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De La Salle University - Manila 2401 Taft Avenue, 1004 Manila, Philippines

A research paper about

The Removal of US Military Bases and its Effect on the Philippine economic growth

In partial fulfilment of the requirements in Political Economy (POLITEC)


Submitted by:

Espiritu, Maria Nikka N. Guzman, Anne Clarisse A.

Submitted to:

Mr. Antonio Pedro POLITEC professor

September 3,2010

The Emergence of US Military Bases In what way did the removal of the US Bases in the Philippines affect the country's economic growth? This question has been addressed with various answers some of which are explicitly contradictory. This paper looks into the validity of those arguments that aims to answer the central question. The arguments would be compared and among these, an adjudication on which argument is most viable would be made.

The establishment of the US bases in different countries all over the world was grounded on the geopolitical theory proposed by Alfred Thayer Mahan is his book, The Influence of Sea Power Upon History. It was a seemingly staid tract, but it was to bring about profound changes upon the world less than a century later (Paez, 1985). Alfred Thayer Mahan was a United States Navy flag officer who introduced the concept of sea power which earned him the recognition of being the most important American strategist of the nineteenth century. His proposed theory succinctly argues that a nation must expand or else it will reach a point of decline. It must gain power over strategic areas around the world in order to gain access to markets and raw materials. To achieve this objective, military power and a strong navy is necessary. In 1898, the United States began to concretize the Mahan principle. In 1898, George Dewey, commander of the U.S. Far Eastern squadron, crushed the Spanish Armada at Manila Bay which paved way to their success of colonizing the Philippines. By the virtue of the Treaty of Paris on December 10, 1898, the United States purchased the Philippines for US$20 million. The Americans saw the Philippines as their only path in order to get to the richest markets in Asia, particularly, China.

What had appeared as mere political and economic objectives carried military implications. It was highly essential and, to say the least, desirable, for Washington to gain a territorial foothold in the Western Pacific. Naval power had to be established and strengthened in this part of the world. For this purpose, the Philippines was admirably located and was generally so regarded. Inevitable therefore, for so long as it was

perceived that the Philippines was significant to the promotion of American interests, it figured prominently in American strategic calculations (Paez, 1985).

Since 1933, the United States had straightforwardly expressed its intention to establish military bases in the Philippines. The longest relationship that lasted between the United States of America and a Southeast Asian country has been the US military involvement in the Philippines. On March 14, 1947, an agreement was signed by the Republic of the Philippines and the United States in view of the mutual interest of the two governments in matters of common defense. This is also due to the desire of the Philippine government to obtain assistance in the training and amelioration of its armed forces and the acquisition of military equipment and supplies at the time immediately following the official proclamation of Philippine independence. The Philippines was a newly-born republic during this period and was strongly in need of aid in terms of national defense. The president of the United States committed to the rendering of military assistance to the Republic of the Philippines aiming towards the establishment and maintenance of national security and towards the formation of a basis for participation by that government in such a defensive military operations as the future may require, and to attain these ends, the governments of the Philippines and the United States have reached into an agreement. For almost a century, the US military was able to utilize two major bases in the Philippines: the Clark Air Force Base in Pampanga and the Subic Naval Station in Olongapo City. The former became the headquarters of the 13th Air Force and the latter became a forward station for the Seventh Fleet. It took a strong anti-nuclear, anti-imperialist mass mobilization and a majority vote in the Philippine legislature to finally put an end on the long US military occupation. What deemed to be focused on issues of national security inevitably rendered some economic implications.

When former senator Benigno Aquino Jr.'s widow, Corazon Aquino came to power, she initially ordered the withdrawal of the US bases. The 1987 Constitution stated that after the expiration of the bases treaty on September 16, 1991, foreign military bases, troops or facilities, shall not be allowed in the country unless a new treaty
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was ratified by a two-thirds vote of the Senate. However, in 1991 when the bases treaty was supposed to expire, Cory Aquino broke her electoral promise and promoted the retention of the US military bases. This pushed for a mass mobilization on September 16, 1991 as the Senate voted 12-11 to reject the new treaty.

