The Turbulent and Dismal Record of World Bank Structural Adjustment Lending in the Philippines

by Maria Teresa Diokno-Pascual*

Since 1962 when it obtained its first standby loan from the International Monetary Fund (IMF), the Philippines has been undergoing some kind of IMF stabilization program. The Ramos government (1992-1998) had been bragging that the country was soon to exit from IMF lending, but before that could happen the Asian financial crisis intervened and the Ramos government found itself knocking on the doors of the IMF for yet another stabilization program. To this day we have yet to break away from IMF "supervision".

With regard to structural adjustment, the Philippines has been an experimental guinea pig of the World Bank since the early 1980s. It has received 10 structural adjustment loans from the Bank, with one more currently in the pipeline (under negotiation, not yet approved). The first structural adjustment loans to the Philippines, accompanied by an IMF stabilization loan, targeted the agricultural, financial and energy sectors during the final years of the Marcos dictatorship. This meant that in exchange for money from the World Bank to support the fiscal deficit and the balance of payments deficit, the Philippine government "surrendered" the agricultural, banking and energy sectors to the World Bank. The World Bank reviewed the policies in these sectors and then told the government which policies to change and how to change them. Structural adjustment lending by the World Bank, especially during the Marcos dictatorship, was undertaken under much secrecy and with very little transparency. Even government bureaucrats did not know what the World Bank was doing! The Bank and the Philippine government cared much less about disclosing anything to the Filipino people, even though the policies being imposed were to have a serious impact on our lives. Not surprisingly, the World Bank has rated its first two structural adjustment loans to the Philippines as "unsatisfactory".

With the ouster of the Marcos dictatorship the economy was in shambles, devastated by heavy borrowing that largely disappeared from the country as capital flight, worsened by cronyism and corruption. Poverty was at its worst, with 60% of the population falling below the poverty line. Unemployment in Metro Manila, where most of the jobs are concentrated, was a high 25%. The Aquino government obtained an "Economic Recovery Loan" from the World Bank to support its economy recovery program, again, together with an IMF stabilization program. The Bank and IMF found the Aquino government to be more willing to comply with their policies than the previous Marcos regime. (That is, after they had persuaded President Aquino to remove her first economic planning minister, Solita Collas-Monsod, who had been pushing her government to adopt a more independent debt policy.) This was the period when the Bank-IMF embarked on more intensive structural adjustment in the Philippines.

This entailed, among others, the following major policies: introducing value-added tax ("rationalizing" the tax system); import liberalization; eliminating quantitative trade restrictions; reforms in the tariff structure to promote export-oriented activities; and rehabilitation of the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP), government-owned banks made bankrupt by crony debt. The rehabilitation, however, required the National Government to absorb the bad debts and non-performing loans of these two banks, while the crony-borrowers and the bank officials that lent the money would be spared from prosecution.

Even by the World Bank’s own reckoning, the Economic Recovery Loan failed to improve tax administration and failed to raise tax revenues. It failed to bring investment spending by the government to a level that would support economic recovery. And it reduced the incidence of poverty by only 3 percentage points between 1985 and 1988. Furthermore it could not prevent the economy from entering into another crisis in 1991, in large part because of the heavy failed debts of the Marcos regime that the Aquino government had been made to absorb.

World Bank Structural Adjustment Loans to the Philippines

Amount (US$M) Approval Date

Contractual savings reform 100.0 Pipeline

Banking system reform 300.0 03-Dec-98

Economic integration 200.0 10-Dec-92

Environment & natural resource management 224.0 25-Jun-91

Debt management program 200.0 21-Dec-89

Financial sector adjustment 300.0 04-May-89

Program for government corporations 200.0 15-Jun-88

Economic recovery program 300.0 17-Mar-87

Agricultural sector/input 150.0 04-Sep-84

Structural adjustment loan (SAL) II 302.3 26-Apr-83

Structural adjustment loan (SAL) I 200.0 16-Sep-80

Total 2,476.3

Source: World Bank

During this time the Philippines was also going through a financial sector adjustment loan (approved in May 1989). While this loan was being implemented under strict Bank supervision the Central Bank of the Philippines became bankrupt. Its cumulative losses of PhP180 billion (1983-1993) were equivalent to 12.2% of gross domestic product or GDP. The losses stemmed from the CB’s failed onlending program. It had borrowed money for relending to the local banks (and therefore Marcos family and cronies) but was unable to collect from the banks to which it had onlent the borrowed funds. The World Bank’s financial sector adjustment loan did not anticipate at all that the Central Bank would go bankrupt; its eventual liquidation and its reconstitution as Bangko Sentral ng Pilipinas was a very costly exercise. To this day Filipino taxpayers are paying for this.

