Republika g Pilipinas

Political Economy

Data as of June 1991
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International Economic Relations

International Trade

At independence in 1946, the Philippines was an agricultural nation tied closely to its erstwhile colonizer, the United States. This was most clearly observed in trade relations between the two countries. In 1950 the value of the Philippines' ten principal exports - all but one being agricultural or mineral products in raw or minimally processed form - added up to 85 percent of the country's exports. For the first twenty-five years of independence, the structure of export trade remained relatively constant.

The direction of trade, however, did not remain constant. In 1949, 80 percent of total Philippine trade was with the United States. Thereafter, the United States portion declined as that of Japan rose. In 1970 the two countries' share was approximately 40 percent each, the United States slightly more, and Japan slightly less. The pattern of import trade was similar, if not as concentrated. The United States share of Philippine imports declined more rapidly than Japan's share rose, so that by 1970 the two countries accounted for about 60 percent of total Philippine imports. After 1970 Philippine exporters began to find new markets, and on the import side the dramatic increases in petroleum prices shifted shares in value terms, if not in volume. In 1988 the United States accounted for 27 percent of total Philippine trade, Japan for 19 percent.

At the time of independence and as a requirement for receiving war reconstruction assistance from the United States, the Philippine government agreed to a number of items that, in effect, kept the Philippines closely linked to the United States economy and protected American business interests in the Philippines. Manila promised not to change its (overvalued) exchange rate from the prewar parity of P2 to the dollar, or to impose tariffs on imports from the United States without the consent of the president of the United States. By 1949 the situation had become untenable. Imports greatly surpassed the sum of exports and the inflow of dollar aid, and a regime of import and foreign-exchange controls was initiated, which remained in place until the early 1960s.

The controls initially reduced the inflow of goods dramatically. Between 1949 and 1950, imports fell by almost 40 percent to US$342 million and surpassed the 1949 level in only one year during the 1950s. Being constrained, imports of goods and nonfactor services as a proportion of GNP declined during the 1950s, ending the decade at 10.6 percent, about the same percentage as that of exports. By the late 1950s, however, exchange controls had begun to lose their effectiveness as most available foreign exchange was committed for required imports. A tariff law was passed in 1957, and, from 1960 to early 1962, import and exchange controls were phased out. Exports and imports increased rapidly. By 1965 the import to GNP ratio was more than 17 percent. Another acceleration of imports occurred in the early 1970s, this time raising the import to GNP ratio to around 25 percent, the level at which it remained into the 1990s. Imports in the 1970s were increasingly being financed by external debt rather than by exports.

The composition of imports evolved after independence as industrial development occurred and commercial policy was modified. In 1949, about 37 percent of imports were consumer goods. This proportion declined to around 20 percent during the exchange-and-import control period of the 1950s. By the late 1960s, consumer imports had been largely replaced by domestic production. Imports of machinery and equipment increased, however, as the country engaged in industrialization, from around 10 percent in the early 1950s to double that by the mid-1960s. As a result of the surge in petroleum prices in the 1970s, the import share of both consumer and capital goods fell somewhat, but their relative magnitudes remained the same.

No matter the trade regime, the Philippines had difficulty in generating sufficient exports to pay for its imports. In the forty years from 1950 through 1990, the trade balance was positive in only two years: 1963 and 1973. For a few years after major devaluations in 1962 and 1970, the current account was in surplus, but then it too turned negative. Excessive imports remained a problem in the late 1980s. Between 1986 and 1989, the negative trade balance increased tenfold from US$202 million to US$2.6 billion. In 1990 weaker world prices for Philippine exports, higher production costs, and a slowdown in the economies of the Philippines' major trading partners restrained export growth to only slightly more than 4 percent. Increasing petroleum prices and heavy importation of capital goods, including power-generating equipment, helped push imports up almost 17 percent, resulting in a 50 percent jump in the trade deficit to more than US$4 billion. Reducing the drain on foreign exchange has became a major government priority.

