THE STRUCTURE OF CRISIS

THE CRISIS OF STRUCTURE

Structural Causes and Effects of the Converging Crises

of the Philippine Economy and Society

James Matthew B. MiraflorCampaigner, Freedom from Debt Coalition

DEVELOPMENT AND PEACE: THE MAGUINDANAO CASE

That Maguindanao (had been under Martial Law by virtue of Proc. No. 1959) is virtually an area where central government failed and where warlords rule is happening amidst a stark economic reality.

From 2000 to 2003, Maguindanao has remained the 2nd poorest province in the Philippines.

The poverty incidence has worsened from 59.3% in 2000 to 60.4% in 2001, the National Statistical Coordination Board (NSCB) reported. Maguindanao has am HDI (Human Development

Index) of .461, with a rank of 73rd among 79 provinces in 2000, then 2nd lowest in 2003.

STARK INEQUALITIES This, while the Ampatuans are known for

lavishness. Two years ago, Q-11 television reported that

Autonomous Region in Muslim Mindanao Gov. Zaldy Ampatuan and his father Maguindanao Gov. Andal Ampatuan distributed the P1,000 bills shortly after arriving at Ninoy Aquino International Airport (NAIA), disrupting operation.

That the Ampatuan clan is rich and powerful may be related to the fact that Internal Revenue Allotment (IRA) is increasing over the years, and Maguindanao received exactly P1,593,823,229.00 in 2006 alone. Despite its "autonomous" nature, the ARMM

receives approximately 98% of its operating revenue from the NG.

THE BANE OF INEQUALITY

The question then is: How did we arrive at this stark situation of extreme inequality?

What policies did the government have in the past which eventually led to, or arguably, maintained a situation of, a very small clique of elite families, dynasties and warlords and vast majority of poor citizens?

Will it get worse today, given the global financial and climate crisis, the current fiscal and economic crisis?

OUTLINE1. Gradual Deterioration: Historical

Trends in the Philippine Economy and Employment

2. The Current Financial Crisis: Ramifications to the Philippine Economy

3. Government Response to the Crisis: Deceptive, Inadequate, Myopic

4. A Social Crisis in the Offing?5. Alternatives: Industrial Integration

and a High Wage Labor Regime6. Climate Debt and Climate Crisis

NEOLIBERALISM’S IMPACT ON INDUSTRY AND THE LABOR SECTOR

1. De-industrialization and Unemployment

Why are the majority of Filipinos poor?

GOVERNMENT POLICIES ON TRADE, INDUSTRY, AND EMPLOYMENT

Financial liberalization to allow entry of foreign capital, cheap labor policy (via contractualization, setting very low minimum wage, and union busting to prevent wage extenders) to attract them.

Trade liberalization to allow the entry of cheap imports, make domestic industy more efficient through foreign competition

What are the effects of these policies to the Philippine economy?

THE PHILIPPINE ECONOMIC STRUCTURE The economic structure can best be

assessed via comparing the components of the Gross Domestic Product (GDP) – Agriculture, Industry (which includes Manufacturing), and Services

Due to trade liberalization policies by the government, and lack of basic industry support, Philippine manufacturing shrunk relative to its ASEAN neighbors.

GRADUAL ECONOMIC STRUCTURING: THE DECLINE 0F AGRO INDUSTRY

Agriculture suffered a continuous decline in GDP share, from 40.4% in 1946 to 18.8% in 2004. Industry, which started at 20.9% in 1946 but peaked at 41.0% in 1981, ended up at 33.6% at 2004. Manufacturing fell from 29.1% in 1974 to 24.4% in 2004.

Services, however, which started at 38.8% in 1946, grew to 47.6% in 2004.

19461949

19521955

19581961

19641967

19701973

19761979

19821985

19881991

19941997

20002003

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0% of GDP, by Industrial Origin

Agriculture, Fishery, ForestryIndustryServicesManufacturing

Source: National Statistical Coordination Board

LABOR RESTRUCTURING Together with the economy, the labor sector

composition has radically been changed also. The labor force share in the Agriculture and

Industry category declined significantly throughout the years. Meanwhile, the workforce share in the service industries grew from 34.0% in 1998 to 43.0% in 2005.

This is unfortunate because it is agriculture and industry that is the most labor-intensive amongst industries.

This is the reason for the unresolved unemployment througout the years.