Enter the Debt Management Program Loan to the Philippines, approved by the World Bank in 1990. This was the seventh "adjustment operation" of the Bank in the country, which was supposedly intended to reduce the country’s debt burden. What it did was to enable the Philippine government to borrow money, some of which came from the Bank, to buy back some of its debt at a discount from the world debt markets. The government then converted these debts into Brady Bonds, which had to be backed up with collateral in the form of US treasury bonds. So the Philippine government also had to borrow money to purchase US treasury bonds. In the end there was little reduction, and many of the bad debts of the Philippines, including fraudulent debts involving Marcos and his cronies, were depoliticized through this process. In fact the main objective of the Debt Management Program Loan was to enable the Philippines to borrow again. In this narrow and mendicant sense the loan was successful: the country’s debt grew.

The recent financial crisis that hit Asia has spawned many new adjustment programs from the World Bank. These include the Banking System Reform Loan (approved 3 December 1998); Financial and Corporate Sector Adjustment Loan (for contractual savings finance reform; in the pipeline): Public Sector Reform Loan (formerly in the pipeline but eventually dropped)

However, current World Bank and multilateral lending to the Philippines does not always need a structural adjustment loan in order to push policies that are within the framework of the neo-liberal model, a model that has in fact been seriously brought to question by the recent Asian financial crisis. At present we are having to fight against the privatization of the state power corporation and the deregulation/restructuring of the electricity industry; the privatization of rural electric cooperatives, the National Food Authority, the Philippine National Railways and two government financial institutions that manage workers’ pension funds. Local water districts are also a target for the penetration of foreign capital. And food security in the Philippines is being threatened further by the push to "modernize" agriculture.

All these form the World Bank’s country assistance strategy for the Philippines, its framework for providing assistance to the Philippines. To quote a World Bank document on the Philippines: "To help the economy reach its growth potential, fortify its capacity to withstand domestic and global exigencies, and reduce poverty, the Bank should focus its assistance on helping the government pursue and deepen its unfinished reform agenda…. Remaining policy and institutional constraints in the social sectors, in agriculture, in natural resource management, and in infrastructure must be eased or removed." (Gianni Zanini, Philippines: From Crisis to Opportunity – Country Assistance Review, Washington DC: The World Bank, 1999, p. 27; emphasis supplied)

Our Analysis of Structural Adjustment Lending

FDC’S campaigns and advocacy work is based on the following analysis of our country’s debt problem and economic condition:

a) The debt problem remains as serious today as it was when the coalition was established in 1988. The debt problematique certainly does not manifest itself in the same way that it did in the early 80s. But it continues to be a problem, a big headache, especially for government. And this continues to have a heavy impact on people’s lives.

The debt crisis and liquidity crunch of the 1980s led to a serious economic debacle that saw per capita real GDP fall to below the 1982 level. Since then ours has been a tumultuous climb to recover what the dictatorship wasted. In the last two decades of the 20th century we went through a power crisis, at least two economic recessions and more recently a financial crisis. Today as we enter the 21st century we are still a long way from recovering the fall in per capita real GDP. And the Estrada government is showing signs of suffering from a deep fiscal crisis as it faces a severe crisis of confidence.

Thanks in large part to the revival of cronyism the Estrada government has not been meeting its revenue goals. Last year the Estrada government fell short of its revised revenue target by P12 billion. A similar pattern is unfolding this year. From January to September 2000 government revenues totaled P376.5 billion, P43.6 billion (10.4%) short of the 9-month target of P420 billion. (Department of Finance/DoF) Its deficit in 1999 of P113 billion was seven times the original deficit target, and more than double the 1998 deficit. By September 2000 its deficit had reached P83 billion, exceeding the target for the entire year of P62.5 billion. This is the third consecutive year that the government has gone into deficit.