The question of how the removal of US military bases in the Philippines is important because its search for the viable answer gives light to the ongoing debate as to whether the Philippine government did the right thing of sending away the American military troops and closing down US military facilities in the Philippines. Moreover, this research could be beneficial in further studies which involve the US bases in other parts of the world. Review of Related Literature Previous studies have been undertaken regarding the impact of the US bases on Philippine economy. In 1991, politicians and experts have debated over whether the military bases agreement should be renewed. Pro-base arguments would revolve

around the decrease of employment rates, loan agreements, and even foreign investments in the country if the bases are removed. Pilar R. Jimenez (1988) outlined both the advantages and disadvantages of having the US bases here in the Philippines. The advantages were mostly directed towards the surrounding area of the bases which are the cities of Olongapo and Angeles. These advantages include the provision of jobs, medical assistance, financial assistance, school supplies and the enhancement of national security. It was said that the bases contributed 30-95% in the annual revenue through taxes and fees from businesses that are being supported by the bases. Most of the disadvantages that were mentioned were about the social conditions which the bases had created. Example included the increased number of prostitutions, accidental killings, and cases of sexually transmitted diseases. The Background on the Bases (a publication of the US embassy) reiterates the amount of dollars that the US bases have directly contributed the economy of the country. It said that over 350 million dollars is spent by the US military in the Philippines annually. The US bases also employed 42,000 Filipinos in 1985, and spent 380 million dollars on them. These figures increased
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in 1987, wherein the number of employed Filipinos became 68,500 and so US spending increased to 500 million dollars as well. The economic impact brought about by the US bases on the economies of Olongapo and Angeles were discussed by Gaerlan (1988).

Despite the projected severity of these arguments, the base treaty was not renewed and the Subic naval base was officially closed in September 16, 1991.The Clark Airbase was closed a year earlier due the eruption of Mt. Pinatubo. The impact of this event on the local economies of Olongapo city was examined by Cordero (1993) wherein he says that the removal of US hurt the businesses in Olongapo city, especially those relying on the consumption of the US military soldiers. On the other hand, Charlie Lindsey (1989) claims that the contribution of the US bases to the Philippine economy is not as significant as it was in 1966. Its contribution to the Philippine economy decreased by half in 1986 wherein it was only 1.43%. Lindsey directly falsifies the figures claimed by the US embassy in their publication, Background of the Bases, later on argues that the influence of the US bases on Philippine economy is continuously declining. Garcia (1988) argues that removal of the bases would result to an increase in economic growth due to the possible alternatives that may be implemented to the US bases after they have left. According to him, the economic conversion of the US bases will result to economic growth.

The contradicting figures and arguments that are being presented by these authors make it difficult for us to determine which one is really accurate. With the presence, of various contradictions, we found it significant to test which of these causal paths were actually true. These causal paths will be further discussed in the methodology.

Methodology

The results of the debate regarding the US bases and the Philippine economy was not clearly resolved, mainly because of the highly contrasting arguments that have been present before and after 1991 about the impact of the withdrawal of the US bases.
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In this research paper we will be testing 2 causal paths. First is whether the removal of US bases resulted to a decline in economic growth, and second whether it resulted to an increase in economic development. The causal mechanisms that will be tested are based upon the existing theories regarding the impact of US bases on Philippine economy.

The data which we will be using in order to test these two paths would be coming from National and International institutions (ADB, NSO, etc) in order to avoid the obtainment of biased figures. We chose to compare the years 1980 1995, because of the availability of data and to show the real status of GNP and employment before and after the removal of bases. Besides these two, we will also be looking into the number of foreign investments in the country during these years. In testing these causal paths we would be verifying if their causal mechanisms are valid, and if they actually affected the outcome of the dependent variable. Also we are going to find out whether one of these two really took effect after the removal of the bases, or both of them are invalid.