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

% Share of Labor Force

Agriculture, Fishery & ForestryIndustryServicesUnemployed

Source: National Statistics Office

UNEMPLOYMENT AND WARLORDISM Failed economy facilitates the strengthening

of “economic warlordism” in the country. It is ultimately the lack of government action

on the rising unemployment, a consequent of its de-industrializing policy, that creates new warlords in impoverished towns, as displaced workers of failing agriculture and industrial sectors look for employment in the underground economy.

Amid widespread economic desperation, holding the gun for a patriarch becomes an attractive choice for the unemployed. Political clans merely have to dangle them patronage to corrupt them.

DE-INDUSTRIALIZATION AND THE UNDERGROUND

De-industrialization resulted to the conversion of the real economy into an underground, illegal economy, Just as the opening up of Mexico to the North

American Free Trade Agreement (NAFTA) converted it from an industrializing country to the home of narcotic syndicates.

The best solution for warlordism and patronage politics is to strengthen the economic base through trade protection and giving people jobs with decent pay.

When people are secure with their livelihoods, the less likely will they be cowed into submission by elites and trapos. The people’s economic power can and must translate to political power.

ALTERNATIVE: LABOR MIGRATION The main reason why OFWs are going out of

the country, in the first place, is the largely unabated unemployment. From 2.24 million people unemployed in 1988, it

jumped to 4.25 million in 2004. Labor exportation policy (LEP) evolved from

being a stop-gap solution on unemployment (as invented by the Marcos administration, with then Labor Secretary Blas Ople as the brains) to a full-blown “development” strategy for the government.

Domestic unemployment, reliance on overseas employment.

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20050.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2.24

2.212.03

2.72 2.59

2.50

2.62 2.70

2.55

2.64

3.14

3.10

3.46

3.65

3.87

3.93

4.25

4.13

0.47 0.46 0.450.62 0.69 0.70 0.72 0.65 0.66

0.750.83 0.84 0.84 0.87 0.89

0.870.93 0.99

Persons Unemployed vs. OFWs Deployed (in millions)

Persons Unemployed

OFW Deployment

Source: National Statistics Office, POEA

REMITTANCES: SUSTAINING CONSUMPTION DESPITE UNEMPLOYMENT

According to the Keynesian model, in a normal economy, de-industrialization and the consequent unemployment would reduce to decreased consumption, which would result into further decline of production.

In the Philippines, we see a different scenario, wherein high unemployment is mitigated by high volume of OFW remittances.

Thus, the services-based economic growth in the Philippines is also a consumption-driven one.

CONSUMPTION-DRIVEN ECONOMY The%age of government spending and

capital formation share in the GDP had remained stagnant, if not decreasing.

The export-import industries had significant and steep increase during the 90’s, while personal consumption is at the top over the years. Interestingly, the rise in

exportation/imporation is proportional to the decline in capital formation

The lack of capital formation may have been brought about by the lack of capacity to save and channel excess cash to banks for reinvestment, particularly because of low-income and high unemployment rate.

19461949

19521955

19581961

19641967

19701973

19761979

19821985

19881991

19941997

20002003

20060

10

20

30

40

50

60

70

80

90

100% of GDP, by Expenditure

Personal Consumption ExpenditureGovernment ConsumptionCapital FormationExportsImports

Source: National Statistical Coordination Board

As trade grows, Capital formation Drops.

CONSEQUENCE ON TAXATION

Aside from low savings, the consequence of high unemployment, high labor export, policy is that the income tax base remains to be low.

Even with the purposive targeting of consumption, the largest chunk of the economy, via regressive taxes (Republic Act 9337 or the E-VAT), the revenue structure is not working.

Arroyo’s VAT-boosted and privatization-boosted revenue effort remains to be below that of Ramos, Estrada, and even Aquino.

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Aquino Ramos Estrada Arroyo

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

19.00%

20.00%

0.155124617973024

0.163010474017019

0.188015650084852

15.53%

Philippine Revenue EffortAquino's AverageRamos' AverageEstrada's AverageArroyo's AverageRevenue Effort

Source: Bangko Sentral ng Pilipinas, National Statistical Coordination Board

RESULT: GROWING DEFICIT, GROWING BORROWINGS, GROWING DEBT PROBLEM

The recourse of a cash-strapped government, in the face of massive debt servicing, is to borrow.

The debt problem is compounded by the current borrowing strategy of the government, which is to borrow in order to retire old debts and replace them with new ones at lower interest rates and longer maturity period.

We see then a growing deficit, and a borrowings and debt service policy going hand-in-hand.

