998 a stagnant labor...

WHAT'S INSIDE

6 The Financial Crisisin East Asia

8 Was the Peso Overvalued?

10 Roles of the Visayasand Mindanaoin the Revolutionary Struggle

14 Habito and Diokno Move On

16 Will China Devalueits Currency?EDITOR'S NOTES

Newly-installed Philippine PresidentJoseph Ejercito Estrada had, on several oc-casions, mentioned that he comes in asleader of the country during an unfortunatetime when its economy is reeling from thedevastating effects of the regionwide finan-cial crisis and the havoc brought about bythe El Niño weather phenomenon. Still, di-sasters can always be transformed intofounts for greatness. This becomes thegreater challenge for the new administra-tion especially as a new millennium is fastapproaching. With his well-respected eco-nomic team, it is therefore hoped that thePresident can craft an agenda that will notonly address the dampening effects of thecrisis but will also bring the economy into asustained growth in the long run.

But first things first. One has to knowon what footing he is proceeding from. Assuch, an assessment of the economy andhow it has performed for the past few yearsis important in drawing up a medium- tolong-term agenda.

The �PIDS Assessment of the PhilippineEconomy, 1986-1997� may very well be acontribution toward this end. Reviewing theperformance of the various sectors of thecountry�s economy from the time of theAquino administration in 1986 to the near-end of the Ramos administration in 1997,the PIDS, through its corps of Research Fel-lows and affiliated researchers, made anexhaustive analysis of each sector�s perfor-mance, the reasons behind it and the fac-tors contributing to such state.

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The PhilippineEconomy in Review:

1986-1997

Vol. XVI No. 4 July - August 1998 ISSN 0115-9097

The circumstances are differ-ent but the situation is simi-lar. Newly-elected PresidentJoseph Ejercito Estrada en-

ters Malacañang in 1998 amidst an eco-nomic crisis, a scenario quite like thetime when former President CorazonAquino assumed office in 1986 whereshe inherited an economy battered bythe 1984�1985 debt crisis and whenformer President Fidel Ramos becamethe country�s leader in 1992 where thePhilippines was suffering from an en-ergy crisis and a post-Gulf War effect.Thus, President Estrada faces a hugetask ahead. Still, the effect of the eco-nomic and social reforms implementedin the past 11 or 12 years and thesmooth and peaceful transition of gov-ernment should provide the Estradaadministration with enough momen-tum to guide the country through theadverse impacts of the ongoing finan-cial turmoil gripping not only the Phil-ippines but the entire East Asian region.

But just how well did the Philip-pine economy fare in the last 11 years?Has it truly recovered from being the�sick man of Asia?" How far has thecountry reached the goal of sustainablegrowth and development? Is the Phil-ippines better off today than it wasmore than a decade ago?

In a major forum sponsored bythe Philippine Institute for Develop-ment Studies (PIDS) last July 22, Dr.Josef T. Yap, together with the otherResearch Fellows of the PIDS, pre-sented a comprehensive assessment ofthe performance of the Philippineeconomy during the period 1986-1997.Using the 1992-1997 Medium-Term Phil-ippine Development Plan (MTPDP) as abenchmark for their assessment andexaminining how close the country has

satisfied the conditions considered asdeterminants of long-term economicgrowth from both the theoretical andempirical standpoints, Yap and associ-ates concluded that despite the overalleconomic gains evident during the pe-riod under review, the Philippines stillfaces daunting problems and, in many

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DEVELOPMENT RESEARCH NEWS July - August 19982

Philippine Economy...From page 1

in technology upgrading, persistentunderinvestment in human resourcedevelopment, extremely slow pace inpoverty alleviation and equity promo-tion, and sharp deterioration in thequality of the environment. Said short-comings in the microeconomic reformsprevented potential gains from beingrealized.

Particularly alarming is the result-ing picture in both the manufacturingand agriculture sectors. For manufac-turing, despite the trade and industrialreforms implemented and the appar-ent efficiency gains, its growth perfor-mance during the period was generallydisappointing. Meanwhile, the agricul-ture sector continues to exhibit lowgrowth rates. The inappropriate ex-change rate policy, low investment rateas well as price distortions are majorculprits. But besides these, the continu-ing decline in the sectors� growth per-formance has been largely attributedto a stagnant labor productivity levelbrought about by, among others, poortechnological development, inad-equate infrastructure, and underinvest-ment in human resource development.

capita income increased from US$426in 1986 to US$507 in 1997, the level ofpoverty incidence declined, the con-solidated public sector account yieldeda surplus in 1996, the first in two de-cades, inflation was on a steady decline,and export growth became positive.

Despite these significant gains,and those in almost all sectors, however,the Philippines still lags behind itsneighboring countries. Per capita in-come, albeit its increase, remains to belower than most East Asian economiesand improvements in the quality of lifeas measured by the UN Human Devel-opment Index have not been as dra-

Table 1: Economic Indicators

Philippines 2,170 2,681 0.557 0.672Indonesia 1,820 3,740 0.418 0.668Malaysia 5,070 8,865 0.687 0.832Thailand 3,280 7,104 0.551 0.833China 2,470 2,604 0.475 0.626

Source: Human Development Report, United Nations DevelopmentProgramme.

*An index nearer to 1.0 indicates a higher quality of life.

Per Capita Income (PPP$) HDI*

1985-88 1994 1980 1994

areas, pales in comparison with itsneighbors, notwithstanding the adverseeffects of the regional financial crisison the latter. The key, according to thePIDS team, is in terms of productivityperformance.

In examining the factors affect-ing the Philippines�s economic perfor-mance, the PIDS team classified theminto two broad categories. One relatesto the elements of recovery and eco-nomic growth whichconsists of the aggre-gate factors liketrade and industrialpolicy, productivitytrends, macro-economic stabilityand infrastructure.Another refers tothe microeconomicset of factors affect-ing the sustainabilityof economic growthand development.This includes tech-nology policy, hu-man resource devel-opment, poverty alleviation and equitypromotion, and environmental man-agement. Clearly, if the economy is totravel the path of sustainable growthand development, the governmentshould not simply focus its attention onthe aggregate factors but also, andequally important, on the microeco-nomic elements.

matic as in other countries over the past15 years (Table 1). Notwithstanding thetremendous negative impact of thecurrent regional financial crisis onsome of these East Asian economies, itwould still take some time for the Phil-ippines to reach the development levelof, say, Malaysia or Thailand.

It is to be noted, too, that while amarked improvement in the invest-ment climate through greater outwardorientation, better infrastructure andmore sound macroeconomic funda-mentals was evident during this periodunder review, progress in terms ofmicroeconomic reforms was quite slow.This can be gleaned in the poor record

Assessing the Past DecadeWhen a new administration took

over in 1986, economic reforms wereearnestly put into place. This was fol-lowed by more reforms through theyears especially during the Ramos ad-ministration. As a result, gross domes-tic product (GDP) expanded, per

A Closer Look into the Story

Aggregate factorsl Trade and industrial policy and

the manufacturing sector. Despite thepolicy reforms where the Philippinestook great strides to enhance its out-ward orientation and be competitive inthe process of globalization, manufac-turing growth has not performed upto expectations. This is due to the ex-change rate policy, the poor record inlabor productivity and total factor pro-ductivity. Between 1987 and 1995, theunit labor cost�which is the ratio be-tween nominal wage and labor produc-tivity�increased and placed the coun-try at the lowest rung in terms of pro-ductivity performance. The manufac-turing sector�s unit labor cost rose by21 percent, which can be attributed to


a stagnant labor productivity ratherthan to rising nominal wages. The lowlabor productivity, in turn, may be dueto low domestic investment rate, infra-structure development, and social sec-tor policies. The first factor points toinsufficient accumulation of capital tosupport the labor force while the thirdrefers to a persistent underinvestmentin human resource development.

l Agriculture. The sector whichcontributes 20 percent to the GDP and40 percent to the employment rate hashad a miserable performance since the1980s. The growth rates of its grossvalue added and exports in the 1980sand 1990s have been lower than otherAsian countries. With the exception oflivestock, poultry and some crops, mostcrops and fishery exhibited decliningcompetitiveness. Although crop pro-ductivity per hectare increased, thepace had been slower than the 1960sand 1970s. This dull peformance is at-tributed to

k increased protection of thesector,

k penalty against exportable ag-ricultural commodities,

k inadequate agricultural sup-port services, and

k land market distortions.There have been confusions arisingfrom the implementation of the Com-prehensive Agrarian Reform Program(CARP), particularly in terms of prop-erty rights. On the other hand, publicexpenditure for agriculture focused onredistribution and the strengthening ofenvironmental management ratherthan on investments to enhance pro-ductivity such as research and develop-ment (R&D) and infrastructure.

l Employment, wages and produc-tivity. In 1996, unemployment rate wasestimated at 7.4 percent. The decreasewas 1.7 points lower than the 1987 rateof 9.1 percentage. This commendableperformance was based on the increasein the number of employed Filipinos

especially during the period 1993-1996when an average of about one millionnet new jobs per year were generated,a number quite close to the target citedin the MTPDP.