Data Unemployment When the US bases were still present in the country, the Americans have claimed that they are second largest employer of Filipino workers in the country. If this is true, then their removal would have a huge economic impact on the countrys economy. Unemployment is part of our first causal path, and it serves as a causal mechanism which links the removal of bases to economic decline in the country. Our data on unemployment rates would be coming from the figures presented by NSO from years 1980 1995 as well as the underemployment rates.
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Foreign Aid and Investments It has been argued that the removal of the US bases would affect the number or foreign investments and foreign aid in the country for the main reason that the US bases will no longer be present to oversee the movement of government. The US pays a substantial amount of money for the rent of its bases. In 1988 alone, the US agreed to pay the Philippines $962 million in exchange for the retention of its bases in the Philippines for another 2 years. It was also claimed that transnational corporations, especially those from the US may be threatened by the removal of the US bases since the bases also served as the stabilizing factor for them to feel secure regarding their investments. The capacity to borrow would also be looked into to see if the presence of US bases had an impact on it. The data for foreign aid would be provided by. The rates of foreign investment will be provided by the Institute of International Finance. Our debt accumulation (excluding the growing interest rates) would also be looked into in order to demonstrate the borrowing capacity of the country.

Economic Conversion By economic conversion, we mean that the former US bases would be used for capital accumulation of the country. These former US bases were transformed into facilities that catered to public goods. To demonstrate its effect on the economy, GNP rates would be looked into. Exports and imports would also be considered to see if the removal of the US bases had effects on the countrys trade. The data on GNP would be provided by the NSO while the data on trade would be provided by the Philippine Statistical yearbook of 1999.

Testing the Hypotheses and Results

A.

A lot of pro- base arguments have centered on the idea that the removal of the bases would result to a decline in the economy of the Philippines because of three basic reasons. First is that the US bases employs 68,000 Filipino workers, and their removal would result to an increased rate in unemployment. But this number is not even 1% of the total labour force of the country. Therefore it is misleading to claim that the removal of bases has such a significant impact on the employment rates in the country. These numbers had an effect on the local economies of the cities that catered to the military bases but it is too little to have significance on the country as a whole. As seen in Figure 1, there has been a steady increase in the labour force of the country since 1985. (See
Appendix, table 5 for exact amount of labor force)

Figure 1:

Line Graph on Philippine Labor Force (1985-1995)


30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Labor force

*Source World Bank (2010)

From the years 1991 (removal of bases) to 1992, there has been a decrease in unemployment and underemployment rates.(See appendix, table 1 for unemployment and
underemployment rates).This data then further proves that the removal of US bases did

not have a negative impact on the countrys employment rates. (The sudden increase of unemployment rates from 1990 1991 may have been caused by the moving of
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corporations to other countries due to the daily brownouts that had plagued the countrys business and the public sectors.)

On the issue of foreign aid and investments we looked into the number of foreign investments, amount of foreign aid and the countrys amount of debt before and after the removal of the US bases. It has been established that foreign aid and borrowing helps in the capital accumulation of a country. The presence of US bases was an excuse for the US to provide assistance to the Filipinos (Simbulan, 1988). Some politicians argued that the removal of the bases may have an impact on the aid that we receive from US as well as the borrowing capacity of the country since it would be more difficult for the US congress to approve loans knowing that the US bases would not be there to oversee the countrys spending (Villalba, 1990). To prove or disprove this claim we looked into the debt accumulation of the Philippines, with consideration to its interest rates.

Figure 2:

Bar graph of Foreign debts in US$ billion


$20.00

$15.00

$10.00

Levels of foreign debt

$5.00

$0.00 Marcos (1966-85) Aquino(1986-91) Ramos(1992-97)

*Source BSP & ADB

This graph shows a decrease in foreign debt after Marcos, during the Aquino administration. This decrease was due to the 25% debt service payments during the
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Aquino administration.

But it is seen that in the succeeding administration debt

accumulation had ballooned. This debunks the argument that the borrowing capacity of the president declined due to the removal of the US bases.

We also examined if the lessened amount of foreign aid that the US paid the country during the presence of US military bases lead to an economic decline. The GNP in 1992 slightly increased (see appendix, table 3 for GNP, and GNP per capita rates). Despite the increased amount of rental from 1985 to 1991 (see appendix, table 2), the economy of the country still plummeted. This then implies that the rental payment of US bases doesnt have a significant effect on the economy of the Philippi nes. Another side which some politicians took was the issue on foreign investments. According to them foreign investments would be threatened if the bases were removed because these bases give them security and act as a stabilizing factor. We test this c laim by looking at the amount of foreign investments that had entered the country before and after the removal of the US military bases.