The mounting deficits of the Estrada government are not due to pump-priming but are a direct result of its failure to collect taxes, particularly from businesses and from wealthy individuals. Data for January to September 2000 in fact show that the government has been cutting back on spending (by P8.1 billion). Over the same period the Estrada government borrowed P134.5 billion from foreign and domestic sources to finance its deficit. The amounts borrowed in the first nine months of this year already exceed the planned borrowing for the entire year.

Today, too, we see a new form of indebtedness emerging the magnitude of which threatens to surpass anything and everything we have ever experienced in our debacle-filled history. We are referring to the non-loan guarantees that the government has committed itself to make with private sector companies under some form of a build-operate-transfer (BOT) contract. Such contracts enabled the Ramos government to put an end to the power outages of the early 1990s that turned out to be more disruptive than the coup threats of the military during the Aquino years. But we now are informed that in order to attract private sector participation the government agreed to purchase a guaranteed level of capacity, quoted in US dollars at a price much higher than it would cost the government to generate such capacity. The government also guaranteed fuel cost and such other business risks. The result of these non-loan guarantees is heavy obligations running to billions of pesos yearly. We do not know the exact amount; we have been told that the government itself does not know exactly how much these non-loan guarantees amount to. But we are already noting the continued financial bleeding of the state-owned National Power Corporation, budgetary allocations to honor similar guarantees, and borrowing from bilateral and multilateral sources, as well as through the bond market, to finance such liabilities. In fact, in order to make the privatization of the state power corporation palatable to the people, the Lower House of Congress is proposing to pass on to the National Treasury from P150 to P200 billion of such liabilities. This is strongly reminiscent of the way the National Government absorbed the behest and fraudulent loans of the Marcos era, among them the Bataan Nuclear Power Plant, and passed on the losses of the bankrupt Central Bank to the Filipino taxpayers.

b) The way the debt crisis of the 1980s was managed has resulted in heavy costs for our people and our economy. To illustrate, government spends only P4,540 per pupil enrolled in public elementary schools, a mere seventh of Thailand’s education spending of P28,000 per pupil. Education Secretary Andrew Gonzalez estimates that the government needs to spend P20 billion more each year just to overcome its backlog: a shortage of 9,760 teachers nationwide in 1999, and a backlog of 14,615 classrooms. "We need at least P20 billion worth of catching up; once we do that, we have to increase our budget every year by 9 percent, or at least by 5 percent just to take care of the increase in the number of students." (Today, 31 January 2000)

Through automatic appropriations for debt service, the creditors are given highest spending priority over the poor and over such social development needs as education and health. It is the creditors, not the poor, who have a safety net in the form of automatic appropriations. Assigning the highest priority to creditors has placed development in the backburner for more than a decade now. Worse, it is teaching us the wrong lessons after having gone through the debt crisis of the 1980s and subsequent crises:

1) that you can be a corrupt dictator and his crony and get away with it

2) that you can lend money to a corrupt dictator, his cronies and his bankrupt government and still get your money back, thanks largely to the World Bank and the IMF.

3) that a foreign/multinational company can be party to this cronyism and still be bailed out by its government and the entire creditor community.

4) that you can always pass the buck to the people.

c) The package of neo-liberal and structural adjustment policies that the government is being made to adopt and implement largely, but not only, through structural adjustment programs merely adds to the problem. It will not help the economy recover and it will not reduce poverty. In fact it is more likely to exacerbate poverty.

First of all, a caveat: We are not against a level playing field. On the contrary how we wish there was truly a level playing field, within our borders and across the globe. But we know the rhetoric was never intended to be reality. Which brings us to our point: In the Philippines a level playing field needs more than market-oriented reforms. It needs redistribution of assets and wealth, as well as a reversal of the existing order that reinforces the wealth, income and power of a few.

Which brings us to the next point: Market-oriented reforms without programs to address inequality only serve to further exclude the already excluded. Besides, given the elitist nature of governance in the Philippines, we know that such reforms are invariably and inevitably watered down to suit those already in control of the industry or sector being liberalized, deregulated and/or privatized. In short, we see little if any benefits for the people.

We believe our country is desperately in need of structural change that is more equitable and just. We know this can be done only with a program of policies that begin with the people, a program where people matter more than the market. This is not what the neo-liberal model is all about.