Despite this positive perfor-mance, however, one aspect remainsworrisome. This is in the area of com-petitiveness. Clearly, with the unit costof labor rising from an index of 1.0 in1992 to an index of 1.3 in 1995, a slip-page in competitiveness can begleaned. The sad part is that data showthat such weakening of competitivenessbegan as far back as 1987 when the in-dex stood at 0.5.

As noted earlier, the high laborcost is attributed to a stagnant laborproductivity which in turn may betraced to

k low investment rate,k weakness in attracting FDIs,k poor infrastructure develop-

ment,k low level of effort in R&D, andk persistent underinvestment in

human capital.

l Investment, saving, fiscal adjust-ment and macroeconomic stability. Invest-ment is at the heart of economicgrowth. Compared to its Asian neigh-bors, the Philippines has a very low in-vestment rate, explaining the medio-cre economic performance of the Phil-ippines and its poor labor productivityrecord vis-à-vis other Asian economies.One reason for the country's low in-vestment rate is its low saving rate asrelated to the country's poor record inmacroeconomic stability where periodicboom�bust cycles were in evidence.

While macroeconomic stabilityshowed a marked improvement in1992�1997 characterized by a down-ward trend in inflation, the currentaccount deficit being under control,the consolidated public sector accountrecording a surplus for the first time

in two decades and the M3/GNP ratiorising, the liberalization of the capitalaccount in 1992 and the surge in glo-bal capital flows, however, significantlychanged the parameters of macropolicymaking and financial regulationsin the country. Thus, it was ironicallyin this same period where the eco-nomic managers faced new threats tomacroeconomic stability and simulta-neously had to contend with old ones.

In terms of the performance ofthe fiscal sector in the period underreview, a lot of fiscal adjustments weremade, enabling the consolidated pub-lic sector position to reach a surplus in1996. Still, the assessment team notedthat the bulk of fiscal adjustments inrecent years was due largely to the in-flows of privatization proceeds. Withthe impending sharp fall in tariff rev-enue resulting from the tariff reductionprogram, the recurrence of a fiscal defi-cit is seen to be a problem.

Emphasis should therefore beplaced on improving the revenue�gen-eration capacity of the government es-pecially in tax administration. Capitalmarket deepening should also be pro-moted along with an improvement inthe level of domestic savings. The lat-ter should come mainly from thehousehold and unincorporated sector.

l Infrastructure. Within the pe-riod 1980�1990, the country may havemade significant improvements in in-frastructure but it nonetheless still lagsbehind its Asian neighbors. Neglect ofinfrastructure investments can be partlyblamed on the country�s macro-economic crisis and may be resolved byimplementing �draconian� stabilizationpolicies. Some of the problems facingthe country�s infrastructure programinclude the following: the country hav-ing the most expensive electricity ratesin Southeast Asia; slow increase in the

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transport fuels has been estimated tohave cost the country approximately P2billion in 1992. Thus, the Ramosgovernment's efforts to lessen emis-sions by promoting the use of unleadedgasoline and imposing high taxes onlowleaded gasoline are noteworthy. Atthe core of sustaining economic growthis the aspect of environmental manage-ment. However, a three percent declinein the genuine savings measure�whichincludes adjustments for both humanand natural resources�reveals that theeconomy is leaning towardunsustainable growth. Data reveal thatthe country has the lowest rate of pro-tection of natural resources. To cite,

roughly six millionhectares (20 per-cent) of land areaare unprotectedand unallocated.Of course, a num-ber of programshave also been setup, aimed at pro-moting equitableaccess to both up-land and coastal re-sources such as theFisheries Code of

1998 or Republic Act 8550; however,they have to be pushed and imple-mented in earnest.

cess to health services is still relativelylow. These conditions are attributed tothe government�s inadequate responseto changing policy and program envi-ronment such as the devolution of thehealth services to local governmentunits. Likewise, there has been littleprogress in providing basic educationdue to the low level of expendituresfor human development priorities.

l Technology. The country�s ca-pabilities in second- and third-wavetechnologies are so insufficient that thegovernment still depends on foreignfirms for telecommunications, powergeneration, transportation, agricultural

inputs and machinery, machine tools,pharmaceuticals, and consumer elec-tronics. The science and technology(S&T) competence is weakly supportedby the educational system and is seenas a cost to be minimized rather thanas an investment. Thus, in the last de-cade, the country still lags behind itsneighbors in terms of the ratio of R&Dexpenditures to GDP and the growthof total factor productivity. Even whilethere are programs to promote S&T,these have been poorly funded.

l Environmental management. Airand water pollution have brought dam-ages similar to the depletion of thenatural resources. For example, an in-crease in the number of respiratorytract illnesses in Metro Manila due tolead emissions from motor vehicles and

Poverty incidence (%) 44.2 35.5 32.1

Number of poor families 4,355,052 4,531,170 4,553,387

Urban 1,250,398 1,521,882 1,246,173

Rural 3,104,655 3,009,288 3,307,215

Source: Economic and Social Statistics Office, NSCB

1985 1994 1997

Table 2: Poverty Indicators

number of main telephone lines andpayphones; inadequate and unsatisfac-tory port facilities; and weak water sup-ply planning and coordination.

Microeconomic factorsl Slow pace in poverty alleviation

and the deterioration in income distribu-tion. Although poverty incidence de-clined between 1985 and 1997 (Table2), the actual number of poor familiesincreased. This means that there re-mains �a core segment of the popula-tion that is marginalized and is affectedvery minimally by developments in themainstream of society.� In terms ofpoverty alleviation, the country has notbeen successful in reducing the num-ber of poor families. Moreover, the1997 data from the Family Income andExpenditure Survey (FIES) showed asharp deterioration in the equity ofincome. Based on the experiences ofother high-performing Asian econo-mies (HPAEs), poverty reduction andgreater income equality improve socialcohesion. Thus, the Social ReformAgenda (SRA) adopted by the Ramosadministration is noteworthy since itaimed to lessen, if not eradicate, pov-erty by implementing government in-terventions which are directed towardthe integration of the �society�s disad-vantaged groups into the mainstreampolitical and economic society.� How-ever, with its institutional approach, itmay take some time before the poten-tial positive effects from the SRA canbe realized.

l Human resource development.Health, nutrition and basic educationhave high significant impact on laborproductivity and it is in these areaswhere the government still has muchto do. To cite, infant mortality has onlyfallen slightly since the 1980s and ac-

An Agenda for the Year 2000and Beyond

A new millennium will be ush-ered in barely two years from this date.The country must be prepared to wel-come it and its many challenges.

As indicated in the assessment ofthe Philippine economy in the last de-cade, there have been certain successesresulting from the basic economic pro-grams set by the Aquino and Ramos ad-ministrations. At the same time, therehave also been a lot of shortcomings.It now becomes the task of the Estradaadministration to come up with eco-


store the levels of capital outlays andgovernment expenditures on mainte-nance and operating costs to their pre-1984�1985 numbers. It must likewiseput emphasis on the maintenance andoperating expenditures sinceunderspending for the upkeep of in-frastructure creates disruptions anddamages to the economy.

