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Chapter 3

Structural Origins of Post-Colonial City Crisis

The Political Economy of Convolution


Dilemma of Dependency and Short-Circuiting Strategies

Accelerating postwar inter-regional and intra-urban disequilibrium - mirrored in Manila’s


mega-urbanisation and overwhelming primacy on the one hand and the secular
degeneration of its formal urban economy on the other - sprouted and grew in the
historical and political compost of structural dependency and post-colonial development
strategies. The heirloom of structural contradictions, inherent in the captive colonial
economy passed unto the newly independent Philippine state during the early postwar
years, gyrated precariously and progressively off course as intervening remedial
modernising state strategies short-circuited at each turn.
While decolonisation turned over state power to the Filipinos, it by no means
implied abdication of economic hegemony by US capital. Indeed, the dowry paid for
Philippine Independence was tremendously onerous. In exchange for token financial
assistance to resuscitate the war-ravaged economy and under US pressure, Philippine
Congress enacted the Bell Trade Act in 1946. The Act restored and extended prewar
core-periphery relations on the basis of the duty free tenet until 1954, with gradually
ascending tariffs over 20 years until 1974. Moreover, the controversial parity clause built
into the Act literally afforded American core capital carte blanche in terms of exclusive
and unrestricted access to the domestic market, maximum capital mobility, as well as
ownership rights on par with those reserved for the Filipinos. American parity privileges
were to be further enlarged to embrace practically all economic sectors when the
bilateral Laurel Langley Agreement, extending the Bell Trade Act,
was finally hammered out in 1955.i
With the free trade regime revivified, nostalgic malaises, generated by the
unequal terms of core-periphery exchange of prewar vintage, were inevitably
resurrected. The shortchanging impact of unequal exchange on the postwar economy
was patently revealed by mounting annual merchandise trade deficits and foreign capital
remittances which by 1949, merely four years after Independence, finally culminated in a
crippling overall balance of payments (BOP) and foreign exchange crisis.ii

The Era of Import Substitution Industrialisation:


Recycling Dependency and Short-circuiting Strategy

Alarmed by the huge dollar haemorrhage and with the endorsement of the US and
International Bank for Reconstruction and Development (IBRD)iii the government
instituted sweeping foreign exchange controls and quantitative restrictions on non-
essential manufactured imports (e.g. food, textiles, footwear).
Complemented by discriminating tariffs in the late 50s, controls spurred an
industrial growth rate averaging 12% annually between 1950-57, with sectoral
employment growing in pace. Whereas total rural output decelerated substantially, by
1960 the net domestic product share registered by the import-substitution industrial
sector climbed to an unprecedented 20%. Overall, economic growth was singing to the
rhapsodic tune of 6% average annual GNP-rates until the mid-60s. iv Protectionism and
the quasi-autarchic industrial experiment seemed to be paying off handsomely in favour
of the nascent national bourgeoisie and expanding urban proletariat. Hindsight reveals,
however, that the industrial miracle of the 50s was no more than a passing mirage as
output gains were vengefully offset by veteran BOP and foreign exchange woes.
Consequently, industrial growth sputtered to a halt in the next decade.v
Critical post mortem appraisalsvi exhume several key blind spots on which
the strategy of import substitution industrialisation (ISI) foundered. Germinating under
the protectionist umbrella of controls, import substitution industries - to a large extent
represented by assembly and packaging concerns - rather than being import-saving were
in fact import-consuming. They were capital-intensive, energy expensive enterprises
dependent on imported technology, raw and semi-processed inputs. The failure to fortify
protectionist measures with national controls on investments and remittances (e.g. US
parity rights) not only allowed US and foreign capital to “gatecrash” into the ISI-sector,
but also accorded them (through import control and tariffs) an ideal shield against other
international competitors. By the late 60s, foreign capital owned one-third of the
Philippine industrial sector, 80% of which was American.vii
Ironically still, as one landmark survey of 108 US firms showed, American
investors were able to put up shop by simply tapping into the domestic credit market,
depriving in the process less-merited Filipino industrialists access to scarce local capital:
84% of invested capital between 1956-65 came from domestic sources, while only 16%
including reinvested profits made in the Philippines originated from the US.viii
Neither did initial industrial growth generate any significant spin-off effects
due to the absence of viable backward linkages, since ISI catered to a limited internal
market, whose size and texture were in the final analysis determined by a highly skewed
income and property structure and the propensity of the upper-classes toward luxury
consumption. Assumed to deliver income equalisation, ISIs oft-advertised productivity
gains appeared for all intents and purposes to be “trickling down” disproportionately
away from the underprivileged classes. While the lowest 20% of the population
accounted for 4.5% and the richest 15% cornered 67% of the national income in 1956, by
1961 the respective categories registered a discrepancy of 4.2 and 70%.ix
Mainly an urban phenomenon, the ISI strategy neglected the development
of the agricultural sector, a veteran victim of nadir productivity and income rates, and
the bulk of the market for industrial output was unduly confined to the urban upper and
middle classes.x Internal market constraints and the high import component of ISI were
major disincentives for the rural oligarchy and compradores to shift long-term
investments from tropical export production to industry. These groups came out
relatively unscathed, retaining economic clout when fragile fractions of native
industrialists fell prostrate as industrial output fizzled out and precipitated a spate of
corporate bankruptcies in the ISI sector in the mid-60s. While industry was on the retreat,
tropical export producers in ten traditional commodity sectors historically blessed by yet
expanding international demand (e.g. sugar, coconut, timber) were offensively cashing in
80% of aggregate export earnings.xi
Under conditions of social disarticulation, windfall profits generated by the
exporting classes, which may otherwise have relieved the industrial fallout via the
multiplier effect, simply fuelled the drive towards further concentration of landed
property, speculative and “anti-deluvian” enterprise, marginalisation of the peasantry,
and added pressures on import receipts as a result of extravagant consumption.
In an attempt to dispel a major BOP and foreign exchange disequilibrium,
the 1962 Macapagal government initiated de-protectionist reforms as quid pro quo to a
300 million stabilisation loan from the US and the World Bank-IMF group. xii Applying the
tourniquet of neo-Free Trade policies without seriously addressing ISIs fundamental
structural flaws multiplied rather than arrested the paroxysms of the disease which it
hoped to cure. Spearheaded by a drastic currency devaluation, descending watermarks
on quantum import restrictions, and coupled with tight fiscal and monetary policies and
more auspicious incentives to foreign investments and capital repatriation, official de-
protectionist correctives were the loaded torpedoes which struck the sinking ISI sector
with even quicker and lethal impact.
Devaluation dramatically hiked imported industrial input costs and the peso
equivalent of the debt servicing bill, deflated real wage rates while inflating living
expenditures and ultimately enlarged the net value of dollar investments of foreign firms.
Squeezed hard by tight fiscal and monetary policies, 1,500 native enterprises folded up
in the face of drastically decelerating average 5% annual industrial growth rates between
1960-65. Furthermore, stagnating industry took a heavier toll on urban and displaced
rural labour as massive retrenchments and corporate shut-downs swelled the ranks of
the unemployed and underemployed. Manufacturing sector’s unaltered 11-12% share of
total labour force throughout the 60s is a tale-telling indication of the industry’s labour
absorptive limitations.xiii General economic slowdown crowned by the unabated effluence
of capital remittances, as a result of official holidays enjoyed by foreign investments,
exacerbated BOP deficits and the foreign exchange drain.
Export-oriented Industrialisation:
Trans-nationalising Dependency and the Police State