A number of factors contributed to the rather dismal trade history of the Philippines. The country's terms of trade have fallen for most of the period since 1950, so that in the late 1980s, a given quantity of exports could buy only 55 percent of the volume of imports that it could buy in the early 1950s. A second factor was the persistent overvaluation of the exchange rate. The peso was devalued a number of times falling from a pre-independence value of P2 to the dollar to P28 in May 1990. The adjustments, however, had not stimulated exports or curtailed imports sufficiently to bring the two in line with one another.

A third consideration was the country's trade and industrial policies, including tariff protection and investment incentives. Many economists have argued that these policies favorably affected import-substitution industries to the detriment of export industries. In the 1970s, the implementation of an export- incentives program and the opening of an export-processing zone at Mariveles on the Bataan Peninsula reduced the biases somewhat. The export of manufactures (e.g., electronic components, garments, handicrafts, chemicals, furniture, and footwear) increased rapidly. Additional export-processing zones were constructed in Baguio City and on Mactan Island near Cebu City. During the 1970s and early 1980s, nontraditional exports (i.e., commodities not among the ten largest traditional exports) grew at a rate twice that of total exports. Their share of total exports increased from 8.3 percent in 1970 to 61.7 percent in 1985. At the same time that nontraditional exports were booming, falling raw material prices adversely affected the value of traditional exports.

In 1988 the value of nontraditional exports was US$5.4 billion, 75 percent of the total. The most important, electrical and electronic equipment and garments, earned US$1.5 billion and US$1.3 billion, respectively. Both of these product groups, however, had high import content. Domestic value added was no more than 20 percent of the export value of electronic components and probably no more than twice that in the garment industry. Another rapidly growing export item was seafood, particularly shrimps and prawns, which earned US$307 million in 1988.

The World Bank and the IMF as well as many Philippine economists had long advocated reduction of the level of tariff protection and elimination of import controls. Those in the business community who were engaged in import-substitution manufacturing activities, however, opposed reductions. They feared that they could not successfully compete if tariff barriers were lowered.

In the early 1980s, the Philippine government reached agreement with the World Bank to reduce tariffs by about one-third and to lift import restrictions on some 3,000 items over a five- to six-year period. The bank, in turn, provided the Philippines with a financial sector loan of US$150 million and a structural adjustment loan for US$200 million, to provide balance-of-payments relief while the tariff wall was reduced. Approximately two-thirds of the changes had been enacted when the program ground to a halt in the wake of the economic and political crisis that followed the August 1983 assassination of former Senator Benigno Aquino.

In an October 1986 accord with the IMF, the Aquino government agreed to liberalize import controls and to eliminate quantitative barriers on 1,232 products by the end of 1986. The target was accomplished for all but 303 products, of which 180 were intermediate and capital goods. Agreement was reached to extend the deadline until May 1988 on those products. The liberalizing impact was reduced in some cases, however, by tariffs being erected as quantitative controls came down.

A tariff revision scheme was put forth again in June 1990 by Secretary of Finance Jesus Estanislao. After an intracabinet struggle, Aquino signed Executive Order 413 on July 19, 1990, implementing the policy. The tariff structure was to be simplified by reducing the number of rates to four, ranging from 3 percent to 30 percent. However, in August 1990, business groups successfully persuaded Aquino to delay the tariff reform package for six months.

Foreign Investment

Foreign participation in the Philippine economy was a controversial issue throughout much of the twentieth century. The 1935 Commonwealth Constitution contained several provisions limiting the areas of economic activity in which non-Filipinos could participate. Operation of public utilities, exploitation of natural resources, and ownership of public lands were limited to Filipinos or corporations controlled by Filipinos. Control of banking and credit was limited to Filipinos with the passage of the General Banking Act in 1948, and the Retail Nationalization Act of 1954 restricted ownership in retail trade to Filipinos. Except in specifically designated areas, foreigners could invest only through joint ventures with Filipino capitalists. Legal decisions altered the interpretation of various restrictive measures, as did Marcos decrees during the martial law era, but the basic restrictions remained and were reaffirmed in the 1987 constitution. Constraints on foreigners also were aimed at non-Filipino residents in the Philippines. The 1987 constitution, for example, includes a provision similar to one in the 1935 constitution defining as natural-born citizens only those individuals whose mother or father was a citizen. The Securities and Exchange Commission ruled in September 1990 that firms engaging in business in areas of the economy that had been at least partially nationalized could not employ non-Filipinos in management positions. Liberalization of rules limiting areas of foreign investment was being considered in the Philippine Congress in early 1991.