GROWING DEFICIT, DEBT-DRIVEN STRATEGY

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Marcos Aquino Ramos Estrada Arroyo-200

0

200

400

600

800

1000Borrowings, Debt Service, Deficit

Borrowings

Debt Service

Deficit

Source: Bureau of Treasury

A CONVERGENCE OF CRISES: IS THE PHILIPPINES READY?

2. Enter the Global Economic Crunch and Climate Disasters

Given the country’s structural economic problems, are we

ready for today’s convergence of economic, climate, and

fiscal crises?

OPTIMISM AMID CRISIS: UNFOUNDED? The mainstream economists are

already confident that the Philippines is on its way to “recovery” after the global economic crunch.

But data shows otherwise. Leading Economic Indicator (LEI) decline six consecutive quarters, now at very low -4.25 in the 3rd quarter of 2009 from +0.045 in the 1st quarter LEI are indicators which gives us strong

clues as to where the economy is heading. LEI are important for investors as they help predict what the economy will be like in the future.

LEI’S DECLINE: A SIGNAL OF GDP WEAKENING

During the 2009 1st quarter, among the negative contributors in the LEI are: number of new businesses (-0.197) and stock price index (-1.077), total merchandise imports (-0.008), and terms of trade index (-0.002).

Interestingly, they roughly correspond to the 1st quarter GDP decline (at current prices) in capital formation (-0.2%), imports (-21.5%), and exports (-18.5%).

LEI’S DECLINE: A SIGNAL OF GDP WEAKENING

Some Contributors in the Leading Economic Indicator (LEI)

Some Components of Gross Domestic Product (GDP) (at current prices)

Contributor 1st quarter 2nd quarter Expenditure Share

1st quarter 2009

Growth from 1st quarter 2008

Consumer Price Index

-0.585 0.429 Personal Consumption Expenditure

1,268,233 8.9%

Terms of trade index

-0.002 -0.185 Exports 528,623 -18.5%

Total merchandise imports

-0.008 -1.006 Less : Imports

530,951 -21.5%

Number of new businesses

-0.197 -0.118 Capital Formation

252,561 -0.2%

HERE COMES EARTH’S WRATH Updated government reports reveal that

crops, livestock, and farm structures destroyed by Ondoy and Pepeng is now reaching a staggering P12 billion. Ondoy accounting for P6.8 billion while Pepeng’s

damages reaches P5 billion, a cost which may climb further.

An estimated 400,000 hectares of rice fields have been affected, with 106,189 hectares totally destroyed. Rice crops destroyed by both weather disturbances have reached 560,000 metric tons, totaling P9.6 billion. This is not to mention infrastructure damages

which also run to billions of pesos as of this writing.

MonthFrequency of Typhoons and Losses/Damages in Billion (B) Pesos

Total1980-85 1986-90 1990-95 1996-00 2001-05 2006-10

July 2 (6.8 B)

2 (6.8 B)

Aug. 1 (2.1 B)

1 (2.1 B)

Sept.1

(4.1 B) 1

(3.2 B)1 (6.6 B) 3

(13.9 B)

Oct.1

(2.1 B)3

(22.7 B)3

(17.8 B)1

(3.9 B)9

(46.5 B)

Nov.2

(13.7 B)1

(3.2 B)1 (5.1 B) 3

(22.0 B)Dec. 1

(2.5 B)1

(2.0 B)2

(4.5 B)Total 2

(6.2 B)3

(15.8 B)5

(28.4 B)3

(17.8 B)5

( 15.9 B)2 (11.7 B) 20

(95.78 B)

ECONOMIC IMPACTS OF THE “WORST” TYPHOONS – DEPARTMENT OF AGRICULTURE

PRESSURE TO SPEND AMID GROWING DEFICIT

The government revealed that its budget deficit had soared 326.9% year-on-year from January to October, ending up with a deficit of PhP266.1 billion by the end of May compared with P62.3 billion deficit at the same period last year.

With this figure, the government now breached its full-year target deficit ceiling of PhP250 billion.

Actually, this deficit target is the largest in the Arroyo administration, and even larger than PhP210.741 billion deficit in 2002 during the fiscal crisis.

NEARING A FISCAL CRISIS?