Revivalist neo-laissez faire policies echoed in ascending crescendo by succeeding


governments, portended the gradual tilt towards full-blown export industrialisation
strategy (EOI) in the 70s and 80s in the Philippines. EOI as a development strategy for
Third World countries came with the ascension of transnational corporations (TNCs) in
the 1960s. This decade was marked by the increasing compulsion on industrial firms in
core economies like the US to globalize production operations.
Faced with unabated upward pressures by organised labour on variable
costs reducing profit margins at home, TNCs developed schemes to farm out more
labour intensive processes of their operations in the vast low-cost labour markets of the
Third World. This new corporate strategy, which required the proper coordination of
several operational facets dispersed geographically overseas, was facilitated by key
technological advances in the global transportation, communication and information
industries. While the locus of research and development remained at the core, labour-
intensive components functionally shifted to the periphery in the image of what has been
labelled the New International Division of Labour (NIDL) with allegedly mutually inclusive
and comparative advantages for the contracting parties. But to be operational, all
protective barriers to the influx of foreign financial, commodity and productive capital
had to be scaled down in the prospective Third World countries. xiv Neo-liberal economics
and EOI emerged as official development dogma in the 70s and 80s,a nd were to be
vigorously prescribed as the structural panacea to underdevelopment by multilateral
lending institutions like the World Bank and the IMF for their Third World client-states.
In the Philippines, attempts to carve out a proto-EOI course during
Ferdinand Marcos’ first presidential mandate in the latter 60s politically polarised the
ruling elite into a militant protectionist bloc of national capitalist interests with powerful
political backing in Congress and the Supreme Court at fiery odds against a pro-TNC
group of exporting oligarches who were at that point ensconced in the executive.
Brewing intra-elite bickering ended in political deadlock as tentative efforts by Marcos to
decisively demolish remaining ISI walls and open up the economy to transnational capital
(through laws like the Investments Incentives Act in 1967 and the Exports Incentives Act
in 1970)xv were being invariably countervailed by landmark congressional legislation and
Supreme Court decisions seriously challenging and undercutting foreign capital mobility
and the sanctity of US parity rights.xvi Indeed, this stalemate if you like accounted for the
protean nature of official policy between 1967-71, cross-breeding elements from the rival
strategies. And as Marcos’ expansionary fiscal policies - highlighted by a massive foreign
debt-financed infra-structural build-up to seduce foreign investors - started to back-fire,
the economy landed anew in the red in 1969, compelling a painful 50% currency
devaluation the year after and jeopardising presidential prestige even more.
Elsewhere, anti-xenophobia and nationalist dissidence were astir in civil
society among the ranks of the working class, the middle class, peasants and students
inspired by the Left, who by decade’s end were dangerously coinciding with increasingly
belligerent segments of the native bourgeoisie. This kind of political realignment
threatened to tip the balance of forces in favour of the nationalist cause.
Thwarting an impending political cataclysm, Marcos staged a rear-guard
offensive in a well-orchestrated coup d’état and declared Martial Law in 1972, cutting in