After more than 10 years of WB-IMF supervision, structural adjustment in the Philippines has not done much to reduce poverty in the Philippines, and it has failed miserably in addressing problems of inequality, which always worsen during a crisis.

Another supposed objective of structural adjustment is to achieve sustainable high growth. Again in this regard the record of structural adjustment lending is very dismal. The Philippine economy has repeatedly gone through cycles of crisis and recovery. Between the mid-70s to the present the highest our gross domestic product (GDP) has grown is 6.75%, in 1988. We have yet to experience sustained GDP growth of over 5% for at least 5 consecutive years. To this day we have yet to get back to the historically highest per capita real GDP level of P12,869 attained in 1982. Even the boom of 1996 was short-lived and by now it is clear that the source of that boom was highly volatile portfolio capital inflows that fuelled the real estate sector. The subsequent disappearance of portfolio capital and the financial crisis that began in 1997 only highlight the feeble and fickle nature of such growth.

People’s lives are now more vulnerable than ever. Jobs are scarce, and workers with jobs are less secure with the introduction of contractual employment and the notion of labor flexibility. The few jobs that are available are mostly found in Metro Manila, the capital, and areas encircling Metro Manila. Here food prices are high. Skilled workers end up overseas—not always for skilled work—whenever and wherever the opportunity arises, and they become the real safety net of the family they leave behind. Consumers are increasingly without protection from the government with the deregulation of the oil industry, the privatization of the Manila water district, very weak regulation of banks, public utilities and other public goods. On top of this government delivery of social services (education, health and housing) and its ability to maintain adequate roads, transport and communication infrastructure remain mired in corruption and are heavily constrained by the servicing of its debt.

In the countryside where most of the poor live the agricultural sector has seen little progress with regard to land reform. Farmers and fisherfolk not only face additional stress due to destruction of the environment but are also being made to compete with heavily subsidized farmers from the US, Europe and other developed countries. Indigenous people, despite legislation in their favor, continue to face difficulty in the recognition of their ancestral lands. Their lives are being threatened with the encouragement by the government of multinational mining investments.

Our Struggle against Structural Adjustment in the Philippines

Our struggle against structural adjustment in the Philippines is an ongoing one, and it takes on many forms. Many adjustment policies must be translated into law, or into modifications of existing laws. So one important arena of struggle is the Philippine Congress, which is composed of the House of Representatives and the Senate. The men and women of Congress, however, are largely traditional politicians who are greedy for money and power and care little about public opinion except when it is election time. So we in FDC take our battle also to the media, through the print and broadcast media. This adds pressure on the politicians especially when we single them out. We also place great value on our presence in the streets. We believe our public protests make ordinary people aware that important decisions are being made without their knowledge and participation.

Since these policies come from the World Bank, the IMF and the Asian Development Bank, we also take our protests into their Manila offices. And we engage them in critical dialogue whenever we have the chance, or whenever we encounter them in other public forums. These institutions, however, remain largely unresponsive to our criticisms. We know they have found a "use" for non-governmental organizations, particularly in monitoring their projects and serving as a counterfoil particularly vis-à-vis corrupt governments. But they have remained intransigent when it comes to discussions on their framework and ideology. For this reason we are beginning to question the usefulness of dialogue no matter how critical, and are finding international calls to close down these institutions increasingly relevant.

Our campaigns are mostly national campaigns, but many of the arenas of struggle are increasingly becoming local. For example, the privatization of rural electric cooperatives and local water districts throughout the country, dam projects in resource-rich areas, mining projects in ancestral lands of the indigenous people, take place in areas far away from the media and from the attention of Metro Manila. So we are also finding the need to conduct our campaign in a manner that would bring together micro-realities with macro policies. This is an area we still need to strengthen but we are very conscious of the need to develop our capabilities here.

We also realize that many problems our country faces, such as the debt, trade and environment-related problems, require regional and international solutions. For this reason our campaigns must also have a global/international dimension. With regard to the debt we were very active in helping to set up Jubilee South last year. This is a network of debt and development movements from Africa, Asia and the Pacific, and Latin America and the Caribbean that aims to strengthen and empower the work of these movements internationally and in their respective countries. We will continue our efforts to strengthen Jubilee South over the coming years. We have also done our best to participate in the growing number of international campaigns and movements aimed at shutting down the World Bank, the IMF, the WTO and the like.

