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Philippine Economics in a Post World War Era

The Second World War left the Philippines in ruins. Not only did it destroy a significant amount of physical infrastructure in the country, it also left a devastated economy. Fortunately, assistance from the United States of America (USA) which became an economic superpower after the war saved the Philippines from further damage. With the help of this post-war rehabilitation, the Philippine economy’s real output grew with an average 6.4% in the 1950s and 4.9 % in the 1960s. However, the country relied greatly to USA that it allowed the pre-war peso-dollar exchange rate to continue and gave no restrictions in imports of products from USA. The assistance of USA was negated by the imbalances in trade and exchange rate that in 1949, the government responded with actions to control these. In general, the Philippine economy in the post-war could be described as a movement towards industrialization.

Industrialization of the Philippines

As the Philippine population reached the 40 million mark in the 60s, the country had a great potential for home-destined production. Therefore, it would benefit the country if they could export more to maximize the labor supply of the country. These became the motivation to increase the production in the country. The private sector was the main initiator in economic progress. Even though the government played little to promote growth, tax exemptions and import controls were made by the government to help industrial establishments as they embark to this new field. The effects of these actions of the government can be seen in the growth of manufacturing and mining in the Philippines in the post world war. However, as the industry sector grew in the agriculture sector suffered as it can’t keep up with the growth of other sectors. This can be attributed to the increasing population in the country that resulted reduction of arable land per person from 1 hectare in 1950 to 0.5 in 1980. For the country to support its industry, agriculture should also grow to have faster development.

The attempt to make the country industrialized needed a lot of changes by the government. The industrial policies made by the government focused on import substitution which is to replace commodities that the country imports by producing them in the Philippines thus creating a domestic market. 1950’s RA 901 covered all taxes for new industries. In 1962, Republic Act (RA) 3127 provided tax exemptions to importation of machine goods. These were all done by the government to support industrial growth of the country. This resulted with the 9.9% growth of manufacturing in 1950s which consisted of food, garments, rubber, metals and other products .

Even though these actions by the government increased production of the country, its focus at import substitution showed its weaknesses in mis-administration and demands of exporters for a more favorable exchange rate. Also import substitution is very dependent to imported inputs so there was no way that exports were given attention. Therefore, there should be an expansion of exports as an alternative to maintain the growth. In response, to increase exports, the removal of control in foreign transactions, which was started under Circular 105 by the Central Bank, resulted in the devaluation of peso. Tariffs were made instead of controlling transactions. Import cost increased in return thus slowing the growth from 7.7% to 3.7% in the 60s in the manufacturing sector which focuses on import-substitution. Because the devaluation of peso makes the products in the country cheaper, exports expanded as expected steady after the decontrol which increased by 200 million dollars from 1962 to 1965 .

Monetary Policies

In an effort to adopt a managed currency system, which would bring about a more flexible money supply less vulnerable to foreign economic fluctuations, the Central Bank was established on January 3, 1949. Government policies, as well as those of the Central Bank, can be classified into five major eras.

Period of Controls (1949-1959)

Characterized by excess liquidity, this era sought various measures to control the outflow of dollars and to maintain liquidity at sustainable levels.

Implemented on November 29, 1949, Executive Order No. 295 increased the percentage of the cuts on importation, especially of non-essentials. It also provided that all transactions were subject to licensing, thus preparing the nation to promote industrialization in the face of importation. In 1950, Congress created the Import Control Administration (R.A. No. 426).

In 1952-1954, after years of relative stability and postwar peak levels in national income, investment production and exports, the government launched a massive development program, which significantly increased finances. Increased spending led to higher prices, increased imports, and a drop in international reserves. In retaliation, the Central Bank partially suspended rediscount facilities, increased the rediscount rate twice in 1957, adopted a system of priorities and portfolio ceilings, increased rates on savings deposits, and imposed a 100% cash margin requirement against non-essential imports. As a complement to import controls, Congress approved R.A. No. 1410, "No-Dollar Import Law" Characterized by excess liquidity, this era sought various measures to control the outflow of dollars and to maintain liquidity at sustainable levels.
. This period was characterized by the government slowing down its expenditures, while increasing revenues and maintaining high levels of exports, thus increasing the GNP growth rate and maintaining price level stability. Transition and Decontrol (1960-1969)

On April 25, 1960, the Central Bank implemented its decontrol program, which sought to lift restrictions on foreign transactions, and restoring the economy to free enterprise. Rediscount rates were lowered and reserve requirements were reduced, all resulting to an expansion of the money supply.