effect the Gordian knot that was stifling unified elite class rule. xvii With democratic
institutions dismantled and nationalist opposition muzzled, the Philippines joined the
league of Third World authoritarian regimes and police states like Brazil, Chile and South
Korea which were to spearhead EOI-led market economies in the periphery toward still
tighter integration into the capitalist world economy in the 70s.
Flanked by a coterie of high-powered western-trained technocrats and
retired generals entrenched in key state agencies, Marcos set out to undertake a grand,
multi-pronged modernisation scheme, incorporating almost in verbatim the full repertoire
of the WB-IMF endorsed EOI-cum-trade liberalisation model. Inked into the regime’s two
successive five-year economic plans (1974-1982), the strategic shift to EOI included a
gamut of concurrent reforms. Massive energy and infra-structural development.
Diversification and expansion of labour-intensive manufacture with strong foreign capital
participation. Measures designed to tenderise the local business climate to suit foreign
investments, e.g. via guarantees on capital repatriation and profit remittances, provision
of fiscal and financial incentives, promotion of industrial peace through a ban on strikes,
the swift construction of export processing zones. Import liberalising policies, tax
exemptions and the deregulation of foreign exchange controls. Concomitantly, the
agrarian sector will be modernised through productivity raising capital-intensive
technologies epitomised in many ways by the s-c Green Revolution, complemented by a
redistributive land reform program and effective credit facilities to small farmers.xviii
With the oasis of self-generating growth looming ahead, historically easy
international credit terms in the 70s plus still expanding global markets for Third World
exports, Marcos went into an orgy of foreign borrowing from the WB-IMF conglomerate
and transnational banks to tee off the EOI program. xix Vulnerably stitching the economy
almost singularly to external demand on the basis of foreign credit proved to be a tragic
affair indeed, as a combination of dramatic reversals on the EOI model’s key linchpins
unfurled by the end of the decade: global recession and the general decline of world
trade; the growth of Western protectionism; the proliferation of other Third World EOI
producers competing in the same stagnating markets for manufactured goods; and the
double-digit rise in international interest rates.
In the face of these external adversities, a deja vu of cumulative trade and
BOP deficits and plunging growth rates haunted technocrats yearly until the end of
Marcos’ political career in 1986. While the growth component of the EOI strategy shrunk
progressively, the external debt account swelled tremendously from $1.9 in 1969 to
$28.3 billion in 1986 even as Marcos sought fresh loans to service maturing debts and
artificially keep the economy buoyant. xx It is in the context of growing debt dependency
that Marcos capitulated unconditionally and totally to the beck and call of WB-IMF
structural adjustment reforms, those designed to blast hitherto remaining impediments
to the EOI and free trade regime.xxi
From the standpoint of social equalisation, these reforms translate into
austerity policies which among others directly and indirectly constrain state delivery of
public welfare, leaving wage labour and consumers more and more at the mercy of
market forces to fend for the requirements of social reproduction.xxii
Fundamental flaws underlying the EOI debacle are reported in several
critical autopsiesxxiii and recapitulate the classic stereotypes of late 20th century Third
World dependency in the Philippines. EOI’s rhetoric and reality are briefly summarized
below:

