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Asia-Latin America Cooperation – ALAC
An ECLAC-UN, IDE/JETRO-Japan and IE/UFRJ-Brazil initiative
International Seminar
Promoting Growth And Welfare: Structural Changes And The Role Of
Institutions In Asia
Santiago, Chile and Rio de Janeiro, Brazil
April 29 - May 03, 2002
Crisis, Recovery, and Growth in the Philippines Institutional
and Coping Mechanisms
Florian A. Alburo
First Draft
April 17 2002
2
Abstract
The Philippines was not in the eye of the Asian crisis that battered the region in
1997 despite the fact that the country exhibited manifestations along several fronts.
Nevertheless the country did suffer both from the contagion of the crisis as well as the
fact the external sector plays a significant factor in its growth process. And just like the
other crisis-affected countries in the region, recovery came earlier and faster and growth
resumed also driven by the very external factors that caused the crisis.
Although all the countries hit by the crisis equally suffered its economic and
social consequences, the Philippines is among those that appeared to have been more
severely affected in its aftermath. Without a sufficient buffer in terms of natural
resources, income, and social infrastructure not to mention economic fundamentals, the
lower income deciles bore the brunt of the crisis, unemployment worsened, and poverty
incidence deteriorated. The lull in the degradation of the environment was more the result
of economic decline than of improvement of conditions.
The country’s response and adjustment to the crisis consisted of its policy arsenal
and institutional preparedness. On the one hand, the policy response became pro-cyclical
instead of being counter-cyclical thus exacerbating the crisis. On the other hand, ordinary
Filipinos faced the crisis with individual private coping mechanisms – increased
migration, marginal employment in the services sector, and surge in crime – until they
succumb to further poverty. The government institutional machinery was not up to
relieving the debilitating effects of the crisis through its safety nets and services delivery
let alone increasing their efficiency.
The Asian crisis has taught a lesson for the country to focus development toward
a singular poverty targeting. But without real comprehensive structural reforms that strike
at the very roots of its social and economic setting, it is doubtful whether the country can
withstand another regional crisis and the country escaping deleterious consequences.
3
Crisis, Recovery, and Growth in the Philippines
Institutional and Coping Mechanisms
Florian A. Alburo
1.
Introduction and the Crisis
It is often heard in discussions about the Asian crisis and the Philippines that the
country was relatively left unscathed and that in fact the country was the first in the
region to recover from its contagion. Moreover the fact that the country exhibited this
resilience meant that its fundamentals are strong and that its current recovery and growth
track rely on an appropriate (if not correct) policy apparatus. Consequently some finetuning is all that is necessary in order for the country to attain its sustainable growth path.
What we want to show in this paper is that this view is not quite accurate. Indeed we
want to demonstrate that even if the country escaped the eye of the Asian crisis, it may
have suffered not only in terms of social and environmental impacts but more seriously in
terms of its long-term economic strength and growth. With an economic history
punctuated by many (home-grown) crisis, the Philippines was the country in the region
which could least afford to be inflicted by a crisis no matter how incidental without
severe economic and social damage 1 . Accordingly, after showing that the country
actually had the same symptoms as the other countries in the region to the Asian crisis,
1
This assertion needs to be read in its narrowest sense i.e., economic and social damage. Expanding the
scope to include political factors obviously puts Indonesia ahead of the Philippines at least in the period of
the Asian crisis in 1997.
4
we trace in the next section the recovery and growth pattern in its aftermath. The
evidence seems to indicate that if external factors (shocks) contributed to the emergence
of the crisis, external (and private-sector led) factors also pushed an early and faster
recovery of the country. In the third section we look at some of the social consequences
of the crisis especially in terms of distribution, employment and poverty conditions.