Jan-Oct Actual 2009 Q1-Q4

Program

Percent Growth

2009/20082008 2009

Surplus/(Deficit) -62.3 (266.1) -250 326.9Revenues 972.6 925.4 1,239.20 -4.8 Cash 925.1 881.4 1,183.90 -4.7 Non-Cash 47.4 44 55.3 -7.3Expenditures 1,034.90 1,191.50 1,489.20 15.1 Cash 987.5 1,147.50 1,433.90 16.2 Non-Cash 47.4 44 55.3 -7.3

DECEPTIVE, INADEQUATE, MYOPIC 3. Government Response to the Crisis

What is the government doing amidst all of these problems?

(SO-CALLED) 2009 ECONOMIC RESILIENCY PLANAmount Item Source Issues

PhP 160 B Incremental budget Government – Taxes (e.g. R-VAT, text tax, etc.)

Why count a regular increase in budget as stimulus?

PhP 40 B Corporate and individual tax breaks

Government – Forgone Revenues

No actual spending here.

PhP 30 B Temporary additional benefits to GSIS/SSS/ PhilHealth members

GSIS/SSS

PhP 100 B Private Sector GSIS/SSS to offer loans with sovereign guarantees

Possible bailout of private sector

PhP330 B Total

DBM Proposed Spending for 2010 (in billion pesos)

Foreign Debt Service 253.459 Education Spending 235.210

Foreign Interest Payments 119.582 Health Spending 48.344

Foreign Principal Amortization 133.877 Natural Resources 13.317

Domestic Debt Service 492.716 Agriculture 55.368

Domestic Interest Payments 221.230 Housing and Community

Development 100.989

Domestic Principal Amortization 271.486

Water Resources Development and Flood Control

14.602

Note: Breakdown of totals may not sum up due to rounding of digits.

INADEQUATE RESPONSE TO CLIMATE CRISES

Compare 2010 debt service figures to spending on health, natural resources, agriculture, and water resources development and flood control of measly P48.344 billion, P13.317 billion, P55.368 billion, and P14.602 billion respectively.

This is when flood-borne diseases such as leptospirosis is striking the metropolis, there is a need for mitigation measures such as reforestation, Ondoy and Pepeng wrought agricultural damages worth P6.766 billion and P1.25 billion respectively, and flood control adaptation measures has to be implemented.

THE MAIN PROBLEM: STILL LACK OF ECONOMIC DEVELOPMENT

The government is caught flat-footed amid the economic, climate, and fiscal crisis particularly because of our lack of development.

Government cannot spend because of lack of revenues collected On top of lack of political will to resolve

the debt and debt service problem Declining government revenues because

of shrinking industry and puny tax-base due to high unemployment This is on top of tax inefficiency

THE SOCIAL CRISIS AMID THE CONVERGENCE OF CRISES

4. The Explosion of the Social Volcano

“Mapupuno na ba ang salop?”

THE PERFORMANCE AND TRUST RATINGS OF GMA (JULY-AUG 2009, IN PERCENT) – PULSE ASIA

CRIME INCIDENCE (NSCB DATA, 2001-2007, PER 100,000 POPULATION)

2001 2002 2003 2004 2005 2006 20070

20

40

60

80

100

120

140

98.8106.9

102.292.5 90

81.9

115.6

Total Crime IncidenceIndex CrimesNon-index Crimes

Criminality rised under the Arroyo administration.

(STOPPING) THE VICIOUS CYCLE

An volatile and deteriorating economy translates to an insecure society.

An insecure society, which does not accept the legitimacy of the rule of law, is one that is prone to social destabilization and decay, and ultimately, violence. Regimes naturally gain legitimacy by providing the

best possible economy for the citizens. Failing on this, legitimacy might be compromised, and so is authority.

We must thus push for economic governance that provides economic security for all, governance that steers the Philippine economy into inclusive prosperity.

INTEGRATED INDUSTRY AND HIGH-WAGE LABOR REGIME

5. Alternatives for a Modern and Properous Philippines

FRAGMENTED INDUSTRY

East Asian NICs focused high-value-added processing or commodity production,

In the Philippines, the failure to strategically link extraction (basic) industries with intermediate (processing) and finishing industries so as to diminish import-dependence relegated our economy into raw material extraction and/or low-value-added processing of imported products.

Our industries are integrated individually to foreign markets, not to each other.

PROPOSAL: INTEGRATE THE INDUSTRIES

Vertically integrate strategic domestic industries engaged in raw material extraction with those engaged in the production of finished consumer goods so as to service domestic consumer needs.

The integration of industry requires creating both supply and demand – and as such, requires government’s institutional support via subsidies (large projects require huge frontload expenses) and coordination (multiple supports are needed for several industries simultaneously).