Despite legal restrictions, foreign investment has played a prominent role in Philippine economic development. In 1948 approximately 50 percent of the assets in manufacturing, commerce, and mining were foreign owned, as were 80 percent of electricity assets. By 1970, however, foreign ownership in manufacturing, commerce, and mining had declined to around 40 percent, and very little foreign investment remained in utilities. Incomplete data for the early 1980s indicated that foreigners controlled about 30 percent of the assets of the 1,000 largest corporations operating in the Philippines at that time. Central Bank statistics, reporting inflows without taking divestments into account, showed foreign investment inflows between 1970 and 1988 totaling US$2.9 billion. Half went to manufacturing, of which chemicals and food were the most important industries; 24 percent was invested in petroleum refining; and 12 percent was in banking and other financial institutions.

United States corporations have been the largest foreign investors in the Philippines. Because of the colonial relationship between the United States and the Philippines, as well as a postindependence agreement protecting United States business interests, United States citizens were not bound by Philippine citizenship restrictions with respect to foreign investment until 1974. A government survey showed that 80 percent of foreign investment in 900 of the 1,000 largest firms in 1970 was American. In the late 1980s, the United States remained the largest foreign investor, but its dominant position had been eroded. According to Central Bank statistics, United States investment between 1970 and 1988 totaled US$1.6 billion, more than one-half the total of foreign-owned equity in the country. Japan was second with US$396 million, almost 14 percent. The Central Bank reports for 1989 showed registration of US$310 million in foreign investment. The United States had the largest investment with US$68.8 million, followed by Japan with US$51.9 million. Also important were Hong Kong with US$16.9 million, the Netherlands with US$15.8 million, and Taiwan with US$14.7 million.

Although foreign investors were forbidden by the Philippine constitution to either own or lease public agricultural lands, there were 124 transnational agribusiness firms operating in the Philippines in 1985, of which 58 were directly engaged in the cultivation of cash crops on the southern island of Mindanao. As early as the 1920s, Del Monte Corporation had established a pineapple plantation in Bukidnon in northern Mindanao. B.F. Goodrich and Goodyear Tire Corporation came in the 1950s, and Castle and Cooke entered in the 1960s, setting up a pineapple plantation in South Cotabato Province. The Philippine government facilitated investment of foreign enterprises in plantations through the government-owned National Development Corporation, which acquired land and leased it to the investors. Foreign-owned firms also were able to get around leasing prohibitions by entering into growers' agreements with landowners and subsequently changing the agreement to allow direct cultivation of the land. Such arrangements have generated considerable controversy.

In the late 1980s, pineapples were cultivated directly by Del Monte and the Castle and Cooke subsidiary, Dole Philippines. Together their plantations comprised 21,400 hectares in 1987. These two transnational corporations, along with a third, United Brands, also produced bananas, almost exclusively for sale in Japan. Production arrangements in the banana industry were more complicated than those in the pineapple industry, involving contract production-marketing arrangements with domestic agribusinesses and small growers, as well as direct cultivation. The three transnational corporations each controlled directly or through contract arrangements about 5,000 hectares of land planted in bananas in the late 1980s. In 1988 exports of bananas totaled US$146 million, and those of canned pineapples US$83 million.