Given the shallow base of social indicators of the country it is not surprising that the
slight drop in growth relative to the other hard-hit countries of the region spelled
significant social consequences for the country. In section 4 we describe the institutional
responses and coping mechanisms as the crisis evolved in the Philippines. In terms of the
country’s (macroeconomic) policy instruments, it appears that these initially exacerbated
the effects of the crisis even if eventually corrected. Similarly the country’s institutional
machinery to cushion the social impacts was vastly inadequate relative to the magnitude
of the crisis. Without the private responses through other social networks the damage
may have been larger. In the final section we draw some conclusions based on lessons
from this crisis and point to policy directions.
The Philippines manifested several symptoms of the Asian crisis such as (a) the
surge of short-term capital mostly in the form of portfolio investments relative to the
flows of foreign direct investments, (b) a bubble in the economy shown by exuberance in
the stock markets and price inflation of real estate and nontradables, (c) the rapid
expansion of domestic credit extended by the commercial banking system, (d) a widening
current account deficit, and (e) an overvaluation of the local currency.2 The
manifestations however were later than their appearance in the other crisis-affected
2
This part of the paper is derived from Alburo (1999).
5
countries in the region by a few years. In a sense although the seeds of the crisis were in
the Philippines their gestation failed to materialize since the outbreak of the crisis had
already began elsewhere.
The Philippines experience with short-term capital inflows has been relatively
recent. In fact the portfolio capital component of them was negligible before the 1990s.
Yet this surged beginning in 1993. From US $ 156M in 1990 this rose to $6.9B in 1996.
Apart from the inward flows of short-term portfolio investments, the country’s financial
institutions also tapped the global markets for both short-term and long-term foreign
exchange resources. In the former, borrowings were utilized to take advantage of interestrate differentials and the stable exchange rate for onward lending to local borrowers in
local currency. For the latter, the institutions floated long-term bonds in international
markets. Again the data show that borrowings, especially by banks did surge but only
beginning 1995. Foreign exchange liabilities (short and long term) of banks and nonbanks stood at US $ 4.7B in 1993 and surged to US 17.8B by 1997 (June). Though there
may be issues here with regard to the use of Foreign Currency Deposit Unit (FCDU) of
offshore banks in the Philippines the fact is that borrowings by the private sector
escalated in two years between 1995 and 1997.
Portfolio investment inflows in the Philippines have found their way into the
property sectors, in the stock markets, or in financial institutions, among others. Driven
by continued privatization of public enterprises, initial public offerings by corporations,
and overall “irrational exuberance”, these investments drove up asset prices and created
6
large paper gains in the stock market. The flotation of the First Philippine Fund (FPF) in
the New York Stock Exchange helped this along especially after 1992. Evidence of the
property bubble can be readily observed in the rapid decline in property prices around the
prime areas of the country, the shelving of planned property construction, and the sharp
drop in prices of club and golf course shares in the immediate aftermath of the crisis.
Partly as evidence of this domestic credit had annual growth rates in excess of 50
percent beginning 1996 with an increasing proportion going into financial institutions,
real estate and business services. Commercial bank loans to the manufacturing sector
tapered off during the same period of rapid domestic credit growth. Indeed there is
consistency in the timing of these changes in the behavior of financial institutions
especially during the mid-90s.
Although these surges appear to be significant especially if viewed in potential
trends, the stock magnitudes are far from alarming. Of the US $ 44.8B external debt of
the country (June 1997), only US $ 8.5B or 18.9 percent are short-term in maturity with
the rest in medium and long term. More than half of the debt is owed by the private sector
with the central bank accounting for 24 percent of the total. Finally, 25 percent of the
debt is owed to Japan with another 24 percent owed to bondholders and noteholders, and
18.5 percent owed to multilateral agencies. The rest are spread evenly across the US, UK,
France and Germany. Banks, financial institutions, and suppliers account for 26.8 percent
of the external debt in terms of institutional creditor with another 30.3 percent owed to
bilateral agencies (e.g., export agencies).