Monetary policy must continue to beprudent and an appropriate exchange ratepolicy must be implemented.

Financial reforms must be imple-mented to maintain investor confidence inthe economy.

Productivity and efficiencyThe government should aim to

boost the manufacturing and agricul-ture sectors through the following in-terventions:

k Raise savings to encourageFDI;

k Refine infrastructure policiesthrough a competitive environment,better-equipped agencies in the face ofa market-oriented policy regime, orga-nized infrastructure agencies, a sen-sible management of contingent liabili-ties by the government, and properdelineation of national-local govern-ment roles;

k Implement strategic humanresource development (HRD) and sci-ence and technology (S&T) throughtechnology transfers, a more focusedand integrated research and develop-ment program, a productivity-orientedHRD plan, and a streamlined Depart-ment of Science and Technology(DOST);

k Continue trade liberalizationand tariff reduction; and

k Reform the agriculture sector.

nomic programs that will carry the Phil-ippines in the next century under themantle of sustainable growth and de-velopment.

As such, the country must gear upfor the increased integration of theworld economy. The economy must bevigilantly monitored and its perfor-mance continuously assessed in an ob-jective manner. Fundamental reformsmust be implemented and, in certaincases, continued in order to achievesustainable growth. The regional finan-cial crisis notwithstanding, ourpolicymakers should not allow it to dis-tract them from focusing on and insti-tuting fundamental reforms.

In this regard, Yap and the PIDSassessment team offers an economicagenda that will help the country pushtoward this goal. The agenda isgrouped into four categories, namely,macroeconomic stability, productivityand efficiency, social cohesion, and en-vironmental management.

Macroeconomic stabilityCapital markets must be futher devel-

oped to spur domestic resource mobilization.An increase in domestic resources willstimulate and further develop the capi-tal markets. A developed financial sys-tem may bring about an increase in thesavings rate and ultimately lead tohigher economic growth. Invariably,economic growth causes savings to rise.This is the cycle of economic growthand economic managers should pushthe country toward this condition.

Fiscal prudence must be maintainedto make monetary policy more flexible. Oneway to enhance the government�s rev-enue performance is to stop enactingnew laws and instead focus on improv-ing tax administration such as, amongothers, polishing the performanceevaluation system for revenue officersand creating data centers (Manasan1998). The government must also re-

physical and human capital so as toenhance their own productivity.

First, a reinvigorated Comprehen-sive Agrarian Reform Program (CARP)should be fully implemented to be ableto push forward the agrarian reform.Second, government interventions toaddress poverty and equity issues mustfocus on the following:

k a broadbased economicgrowth that will benefit the rural areasthrough the generation of more gain-ful employment and livelihoodprojects,

k efficient basic social servicesprograms targeted for poverty groups,

k institution of safety nets forthe poor during the transition into aglobal economy, and

k a monitoring system for iden-tifying proper beneficiaries.

In addition, a population man-agement program must be seriouslyimplemented since rapid populationgrowth is one of the underlying factorsin the problems on health and educa-tion. Moreover, the low-income groups�access to housing should be remedied.

Environmental managementThree important issues need to

be addressed in terms of enviromentalconservation and management. Theseare the correct pricing of the use ofnatural resources, reform of propertyrights, and strong monitoring and en-forcement of prices and propertyrights. To do these, the DENR and theDAR have to work closely together.Adequate and timely information mustalso be ensured.

ConclusionSumming up, it is evident from

the analysis and assessment that manybasic reforms still have to be designedand implemented. Moreover, it shouldbe noted that to ensure a more sustain-

Social cohesionThe PIDS Assessment Team pro-

poses the facilitation of access of thelow-income groups to basic services andof the underprivileged groups to both = 9


The Financial Crisisin East Asia

The stance of the government,particularly the monetary authorities,also encouraged the expansion of thefinancial system and dollar borrowing.There are at least two elements to thisaspect:

k By standing behind the viabilityof the domestic financial system, the govern-ment always gives an implicit guarantee toprivate debt. This guarantee encouragedbankers to take on riskier loans know-ing that even if these fail, they will bebailed out eventually. Deposit insur-ance forms part of this guarantee, butin this case, it discouraged depositorsto monitor the performance of the banks.

k Economic managers were not ableto respond properly to the rapid inflow offoreign capital. Exchange rates appreci-ated in real terms and/or interest ratesrose. The interest rate differential en-couraged dollar-denominated borrow-ings. In the Philippines, instead ofworking to keep the exchange rate ata competitive level, the Bangko Sentralng Pilipinas (BSP) gave a strong signalthat the level of the exchange rate wasnot only appropriate but would remainstable for an extended period of time.This stance further encouraged foreignborrowing.

The increased access to funds andgreater competition led to a rapid ex-pansion in the assets of the domesticfinancial system, mainly in the form ofloans to the private sector. An un-healthy mismatch of funds in terms ofmaturity and currency base developed.Banks would lend long-term loansbased on deposits and borrowings thatwere short-term in nature; and bankswould lend dollars to firms that earned

From Miracle to DebacleThe current financial turmoil in

East Asia has sent shock waves acrossthe global economy, even eliciting direpredictions of another Great Depres-sion. A World Bank (1989) study liststhree possible sources of a financialcrisis: macroeconomic conditions, in-dustrial and financial policy, and debtorand creditor behavior. The dominantview is that the present crisis wasbrought about by weaknesses in the fi-nancial system of the economies, bring-ing into focus specific financial policies,and debtor and creditor behavior.

Many of the East Asian econo-mies implemented twin liberalizations.First is the opening up of the capitalaccount which allowed foreign invest-ment to flow in and out of an economywith very minimal regulation, and sec-ond is the liberalization of the domes-tic financial system. The first measureallowed domestic firms to gain accessto foreign capital while the second in-creased competition among financialinstitutions operating locally.

One view of the crisis is that theexisting regulatory framework couldnot cope with the new demandsbrought about by these structuralchanges. Prudential regulations andbank supervision were inadequate tocope with the more liberalized eco-nomic climate. The riskiness of loanswas not evaluated thoroughly, financialinstitutions did not disclose enoughinformation, and even if they did, thedata were not timely.

revenue in domestic currency. Datashow that 40�50 percent of foreigncurrency deposit loans in the Philip-pines went to nonexporters. Thailand,Indonesia and Korea, meanwhile, hada rapid build-up of short-term foreigndebt.

It was inevitable that there wouldbe some bad loans because of overin-vestment in some sectors, particularlyin real estate. As a result of the intensecompetition, profits were squeezed,projects failed and loans were not re-paid. In the case of Thailand, the crisisin the financial sector was relativelywidespread. This prompted foreign in-vestors to start pulling out of the stockmarket. Because Thailand had a hugecurrent account deficit at that time, thepullout of foreign money put tremen-dous pressure on the baht. There wasno recourse but to allow the baht todepreciate sharply.

Neighboring countries were thendrawn into the crisis, the so-called con-tagion effect. One reason was that thestructure of the export sectors of Ma-laysia, Thailand, Indonesia and thePhilippines is similar. Hence, to remaincompetitive with each other, their cur-rencies must depreciate in tandem. Itshould be noted that when China ex-perienced a sharp depreciation in1994, it put competitive pressure on theSoutheast Asian countries. This expla-nation, however, lost some of itsstrength when the crisis spread toHong Kong and Korea.

The second reason for the con-tagion effect was that foreign investorsacted like a herd in withdrawing theirfunds from the region. This is attrib-uted to incomplete information on thepart of the investors; they could not ordid not bother to differentiate amongthe various economies. This type ofbehavior is the central theme of the lit-erature on self-fulfilling crises.


parency in credit allocation leading tothe bad loans.

This sweeping analysis tends togloss over the fact that similar criseshave occurred in countries with sophis-ticated financial regulation (for ex-ample, the U.S. savings and loan de-bacle) and in places with high levels oftransparency (for example, Scan-dinavia) [Stiglitz 1998]. Moreover, two-thirds of external bank lending in In-donesia were for the nonbank privatesector, indicating that foreign lenderswere willing to extend credit to Indo-nesian firms. The latter did not haveto resort solely to behest loans from�friendly� domestic banks.