Figure 3:

*Source Institute of International Finance

The flow of foreign investments seemed to stable during the transition of 1991-1992. But a severe decrease in the investments in the middle of 1992 has negatively affected the GNP of the country. This sudden decrease in foreign investments may have been due to interconnected factors, one of them being the removal of the US bases.
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Transnational corporations have also conveyed their worries regarding the removal of the US bases. For their part, the Transnational Corporations, especially from the U.S., Japan and the NICs like Hong Kong and Singapore expressed grave concern about their current and future investments should the U.S. Bases Treaty be rejected by the Philippine senate. Many expressed doubts that their investments would be secure without a strong stabilizing factor like the U.S. military presence. (Villalba, 1988). Other factors include the eruption of Mt. Pinatubo and the shortages in power supply which resulted to a daily rotating brownout.

B.

The maintenance of the US military bases in the Philippines has generated the question of which faction actually gains benefits in the American military presence. This exhaustively shows how security issues yielded economic impacts. One argument that supports the retention of the military bases is that the said bases contributed to the economic boon experienced by the Philippines. The bases reportedly pump an estimated US$260 million a year (1977 figure) directly into the Philippine economy with the total contribution, including the secondary benefits, said to be considerably higher. This contribution is placed at about 5% of the Philippine GNP (Paez, 1985).

Despite the overwhelming amount of cash inflow from the US military bases to the Philippine economy, critics of the US military in the Philippines pointed out that the figures presented by the US government needs a closer examination. The figures presented included base spending on US goods and services. In reality, the actual amount of money being received by the Philippine economy constitutes merely a fraction of the given yearly figures. Most of the appropriations for the bases were spent for the maintenance and repair of the facilities which do not entail contract servicing by Filipino firms, and most purchases of consumption goods by base personnel are made at tax-free PX commissions. Therefore, the sources of income at military bases are mostly from off-base housing facilities, for entertainment and recreation services, and
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the employment of a few Filipinos in the base. Therefore, US base expenditures are mainly concentrated on consumption rather than on capital investment and thus do not contribute to Philippine production.

Paez (1985) presented a case in Sangley point, the US facility in Cavite. Before it was turned over to the Armed Forces of the Philippines, there have been rumors that the city's economy would deteriorate and the base-workers would end up unemployed. This case never actually happened. Sangley point absorbed the discharged Filipino workers. This did not render any negative effect on the city's economy. It showed otherwise. Before, the Americans hardly purchased the consumption goods from the local market of Cavite but instead buy their desired products. The transfer of the facility back to the Filipinos is a step towards a better economy because since the possession of the facility was given back to the Philippines, it will create market motivation for the base personnel to buy personal needs from the Cavite City market.

The Filipinos who support the withdrawal of US military bases recognize the fact that the Philippines may experience short-term dislocations. They are more in favor of transforming the base sites into economically productive areas. The base sites are actually potential agricultural land. About 60% of the Clark and Subic base area are actually arable.

By extending arable lands for American military use, the Philippines has been losing the opportunity of producing about 8 400 000 cavans of husked rice (based on the conservative production estimate of 35 cavans per acre, two harvests yearly) At the cost of US$13 per cavan (1978 market price), the Philippines lost an estimated possible earning if US$109 million. (Paez, 1985).

What the people want to do with the base is called Economic conversion. It refers to the process by which the military bases are transformed from a primarily defenseoriented site to one that creates productive and profitable jobs for dignified communities (Garcia, 1988). The whole point of economic conversion is to say that there is life after
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the bases. The participation and cooperation coming from the people in the military base is important. They help provide a meaningful and successful economic conversion which is acceptable in majority of the communities. It is also an essential step towards a more self-reliant and authentic national development.

Garcia (1985) highlighted some lessons that have been learned from the experience of the withdrawal of the US military bases in Cavite in 1971. In the first place, the largely unilateral withdrawal of the United States from Sangley Point which took place under unfavorable circumstances did not necessarily result in an economic dead-end for the immediately affected community.

