The transformation of the Philippine economy

Manila, 1981. A chauffer-driven white Mercedes weaves in and out of the traffic backed up along what could well be a street in downtown Manhattan. This is Makati, its modern skycrapers housing the business and financial elite of the Philippines. In the back seat sits a well-dressed Filipino businessman whose millions have been amassed over the decades through production of goods for the domestic market. A man who has earned the epithet of "nationalist" by keeping his hands clean of involvement with foreign corporations and foreign markets. But times are changing. "Export or perish," he sighs. First stop: the investment house of the Philippines' largest commercial bank to converse with influential friends in the hopers of obtaining a sizable loan to convert his production processes toward the export market. Second stop: a government office to register for tax exemptions and other gifts bestowed upon exporters. "A tragedy," he mutters on his way back to his limousine. "The Philippines is importing a perfect substitute for what I will be exporting. But with all the loans and tax exemptions reserved solely for exporters, how can I afford not to export?"

Manila, 1981. Marikina, Manila's shoe district. A less well-dressed man sullenly nails a hastily painted sign on the door of an old, nondescript building that had housed his small footwear factory. "Out of business." A group of uniformed, giggling school girls skip by. He stares at their shiny yellow, blue, and pink plastic shoes, the kind from Japan, South Korea, or Taiwan that have been flooding the domestic market this year ever since the drastic reduction in shoe import tariffs. Then he looks at his own leather shoes, the types his small business had produced until it folded in bankruptcy a day or so before. He sighs, and continues hammering.

Manila, 1981. Magallanes Village, one of the favorite and most posh residential areas for foreign executives who come as part of the package when transnational corporations (TNCs) move to the Philippines, as well as for the lucky Filipinos who are allotted high positions within these foreign corporations. Inside one of the securely fenced houses (a modern rendition of an old Spanish villa), a smartly dressed Filipina, whose husband is involved in various joint ventures with American and Japanese TNCs, sends her maid scurrying to offer the guests some snacks. Chocolates from Switzerland. "So much nicer than our own candies," the wife purrs. Sausages from the U.S. "We really don't have anything that can compare with these," she continues. Apples from Taiwan. "As cheap as our own mangoes...they're all so reasonably priced now." Now that taxes on imported goods have been slashed and laws barring the import of certain luxury goods lifted.

Manila, 1981. North Forbes Park. Creme de la creme of Manila's residential subdivisions. Here exclusively sculptured gardens, filled with bushes cut into shapes that nature never intended for them. Tightly guarded mansions hidden behind forbidding walls topped with a layer of jagged glass. Diosdado Macapagal, Philippine president from 1962 to 1965, stands in his extravagant stone entryway, surrounded by priceless wood carvings depicting his administration's great moment in history. Shoulders proudly back, face handsomely tanned, Macapagal, waving a copy of a recent statement he authored as a spokesperson for today's elite urban opposition, remains a politician to the core. The loser in the 1965 election that ushered in Ferdinand Marcos' extended reign, he finds few kind words for the role played of late by the World Bank and International Monetary Fund, or their corporation allies. "A pack of wolves has jumped on the carcass of the Philippine economy," he says. There is bitterness in his voice.

Manila's disenfranchised domestic businessmen did not start lobbing bombs in 1972 when martial law was first declared. They waited until nearly eight years later, when President Ferdinand Marcos and his elite corps of technocratic aides had implemented policy changes transforming the economy into an export enclave for garments, electronic components, and other light manufactured goods destined for developed country markets. And then--for a few months--the bombs were heaved in earnest.

Elsewhere in the Philippine capital city, there was further evidence of change, further signs that the early 1980s marked an important juncture for the Philippine political economy. Boards--sometimes lettered, sometimes not--sealed shut the doorways and windows of more than a couple of former shoe, dressmaking, and tailoring shops. Nailed there to proclaim a phenomenon that was becoming ever more common--closed; bankrupt; out of business; cannot compete.

Across the bay from Manila, in Bataan, at the famous Second World War battle site, the unbroken din of sewing machines could be heard from newly built factories. Others in the Bataan industrial export complex were quieter, the rows and rows of sewing and cutting machines replaced by microscopes and chemical baths for electronics assembly. Modern factories, busy or not so busy, depending on the vissitudes of the world market to which all production was geared. The underpaid labor force--predominantly young and female--hurrying to piece together their quota of shirts, brassieres, microelectronic circuitry, and the like.