A third line of argument lays theblame squarely on the liberalization ofthe capital account and the liberaliza-tion of the banking sector as the causeof the weaknesses in the financial sec-tor (Montes 1997). Ready access to in-ternational credit amplified existingmarket failures leading to the profli-gacy and excesses of the private sector.Both Stiglitz and Uy (1996) and Rodrik(1998) note that market failures aris-ing from asymmetric information, in-completeness of contingent markets,and bounded rationality are endemicto financial markets.

Despite the seemingly consistentanalysis, the framework rooted on fi-nancial sector weaknesses is still incom-plete. The macroeconomic parametersof many of these economies (exceptperhaps for Thailand) did not warrantthe excessive deterioration in their con-ditions, particularly the exchange rate.Thus, to put the entire blame on do-mestic policy mistakes, particularly inthe financial sector, can lead to mislead-ing policy prescriptions.

Krugman (1998) echoed this sen-timent when he stated that �it is clearlywrong to blame all of overinvestment and

overvaluation of assets in Asia on domesticfinancial intermediaries. After all, privateindividuals�and foreign institutional in-vestors�did buy stocks and even real estatein all the economies now in crisis. This sug-gests that other kinds of market failure, no-tably `herding� by investors, still have somerole to play.� It is evident that contagionthrough the panic of fund managershad an impact on the economic per-formance of the East Asian economies.

The discussion on this subject re-veals that there is still much to belearned about the present crisis before

Since many of the debts weredollar-denominated and did not carrya natural hedge against sharp depre-ciations, the fall in the value of domes-tic currencies weakened the financialviability of many projects. The situationwas exacerbated by the rise in interestrates. The higher cost of money andthe larger debt overhang in terms oflocal currency magnified the crisis andcaused a downward spiral in the EastAsian economies, especially Indonesia.

Some pundits contend that it wasless a case of overinvestment than a caseof unwise investment. This is anotherview of the cause of the weaknesses inthe financial sector. They cite as ex-amples the national car program ofTommy Suharto in Indonesia, thePetronas tower in Malaysia and the steelindustry in Thailand. A Newsweek issue(26 January 1998) even revived the phe-nomenon of crony capitalism.

This analysis gives a distinct im-pression that some of the factors re-sponsible for the rapid growth of EastAsia were either absent or were them-selves the cause of the problem. For ex-ample, promoting competition, espe-cially through export-oriented policies,was hailed as one of the key ingredi-ents of their rapid growth. Yet, lack ofcompetition in the business conglom-erates is seen as one of the critical fail-ings that contributed to the crisis.Moreover, what were previously viewedas strong financial markets�able tomobilize huge flows of savings and al-locate them efficiently�were thentransformed into weak financial mar-kets which sparked the economic de-bacle (Stiglitz 1998). And as a swipeagainst government intervention, somequarters contend that the close rela-tionship forged between the bureau-cracy and private sector in several ofthese economies to address informa-tion problems brought about politicalcronyism and a general lack of trans-

dismissing the East Asian miracle, par-ticularly the idiosyncratic financialpractices associated with some of theeconomies. What is clear is that the les-sons from the experience of the high-performing Asian economies orHPAEs�Japan, Korea, Taiwan, HongKong, Singapore, Thailand, Malaysia,and Indonesia�are still valid. The cri-sis was caused by an aberration in thefinancial sector and had little to do withsupply side fundamentals.

Policy Implications of the CrisisSeveral lessons, however, could be

drawn from the tumultuous experienceduring the past six months.

First, prudential regulations andsupervision of financial institutionsmust be strengthened in order to pre-vent moral hazard problems. Intal and

"The higher cost of money andthe larger debt overhang in termsof local currency magnified thecrisis and caused a downward

spiral in the East Asianeconomies..."

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Was the PesoOvervalued?Despite the sharp apprecia-

tion of the peso in realterms and its adverse impacton the performance of the

agriculture and manufacturing sectors,there is still an ongoing debate onwhether the peso can be described asovervalued or not.

The argument against labelingthe peso as overvalued revolves aroundthe Balassa-Samuelson theorem whichshows that the real appreciation of acurrency can be caused by shifts in therelative prices of the tradable andnontradable sectors, which are in favorof the latter. In the Philippine case, theincrease in investor confidence follow-ing the resolution of the energy crisisin 1992 and the liberalization of thecapital account in that same yearcaused a rise in the price of non-tradables. This was brought about byincreased activity in this sector particu-larly in construction and real estate.The real appreciation could not havebeen brought about by a surge in port-folio capital flows as net portfolio in-vestment was quite small even duringthe period after the capital account wasliberalized. The only other major in-flow of foreign exchange were the re-mittances of overseas workers but thiswas used to cover the trade deficit. Thecurrent account deficit was generallymanageable, ranging from 3.0�4.5 per-cent of GDP. Hence, the appreciationin real terms was an equilibrium re-sponse to improved economic condi-tions.

On the other hand, movementsin the nominal exchange rate show thatthe appreciation of the peso in realterms was directly related to its sharpappreciation in nominal terms from

Source: Author's estimates

P29.2 in October 1993 to P24.1 in De-cember 1994. Other Southeast Asiancountries were able to prevent largechanges in their nominal exchangerate. Real interest rates have alwaysbeen on the high side during this pe-riod indicating that monetary policywas extremely tight. Lamberte (1993)cited the IMF-imposed ceilings on mon-etary variables as the culprit. Empiri-cal evidence also shows that the BangkoSentral ng Pilipinas was targeting theexchange rate (Gochoco 1992, Reyesand Yap 1993).

The notion that there was in-creased investor confidence in the Phil-ippine economy because of majorstructural reforms hangs by a thinthread. As Krugman (1995) convinc-ingly argued, the spectacular economicperformance of some developing coun-tries was based not on solid achieve-ments, but on excessively optimistic ex-pectations on the part of international

and domestic investors or, using the ter-minology of Federal Reserve chairmanAlan Greenspan, on their irrationalexuberance. While Krugman was spe-cifically referring to Mexico, his analy-sis can apply to Indonesia and the Phil-ippines.

The initial successes that followedthe implementation of economic re-forms (note that the term �followed�and not �were caused by� was used de-liberately) led to a speculative bubble.Krugman described this process as fol-lows: �Markets poured money into de-veloping countries, encouraged bothby the capital gains they had alreadyseen and by the belief that a wave ofreform was unstoppable. Governmentsengaged in unprecedented liberaliza-tion, encouraged by the self-reinforc-ing conventional wisdom and the un-deniable fact that reformers receivedinstant gratification from enthusiasticinvestors.�

Figure 1: Equilibrium Real ExchangeRate, 1980�1997


major partners, was used to approxi-mate a real exchange rate. The resultsare shown in Figure 1. The degree ofovervaluation (undervaluation) is de-rived by taking the ratio of the actualvalue of the real exchange rate and itscorresponding equilibrium value.Based on the definition of the real ex-change rate index used, a ratio above1 (below 1) indicates that the currencyis overvalued (undervalued).

As shown in Figure 2, the ratio isabove one for most of the sample pe-riod. The only times the ratio woulddip below unity was when there was asharp peso depreciation (October1983, November 1990, and the secondhalf of 1993). Thereafter, the ratiowould climb back above 1 implying thatthe tendency is for an overvalued cur-

Vol. XVI No. 4 July - August 1998

Editorial Board

Dr. Ponciano S. Intal, Jr.President

Dr. Mario B. LamberteVice-President

Mr. Mario C. FeranilDirector for Project Services and Development

Ms. Jennifer P.T. LigutonDirector for Research Information

Ms. Andrea S. AgcaoiliDirector for Operations and Finance

Atty. Roque A. SoriosoLegal Consultant

Staff

Jennifer P.T. LigutonEditor-in-Chief

Genna J. EstrabonIssue Editor

Corazon P. Desuasido, Joel C. CruzBarbara F. Gualvez, Edwin S. Martin

and Liza P. SonicoContributing Editors

Valentina V. Tolentino and Rossana P. CleofasExchange

Delia S. Romero, Galicano A. Godes,Necita Z. Aquino, Lilet L. Lamayo

and Federico D. UlzameCirculation and Subscription

Jane C. AlcantaraLay-out and Design

rency. The degree of overvaluation,however, is generally mild (in the or-der of 10 percent).