7
In terms of the trade and current account deficit characteristic, the Philippines has
had a trade problem for some time and it has been persistent. On the other hand its
current account deficit has fluctuated over the years narrowing the trade deficit with
surpluses in the services trade, and net transfers. As a major source of overseas contract
workers, Filipino workers send remittances, which partly pay for the country’s trade
deficits. In fact without these the Philippines current account would have been in a worse
position. The current account deficit as a percent of GNP never hit above 6 percent with
the exception of the second quarter of 1996. But in the second quarter of 1997 before the
actual crisis took place the current account deficit stood at 6.7 percent of GNP, which
somehow was a threshold during the Mexican crisis. The narrowing of the gap between
the two deficits has been covered by the surge in the net services trade. For example this
item had an inflow of US $ 4B in 1994 from US $ 1.5B in 1990. By 1996 just before the
crisis this had reached US $ 6.8B. Of this net inflows remittances from overseas Filipino
workers constitute more than 60 percent.
The overall Balance of Payments (BOP) of the Philippines has been positive for
most of the years between 1990 and 1996 principally because of a positive capital
accounts position. In turn this has been carried by more significant inflows of medium
and long-term loans. It is only in 1995 when the net portfolio account began to be
significant in the capital accounts.
8
A widening goods trade deficit is a reflection of lack of competitiveness of
Philippine exports. The extent to which a nominal exchange rate is unable to adjust
relative to competing countries partly determines the extent of the deficit. To portray this
more accurately, the real effective exchange rate (REER) is often calculated. The
calculation of a real effective exchange rate is quite sensitive to the base year chosen, the
countries included (and excluded) in the calculation, and the price indices. Thus there are
many such indices. What is important to remember is that the REER of the Philippines is
relevant when compared with the countries that we compete with in other external (and
common) markets. A number of the recent calculations of these REERs for the
Philippines appear to show that the country has been losing out to other countries in the
region despite the fact that all other currencies have been overvalued. In short the peso
has been more overvalued than the other currencies reflecting the long history of the
currency’s real effective values over time3 .
In summary, it is evident that the Philippines had all the symptoms of a financial
crisis even if it actually was not a direct casualty from the crisis that exploded in the
region. What has kept it from acquiring the severity that others have experienced is its
late exposure to the symptoms and not necessarily that the country had strong
“fundamentals” to begin with. This does not mean that the measures being taken to
address the root causes of the “Asian flu” should not be applicable to the country as well.
3
For one of the more recent calculations of the real effective exchange rates in comparison with several
Asian countries, see De Dios and others (1997). Earlier calculations in the seventies and eighties which
give similar results are found in Medalla, Tecson and others (1995).
9
2.
Recovery Pattern and Growth
The quarterly growth rate of the real Gross Domestic Product (GDP) gives a
better tracking of the country’s path as the Asian crisis unfolded. That the country was
not in the direct way can be seen in a 2.5 percent growth rate in 1998Q1 even as the other
countries already experienced negative GDP growth rates. See Figure 1.
Figure 1
Quarterly GDP Growth Rate (%, y-o-y)
15
10
5
0
-5
-10
-15
-20
96Q3
96Q4
97Q1
97Q2
97Q3
Indonesia
97Q4
98Q1
Rep of Korea
98Q2
98Q3
Malaysia
98Q4
99Q1
99Q2
Philippines
99Q3
99Q4
00Q1
00Q2
Thailand
Source: http://aric.adb.org
Notice how moderate has been the deceleration of Philippine GDP growth rate
compared to the other countries i.e., the recession of the country seemed relatively mild.
10
On the other hand it seems fairly evident that the growth rates of the other crisis-affected
countries were higher to begin with prior to 1998Q1 with the Philippines exhibiting the
lowest growth rate. It is therefore obvious that the sharp decline from positive to negative
was less precipitous for the Philippines. This explains the sharp V-shaped pattern of
decline and recovery for the other countries. But when seen in absolute pattern the
country also had a V-shape – from a fall of –1.4 percent (1998Q2) and –2.4 percent
(1998Q4) to sharp recovery of 0.7 percent (1999Q1) and 3.8 percent (1999Q2). Although
technically the country suffered a recession following the Asian crisis4 , its full year
(1998) drop in GDP was only –0.6 percent. This can be seen in Figure 2.