External Debt

On October 17, 1983, it was announced that the Philippines was unable to meet debt-service obligations on its foreign-currency debt of US$24.4 billion and was asking for a ninety-day moratorium on its payments. Subsequent requests were made for moratorium extensions. The action was the climax of an increasingly difficult balance of payments situation. Philippine development during the decade of the 1970s had been facilitated by extensive borrowing on the international capital market. Between 1973 and 1982, the country's indebtedness increased an average of 27 percent per year. Although government-to-government loans and loans from multilateral institutions such as the World Bank and Asian Development Bank were granted at lower-than-market rates of interest, the debt-service charges on those and commercial loans continued to mount. In 1982 payments were US$3.5 billion, approximately the level of foreign borrowing that year and greater than the country's total debt in 1970. The next year, 1983, interest payments exceeded the net inflow of capital by about US$1.85 billion. In combination with the downturn in the world economy, increasing interest rates, a domestic financial scandal that occurred when a businessman fled the country with debts estimated at P700 million, escalating unrest at the excesses of the Marcos regime, and the political crisis that followed the Aquino assassination, the debt burden became unsustainable.

The Philippines had turned to the IMF previously in 1962 and 1970 when it had run into balance of payments difficulties. It did so again in late 1982. An agreement was reached in February 1983 for an emergency loan, followed by other loans from the World Bank and transnational commercial banks. Negotiations began again almost immediately after the moratorium declaration between Philippine monetary officials and the IMF. The situation became complicated when it came to light that the Philippines had understated its debt by some US$7 billion to US$8 billion, overstated its foreign-exchange reserves by approximately US$1 billion, and contravened its February 1983 agreement with the IMF by allowing a rapid increase in the money supply. A new standby arrangement was finally reached with the IMF in December 1984, more than a year after the declaration of the moratorium. In the meantime, additional external funds became nearly impossible to obtain.

In each of these arrangements with the IMF, the Philippines agreed to certain conditions to obtain additional funding, generally including devaluation of the peso, liberalization of import restraints, and tightening of domestic credit (limiting the growth of the money supply and raising interest rates). The adjustment measures demanded by the IMF in the December 1984 agreement were harsh, and the economy reacted severely. Because of its financial straits, however, the government saw no option but to comply. Balance of payments targets were met for the following year, and the current account turned positive in FY (fiscal year) 1986, the first time in more than a decade. But there was a cost; interest rates rose to as high as 40 percent, and real GNP declined 11 percent over 1984 and 1985. The dire economic situation contributed to Aquino's victory in the February 1986 presidential election.

When Marcos fled to the United States later that month, the Philippine external debt had grown to over US$27 billion. The country's most immediate concern was with meeting debt-service payments. Reduction in the size of the debt was a longer term issue. Debt servicing, US$3 billion in 1986, was a drain on both the country's foreign-exchange earnings and its investible surplus. Technocrats in the National Economic and Development Authority recommended declaring another moratorium, this time for two years, to allow the country a breathing space. Measures were introduced in Congress in 1986 and subsequent years to cap annual debt-service payments. The Aquino administration and the Central Bank, however, consistently resisted both tactics, opting instead for a cooperative approach with the country's creditors.

Some of the government and government-guaranteed debt was incurred under questionable circumstances, and there were persistent demands for repudiation of those loans that could be shown to be fraudulent. In November 1990, the Freedom from Debt Coalition, a nongovernmental organization, presented findings from its investigation on six potentially fraudulent loans, together worth between US$4 billion and US$6 billion. The largest, a US$2.5 billion loan for the construction of the Bataan Nuclear Power Plant, involved allegations of irregularities in bidding procedures and design, overpricing, and kickbacks. The Aquino government previously had filed a civil suit in the United States against Westinghouse Corporation, the corporation with which the Marcos government had contracted to build the nuclear power plant, but the Philippines continued to pay interest payments on the nuclear plant loans of US$300,000 per day while the case was under litigation. In response to the coalition's findings, however, the president said that the country would not pay fraudulent loans, a statement interpreted as a major policy change.