Given the weight of the theoreti-cal arguments and the empirical evi-dence, the answer to the questionposed in the title is definitely YES.

able form of economic growth, focusmust equally be given to the more mi-cro level reforms as to macroeconomicreforms.

The bubble did burst for manydeveloping countries, the major lessonbeing that the real currency apprecia-tions that resulted from the apparentincrease in investor confidence did notreflect changes in real exchange rateequilibria. Rather, the currency appre-ciations should have been interpretedas transitory in nature given the factthat they resulted from excessively op-timistic expectations of internationalinvestors that were not warranted bystructural economic change.

To give an empirical sense to thedebate, an equilibrium real exchangerate was calculated with monthly datafrom 1980-1997 using the Hodrick-Prescott filter as applied by Goldfajnand Valdes (1997). The real effectiveexchange rate, based only on trade with


Source: Author's estimates

Figure 2: Degree of Overvaluation (Ratio of actual to equilibrium), 1980�1997

DRN

Finally, an economic blueprintcan only go as far as the nation�s politi-cal will allows it. The new political ad-ministration should therefore commititself fully to carrying the Philippineeconomy to new heights as it enters the21st century. DRN

DEVELOPMENT RESEARCH NEWS July - August 19981 0

Roles of the Visayasand Mindanao in the

Revolutionary Struggle

June 12 as a CentennialFramework

Several writers and historianshave forcefully argued that the KawitDeclaration of Philippine Indepen-dence on June 12 was not as politicallysignificant as the Bacoor independencedeclaration by municipal presidents onAugust 1, 1898 or the Malolos ratifica-tion of the Kawit independence proc-lamation on September 29, 1898 or asinternationally significant as the July 4,1946 independence proclamation byUnited States High Commissioner PaulV. McNutt, the latter being duly ac-cepted and recognized by no less thanthen Philippine President Manuel A.Roxas amidst a jubilant crowd and dis-play of fireworks at the Luneta. Whilerecognizing the circumstantial and es-pecially the theoretical and linguisticimperfections of the June 12 declara-tion, I believe, however, that there is,to a significant extent, historical rel-evance in the said declaration in oursearch for a national point of referencefrom which centuries of numerousstruggles for freedom by variousethnolinguistic groups comprising theFilipino national community may beviewed interrelatedly.

There are at least two reasons tosupport this tentative position.

First, the 333 years of Spanish rule(1565�1898) were marked by numer-ous uprisings and armed disturbancesin various areas in Luzon, Visayas andMindanao involving several, if not prac-tically all, of the documented Christianand non-Christian ethnolinguisticgroups. The outbreaks throughoutPhilippine history have common fac-tors despite cultural diversity. That is,the natural love for liberty and the willto resist any external threat. This basicrationale of local and sectoral struggleswas forcefully expressed in the dra-matic and emotional declaration ofnational independence on June 12,1898 in Kawit, Cavite by a council of

on the Malolos documents, numerousareas of the archipelago were repre-sented in the Congress with del-egates1�a majority of whom were Ta-galogs, Pampangos, Ilocanos, andVisayans�either designated or elected.The Malolos Congress clearly envi-sioned an entire archipelago, fromBatanes to Tawi-Tawi, that was repre-sented in the entire process ofnationbuilding and guided by the com-mon imperative for freedom.

Thus, the national process towardthe ultimate birth of a truly free Fili-pino nation formally and historicallyproceeded from the June 12 indepen-dence proclamation. The second logi-cal landmark was the convening of therevolutionary Congress in Malolos onSeptember 15 where two vital docu-ments relevant to independenceemerged: the ratification of the June12 declaration of independence onSeptember 29, and the promulgation

revolutionaries who foresaw, and be-lieved in what they perceived, a newnation emerging from a multicoloredrevolutionary past.

Second, the same people whowitnessed the Kawit proclamation werealso subsequently involved in perfect-ing the independence declaration andinitiating a constitutional processthrough the Malolos Congress towardthe establishment of a democratic re-public. Thus, the revolutionary leader-ship assumed in theory and in spirit theexistence of an independent Filipinasafter June 12, 1898 that would includenot just the dominant Christian major-ity but also the non-Christian minori-ties. This is shown by the designationof delegates to represent outlying com-munities as far as Bongao, Sulu in theSouth and Batanes in the North. Based

Samuel K. Tan*

��*Director, National Historical Institute (NHI). This paper was presented in one of the sessions of the

PIDS Centennial Lecture series, conducted to commemorate the observance of the centennial of the dec-laration of Philippine independence.

1The represented areas and their respective delegates to the Malolos Congress included the follow-ing: Zamboanga by Felipe Buencamino, Tomas Mascardo, and Lazaro Tanedo; Misamis by Teodoro Sandico,Apolinario Mercado, and Gracia Gonzaga; Calamianes by Narciso H. Resurreccion, Norberto Cruz Herrera,and S. Isidro; Batanes by Daniel Tirona and Vito Belarmino; Surigao by Tomas G. Del Rosario and TimoteoPaez; Davao by Leon Guerrero and Ceferino Pantoja; Cotabato by Jose M. Lerma and Pedro LayugVillaluz; Basilan by Juan Tuason and Jamiano Bautista; Dapitan and Lal-Lo by Jose Albert and Julio Ruiz;Paragua (Palawan) by Felipe Calderon and Domingo Colmenar; Amburayan by Mateo Gutierez Y Ubaldoand Jose Coronel; Tiagan by Lino Abaya and Fernando Ferrer; Jolo by Benito Legarda and Victor Papa;Balabac by Santiago Icasiano and Jose Zulueta; Palao by Isidro Tiongco and Alfonso Ramos; Laboc byRamon Aviola and Manuel Aldeguera; Matti by Vicente Samosa and Urbano Morales; Malabang by Lorenzodel Rosario and Agripino Atienza; Tucuran by Telesforo Chuidian and Juan Santos; Siassi by Jose Hernandezand Alejandro Avecilla; Fatoan (Tata�an) by Manuel Gomez Martinez and Luis Avecilla; Bongao by SoteroLaurel and Jacinto Vega; Baras by Arcadio del Rosario and Andres Tirona; Butuan by Santiago Barcelona,Alfonso and Ambrosio Delgado; and Bontoc by Fernando Canon and Mariano Noble Jose.


of a democratic constitution on Janu-ary 22. Hence, the first democratic re-public in Asia was introduced on Janu-ary 23, 1899.

It is apparent that the politicalactivities and decisions of theAguinaldo leadership after the Kawitdeclaration were appropriate reactionsof a freedom-seeking people. Said re-actions refer to the resistance put upby the Filipinos against the UnitedStates' acquisition of the Philippinesfollowing an easy American victory overthe Spanish army in the battle of Ma-nila Bay on May 1, 1898. The series ofAmerican decisions and activities wereantithetical to Filipino aspirations andunderstandably confused and compli-cated the so-called Filipino�Americanalliance during the Spanish�AmericanWar in the Philippines.

What were these American ac-tions that brought about the Filipinos'resistance towards them?

will to independence through a "car-rot-and-stick" policy.

Throughout this process, whatwere the roles and participation of theVisayas and Mindanao?

The Visayan Freedom StruggleThree historical landmarks deter-

mined the character and extent of theVisayan struggle for freedom duringthe Philippine Revolution.