Hurrying as ordered--until June 1982, when 10,000 of these workers did exactly what their government had promised transnational corporations they would never do. They walked off their jobs--not simply in a single strike action (which itself was illegal, but not unknown), but in a mass walkout, a general strie.

The disintegration of a social fabric witnessed in these actions by businessmen and workers alike was not only the result of internal squabbling among Philippine classes. It was also the outcome of a development path chosen and molded by Philippine technocrats together with officials with the World Bank and International Monetary Fund. That export-oriented industrialization path, conceived over the course of the 1970s and implemented at the turn of the following decade, carried with it the seeds of this disintegration. For while it benefited some (most notably the transnational corporations and banks with alliances to a small class of Filipinos dominating the industrial and financial sectors), it hurt many.

The Newest International Division of Labor

The international division of labor is in a state of rapid flux. A once simple division of labor between industrialized developed countries and raw materials exporting developing countries emerged in the middle of the last century and lasted through the middle of this century. Such a basic international division of labor--between former colonizers and colonies, North and South, industrialized and non-industrialized--has been replaced. In the place of the former colonies stands a highly differentiated developing world order which defies easy categorization.

Two identifiable groups of less developed countries (LDCs) began to shatter the primary commodities exporting mold in the 1960s and early 1970s. During the 1960s seven LDCs started to shift out of natural resource export and to penetrate the world market as serious manufacturers. These were the so-called newly industrializing countries--the NICs of Taiwan, South Korea, Hong Kong, Singapore, Brazil, India, and Mexico--and the disruptions they wreaked in the older world order were enough to spawn an entire literature on the "new international division of labor." These seven were followed by a second stratification in 1973-74, when the 13 nations of the Organization of Petroleum Exporting Countries (OPEC) harnessed their power over oil and attempted to translate their financial success into development grounded in construction and heavy industries.

Beginning in earnest in the late 1970s, another division appeared which has sometimes mistakenly been analyzed as a new generation of NICs. Indeed, as this third group of 20 to 30 LDCs began to complement their established pattern of raw-materials export with labor-intensive manufacturing, they often took up the rhetoric of successful industrialization to declare themselves future NICs.

But there were important distinctions, leaving the more rightfully termed "near-NICs" on a decidedly different plateau of development from the original NICs. Primary among these distinctions was the historical moment: the decade-plus that separated the NICs' debut from that of the near-NICs witnessed technological advances in several industrial sectors which changed the very definition of third-world industrialization as it applied to the near-NICs. By the late 1970s, technological changes (including a communications revolution) made the global fragmentation of production highly profitable and desirable. Whereas the NICs had received complete industrial processes such as shipbuilding and machinery, the near-NICs won fairly marginal segments of worldwide assembly lines for semi-conductors and consumer electronics, textiles and apparel. Such is the tragedy of contemporary Philippine development.

As the international division of labor is far from an immobile configuration, so too it is hardly a natural thing. The simple colonial division of labor of the nineteenth century was imposed by direct force as well as by subtler means such as taxations. Since the attainment of political independence by the bulk of the developing world, several sets of international institutions have played major roles in molding and shifting these countries' domestic economic policies. But very little has been written on the process of policy formulation in LDCs, and even less on the interplay of national and international forces which affect the process.

In general terms, three sets of international institutions influencing LDC economy-wide policy-making can be differentiated: (1) private institutions, consisting primarily of transnational corporations (TNCs) and transnational banks (TNBs); (2) "core" states which are comprised principally of the former colonial powers; and (3) multilateral institutions which, in addition to the IMF and World Bank, include the General Agreement on Tariffs and Trade, regional development banks, and United Nations agencies.

The interaction between these three sets of international actors and LDC states in policy-making differ in each country. In influencing economic policy-making in LDCs, each of the three sets interacts with and nurtures a corps of technocratic bureaucrats who share a conviction in the importance of economic linkages with the world economy. Opposing these technocrats stands another LDC group whose primary concern lies in the local market. Hence the ruling stratum of most LDC states is split into two factions: a globalist component and a localist one.

Likewise, the other major set of national institutions influencing policy formultion--domestic private corporations, financial institutions and capitalists--has a globalist and a localist faction. The absolute and relative size of globalist and localist factions in both private sector and state varies widely from LDC to LDC and across time. The broad masses, who influence certain policies in more democractic LDCs, are excluded from any appreciable impact on aggregate economic policy-making in the bulk of LDCs.

Formal and informal collaboration, based on shared interests, exists between the major sets of actors. Just as the three international sets of institutions and the local elites influence LDC policy-making, individual economic policies of LDC states have repercussions back on each set of institutions and on factions thereof.