 Multiplier effect versus modern enclave economy: urban-based EO


manufacturing industries are often footloose units virtually operating as enclave
economies closely integrated into the geographically dispersed production chain
of their parent TNCs. Due to the limited size of the domestic market and the
external thrust of production, few, if any, backward linkages develop and thereby
unable to generate spin-off effects in the economy at large. Whatever modest
growth prospects remain from EOI are further chewed up by the general
conjunctural downtrend in world export markets, translating among others into
comprehensive industrial slowdowns.
 Capitalisation versus de-capitalisation: contrary to the aphorism of the
indispensability of foreign capital injections to fuel EO industrial take-off, direct
foreign investments have been mediocre as the crucial venue for capital tends to
shift to international loans and credit. Both have in fact exerted in various modes
a “siphoning” effect on domestic savings. While direct net foreign capital inflow
contracted in the latter 70s, foreign firms reluctant to bring in fresh capital were
able to put up their cumulative borrowing from local sources as a result of Marcos’
policy incentives facilitating easier access to domestic credit markets. xxiv
Moreover, the near-to maximum capital mobility enjoyed by TNCs - via generous
holidays on profit repatriation and remittances plus a myriad of intra-corporate
transfer mechanisms at their disposal - exercises a restraining impact on local
capital accumulation. Meanwhile, massive loan commitments to underwrite the
expensive infra-structural EOI prerequisites and designed to attract foreign capital
have apparently evolved into what amounts to the ultimate de-capitalising devise
vastly constraining both national savings and foreign exchange earnings.xxv
 Labour-intensive, export-oriented versus capital-intensive, import-
dependent: notwithstanding optimistic forecasts of an EOI-induced employment
boom, the labour absorptive capacity of these industries has been irrelevant due
to the high capital intensity of their operations. In fact, World Bank figures in 1987
disclosed a general decline in manufacturing employment as a percentage of the
aggregate labour force from 12.3 to 9.5% in a span of 15 years (1970-85).xxvi Nor
has the propensity to and dependency on imported inputs, an argument used to
discredit the previous ISI-model, been significantly checked. Erratic shifts in the
international export markets, articulated in industrial slowdown and periodic
corporate shutdowns, have accounted for instability in the domestic labour
market resulting in recurrent massive lay-offs, e.g. in the electronics and garment
industries, and perennial unemployment and under-employment. A sizeable
chunk of export earnings derived by these firms is devoured by imported inputs,
reinforcing still the ever-widening balance of trade deficits. Nor has EOI facilitated
any substantial technology transfer since these concerns employ mostly lower
level skills.
 Productivity and income elevating-cum-equalisation versus social
marginalisation: the productivity bias of the EOI ancillary rural modernisation
and agrarian reform programs have, in the context of unaltered power and
property structures exacerbated rather than corrected skewed rural income
relations. Corporate expansion in agriculture and the capital-intensive nature of
operations have hastened the process of land concentration, rural proletarisation
and labour displacement in the countryside at a rate bearing no tantamount
relationship with the labour absorptive abilities of urban industrialisation. Far from
elevating productivity, rural levels remain below international averages. Coupled
with chronic labour surpluses, repressive anti-labour laws structurally and
politically maintain wages at bargain levels. Low-cost labour is a vital pre-
condition to the operation of EOI’s alleged comparative advantage equation.
Indeed, the scissors relationship between descending real wage rates and
ascending consumer price indices has been the durable rule of the 70s and 80s.
 Mitigating versus magnifying fiscal and foreign exchange crises: whereas
it reduced financial impositions on foreign corporate beneficiaries of EOI, the
regime increasingly had to resort to two alternative sources to fund the pre-
requisites of modernisation: foreign loans and local taxation. The fiscal solution to
EOI’s infra-structural needs strongly undermines one of the primary goals of the
strategy, i.e. relieving the critical balance of payments situation. Presumed to
generate foreign exchange, EOI actually encourages a haemorrhage of hard
currency for the expensive infra-structural and raw material, intermediate and
capital goods inputs of EOI industries. As debt servicing ratios skyrocketed, state
delivery of public welfare, in the face of widening poverty indices and mounting
social unrest, was becoming increasingly problematic. In the end, state and
society stood in the early 80s with nothing left of the EOI debt-led growth strategy
but the worst debt-led crisis scenario in Philippine modern history.