The Katipunan in the VisayasEven before the outbreak of the

Revolution in 1896, Katipunan revolu-tionaries began arriving in the sur-rounding areas of Cebu and started theprocess of integrating the long Visayanrevolutionary struggle into theKatipunan-led revolution in the Luzonarea. In particular, the roles of revolu-tionaries such as Emilio Verdeflor ofCavite, Mateo Luga of Ilocos,Pantaleon del Rosario, Gil Domingo,and Hermogenes Peralta who becamecommanders of revolutionary units orfactions in Cebu were crucial to therevolution in the Visayas. Especially sig-nificant was Pantaleon Villegas (LeonKilat) of Oriental Negros who becamea Katipunero in Manila while workingas an acrobat in a circus company andsubsequently commissioned by EmilioAguinaldo in March 1898 to start therevolution in Cebu. The April 3, 1898offensive in the city was impressive butwas shortlived after Leon Kilat�s assas-sination by his own men on April 8, aHoly Friday, at about 2 a.m., as insti-gated by the local priest and the elite.What he began, however, spread toCarcar and other areas outside of thecity and brought into the revolution-ary circle all sectors of Cebu, includ-ing the ilustrado and elite.

After a series of rise-and-fall ofleaders, who were plagued by multipleproblems such as class interests, oppor-

lation of the City by the Spaniards tothe Americans on August 12 withoutthe inclusion of the Aguinaldo govern-ment in the formalities. The more im-portant result, however, was the con-clusion of the Treaty of Paris on De-cember 10, 1898 which provided for theSpanish secession of the Philippines tothe United States for $20 million. Forthe second time, the Philippines wasdeliberately excluded despite the pa-triotic diplomatic efforts of FelipeAgoncillo in Paris.

Third, American military forceshad begun moving by September 1898to the Visayas while the Malolos Con-gress was laying down the Constitu-tional basis of independence anddemocratic government for the Philip-pines. The American military moveswere sweetened by the oft-quoted�Policy of Benevolent Assimilation� asenunciated by President WilliamMcKinley on December 21, 1898, onlyto be followed immediately the next

= 12

First, preparations for the Ameri-can expeditionary forces for the con-quest and occupation of the Philip-pines began soon after CommodoreGeorge Dewey�s victory in the Battle ofManila Bay. By the end of July, threecontingents arrived in the Philippinesequipped for military war.

Second, peace protocols of theSpanish�American war which startedon August 10 began to end the Span-ish�American conflict. One of the re-sults of these peace protocols was themock battle of Manila which, as notedearlier, easily led to the formal capitu-

day by the American occupation ofIloilo.

On the basis of the foregoing his-torical observations, it appears that theJune 12 declaration of independence�however imperfect it may be at thattime�represented a clear, unequivo-cal, and strong desire of a war-torn andrevolt-laden community to be free andemancipated from colonial rule. It in-spired the revolutionary government ofAguinaldo to counter in a democraticmanner the imperialist design of a newcolonial power to weaken�interna-tionally and domestically�the Filipino

"Even before the outbreak of the Revolution in 1896, Katipunanrevolutionaries began arriving in the surrounding areas of Cebu and

started the process of integrating the long Visayan revolutionarystruggle into the Katipunan-led revolution in the Luzon area."


Katipunan-related activities began toappear in Mindanao although the pres-ence of dissidents before that yearcould be implied from the lists ofdeportados from Luzon sent to variouspoints in Mindanao, including even theremote islands of Jolo, Basilan, Siasi,Bongao, Tata�an and Cagayan de Jolo(Sulu). They formed part of the Span-ish garrisons and were used to suppresslocal resistance and for other purposes.

The Moro struggleBy 1896, the profound effects of

Spanish pressures and influence hadnot only been felt in the Christianizedcommunities but also in the non-Chris-tian areas including that of the Mus-lims. In Lanao, the Spanish militarycampaigns mounted by Governor Gen-eral Valariano Weyler against Maranaoresistance led to the final destructionof Amai Pakpak�s fort, the symbol ofMaranao steadfast struggle, in Marawiand the diffusion of local resistance.The inertia of the Maguindanao armedstruggle initiated by Datu Utto ofBuayan had virtually dissipated by 1890after Datu Utto retired into the secu-rity of his home in Bakat. His capitula-tion in 1887 led to the rise of at leasttwo datus: Datu Piang and DatuAlunan. In several kirim manuscript cor-respondences, the Maguindanao aswell as the Maranao leadership wascoopted politically by colonial rule.Sulu, which suffered from political ero-sion following the unilateral proclama-tion of Datu Harun Alracid (orNarassid) of Palawan as Sultan of Suluin 1884, continued to lose leverage inforeign relations until 1893 when thisDatu abdicated. Amirul Kiram, leaderof the anticolonial resistance duringthe last decade of Spanish rule, as-sumed the throne as Sultan JamalulKiram II.

The Indio responseThere were no radical differences

or disagreements over the 1896 revo-lution in Mindanao. First, the repercus-

Roles of the Visayas...From page 11

declaration of independence with thecreation of a Negros Republic in 1899,only to be co-opted by the Negrenseelite�s acceptance of American rule, thesame way the elites in Iloilo and Cebu did.

The masses in the struggleIn the overall assessment of the

Visayan freedom struggle, it is impor-tant to note that by the end of 1901,the virtually ilustrado-led revolutionhad ended as a chapter in Philippinerevolutionary history. But the freedomstruggle, which antedated theKatipunan outbreak by almost threecenturies, continued to plague Ameri-can occupation and rule. These armedmovements were led by charismatic per-sonalities who regarded themselves asprophets, messiahs, and reincarnationsof Rizal, the Holy Spirit, and Christ.The fanatical followers of these messi-anic movements were called in colonialreports as pulahanes, tulisanes,vagamundos, babaylanes, and other so-cial identities. Their revival during thefirst decade of American rule was at-tributed to perceptions that the dete-rioration of social conditions includingloss of lives due to epidemics, sickness,and destruction of the environmentand properties were the result of thescorch-earth method used by theAmericans in the war.

tunism, personal rivalries, racial andethnic prejudice, epidemics, fires, andcriminality, took place, the revolution-ary struggle crystallized along the pro-independence ideals of ArcadioMaxilom and Juan Climaco until theirformal surrender between 1901 and1902. Afterwards, only messianic andmillenarian movements�sometimeslabeled by colonial authorities as ban-ditry�continued the freedom struggle,under leaders like Roberto Caballero,Petronilo Esmardo, EugenioAlcachufas, Rafael Tagal, MarianoAbayan, Claudio Bakus, and mysticleaders such as Ponciano Elopre(Buhawi) and Papa Isio of Negros.

Meanwhile, Iloilo witnessed theouster of Spanish rule shortly beforethe American occupation of the City inDecember 1898. Martin Delgado ledthe resistance against American rule.Samar and Leyte also had their shareof anticolonial struggle against Span-ish rule but their wellknown chapter inrevolutionary history was the armedstruggle against the superior Americanmilitary forces. Indelibly rememberedis the battle of Balanggiga in Septem-ber 1899 wherein a dawn attack bybolomen surprised the Americans whowere having breakfast in their detach-ment. Most of the more than 60 menwere killed except a few who survivedto report the most serious crack inAmerican supremacy in the Visayas, ifnot in the entire archipelago. Thewellknown response to this massacrewas the landmark American reprisal, onorders of Gen. Jacob Smith, to kill men,women, and children above 10 years ofage in Samar.

Elsewhere in the Visayas, particu-larly Negros, the armed struggle againstSpanish rule was eclipsed by the brief

The American factorThe Treaty of Paris definitely gave

American forces basis to claim sover-eignty over the entire archipelago. TheAmerican occupation of Cebu andIloilo by December 1898 brought su-perior military technology against therevolutionary government. By 1902,American control was established inthe Visayas leaving the freedomstruggle to the masses after the elitehad been co-opted by colonialism.