Figure 2
Quarterly GDP growth rate (%y-o-y)
6
5
4
Percent
3
2
1
0
-1
-2
-3
98Q1
98Q2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
00Q4
01Q1
01Q2
01Q3
01Q4
Year and Quarter
Source: National Income Accounts, National Statistics Office.
4
The country had three consecutive quarters (1998Q2 through 1998Q4) of negative growth rates that
technically defines the Philippines as experiencing a recession.
11
This decline is identical to the decline in the 1991 recession although the latter
recovery was not as sharp as the one following the Asian crisis. The V-sharp is even
therefore more prominent. Translated into the number of quarters in which GDP growth
rates were negative the Philippines rode the crisis after only 3 quarters compared to the
other countries that went through several more quarters of decline before beginning a
recovery (e.g., 8 quarters for Thailand, 5 quarters for Indonesia and Malaysia, and 4
quarters for Korea) apart from the actual magnitudes of the declines. These observations
underline the argument that the Philippines was relatively left unscathed by the Asian
crisis and was quicker to recover.
The trigger that spread the crisis to the rest of the country was of course the sharp
depreciation of the peso that eventually affected investments, imports, and the rest of the
economy. Whatever the relative importance of speculative attacks and capital flights,
among others, in sparking that trigger is an interesting scope for discussion but is not of
direct concern here. It is sufficient to point out that the external sector played a major role
in the economic decline. Indeed in 1998 Philippine export of goods and services (in real
peso terms in the National Income Accounts) declined by 21 percent while imports of
goods and services fell by 14.7 percent. The former was a source of contraction as the
external markets failed to provide an important contributor to growth whereas the latter
was likewise a source of contraction as production deteriorated through reduction in
necessary and essential imports as inputs. Both had successively declined over the course
of several quarters after the crisis broke out. However the country did not actually starve
of foreign exchange resources as net transfers continued to keep the current account in
12
positive balance arising from the inflows that came from remittances of Overseas Filipino
Workers (OFW). Thus the rapid trade balance deterioration did not immediately translate
into a worsening current account deficit because of other compensating items in the
current account balance. In fact the trade balance deterioration was worse before the
actual decline in overall economic growth in the second quarter of 1998 (shown in Figure
3). This was owing to the reduction in the growth rate of exports of goods that was
already apparent in the early quarters of 1996, part of the symptoms noted above.
Figure 3
Growth of Merchandise Exports and Current Account Balance (CAB)
30
Merchandise Exports Growth Rate
Export Growth (percent) and CAB (percent of GDP)
20
10
Current Account Balance
0
98Q1
98Q2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
00Q4
01Q1
01Q2
01Q3
01Q4
-10
-20
-30
Year and Quarter
Source: See Figure 2.
Notice that the current account balance continued to be improve even as the
merchandise exports growth (in current US Dollar terms) had deteriorated. It can also be
13
seen in the figure that the reversal in the exports growth in the first and third quarters of
1999 seemed to be instrumental in starting the recovery. It is only when the decline in
exports growth is quite large that the current account balance begins to be in the negative
territory. How strong is the influence of the external sector of the Philippines to its
growth is not really prominent in the figure. When we view the movement of exports and
the movement of growth the strength of the relationship becomes more pronounced.
Figure 4 plots exports growth, current account balance and GDP growth rates.
Figure 4
Exports Growth (pesos), Current Account Balance and GDP Growth Rate
30
18
Exports of Goods and Services Growth
16
20
12
10
10
0
8
CA B(US Dollar) as Percent of GDP
6
-10
4
-20
Real GDP and CAB (Percent)
Exports Growth (percent in real pesos)
14
2
Real GDP Growth
0
-30
-2
-40
-4
98Q1
98Q2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
00Q4
01Q1
01Q2
01Q3
01Q4
Year and Quarter
Source: See Figure 2 and Bangko Sentral Ng Pilipinas.