In this mix of influence and control, it is multilateral institutions' influence on LDC policy-making that constitutes the major force in the emergence of the near-NICs. It is here that answers lie to how the World Bank and IMF contribute to shifts in a LDC's dominant paradigm of development--in particular, why near-NICs emerge; why it was that a country like the Philippines was shifting its overall economic direction from primary commodity export-led growth to export-oriented industrialization in the late 1970s and early 1980s; how it was that, by that period, the Bank's and Fund's position in Philippine policy-making was sufficiently well entrenched to enable them to play a major role in the transformation of industry and finance in that country.

The Philippine Transformation

How can one slip behind the closed doors and into the mysterious process by which World Bank and IMF prescriptions are translated into politics that touch the lives of millions? The answer is not obvious. This process and the interaction among Bank, Fund, and LDC state officials it entails are closed off to the public. Moreover, it would appear that all the actors would have a vested interest in keeping it so.

In the Philippines' case, a two-pronged approach succeeded in lifting the veil. First, a series of high-level leaks of Bank and Fund documents during the late 1970s and early 1980s provided access to thousands of pages intended for insiders' eyes only. A second tack involving interviews with key actors was also undertaken. These were the very people who normally would not be expected to talk freely (if at all) and certainly not about policy-making, an acutely sensitive arena in a country like the Philippines where democratic processes are noticeable by their absence. Yet, over a hundred interviews--many with globalist and localist policy-makers; some with Bank and Fund officials--were conducted in the Philippines from November 1980 to June 1981, and from July to August 1982.

Most of the Philippine transformation can be understood through events surrounding two World Bank loans--a "structural adjustment loan" for the industrial sector and an "apex loan" for the financial sector--which together were resounding successes in stimulating policy changes. Yet, just prior to these Bank loans, from 1976 to 1978, the IMF had tried to no avail to initiate a series of similar policy shifts. The mystery is what changed. Why did the Bank succeed where the IMF had not? And how did that success affect different groups?

The gist of the story, culled from the days of interviews, can be outlined in brief.

The September 1980 signing of a $200 million loan for the Philippine industrial sector, after two years of intense dialogue between the World Bank and government officials, reflected a masterful example of learning from history. The IMF had failed in its attempt to sell a similar package, attached to a loan of approximately $250 million, in part because it could not shake its image as purveyor of austerity and social upheaval. Beyond that, the Fund failed to neutralize localist factions in the government, especially in the crucial Central Bank.

Determined not to suffer the same fate, the World Bank shifted roles and steered policies skillfully around the Central Bank. It was aided by its more benevolent image as a bestower of funds for long-term development projects. Clothed in this benevolence, the World Bank was able to act out the short-term stabilization role of the IMF. It had put together the $200 million "structural adjustment loan" package (the Bank's fourth, the Philippines' first) as a broad balance-of-payments support, attached not to a specific project but to a set of policy stipulations consolidating an export-oriented course for the Philippine industrial sector.

To implement the policy conditions for the loan, the World Bank turned to allies in the ministries of Industry and Finance. Quietly bypassing the import control office within the Central Bank, the World Bank hammered out import liberalization and tariff reduction policies with the Industry Ministry. Exchange rate policies were expected to pass through the Central Bank, yet here the World Bank finalized de facto devaluation measures with the Finance Minister.

While the IMF was privy to the World Bank charade (indeed, it was the Bank's behind-the-scenes coach), the Central Bank was struggling furiously to retain its rightly policy domain. It was the World Bank's conscious strategy to link forces with sympathetic Philippine globalists and thereby surmount the once powerful localists within the Central Bank that enabled the Ministries of Finance and Industry to play their new parts so well. As the World Bank (and IMF behind it) discreetly circumvented the Central Bank by amassing a potent group of globalist allies elsewhere, it tilted the domestic power struggle in favor of globalist over localist factions.

Philippine officials of all persuasions agree that the period of the negotiations marked a critical juncture in the Philippine development path. Tariffs were slashed. Import restrictions which had protected domestic industry were lifted. The exchange rate began a steady and steep devaluation. Strengthened export and investment-promotion policies diverted resources away from domestically oriented output. New free-trade tax havens with generous incentives for transnational corporations to exploit low-cost Filipino labor were set up across the archipelago. Individual light manufacturing industries (textile, cement, food processing, furniture, and footwear) were slated for restructuring according to World Bank specifications to render them internationally competitive. In sum, the policies spelled one thing: export-oriented industrialization.

