The roots of Philippine poverty

Part 1

A video in YouTube is going viral.  It is entitled “Why is the Philippines Still Poor:  The Hard Truth.” I have received it from at least four of my Vibermates.  It has been widely disseminated among the alumni  of   the executive education programs of the University where I teach, the University of Asia and the Pacific.  

In the spirit of the continuing education program that we provide our alumni, I would like to offer a critique of the content of the video.  It is oversimplistic in putting all the blame for Philippine poverty on the inter-related factors of bad governance, corruption and dynastic politics. I maintain that these factors can explain only 10 percent of the failure of the Philippine economy to progress.  

The main explanation is a series of economic policy errors that the Philippine leaders committed during more than thirty  years after the country was granted independence in 1946 by the last of its colonizers, the United States. Lest I be misunderstood, however, let me state in the most categorical manner that all of us have to fight with all our might corrupt practices, not because they deter economic development, but because they are evil, unjust, immoral, and from the spiritual point of view sinful.  We should combat corrupt practices in the same way we wage war against extra-judicial killings, the trafficking of children and women  and the drug trade irrespective of their impact on economic progress.

The video presents very accurate information about the descent of the Philippines from one of the most developed economies in the Asia Pacific region, next only to Japan, after the Second World War to the poorest today in East Asia (excepting Laos, Cambodia and Myanmar). It was richer (in terms of per capita GDP) than Singapore, Taiwan, Hong Kong and South Korea in the 1950s. It was still ahead of its ASEAN neighbors, i.e. Indonesia, Thailand, Malaysia and Vietnam in the 1960s.  By the end of the last century it was at the cellar among all its peers, except Vietnam, and deserved the sobriquet “The Poor Man of Asia.”  By 2020, Vietnam surpassed the Philippines in per capita income.

The larger tragedy , however, is not its low per capita income.  More damning is the fact that it has the highest poverty incidence among its ASEAN peers.  The latest poverty incidence (2023)  measuring the percentage of Filipinos earning less than what is considered necessary for minimum human subsistence  (food and other basic essential goods and services) is 22.4 % or 25.4 million Filipinos (this is to be distinguished from the percentage of Philippine households below the poverty line which is at 16.4 %).  All its ASEAN peers have brought down their poverty incidences to single-digit levels as of 2023:  Indonesia at 9.5 %; Thailand 6.8 %; Malaysia 6.2 %; Vietnam 4.2 %; and Singapore 0 %.  It is only in 2028 when the BBM Government is targeting a poverty incidence rate of 9%, the attainment of which will be premised on GDP growing at 8 % or more annually  in the next four years, agricultural production growing at 3 to 4 % yearly, investment to GDP ratio growing from 22% to at least 30 %.  This is a tall order.

How did we get into this terrible mess?  Some would put all the blame on corruption and the related issues of bad governance and political dynasties.  When I point out that the major reason is a series of serious economic policy errors over a period of decades, they would counter by postulating that erroneous economic policies result from the actions of corrupt politicians elected by the uneducated masses.  I maintain this view does not hold water upon examination of the real  historical causes of our economic backwardness.  Most of the policy errors were not results of politicians with bad intentions but were products of decisions made by well meaning leaders based  on erroneous politico-economic theories, starting with the failed industrialization efforts  in the years immediately following our obtaining independence from the US in 1946.

As the YouTube video pointed out, most of us in the Southeast region were under colonial powers for some time, except Thailand.  It was understandable that the  post-colonial local leaders would take measures to make sure that their former colonizers would not continue to exercise undue influence on their domestic affairs through their control of the important sectors of the economy. That is why all of these nations implemented some protectionist, nationalistic economic policies at the beginning of their independence.  This fear of being controlled by the former colonizer was expressed in very colorful terms by President Manuel Quezon who famously quipped “I prefer a Philippines run like hell by Filipinos to one run like heaven by Americans.”  This hyperbolic expression unfortunately was the start of an ultra-nationalistic mind set that had disastrous consequences for the Philippine economy.

In  less than a decade after getting their political independence, our East Asian neighbors were able to free themselves from their paranoia about being controlled by their former colonizers.  They realized that they needed to open up trade and investment relations with the richer countries to be able to benefit from the demographic dividend that all countries in the East Asian region enjoyed after the Second World War.  We all had a baby boom.  This explains why those of us who were born during or after the Second World War are called “baby boomers.”  This realization of the need to take advantage of the richer markets of their former colonizers led to the famous export-oriented, labor-intensive industrialization strategy of the first four Asian Tigers, i.e. Singapore, Hong Kong, Taiwan and South Korea. By starting to export labor-intensive products such as garments, toys, furniture, and other consumer goods, these countries were able to fully employ their burgeoning labor force while at the same time earning the necessary foreign exchange to begin to invest in the second stage of a more capital-intensive industrialization.  They were just following the lead of the first tiger in the region, Japan. What we failed to emulate in the Japanese development was the green revolution that preceded the industrial revolution.

In contrast, a very pervasive “Filipino First” mentality motivated by a well-intentioned but misguided nationalism caused  the post-colonial Government leaders to adopt an inward-looking, protectionist and import-substitution (as opposed to export-orientation) industrialization strategy.  It is interesting to note that the speaker in the video that is the subject of this commentary made and extended reference to the fact that  the Philippine peso was the strongest currency in the region at two pesos to a  US  dollar.  Such a foreign exchange policy was actually one of the means through which the Philippine  Government spawned  a highly inefficient domestic manufacturing sector by allowing the inward-looking industries to import their capital equipment and semi-processed goods at a very unrealistic exchange rate while simultaneously suffocating at the root any attempt at an export-oriented industrialization as was wisely followed by our neighbors. While our leaders were proudly proclaiming how strong the Philippine peso was, Japan had its yen depreciate to 300 yens to a US dollar, South Korea its won to 1,000 wons to a US dollar and Taiwan its NT dollar to 100  to a US dollar.  Not content with this anti-export policy, the Government (again without any malevolent intention) subsidized the local industries through unrealistically low effective interest rates, thus wasting our already extremely low domestic savings. To top it all, the already artificially propped up domestic  manufacturing enterprises were protected from foreign competition with very high tariff walls.

The local manufacturing sector that was a result of all these inward-looking, protectionist measures did very little to address the serious poverty situation (poverty incidence was as high as 60 % especially in the rural areas) because the resulting enterprises were very capital intensive and needed little labor.  In fact, even the raw materials they used were semi-processed goods and required little domestic processing.  This led to the  colorful Mayor of Manila Arsenio Lacson to sarcastically refer to them as “beauty parlor” industries since he accurately observed they just imported almost finished manufactured products and then just added curls and frills to make them ready for sale.  This was epitomized by the corrugated iron industry.  Because these artificially propped up “white elephants” had a voracious demand for foreign exchange to  import their capital goods and semi-processed materials,  the economy suffered frequent crises of shortage of foreign exchange which had to be subsequently rationed by the Central Bank.  Predictably, this rationing process led to a great deal of corruption and influence peddling.  This was the 10 percent explanation to which I referred at the beginning of the article.  (To be continued.)