The relative importance of the external sector (through the growth of exports) is
fairly strong in pushing the economy into recession but equally strong in lifting the
14
economy on the road to recovery. Subsequent increases in exports however (as in
2000Q4) did not have the kick that was apparent in the early recovery. The point to make
however is that the external sector has been critical in both the economy’s decline and
recovery. To examine this hypothesis in the context of the crisis evolution, the
contribution of the different components of GDP by expenditure categories was estimated
and the results tend to show that indeed net exports contributed largely to the decline in
real GDP at the start of 1998Q1-Q2 and then the decline in fixed investments dragged the
economy into actual recession in the following two quarters. On the other hand, in the
run-up to early recovery net exports have been largely prominent in contribution to GDP
although in the succeeding quarters positive fixed investments and changes in stocks have
gained significant contributions. Throughout all this period is the continued stability of
private consumption expenditures in keeping the economy from more drastic growth
reduction. In fact, public consumption expenditures failed to show any significant
contribution (there was a –1.9 percent decline in all of 1998). In short, it is safe to assert
that while the external sector has been the vehicle for the country catching the Asian
crisis it has been equally the vehicle in recovery from it more quickly and earlier. And
when combined with the importance of the pervasive private consumption expenditures
in keeping the economy “afloat”, the country’s recovery has really hinged on the private
sector. Figure 5 shows the different components of aggregate demand and the quarterly
GDP growth rates during the course of the crisis.
15
Figure 5
Contribution to Growth, by Expenditure Categories (%, y-o-y)
Philippines
100%
15
80%
10
60%
40%
5
20%
0%
0
-20%
-5
-40%
-60%
-10
-80%
-100%
-15
98Q1
98Q2
98Q3
98Q4
99Q1
Private Consumption
99Q2
99Q3
Public Consumption
99Q4
00Q1
Fixed Investment
00Q2
00Q3
Change in Stocks
00Q4
01Q1
Net Exports
01Q2
01Q3
01Q4
GDP Growth
Source: http://aric.adb.org
3.
Crisis Consequences
It is possible to enumerate the many economic consequences arising from the
Asian crisis including damage to the financial sectors, corporate fallouts, and bankruptcy
declarations. It is also possible to look into the incidence of the crisis on industries or
sectors hardest hit or by various expenditure categories. However what we want to do
here is examine its effects on the social conditions in the country, in particular, on
employment, distribution, poverty, and the environment.
3.1
Employment
As a result of the ensuing contraction of public consumption expenditures and
gross domestic investments, unemployment consequently rose to a high 13.3 percent in
the second quarter 1998 before settling down to 9 percent the next quarter. This seeming
16
direct consequence of the Asian crisis needs to be qualified for a number of reasons.
First, this negative relationship between growth and unemployment has existed in the
country for some time even before the crisis (Brooks 2002). The question is really the
incremental magnitude of unemployment that may be attributed to the severity of the
crisis. The average annual unemployment rate between 1990 and 2001 was 8.7 percent
that includes the period 1991-1994 which also had a recession. Compare this with the
average quarterly unemployment rate during the course of the crisis i.e., between 1998Q1
and 2001Q3 for which data are available, of 10.6 percent. Clearly this 22 percent increase
in average unemployment rate, in the absence of a more rigorous analysis, seems a
significant shift and a further deterioration of the employment picture of the country and
happened during the Asian crisis. Second, there is seasonality in the unemployment
figures for the Philippines where on a quarterly basis the second quarter unemployment
rates are usually higher than all the other quarters.5 Our data reported here have not been
adjusted for this seasonality. A visual inspection of the unemployment rates by quarters
during the period 1998Q1 and 2001Q3 reveals these spikes every second quarter of the
year. See Figure 6 for quarterly unemployment rates (October series) and GDP growth.
5
The second quarter usually coincides with the end of school year wherein a number of students 15 years
and above are defined as temporarily out of job apart from those recent graduates who are yet to find work
within a short span between graduation and the employment surveys.