What we need for this purpose are efficient and effective State Operated Enterprises (SOE) which can serve as linkages across industries (by providing supply and/or demand).

WORKERS ARE CREATOR OF WEALTH, DETERMINANT OF WEALTH’S VALUE

Workers role as a value creator - upon utilizing capital goods and technology, transforms natural resources into tangible wealth.

Workers they do not just create wealth; they also determine the value of that wealth. Members of the labor sector, as income-

earners, are also the ones which inject the money back into the economy as consumers.

They serve as the consumption base which purchases much of the products created by society and thus, determines their relative values.

WORKERS AS NATIONAL SAVINGS, INVESTMENTS, AND TAX BASE

But a well-paid workforce doesn’t just serve as a consumption base

Its surplus income not consumed is also injected back into the economy in a form of: Savings, which strengthens the banks and the

national capital base (Japan) Investments, via financial instruments such as

stocks, for the improvement of the instruments of production (US)

It is also the revenue-generation base of the government for, with much of its revenues coming from employees’ income tax returns and consumers’ payment of value added taxes.

PROPOSAL: A HIGH-WAGE LABOR REGIME So as to expand the consumption,

savings, and tax base of the government, the minimum wage must be increased so that workers have surplus income more than that (s)he needs to spend for decent living

The state must ensure that worker’s income is over and above the “living wage”

Living wage is for justice, Income beyond living wage is for economic development.

WE ARE THE CREDITORS6. Climate Debt and Climate Crisis

Actual historical emissions

Equal individual shares (past)

CLIMATE CRISIS » CHANGES IN PERCEPTION The climate crisis, and the ensuing

social crisis, must change our perception on our situation.

In public finance, for example, our fiscal situationers usually tell us as of end-June 2009, that we are in debt to foreign countries, individuals and banks by as much as P1.851 trillion Out of P4.227 trillion national government debt.

P1.059 trillion are foreign denominated securities. P955 billion are US Dollar Bonds/Notes, P25.2

billion are Japanese Yen Bonds, and P78.2 billion are Euro bonds.

OUR CLAIM TO FIRST WORLD: CLIMATE CHANGE

“Ondoy”, and the succeeding record-breaking supertyphoons, are manifestations of climate change which disturbs natural atmospheric cycles.

Atmospheric concentrations of greenhouse gases are higher today than anytime in millennia. Emitted since industrial revolutions Built up in the atmosphere, blanketing the Earth

and causing considerable warming. Responsibility for these emissions lies

principally with the developed countries. Why?

HOW ABOUT THEIR DEBT TO US? With less than one fifth of the world’s

population they have grown wealthy while emitting almost three quarters of all historic GHG emissions during industrialization periods So called Annex 1 countries (includes

G8 countries).

Actual historical emissions

Equal individual shares (past)

US$24 TRILLION CLIMATE DEBT According to Jubilee South-APMDD, the

initial minimum estinmate of the moentary equivalent climate debt owed to poor developing countries from 1800 to 2008 is about US$ 24 Trillion.

The climate debt owed by the rich countries to the world’s poor consists of - “adaptation debt” and “emission debt”. The emission debt was shown at the last

sliede. Estimates show that developed countries

have already taken a debt of 115 gigatons of carbon dioxide above their allocation of 125 gigatons.

ADAPATION DEBT Apart from freeing the atmospheric space,

developed countries should be accountable for the adverse impacts to poor communities and countries of their historical emissions.

These impacts constitute the “adaptation debt”, which are measured according to the losses and damages in the total production of goods and services of affected countries.

The costs of Ondoy and Pepeng (along with Frank and the El Niño phenomenon), for example, are part of the Adaptation Debt of Annex 1 countries to us.

RICH INDUSTRIALIZED COUNTRIES MUST PAY UP!

Climate negotiations must compel rich countries and corporations to fully pay for the Climate Debt they owe for causing climate change and devastating poor and vulnerable countries.

Financing must become the centerpiece of a new climate agreement to provide a basis for solving the global climate crisis and injustice.

Apart from emmission cuts, rich countries must suppoer adaptation and mitigation measures, through actual funds and technology transfer.

www.fdc.ph

FREEDOM FROM DEBT COALITION11 MATIMPIIN STREET, BARANGAY PINYAHAN, QUEZON CITY. 9246399. 9211985. MAIL@FDC.PH

HANEP2020