In 1963, the government launched its Socio-Economic Development Program, which led to further expansion. This time, the Central Bank raised interest rates on savings and time deposits, as well as reserve requirements, rediscount quotas were reduced and national government deposits were partially transferred to the Central Bank, and government securities were also sold.

In the same year, Congress passed R.A. No. 3779, the Savings and Loan Associations Act, regulating and supervising savings and loans to ensure stable and efficient operations by placing all power under the control of the Central Bank.

In 1966, the government underwent an expansionary program to improve economic growth. In line with this, the Central Bank adopted a policy of credit ease. This period was characterized by an increase in per capita income, but such was achieved at the cost of a deteriorating balance of payments and a decrease in international reserves.

The New Society

Characterized by excess liquidity, this era sought various measures to control the outflow of dollars and to maintain liquidity at sustainable levels.
Despite expansionary trends, the Price Control council enforced price ceilings, which helped hold down the prices of consumer items. Given the authority to meet external and internal crises, and to ensure preventive measures, the Central Bank could grant emergency loans to assist a bank in financial distress.
"With greater fiscal discipline, which has recently been achieved over fiscal operations, monetary policy may play a more decisive role as an autonomous factor rather than as a mere counterbalance to fiscal policy in future stabilization efforts."

Fiscal Policies

The Philippine Government, being the deciding body in whether to take part in the economy or not, by the mid-1940s had just been freed from the American and Japanese Colonization. In this case, the country had to cope up from the dependence of the governance and the damages of the conflicts, especially from that of the World War II. It was, and is, the government’s responsibility to develop taxation and government spending. Even if these policies were not quite established yet, the sector tried to upgrade the market and and support the industry. For the taxation, taxes and tax exemptions were not imposed on an effective level. For the latter, government spending was proven to be efficient with liquidity but not with the finances.

Taxation

At the beginning of the period, the sale of foreign exchange was under a 17% tax . This was different from that to the importable goods which would either be 30% or 50%, depending on the level of luxury of the good. However, during the 1950s, the government might have realized that the country needed more elements in the market to help in the country’s development. “New and necessary industries” were offered of indirect subsidy through tax exemption. The range of industries was extended more and even tax incentives were given . By the next decade, minimal changes occurred since the government still used the 1939 National Internal Revenue Code. Taxes were only 2% to 3% of the national income, which by that time, was an indicator of a system-at-a-loss. Based on the “Emergence of the Philippine Economy”, 73% of the taxes taken for the whole period equated to the indirect taxes taken for the year 1969. This shows a greater loss displayed throughout the period.

Government Spending

As inflationary pressures came, the government increased spending. The government tried to control this by supporting the decisions to the balance of payments and by developing policies to control the economy. Market expansion was encouraged in the efforts to stem the said inflation. Money supply increased since foreign money continued to enter the Philippine economy but the lending policies and the financial assistance were not up to the industrial development of the country. By the end of the period, an export incentives law was passed but development was not guaranteed since exporting to the developed countries became more and more expensive for developing countries like the Philippines. Table 2 included government spending and revenues for the years 1962 to 1969. Deficit continued to increase except for the year 1967. However, the ratios of the figures in deficit to the national income of the corresponding years remained within 10% to 12% . Because of this, increase in deficit may have been reasonable since the income have been increasing as well. Government spending included financing the salaries of government employees, and infrastructure projects such as roads, buildings, and other facilities .

Effects

The tax exemptions resulted to a great deal of attraction to entrepreneurs. Manufacturing profited under the complementary set of policies formed . In addition, government expenditures incurred for the current operations also generally increased production and productivity of the country. However, output may have increased by about 200% but the receipts were not enough to compensate all the expenses. With these, the policies made in the period were revised by the subsequent administrations along with the other policies to promote Filipinization and long-run growth of the industries.