17
Figure 6
6
16
5
14
GDP Growth Rate (Percent)
4
12
Unemployment
3
10
2
8
1
GDP Growth Rate
6
0
4
-1
Unemployment Rate (Percent of Labor Force)
GDP Growth and Unemployment Rate
2
-2
-3
0
98Q1
98Q2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
00Q4
01Q1
01Q2
01Q3
01Q4
Year and Quarter
Source: See Figure 2 and Department of Labor and Employment.
Third, the (negative) relationship between GDP growth rates and unemployment rates
loses prominence as growth proceeds. Unemployment rates appear to have a new life of
its own where higher growth does not seem to dent further reduction in unemployment.
Whether this era can be called “jobless growth” needs to be technically explored. This
high rate of 13.9 percent unemployment rate is not of course the highest in the country’s
history. Yet this period of close to two years is the longest protracted period of high
unemployment rates. One must therefore be careful about the attribution given to a direct
consequence of the Asian crisis. Indeed without it unemployment rates would still have
been historically quite high. This behavior contrasts sharply with the other crisis-affected
countries (with the exception of Indonesia) where unemployment rates did shot up at the
18
height of the crisis (most of 1999) yet returned to historic levels as recovery took place
and growth resumed.
3.2
Poverty
One important impact of the crisis across all the affected countries was the
increase in poverty incidence based on measures of absolute poverty. Numerical
comparisons of poverty conditions among countries are always fraught with problems of
definitions, varying reference periods, and consistency over time, among others. In the
end standards are diluted and comparisons are made on one simple number, e.g., those
earning less than US $1 per day or some variant. For example, the World Bank has
estimated the magnitude of poverty through a singular stick and concluded that indeed
the degree of poverty among the crisis-affected countries in Asia dramatically increased
yet also recovered as the countries’ growth resumed. The recent slowdown of growth has
had only a marginal impact on poverty. The incidence of poverty has therefore increased
as a result of the Asian crisis but the extent of this increase, using the standards imposed
by the World Bank comparisons, is probably overstated. In many of the affected
countries especially where rural populations and agriculture remain large the value of
consumption baskets is oftentimes different from incomes received. Estimations of
poverty against thresholds gloss over the non-monetized consumption goods which
influence the location of individuals or families. In the rural areas and among agricultural
families, a more accurate way to capture poverty is to use consumption and expenditures
rather than income in measuring poverty. And in times of crisis and income declines
19
(which are viewed as transitory), dissaving takes place and consumption is protected
from deterioration.
In terms of absolute poverty, the Philippines has seen a steady decline in
incidence (in terms of families and population) between 1985 and 1997 (just before the
crisis had its effects) –from 44.2 percent to 31.8 percent of families and from 49.3 percent
to 36.8 percent of the population. The absolute magnitudes are some 4.5 million families
and 26.7 million people in 1997. The 2000 poverty survey shows that poverty incidence
did go up close to (but still less than) the 1994 level of 35.5 percent 6 . In short, this Asian
crisis had similar poverty effects as the 1991 recession.
A study re-estimating the poverty incidence (and other analytical explorations)
using the Family Income and Expenditure Surveys (FIES) has shown that the actual
incidence may really be lower than the official statistics, has systematically declined
since 1985, and that the crisis did not raise the incidence anywhere close to the 1994 level
(Balisacan 2002, forthcoming). Indeed the numbers indicate that the official statistics
overstate the extent of the actual poverty by at least 8 percent and as much as 30 percent.
The 2000 poverty incidence measured 27.5 percent of families from the 1997 incidence
of 25 percent (indicating only a slight increase between the two periods). Irrespective of
which poverty numbers we use the resulting conclusion seems to be that the external
shock and contagion from the 1997 Asian crisis did not have the same poverty effects as
the 1991 (home-grown) crisis. In this sense (and without the benefits of systematic
6
The 2000 poverty incidence was 34.2 percent of families and 40 percent of population (2000 Family
Income and Expenditures Survey Preliminary Results, 2001).