The Mindanao Freedom StruggleFrom historical, especially docu-

mentary sources, it was not until early1897 that tangible indications of


sion of the Katipunan-led revolutionwas not significantly felt until early 1897mainly because of the mode and ex-tent of communication then which wasdependent on slow interisland ship-ping between Mindanao and Luzonand the old riverine routes and moun-tain trails used in internal travel. Sec-ond, the Spanish presence and impactin Mindanao were profoundly religiousdespite the establishment of forts instrategic points in Mindanao includingJolo, Siasi, Bongao, and Tata�an. Con-sequently, the withdrawal of Spanishpresence after 1896 did not necessar-ily reduce the Spanish influence in theregion. It merely entrusted the defenseof Spanish interests to the religious as-signed in the region, particularly theJesuits, whose role had become crucialin the response of the Christian popu-lace to the 1896 outbreak. Understand-ably, the reaction was divided and thelocal people were confused betweenchoosing the Papal Flag or that of theRevolution as a rallying emblem. Thiswas demonstrated in late 1896 inSurigao and Butuan where theGonzales patriarch �Jantoy� and his twosons, Simon and Wenceslao, had estab-lished themselves as leaders of the revo-lution in Mindanao. They were sup-ported by contingents of deportados andby mutinous members of the SpanishArmy.

The Lumad reactionThere were no written records in

the Lumad sector that can best describetheir condition in 1896 or their role inthe revolutionary struggle. From scantysources, only the Bukidnons appearedto have been identified as being limit-edly involved in the revolutionary ac-tivities. The involvement of theManobos was not that clear either ex-cept during the time of Sultan Kudaratwhen the Manobo Chieftain Manakiorand his warriors supported theMaguindanao overlord against Spanishtroops. What seems to be clear basedon some scanty accounts from travel-

a dramatic turn with significantchanges altering the patterns of devel-opment in the archipelago and pavingthe way for the outbreak of the Revo-lution in 1896. It was from this focalpoint of history that makes the centen-nial consciousness the motive force be-hind nationbuilding.

The colonial era is long gone butcolonialism still continues, not in Span-ish nor American forms, but in a Fili-pino neocolonial raiment that is moresubtle and difficult to deal with. In asense, a new frailocracy is emerging, anew form of exploitation and oppres-sion of the poor and marginalized sec-tors. It is in this context where we seethe relevance of our centennial activi-ties and the need to remind the Fili-pino people of the unfinished reformmovement.

The same reality applied to theRevolution from 1896 to 1913 whichbrought together the social classes tofight for a common cause to attain com-plete national independence, fromBatanes to the Muslim South, by over-throwing the colonizers through armedstruggles. The love for freedom and thedetermination and will to achieve it,regardless of the loss of lives and re-sources, is one of the enduring lega-cies of the Revolution and the mostvaluable element in our centennial cel-ebration.

Undoubtedly, the contributionsof the Visayas and Mindanao areas tothe freedom struggle were impressiveand cannot be ignored. There mightbe no colonial power to overthrow any-more but there are many manifesta-tions of neocolonial structures andforces that threaten the freedom we arecurrently enjoying. It is in the protec-tion and preservation of our freedomwhere the centennial celebration de-rives its meaning and importance. Thisshould be the motivation for the futurethat we, as Filipinos, want.

"The value of the past to man,however, lies in what it can offer

for the present and the future."

ers was the system of ethnic withdrawalfrom conflict with either Spanish forcesor the Moros.

The lists of inhabitants ornaturales as early as the 1850s in thearchival records are clear indication ofSpanish presence in the area. However,sources did not indicate if theSubanuns had been organized intogovernment units headed bygobernadorcillos or cabezas similar tothose in Dapitan, Misamis, Surigao, andZamboanga. The organization of theSubanun homeland would not appearin Spanish records until the successfulprobe into the Sibuguey area by AlejoAlvarez and a companion to bring aSpanish official message to the triballeaders. One result of the determinedefforts of the Spaniards to restructurethe Zamboanga peninsula in accor-dance with Spanish policy was theTreaty of 1896.

Conclusion: History and DestinyThe Philippine centennial brings

together the past and the future innationbuilding. It links history and des-tiny as interrelated and, in a sense, in-terdependent concepts. History, by thenature of its academic focus, providesinsights into the past as early as histori-cal sources allow. It portrays people,events, and realities far beyond thereach of human memory. The value ofthe past to man, however, lies in whatit can offer for the present and the fu-ture. The activities of the centennial an-niversary are the means to achieve thisend.

Necessarily, the centennial storybegins from the last decade of the 19thcentury when Philippine history took DRN


Habito and DioknoMove On

Officials come and go. This isa reality in governmentorganizations where leadershave fixed terms of office.

Thus, with the entry of a new adminis-tration under President Joseph EjercitoEstrada, two economists who are closelylinked with the Philippine Institute forDevelopment Studies (PIDS) took onnew directions and faced new chal-lenges.

The Institute recently bid farewellto Dr. Cielito Habito and Dr. BenjaminDiokno. Dr. Habito ended his term ofoffice as Secretary for SocioeconomicPlanning and Director-General of theNational Economic and DevelopmentAuthority (NEDA). As NEDA Chief, he

was also the Chairman of the PIDSBoard of Trustees. Dr. Habito was suc-ceeded by Dr. Felipe Medalla, formerdean of the UP School of Economicsand a former member of the PIDS Lo-cal Advisory Board. Meanwhile, Dr.Benjamin Diokno, UP School of Eco-nomics Professor and member of thePIDS Board of Trustees, was appointed

by President Estrada as Secretary of theDepartment of Budget and Manage-ment (DBM).

Dr. Habito had a relatively shortyet distinguished service in the govern-ment. After being in the academe for15 years, teaching at the University ofthe Philippines�Los Baños, he joinedthe NEDA in 1990 as Assistant Direc-tor-General. He was promoted the nextyear to Deputy Director-General and,after another year, was named by thenPresident Fidel Ramos as Secretary ofSocioeconomic Planning and NEDADirector-General. The appointmentmade Dr. Habito the youngest mem-ber of President Ramos� Cabinet. Con-currently, Dr. Habito was the Chairman

of the Commis-sion on Popula-tion and the Phil-ippine Councilfor SustainableDevelopment.

Even as astudent, Dr.

Habito already showed great promise�he graduated with honors at the Phil-ippine Science High School, a summacum laude at UP Los Baños, and re-ceived masters and doctorate degreesfrom the Harvard University. After hisCabinet stint, Dr. Habito is taking iteasy: he reads a lot and does some re-search occasionally.

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Dr. Diokno, on the other hand,has been serving in various governmentpositions for the past 12 years. He isalready familiar with the Budget andManagement portfolio since he was theDepartment�s Undersecretary from1986 to 1991. In addition, he was theDirector of the Board of the PhilippineNational Oil Company (PNOC) from1988 to 1991 and subsequently itsChairman and CEO in 1991, Chairmanof the Local Water Utilities Adminis-tration (LWUA) from 1988 to 1991,Vice-Chairman of the National Statisti-cal Coordination Board (NSCB), andFiscal Adviser in the Office of the Sen-ate President from 1993 to 1995. Hewas also a member of the PIDS Boardof Trustees for 10 years (1988�1998).Dr. Diokno earned his bachelor andmasteral degrees in economics fromthe University of the Philippines. Heobtained another masteral degree inPolitical Economy from Johns HopkinsUniversity in Maryland and a doctor-ate in Economics from the MaxwellSchool of Citizenship and Public Affairsof Syracuse University in New York.

With their new assignments inand out of government, these two dis-tinguished economists will surely bemissed not only by their respective staffin their previous organizations but thewhole Institute as well who have lookedup to them for being two of the morededicated and brilliant economists inthe Philippine government. BFG

3 Dr. Cielito F. Habito(right), former NEDAChief, welcomes andfiguratively hands overthe reins to Dr. Felipe M.Medalla, the new head.