The story of the Philippines' transformation into a near-NIC does not end with the industrial sector. Industrial restructuring was to find a reinforcing counterpart in financial sector restructuring. This time the vehicle used by the World Bank was a $150 million "apex" loan to the Central Bank, negotiated over the same time period as the industrial sector loan, but not signed until nearly a year later.

As the Bank and Fund understood well, a full-fledged commitment to export-oriented industrialization demanded finance capital. IMF and World Bank officials together fashioned a new vision for the Philippine financial sector whereby enlarged banks would be encouraged--if not forced--to undertake major equity investments in industrial enterprises. This was in tune with the German model of universal banking, illegal in the United States.

Once again, the path to actual policy implementation was not a smooth one. Undisputed reign over the financial sector rested with the localist-dominated Central Bank; there was no feasible way of turning to technocratic allies in other ministries this time. On the surface, the Bank acquiesced to this reality: it opened negotiations over the apex loan with the intransigent and localist Central Bank governor who had stymied IMF policy influence in the mid-1970s.

In time, however, it became painfully clear to the powers at the

Central Bank that their authority was in no way immutable. By the middle of the negotiations, the Central Bank hierarchy was no longer an active, informed participant. Instead, World Bank missions were spending more of their time coordinating with a new unit that had been created within the Central Bank to oversee the World Bank apex loan. Antagonism from the rest of the Central Bank toward the fledging "apex" institution was no more surprising than the World Bank's budging friendship. In all aspects, it was a World Bank operation, Bank-conceived, Bank-staffed, Bank-trained, Bank-supervised. The Central Bank had been seeded with a potent globalist core.

By the time the localists caught onto the essence of the Bank's manuevers, it was already too late. By the end of the negotiations, the former Central Bank governor was out of a job. In the meantime, the World Bank had set the stage for the apex institutions's expansion. Not only would the first financial sector loan be channeled through the apex institution into universal banks, and, finally, into export-oriented industries, but so too would a growing number of future World Bank loans, future regional development bank loans, and future transnational bank loans.

When the industrial and financial sector loan sagas are reexamined together, the role of the Bank and Fund as policy-making institutions begins to take shape. In particular, three mechanisms of policy influence can be distinguished: (a) strengthening the role, power and ranks of technocrats within LDC bureaucracies in policy-making and implementation; (b) building new institutions within the LDC bureauracy; and (c) reshaping old institutions to fit with and further the new aims.

The export-oriented industrialization policies that ensued under multilateral institutions' collaboration with segments of the Philippine state had significant ramifications for various sets of international and national actors. Under the weight of the Bank's and Fund's successful policy influence in 1979 to 1982, localists lost every foothold of influence on policy formulation as globalists assumed hegemonic control of all major ministries.

And within the set of private institutions, localist factions whose enterprises depended upon domestic markets were decimated. As the industrial sector policy changes left an ever more concentrated industrial sector in their wake, so too universal banking choked all but a small circle of large banks.

These ramifications for individual sectors--state, industry, and finance--fed on each other until, by the early 1980s, the texture of the Philippine political economy had been altered in a most pronounced manner. A domestic triple alliance linking the victors in each sector--globalist factions of the state to globalist bankers to globalist industrialists--dominated the landscape. But that domestic alliance among globalist factions rested on a broader one: export-oriented industrialization policies also tightened the bonds of collaboration between TNCs, TNBs, and their respective domestic globalist-oriented partners.

Beyond the Philippines

The saga of the Philippines over the past four years delineates the mechanisms by which the alliance of globalist factions in LDC states and private sectors with multilateral institutions can propel these factions into positions of authority. The emergence of the World Bank to join the IMF as central determinants of policy making applies not only to the Philippines, but to the 20 to 30 LDCs entering stages of export-oriented industrialization.

The Philippines may have been a "guinea pig" (as World Bank officials put it) as one of the first recipients of structural adjustment lending, but there certainly lurk equally fascinating stories behind Turkey's four structural adjustment loans and Jamaica's two. Or the Ivory Coast's overlapping and publicly linked structural adjustment loan and IMF three-year "extended fund facility."

The challenge to students of development is to move behind the broad concept of dependency to the specific mechanisms of external influence and control. The World Bank and IMF have too long been shrouded its veils of mystification. Their role in contemporary underdevelopment must now be examined in detail.

Only by such careful dissections--case study after case study--will the complex nature of the dependency relationship between center and semi-periphery be better understood.

COPYRIGHT 1984 Monthly Review Foundation, Inc.
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