Second, in the event of the withdrawal, the following five factors must be considered: 1. The participation of the people in the deliberation regarding economic conversion 2. The coordination between economic planning and preparations for a transition program to facilitate adjustment 3. The priority for labor-intensive economic alternatives; 4. An appropriate time-frame within which to provide skills training in the light of re-employment possibilities; and 5. A comprehensive financing scheme which will involve the private sector, the national government and fair assistance from the United States as may be agreed upon.

Although the bases played a significant role in Philippine economy, it must not be overemphasized for the reason that it does not deserve to. It has generated a number of employment opportunities but it has also raised the number of incidences associated with prostitution, child abandonment, drug dealing, crime, black marketing or smuggling and corruption.

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The negative social behavior and values arising from the activities which occur in places that surround the base leaves an absolute moral consequence on the local population, especially the youth. In addition, Filipinos who work at the base and those who live in the surrounding areas face the threats of dangerous chemicals that could be fatal for their health. It was also claimed that the establishment of US military bases also
paved way for the spread of AIDS in the Philippines, associated with the rampant spread

of prostitution.

As early as 1975, long before the withdrawal of the US military bases, the Philippine Chamber of Commerce and Industry (PCCI) had already conducted a study on the possible ways of converting the Subic Naval Base and the Clark Air Base for non-military use. According to this study, more benefits from the base could be extracted once it goes into the possession of the Philippine government and the private sector. This leads to the creation of an agro-industrial development strategy for the region.

The conversion of the bases as economic growth centers are in line with the vision of the National Economic and Development Authority which called for the creation of an industrial scenario attractive to private investors and the promotion of industries which would develop inherent regional resources and economic potential. The withdrawal of the US military bases positively affected the economic growth of the Philippines and increased the level of trade with the United States given that after the military bases were abolished, these bases were declared to remain as free ports. These free ports provided tax incentives to foreign investors which also supported the trade in the country.

The economic conversion supports the argument that the withdrawal of US military bases has led to positive effects on the Philippine economy. Since the abolishment of the bases in 1991, there might have been a decline in the level of foreign investment and GNP (See Appendix) but this was in the short-term context which was actually anticipated by the Filipino people, especially those who reside in areas around
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the abolished bases. However, this was heavily compensated by the significant increase in GNP starting 1993, decline in the level of unemployment and increase levels of trade. This was eventually followed by the level foreign investment which improved at around 1993 and even resulted in a foreign investment boom in 1994 (See Appendix). This appears to be a resemblance of the J-curve as discussed by Hellman (1998).

Conclusion

Despite the existence of various supporting claims for the argument that the Philippines' economic growth rate would decrease upon the withdrawal of US military bases, there seemed to be no compelling evidence to underpin the vindication. The abolishment of the bases also did not have a significant level of unemployment of the country because only a rough estimate of one percent of the country's entire employment was associated with the US military bases. The number of people who became jobless after the removal of the bases was limited to those situated near the said bases. This may also be looked at as a positive result of the abolition of the bases since it ended the hazards imposed on the lives of the base workers and residents around the base who were constantly exposed to the chemicals being used in the facilities. These people were also able to get another job when the Philippine government decided to convert the bases into industrial sites. Moreover, there has been no effect on the Philippines' capacity to borrow money as evidenced in the increasing debt service during the administration after the discontinuation of US military services. But on the mechanism of foreign investments, there seem to be a slight connection between the sudden decline of foreign investments to the removal of the US bases given the expressed concerns of the foreign investors. Because of this we considered foreign investments, as a factor that influenced the decrease in GNP, but concluded that the decrease in foreign investments was not only caused by the removal of bases but by other interconnected factors as well.