4 Dr. Benjamin Diokno'sexpertise will be tested tothe fullest as he heads thenew administration'sbudget department.


Financial Crisis...From page 7

Editor's NotesFrom page 1

Llanto (1998) list some specific recom-mendations:

k Strengthen prudential regu-lation and supervision by implement-ing comprehensive risk-based assess-ment and supervision instead of focus-ing primarily on credit risk. In addition,there is a need for more stringent in-formation disclosure requirements, ad-equate accounting and auditing stan-dards, as well as clearer rules andgreater transparency in asset classifica-tion and provisioning.

k Review the policy on capitalaccounts and foreign borrowing. Itwould be useful to look into the Chil-ean case which entailed stricter ruleson domestic firms� borrowing directlyabroad (such as the minimum creditrating rule), the imposition of reserveson short-term foreign currency depos-its by nonresidents and other short-term portfolio flows, and a one-yearresidency requirement on foreign di-rect investment. Furthermore, dollarlending from FCDs to unhedged bor-rowers must not be allowed.

Second, the timing, extent, andpace of the twin liberalizations, includ-ing trade liberalization, should be re-viewed. It is not surprising that since1980 when financial liberalization wasbegun in earnest around the world, thenumber of BOP crises associated withbanking crises increased (Kaminskyand Reinhart 1996). Public authoritieswould do well not to let the ideologyof liberalization obstruct the specificobjectives of monetary policy�thesound development of the financialsystem and the increase in the produc-tivity of investment (Montes 1997). Inthis regard, measures should be imple-mented to regulate the flow of short-term capital although this is closely re-lated to the second recommendationof Intal and Llanto (1998).

Finally, the behavior of the inter-national private sector should be exam-ined. First, international lenders mustbe more prudent and not be swayedby herds nor be afflicted with disastermyopia. Second, foreign investorsshould be encouraged to hedge at leastthe currency risk of their investmentsto prevent sudden withdrawals from do-mestic capital markets (Montes 1997).But beyond this, the current situationwhere there is simply too much liquid-ity in the global system should be cor-rected. This situation encourages veryshort-term investment and fuels specu-lative activity which generates the volatilitythat makes globalization a threat insteadof a challenge and an opportunity.

ReferencesIntal, P.S. Jr. and G.M. Llanto. "Financial Reform

and Developments in the Philippines, 1980-1997: Imperatives, Performance and Chal-lenges." PIDS Discussion Paper Series No. 98-02. Makati City: Philippine Institute for Devel-opment Studies, 1998.

Kaminsky, G. and C.M. Reinhart. "The Twin Crises:The Causes of Banking and Balance-of-Pay-ments Problems." International Finance Dis-cussion Paper No. 544. Washington: Board ofGovernors of the Federal System, March 1996.

Krugman, P. "What Happened to Asia?" ForeignAffairs, January 1998.

Montes, M.F. The Currency Crisis in Southeast Asia.Singapore: Institute of Southeast Asian Stud-ies, 1997.

Rodrik, D. "Who Needs Capital Account Convert-ibility?" In "Should the IMF Pursue Capital Ac-count Convertibility?" Essays in InternationalFinance No. 207. New Jersey: Princeton Uni-versity, May 1998.

Stiglitz, J.E. "Sound Finance and Sustainable De-velopment in Asia." Keynote address beforethe Asia Development Forum, Manila, Philip-pines, March 12, 1998.

______ and M. Uy. "Financial Markets, Public Policy,and the East Asian Miracle." The World BankResearch Observer 11, 2 (August 1996).

The World Bank. World Development Report 1989:Financial Systems and Development. NewYork: Oxford University Press, 1989.

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Presenting the study�s integrative re-port during a major PIDS symposium inJuly, Dr. Josef Yap, PIDS Research Fellowand Team Leader of the AssessmentProject, concluded that while there hadbeen a lot of improvements in many ar-eas during the last decade, the Philippinesnevertheless still lags behind its majorASEAN neighbors. He then presented aproposed agenda beyond the year 2000which focuses on four areas, namely: (a)macroeconomic stability, (b) productivityand efficiency, (c) social cohesion, and (d)environmental management.

The highlights of this report are fea-tured in the banner story of this DRN issue.

Also included in this issue are ac-companying articles to this issue's ban-ner feature on the assessment of the Phil-ippine economy. The first one is about thefinancial crisis (page 6) and the other onwhether the peso is overvalued or not(page 8). Both were lifted from the PIDSassessment report.

Meanwhile, capping the Institute�sseries of centennial lectures was the pre-sentation made by Dr. Samuel Tan, Di-rector of the National Historical Institute,which gave a perspective of the revolu-tionary struggle in the Visayas andMindanao areas in relation to the fight forPhilippine independence. Rarely beinggiven the same prominence as their Luzoncounterparts in the retelling of the Philip-pine Revolution, Visayas and Mindanao,according to Dr. Tan, also had a numberof contributions which should be madeknown to every Filipino (page 10).

Also in this issue are short articles onthe prospect of devaluation of the Chinesecurrency based on Dr. Johanna Ruivivar�spresentation in one of the PulongSaliksikan sa PIDS sessions (page 16) andthe farewell dinners tendered by the In-stitute in honor of Dr. Cielito Habito,former National Economic and Develop-ment Authority (NEDA) chief, and Dr.Benjamin Diokno, University of the Phil-ippines School of Economics professor, asoutgoing Chairman and member, respec-tively, of the PIDS Board of Trustees (page14). The two economists have made sig-nificant contributions to the Institute interms of strengthening its linkages withvarious policymaking publics and improv-ing its institutional resources.


Will China Devalueits Currency?

After the recent devaluation ofthe Russian ruble, there is agrowing agitation amongSoutheast Asian countries

over the possibility of China�s currency,the renminbi, to follow suit. If andwhen the Chinese finally decides todevalue the renminbi, the consequen-tial effects of a contagion would mostlikely bring about additional jitters tothe already shaken financial landscapeof the region.

In a study presented at the Phil-ippine Institute for Development Stud-ies (PIDS) by Dr. Johanna Ruivivar, aneconomist from PARIBAS (a New York-based investment consultancy firm),the possibility and scenario of therenminbi�s devaluation and its effectson the region�s financial status werediscussed.

Dr. Ruivivar said that in a worst-case scenario, Chinese devaluationmight bring about the depreciation ofthe peso from between P45 to P55 tothe U.S. dollar while the Indonesian ru-piah may plunge down to a staggeringR20,870 the U.S. dollar.

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During her presentation, Ruivivardelved on the current overvaluation ofthe Chinese renminbi, a concernwhere most of the apprehension for animpending renminbi devaluation isrooted. Dr. Ruivivar noted that ananalysis of the data shows how therenminbi is currently overvalued by asmuch as 15 percent of its real exchangerate.

a level of 25 percent as the thresholddegree of overvaluation. To effect aworst-case scenario for a possible de-valuation of the renminbi, two alterna-tive prerequisites are necessary. One isif the Japanese yen is devalued to Y222to the U.S. dollar, or another is whereall Asian currencies depreciate at thesame rate as the yen, from U.S.$1:Y137to U.S.$1:Y185.

�From January 1994 to December1997, the renminbi remained underval-ued relative to its equilibrium value byan average of 15 percent. However, therenminbi has since become overvalued.Today the degree of overvaluation hasincreased from 15 to 9 percent in Janu-ary 1998,� she illustrated.

Nevertheless, she said that thereis no immediate cause for alarm. Whilethe renminbi overvaluation is indeedplaced at 15 percent, Ruivivar defined

Moreover, she noted that therenminbi�s overvaluation is not neces-sarily the only consideration for theChinese to effect a devaluation. �Theultimate decision to devalue therenminbi will involve a political dimen-sion and be driven by the prospects forexport market growth and capital in-flows as well as export competitiveness,�Ruivivar explained.

At present, competitiveness ofthe renminbi has not yet hamperedChinese exports significantly. The U.S.import growth from China, whiledown, nevertheless remains robust. Fig-ures show a marked increase of 18 per-cent in the first five months of 1998.Comparatively speaking, U.S. importgrowth from problem economies inAsia is low and in some cases negative,as in the case of Indonesia.

In conclusion, however, Dr.Ruivivar acknowledged the limitationsof the study. �The paper limits its focus(largely) to measuring renminbiovervaluation. The broader question ofwhether or not China will devalue isbased upon parameters beyond the(actual) scope of this analysis.� DRN

the philippine economy in reviewdevelopment research news 3 july - august 1998 a stagnant labor...

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