Greece resists, Philippines submits

Jul 07

originally posted on Rappler

The tumultuous events in Greece have invariably triggered questions about the Philippines’ own approach toward its international creditors. The difference is like night and day.

If resistance is what the government of Prime Minister Alexis Tsipras has offered finance capital, total submission to the creditors’ demands has been the policy of the Philippines ever since the administration of Corazon Aquino.

Indeed, the Philippines possesses the distinction of being the only country with an “Automatic Appropriations Law,” which mandates that foreign and domestic creditors have the first cut in the national budget, and only after the amount required for debt servicing has been deducted can the government devote the remainder to its operational, capital, and personnel expenditures.

Over the last five years, under the reign of Cory’s son, Pnoy, the government has dutifully turned over from 20 to 22 percent of the national budget to the country’s creditors.

How did this sorry state of affairs come to pass?

The story begins with the crushing $26.5 billion foreign debt that Mrs. Aquino inherited from the Marcos dictatorship.

Debt repayment before development

A few months before she came to power, the University of the Philippines School of Economics, in its famous White Paper, had warned: “The search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one and should therefore be abandoned.”

The issue of debt repayment shot to the forefront soon after her assumption of office in early 1986. Without even giving it breathing space, the International Monetary Fund (IMF) and the World Bank, at the urging of the country’s commercial creditors, put debt servicing at the top of the new administration’s agenda. Fairly quickly, Aquino faced the choice of devoting the country’s scarce financial resources to development or to debt repayment.

Within the government, the first, pro-development, position was espoused by Professor Solita Monsod, then head of the National Economic and Development Authority (NEDA). Opposing her was Central Bank Governor Jose “Jobo” Fernandez, a Marcos holdover, who warned of the risk of “economic retaliation against the country” should it take unilateral actions in defiance of its creditors. Trade credit lines could be withheld, paralyzing foreign trade, and foreign aid could be suspended. According to one account, then Citibank president John Reed visited the Philippines and warned that unilateral action on debt “would produce immense suffering and difficulty for the people.”

The so-called “model debtor strategy” won out, partly because its opponents within the government did not put up more than token opposition, owing to fears of retaliation from the creditors. This was a mistake, according to economist Jim Boyce, because the “credibility of these threats is open to question.”

In any event, President Aquino issued Proclamation 50, which committed the government to honoring the original terms of the Philippines’ enormous debt, including odious ones like those contracted to build the Bataan Nuclear Power Plant. The model debtor approach was institutionalized with Aquino’s signing of the Administrative Code in 1987, whose Section 26 (B) requiring automatic appropriation of the amounts needed for debt servicing was copied in toto from an earlier Marcos era decree.

Financial hemorrhage, budgetary squeeze

The prioritization of debt repayment resulted in investment, which was, along with consumption, the key engine of growth, becoming sorely constrained since government was the biggest investor in the economy.

Government resources instead flowed out of the country in the form of debt service payments. In the critical period 1986-93, some eight to ten percent of GDP left the country yearly in the form of debt service payments, with the total amounting to nearly $30 billion.

Even with this massive outflow, the Philippine debt was not reduced and in fact rose from $26.5 billion in 1986, when Aquino assumed power after the overthrow of Marcos, to $29 billion in 1993 because of the onerous terms of repaying debt, such as variable interest rates and the practice of incurring new debt to pay off the old.

The radical increase in interest payments as percentage of total government expenditures, from 7 percent in 1980 to 28 percent in 1994, was accompanied by the plunge in capital expenditures from 26 to 16 percent.

Debt servicing, in short, became, alongside and salaries, the number one priority of the national budget, with capital expenditures being deprived of outlays. The savage reduction in government capital expenditures translated into a steep reduction in the ratio of investment to GDP. From nearly 30 percent in the early ‘80s, under the Marcos regime, it dropped to 17 percent in the mid-`80s and never really recovered, staying at an average 20-22 percent in the 2000 decade.

The radical stripping away of capital expenditures is one of the key factors that made the Philippines the “poor man of Asia.”

According to the United Nations Development Program Human Development Report, the Philippines registered the second lowest average yearly growth rate, 1.6 percent, in Southeast Asia in the period 1990 to 2005 – lower than that of Vietnam (5.9 percent), Cambodia (5.5 percent), and Burma (6.6 percent). The only country registering average growth below that of the Philippines was Brunei, which, being an oil-rich high-income country, could afford not to grow.

Persistence of a policy

This trend of continuing outflow of government resources in the form of payments to creditors and the shrinking of capital expenditures continued in the first years of the new century.

In 2005, according to the World Bank, 29 percent of government expenditures went to interest payments to both foreign and domestic creditors and 12 percent to capital expenditures. This configuration of government spending prompted the University of the Philippines School of Economics to complain that the budget left “little room for infrastructure spending and other development needs…”

With government capital expenditures remaining low, total fixed investment remained anemic during the reign of Gloria Macapagal-Arroyo, running at only 14 percent of GDP, which the World Bank noted was “substantially lower than during the deep recession in the first half of the `80s.”

The pattern was unchanged during the five years of the Aquino administration; 20-22 percent of the budget was allocated yearly to debt service. Owing to lack of funds, poor physical infrastructure continues to be one of the key bottlenecks to development.

As for social spending to provide better health, education, and other social services, the situation is even worse. At 28 per cent of the population, the poverty rate is at the same level as in the early 1990’s.

At a time that the government trumpets the high GDP growth rates of recent years, one must not overlook the fragile basis of that growth owing to the devastating impact of the debt service economics of the last 30 years.

The history of these last three decades could have been different had we had a government that had more spine, like those of Nestor Kirchner in Argentina and Alexis Tsipras in Greece.

Timidity does not pay: after years of borrowing new money to pay the interest on old debt, the country’s foreign debt is now over $77 billion in 2014, or nearly three times the $26.5 billion figure at the beginning of Cory’s presidency in 1986.

Greece is stepping off the treadmill. The Philippines is lashed securely to it. –

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