Government negotiators dealt mainly with three groups of creditors in their efforts to reduce the burden of debt servicing. The first, and in some ways the most important, was the IMF, because its imprimatur was considered necessary to conclude arrangements with other creditors. The second was the Paris Club, an informal organization of official creditors. The third group was the commercial bank creditors, numbering 330 as of 1990. Bank negotiations generally were with the twelve-member bank advisory committee, chaired by Manufacturers Hanover Trust.

The standby agreement that the Marcos government had negotiated with the IMF in 1985 was discontinued shortly after Aquino assumed office. The agreed-upon targets with respect to government spending and increases in the money supply had been wildly exceeded as Marcos dipped into government coffers in a desperate effort to win the 1986 election. In addition, the government wished to negotiate a more growth-oriented arrangement. An agreement on repayment terms for US$506 million of loans was concluded eight months later in October 1986. In January 1987, an agreement was reached with the Paris Club to stretch out over ten years, with a five-year grace period, US$870 million of loans that were to have been paid in 1987 and the first half of 1988. The IMF accord also triggered the release of US$350 million in new loans by commercial bank creditors that had been held up when the agreement with the IMF broke down in early 1986. In March 1987, the Philippines and the twelve-bank advisory committee came to terms on the rescheduling of the country's US$13.2 million debt to private banks and a reduction in the rate of interest. Signing of the agreement was delayed, however, by a group of creditor banks led by Barclays Bank of Britain, who demanded that the Philippine government guarantee the US$57 million debt of a private fertilizer firm, Planters Products, Inc. An accommodation was not reached until December 1987.

A second round of negotiations began in 1989. The Paris Club restructured US$2.2 million of debt coming due between September 1988 and June 1990. The IMF and commercial bank agreements allowed the Philippines to undertake, in early 1990, a three-pronged program under Brady Plan guidelines. First, the government used funds from the World Bank, IMF, and other sources to repurchase US$1.31 billion of government debt from private banks at the 50 percent discount at which they were selling on the secondary market, which action reduced the country's debt by some US$650,000, and, in the process, the number of creditor banks fell from 483 to 330. Second, debt coming due between 1990 and 1994 was rescheduled. Last, some eighty banks subscribed to US$700 million in new loans.

In July 1990, it was reported that the IMF had reviewed Philippine economic performance and found it "favorable" for the period between October 1989, when the loan agreement was reached, and March 1990. By September, however, the situation had turned around. Agreed-upon targets had not been met with respect to the sizes of the government budgetary deficit, the trade balance, or the country's international reserves. As a consequence, the IMF had refused to release the September tranche (installment of funds) to the Philippines. In turn, Manila canceled the 1989 standby agreement and reopened negotiations with the IMF. A new agreement was announced in early 1991. It involved a three-year credit package, totaling US$375 million, only one-third of the US$1.17 billion loan package suspended the previous September. Among other things, the agreement required the Philippines to implement new revenue-raising measures by the end of August 1991.

As a consequence of the country's failure to meet the September standby agreement targets, the commercial banks in February 1991 refused to disburse the last US$115 million of the US$706 million credit line agreed to in early 1990. At a meeting with Filipino officials, the bank advisory committee also declined to discuss providing some US$500 million in new funds. In February 1991, the Philippine government also said that it would ask the Paris Club for deferment of payment on US$1 billion in debts falling due from June 30, 1991 to July 31, 1992. In a measure to reduce the risk of lending to the government by commercial banks, in February 1991 the Philippines indicated that it would approach multilateral financial institutions such as the World Bank and the Asian Development Bank for cofinancing, in return for which the Philippine government would give up the possibility of rescheduling.

Efforts to reduce the external debt included encouraging direct investment in the economy. In August 1986, the Philippines initiated a debt-equity conversion program, which allowed potential investors who could acquire Philippine debt instruments to convert them into Philippine pesos for the purpose of investing in the Philippine economy. Because the value of the debt in the secondary market was substantially less than its face value (about half, at the time), the swap arrangement allowed investors to acquire pesos at a discount rate.