In recent years the Freedom from Debt Coalition (FDC) has embarked on several campaigns to challenge the neo-liberal framework that the World Bank and other multilateral financial institutions have been imposing on our government. Specifically with regard to structural adjustment, we have been part of an international initiative called CASA–Citizens’ Assessment of Structural Adjustment. We have been spearheading the CASA initiative in the Philippines. This is currently ongoing, and we are about to reach completion in the coming months. We helped to convene two national assemblies to discuss the issue of structural adjustment with many grassroots sectors. We are in the process of completing our assessment of specific areas such as social services and social spending, the indigenous people and mining sector, and State and markets. These efforts will culminate in a concluding National Assembly.

In 1996 until 1997 we engaged in a "legislative battle" with the Philippine Congress when it was tackling the proposed comprehensive tax reform package that was part of an IMF stabilization program. We pushed for tax relief for fixed income workers, arguing on the basis of a living wage which is actually mandated by the Philippine Constitution. We also advocated a more progressive tax policy and structure, and urged Congress to plug leakages in the tax administration which traditionally enable the rich and wealthy to evade and avoid paying taxes. Because of our efforts Congress had to raise the household income level that would not be subject to income tax. But our success was admittedly limited.

We also fought against the passage of the bill that would deregulate the oil industry, but were unable to block its passage. However we then questioned the validity of the Bill before the Supreme Court, which surprisingly paid attention to our petition. Consequently Congress had to revise the Bill in accordance with the Supreme Court decision. Again we are not fully satisfied with the results. We continue to monitor the oil industry, which we believe remains a monopoly to this day, despite the intention of the Bill to introduce competition into the industry. In the face of rising oil prices that are no longer subject to regulation by the State we are concerned that consumers again have no protection.

An ongoing campaign we have is also against the privatization of the state-owned National Power Corporation (NPC) and the restructuring of the electricity industry. Again the rationale here is to introduce competition that should bring down electricity rates, which are second highest in Asia, second only to Japan. We have challenged the notion of competition in many public forums organized by ourselves and by proponents of this bill. We have questioned the accuracy of the claims of the proponents by presenting facts about the deregulation experience in the electricity industries of the United Kingdom and more recently San Diego, California. We have done a lot of study and research for this campaign, especially because we were repeatedly told by the proponents of the Bill that the issues were "too technical" for us to understand. We were able to expose many of the myths that the proponents of the Bill were propagating. But we were unable to stop its passage in the Lower House. The Senate, however, still has to pass its version of the Bill. We are grateful that the current "Jueteng-gate" scandal that has exposed President Estrada as the supreme gambling lord of the country has shifted the Senate’s attention away from this Bill.

We have learned many lessons especially from the campaign against the NPC privatization. In the case of the latter we found our lobby work was made more difficult by the many interests involved—crony and business, both foreign and local. The influence money involved in the lobby by these groups was monumental. The proponents of the Bill were able to get the Lower House to pass it in exchange for bribe money—what we call "payola", and the amounts involved were reportedly record high. So we exposed this with the help of two members of the opposition in the Lower House. The NPC bill also was the subject of IMF intervention. We learned that in December 1999 the IMF had written to the chair of the energy committee of the Lower House, complaining about the slow progress regarding the bill’s passage. We also exposed the IMF intervention and put the chair of the committee on the defensive.

The offensive of the WB-IMF together with Asian Development Bank and the governments of the developed world, to push the neo-liberal framework in our country, has never been more aggressively undertaken than at the present time after the Asian financial crisis. We at FDC see a lot of hard work still ahead of us. We are prepared for a long and hard struggle.

* Maria Teresa Diokno-Pascual is president of the Philippines Freedom for Debt Coalition.

Prepared for the Trade and Economy Forum, ASEM 2000 People’s Forum, 18 October 2000, by Maria Teresa Diokno-Pascual, Freedom from Debt Coalition, 34 Matiyaga St., Central District, Quezon City, 1101 Philippines, Tel nos. +632-921-1985, +632-433-5537, Telefax +632-924-6399

E-mail: [email protected]