On the contrary, it was during the revocation of the US bases in the Philippines where the country was able to experience a gradual growth in its economy. We do not
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neglect the fact that the economy was down for a brief period of time immediately after the removal of the bases but it was a very minor incident and was more limited to the areas surrounding what used to be the sites of the US bases. It could also be directed to the series of brownouts which occurred during the Aquino administration that led to the withdrawal of various foreign companies situated in the Philippines due to their difficulty to function and generate income with fluctuating power. Eventually, it was compensated by the long-term augmentation of the Philippine economy when Fidel V. Ramos became the president of the Republic of the Philippines. The free ports which was established after the removal of bases encouraged investments and supported local and international trade. The Philippine government's possession of the base sites enabled economic conversion which facilitated more production and more job opportunities especially for those whose employment were directly affected by the termination of the bases. Therefore, the overall impact created by the removal of the US bases was positive given that it entitled the Philippine government the authority to utilize its territory. This created more venues for utilization which is geared towards the welfare of the Filipino people.

So we return to the question, how the removal of US bases affected the economy of the Philippines. Our findings have shown that some of the causal mechanisms used to claim the connection between the decline of Phil. Economy and the removal of bases were invalid. Included here are US aid and unemployment. But the removal of the US bases was a contributing factor to the decline of foreign investment in the country. There was a short term loss for the Philippines after the withdrawal of the bases but the economy eventually got back on its feet with the help of the economic conversion of the former military bases. This conversion was a step towards the economic development in the country. In the end, the country was able to reap more benefits from the withdrawal of the military bases. This proves that Philippine economy is not dependent on the presence of US intervention alone.

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Appendix of Figures.

I. Underemployment and Unemployment Rates in the Philippines (1980-1995) Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Unemployment 7.9 8.8 9.6 10.4 10.4 12.5 11.8 11.2 9.5 9.1 8.4 10.5 9.8 9.3 9.5 9.3 Underemployment 20.7 22.8 25.8 29.1 30.5 20.4 23.0 23.1 21.3 21.1 22.4 22.5 20 21.7 21.4 19.8

*Source NSO

II. Rental Payment from the US (1979 1991) Time Period 1979 1982 1983 1988 1989 1991 Rental payment (in US dollars) $ 500 million $ 900 million $ 962 million (rental of bases)

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III. GNP and GNP per Capita (1980 1995) Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 GNP GNP per capita 4.63 3.24 2.84 1.44 -8.72 -7.06 4.15 5.10 7.16 5.73 4.53 0.23 0.62 2.12 5.25 4.96 1.86 0.70 0.33 -1.06 -10.92 -9.31 1.68 2.61 4.67 3.31 2.19 -1.99 -1.54 -1.16 2.75 3.02

*Source NSO

IV. Value of US-Philippine Trade in US dollars (1989 1995) Year 1989 1990 1991 1992 1993 1994 1995 Exports 1,979,273 2,365,532 2,462,278 2,620,204 3,522,267 3,941,268 5,014,293 Imports 2,945,612 3,094,588 3,143,653 3,831,548 4,371,159 5,143,260 6,159,655 Balance (966,339) (729,056) (681,375) (1,211,344) (848,892) (1,201,992) (1,145,362)

*Source Philippine Statistical Yearbook (1999)

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V. Labor Force (1985 1995) Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
*Source World Bank (2010)

Number of People 20,729,698 21,658,316 22,576,248 22,576,248 23,436,092 24,099,597 24,771,832 25,648,642 26,186,154 26,894,754 28,086,519

VI. Foreign Debt Accumulation (Marcos- Ramos) US$ million Foreign debt at end of period Accumulation entire term Average accumulation Marcos 1966-85 26,389 Aquino 1986-91 29,933 3,544 591 24,550 5,291 882 5,382 (1,748) Ramos 1992-97 42,972 13,039 2,173 26,708 2,158 360 16,263 10,881
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during 25,790 annual 1,290 19,259 7,130 -

Public foreign debt at end of period Accumulation entire term Average accumulation during annual

Private foreign debt at end of period Accumulation entire term during

Average accumulation

annual

(291)

1,814

*Source- Bangko Sentral ng Pilipinas (BSP)

VII. Debt Service Burden (Marcos Ramos) Marcos Aquino 198185 Value (US$ million) Average annual DSB (US$ million) Average annual per capita (US$) Average annual DSB to GDP (%) 13,661 2,732 52.80 8.1 1986-91 17,774 2,962 50.17 7.8 Ramos 1992-97 27,465 4,578 67.67 6.9

*Source - Asian Development Bank (ADB)

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