Most of the swapped debt was held by the Central Bank, which could provide the peso proceeds to retire the debt only through issuing new money, with obvious inflationary consequences. For this reason, the program was suspended in April 1988. At that time, US$917 million in debt reduction had taken place. Other issues were raised, however, about both the benefits to the Philippines and the fairness of the conversion program. Debt-equity swaps, it was argued, amounted to a considerable gain to investors, costing much less in dollars than was received in pesos. If an investment had taken place without the swap, a very large subsidy would not have been involved. Second, a considerable portion of the conversions appeared to have been by Filipinos bringing their wealth back into the country. Critics questioned whether those who engaged in capital flight should be awarded a premium for returning their wealth to the Philippines. There also was the question of the arbitrage possibilities of "round tripping," whereby investors with pesos engaged in capital flight to obtain foreign currency, which was used through the swap to achieve a much larger amount of pesos. Alternatively, an individual with dollars could engage in a swap and then convert pesos back into dollars through the exchange market. Although the government had some regulations concerning length of investment, the process was ripe for abuse. Nevertheless, the government resumed the program in December 1990 with an auction of US$7 million in debt paper. The new program was reported to have been altered to reduce inflationary pressures.

In March 1991, Philippine officials raised the issue of "condonation," or debt forgiveness, of Philippine debt with United States officials, requesting that the United States accord the Philippines similar treatment to that accorded Egypt and Poland. The United States resisted the entreaty, pointing out that whereas US$33 billion of Poland's US$48 billion debt was official, all but 20 percent of the Philippine debt was owed to commercial banks.

The Aquino administration spent an enormous amount of time and effort negotiating with various creditor groups to lower interest rates, reschedule the country's debt, and reduce the magnitude of the debt. A number of innovative schemes were undertaken; more were discussed. It was a process, however, that essentially meant running fast to stay in place. The size of the country's external debt in June 1990, US$26.97 billion, was about the same as the US$26.92 billion the country owed at the end of 1985, shortly before Aquino took office. Debt-service payments also changed very little: US$2.57 billion in 1985 as opposed to US$2.35 billion in 1990. The balance of payments pressures remained. The growth of the Philippine economy, however, caused the ratio of the country's debt to GNP to decline from 83.5 in 1985 to 65.2 in 1989, whereas that of debt service to exports fell from 32.0 to 26.3 over the same period. Projected debt servicing in September 1990 for the 1990s showed a rise from US$2.35 billion in 1990 to US$3.25 billion in 1995, falling off to US$2.08 billion in 1999.

Development Assistance

Official development assistance (ODA) includes grants and loans at concessional rates from official donors, both bilateral (individual country) and multilateral (e.g., the World Bank and the Asian Development Bank). In the early independence period, 90 percent of aid was bilateral grant aid, almost entirely from the United States. By the 1960s, however, there was growing assistance from multilateral organizations and Japan, 85 to 90 percent of which was in the form of loans. During the 1970s and 1980s, concessionary loans became the dominant mode of assistance from all sources, averaging in excess of 80 percent of the total.

Following Aquino's accession to the presidency in 1986, ODA increased, primarily from the United States, Japan, the World Bank, and the Asian Development Bank. In the first three years of the Aquino government, 1986 to 1988, concessionary loan commitments increased 60 percent above the last three years of the Marcos regime, 1983-85, from an average of US$764 million to US$1,233 million per year. Grant-aid commitments increased even more, jumping 150 percent from an average of US$195 million to an average of US$486 million.

In November 1987, a bipartisan group of four members of the United States Congress proposed a major multinational aid initiative - a "mini Marshall Plan" - to help the Philippines address the manifold economic problems that were the legacy of the Marcos regime, support economic reform in that country, and help ensure the return of the Philippines to democracy. The initial proposal suggested US$5 billion in additional aid over a five-year period, along with a substantial increase in private foreign investment. By the time the program was announced, the goal of the Multilateral Aid Initiative had risen to $10 billion, mainly, but not always, divided equally between ODA and private investment.