Notes
iFree trade according to the terms of the Bell Trade Act was in fact a zero-sum affair in favour of
the US since e.g. unhampered entry of manufactured American imports into the Philippines was
unfavourably matched on the opposite side by import quotas imposed on Philippine tropical exports
entering the US market. Constantino b, 1982: 198-201; 291-93.
iiVillegas in Jose, op cit: 49.
iiiIn 1947, the US created the joint Philippine American Finance Commission whose
recommendations would form the basis of a five-year rehabilitation plan to be drawn by the
Philippine government for approval of IBRD (World Bank’s forunner) and the Bell Mission as sine
qua non to a 250 million dollar development loan. Washington emissary, Daniel Bell, heading the
economic study mission to the Philippines in 1950, recommended certain correctives to balance the
economy, two of which would later become the cornerstone of official development strategy in the
1950s: import and exchange controls and import-substitution industrialisation. Villegas, op cit: 39.
ivSee Bello, op cit: 128-29; Mariano in Canlas, op cit: 11; Lichauco, 1981: 37.
vDespite protectionist policies, the Philippines recorded an average annual trade deficit of $9
million with the US until the late 50s, one mitigated ad hoc-ly by World Bank loans in 1957. Jose,
op cit: 50.
viJose, ibid; Bello, op cit; Canlas, op cit; Lichauco, op cit; Broad, 1989; Villegas, op cit, to name
only a few.
viiShalom-Rosskamm, 1986: 98.
viiiBello, op cit: 130.
ixMariano quoted in Canlas, op cit: 20.
xShoesmith, 1986: 200-01.
xiIbid: 40.
xiiLichauco, op cit: 42.
xiiiShoesmith, op cit: 40, 201; Bello, op cit: 17, 132.
xivShoesmith, ibid: 202.
xvThe Investments Incentives Act allowed 100% foreign equity in pioneer and even non-pioneer
industries, provided greater assurance for profit remittances, and exonerated foreign investors from
expropriation and requisition of investments. Also, included here was the passage of a law creating
s-c export-processing zones in 1969. Shoesmith, ibid: 201; Bello, op cit: 134-35.
xviFor example, the Supreme Court decreeing that lands acquired by Americans since 1946 were to
be nullified and subject to forced sale or confiscation on or before 1974 when parity rights would
expire; the banning of foreigners form holding executive jobs in industries reserved for Filipinos.
See Bello, ibid: 138.
xviiRojas, 1987: 6.
xviiiShoesmith, op cit: 203; Bello, op cit; Jose, op cit.
xixIn contrast to the mediocre $326 million in WB loans contracted by the Philippines between
1952-72, more than $2.6 billion was funnelled into 61 development projects between 1973 and
1981 alone. This massive commitment catapulted the Philippines in cumulative terms from 13th to
8th position on a scale of 113 Third World countries indebted to the Bank. Bello, op cit: 24. See also
Broad, op cit: 210.
xxMiranda in Canlas, op cit: 15; Broad, op cit: 205. See also Briones (1984) on the debt issue.
xxiAccording to Loxely (1984) loan conditionalities, particularly those imposed by the IMF on
financially troubled countries like the Philippines translates with striking regularity into a set of
specific measures: devaluation, reduced public spending, elimination of public subsidies for food
and other essentials, wage restraint despite inflation, taxes related to demand curbs, elimination of
state-owned or supported enterprises, greater access for foreign investment, de-protection of local
industries, export promotion and application of new foreign exchange to debt services. Loxely,
quoted by Walton in Smith & Feagin, 1987: 368-69.
xxiiWalton, while cautioning against variegated economic effects derived from austerity program
applied in 22 countries (including the Philippines) studied where the latter precipitated popular
protest movements, sweepingly describes the regressive impact of IMF-imposed austerity programs
from the point of view of social equality. A description which is by all means discernable in the
Philippine case. Similarly, one can there note: wage restraint below levels of inflation penalising
working and salaried middle classes. Domestic demand curbs via e.g. de-subsidization of staple
foods, depriving the slum dwelling underemployed population of the means of survival. Public
spending cuts eliminating services for the same population and jobs for middle-class civil servants;
national entrepreneurs are hurt by ... rising interest rates, reduction of troublesome excessive
domestic demand. Everyone faces higher “undistorted” prices that tend to follow devaluation.
Domestically, only the upper classes benefit and, of this stratum, only a special fraction, namely
exporting interests with the least reliance on imports and the domestic market. When the austerity
measure “work,” and the export-earned foreign exchange is applied to the debt , of course the
international bankers benefit. Walton in Smith & Feagin, ibid.
xxiiiSee the eloquent reviews of Bello, op cit; Miranda in Canlas, op city; Jose, op cit; Lichauco, op
cit; Shoesmith, op cit.
xxivThat foreign firms could raise their local borrowing from $1.9 to 3 billion between 1973-79 can
be deduced from refurbished local credit rules allowing e.g. foreign export manufactures to borrow
up to 150% their equity investments worth. Bello, ibid: 155.
xxvDebt servicing constituted roughly 40% of export earnings and 10% of GNP in 1987, while
almost 47% of total public spending went to ditto during the previous year. Miranda in Canlas, op
cit: 23, 31.
xxviWB country study, 1987, Table 1.3: 74.