At the request of Japan, the Multilateral Aid Initiative - also referred to as the Philippine Assistance Plan - was set up under the Consultative Group, a group of international agencies and countries established in 1971 at the request of the Marcos government to coordinate assistance programs to the Philippines and chaired by the World Bank. The Multilateral Aid Initiative was clearly meant to precipitate a substantially larger flow of aid than had been committed to the Philippines in the two years since Marcos had fled the country.

The first Multilateral Aid Initiative pledging session, held in Tokyo, July 3-5, 1989, resulted in aid commitments of US$2.8 billion, plus US$600 million in debt relief by the Japanese. In the Philippines, the extent of "additional" aid was cast as a measure of international support for the Aquino regime. The country had received official development assistance commitments of about US$2.4 billion in 1988. Given that figure and estimates of the size of aid projects that were then under discussion between the Philippines and potential donors, estimates of new funds generated at the Tokyo pledge session ranged from US$250 million to US$1.5 billion to the full US$3.4 billion. The government, accordingly, received criticisms or plaudits as one judged the extent of success in generating new funds.

In 1990 there was no pledging session, reportedly because of the suspension of the IMF agreement in March 1990. A second session was held in Hong Kong on February 25 and 26, 1991, with a total of US$3.3 billion pledged. The Philippine government reported that by the end of 1990, the full amount pledged at the Tokyo session had been committed; however, actual disbursements were only US$839 million. Donor government representatives at the Hong Kong session expressed support publicly for the enactment of economic policies that Aquino advisers had worked out with the IMF, as well as concern over the resistance of the Philippine Congress to their implementation. The size of pledges and the willingness to comment on internal Philippine policy issues indicated that the donor nations hoped that the Philippines would be able to undertake a viable economic program but were concerned that it would be unable to do so.

Political Economy of United States Military Bases

In early 1991, the Philippine government was in ongoing negotiations with the United States on the future status of United States naval and air facilities at Subic Bay and Clark Air Base. What would normally be an issue of foreign policy and national security became a major domestic political issue and took on an economic dimension of considerable importance. At the domestic level, the conflict was between those who argued that the continuing presence of the United States bases was an infringement on Philippine sovereignty and a continuation of a neocolonial relationship and those who, for a combination of internal security, foreign relations, and economic reasons, saw the need for maintaining the presence of the bases. President Aquino, through 1990, refused to publicly commit herself to a position; however, it was clear that her government was working to reach accommodation with the United States. As negotiations progressed, the economic issue became prominent.

There were three economic considerations from the point of view of the Philippine government. First, the proportion of the Philippine budget allocated for its armed forces was the smallest in the region, a fact linked to the presence of United States air and naval forces in the Philippines, as well as direct military assistance. Second, in the latter half of the 1980s, the bases directly employed between 42,000 and 68,000 Filipinos and contracted for goods and services from Filipino businesses. During this period, yearly base purchases of goods and services in the Philippine economy (when corrected for the estimated import content of the goods purchased) was in the range of P6.0 billion to P8.3 billion.

A third and politically very important consideration, was the sum given to the Philippines by the United States in connection with the presence of the bases, referred to as aid by United States officials and as rent by the Filipinos. Base-related payments were first agreed to in 1979 when United States president Jimmy Carter made a "best effort" pledge to secure US$500 million for the Philippines from the United States Congress over a five-year period. In 1983 another five-year commitment was made, this time for US$900 million. In October 1988, the Philippines' Secretary of Foreign Affairs Raul Manglapus and United States' Secretary of State George Schultz signed a two-year agreement for US$962 million, an amount double the previous compensation but substantially less than the US$2.4 billion that the Philippines initially demanded. In 1991 talks over the future of the bases and the size and terms of the aid or rent that would be given in consideration for continued United States access to military facilities in the Philippines was the most important unresolved issue. The decision of the Philippine administration to bring Secretary of Finance Jesus Estanislao into the negotiations in March 1991 was a further indication of the economic importance of the bases to the Philippine government.


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