20
comparisons between the two crisis) the country was not in the eye of the 1997 crisis and
had therefore only suffered collateral damage.
A way of confirming this poverty consequence is how poorer the population felt
after the crisis erupted. A regular poll is made of a sample population in the country
responding to the question how they feel relative to being above, below, or on the
(poverty) line (Mangahas 2000). This measure is nowhere near an objective indicator of
poverty but given that it has been carried out consistently over time suggests stability in
the trend of the responses. On the other hand this subjective poverty indicator is a
reflection of relative poverty as respondents position themselves in relation to others even
if they are asked to point a position relative to a threshold. The results of these polls show
that the proportion of the population who feel poor increased between February and
March 1998 as the GDP dipped in the second quarter of 1998. From 57 percent of the
population (February 1998 polls) to 65 percent of the population (September 1998 polls)
in the midst of the crisis is a significant jump despite the fact that in between these dates
the self-rated poverty ratio had decreased.7 There are two clues that need to be watched
out. One is whether there has been a negative relationship between self-rated poverty and
the decline of the economy. The second is what happened to this relationship as recovery
and subsequent growth took place. These two can then be compared to the longer-term
trend in poverty self-rating, in particular the period of the 1991-1994 crisis. We can then
ascertain if the clues and the comparative trends reinforce the earlier findings of objective
measures of absolute poverty as noted above. It will then become clear if there is
7
The polls in 1998 were run in February, March, April, July, September, and November which do not
coincide with quarterly frequency of national income figures.
21
complementation between different subjective and objective indicators of poverty at least
in the context of the Asian crisis. Figure 7 tracks poverty self-rating and GDP growth
rates.
Figure 7
GDP Growth Rate and Poverty Self-rating
6
70
Poverty Self-rating
5
60
4
40
2
GDP Growth Rate
1
30
0
98Q1
98Q2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
00Q4
01Q1
01Q2
01Q3
01Q4
Poverty Self-rating (percent)
GDP Growth Rate (percent)
50
3
20
-1
10
-2
-3
0
Year and Quarter
Source: See Figure 2 and SWS (http://www.sws.org.ph)
Poverty self-rating did rise as the economy slumped during the height of the crisis
but as the recovery took place sharply, perceived poverty failed to improve
commensurately. This is evident as growth resumed, and becomes even more evident as
the economy sputtered in 2001 when this poverty indicator rose to a self-rating higher
than when GDP was actually in the negative territory. While there is no doubt that
poverty rose during the crisis the actual severity and depth of poverty hinges on the
measurement one uses. At one extreme is the self-rating the population gives itself in
terms of some perceived threshold. This has risen to more than 60 percent of the
22
population at the height of the crisis. On the other hand based on the income measure
relative to a defined threshold, the extent of poverty is around 35 percent of families and
around 40 percent of the population. There are a number of associated variants of these
objective measures including subsistence incidence, and classification according to
location of residence (urban, rural, region, and province). When the measurement takes
into account the consumption basket relative to a threshold, the extent of poverty actually
falls to 25-27 percent of families (Balisacan 2002). This has also been equally extended
to the variants that are comparable to the official statistics. What perhaps matters most in
all this is the urgency with which appropriate policies can be brought to bear in order to
assuage the burden of a crisis on the poor and not necessarily the technique in measuring
them.
The historical track of self-rated poverty reveals that between 1983 and 2001 it
has been during the 1991 crisis that the proportion of the population who expressed being
below the poverty line was highest at 72 percent (February 1992 polls) easing only as
1994 began. Of the 10 polls conducted between July 1991 and December 1993, half
registered poverty self-ratings of 68-72 percent. In contrast of the 14 polls conducted
between February 1998 and December 2000, there were no self-ratings exceeding 68
percent though in 5 of those polls self-rated poverty exceeded 60 percent. If these
comparisons are feasible this would mean that indeed the 1997 Asian crisis did not have
as severe an impact on poverty in the Philippines as had been expected nor as severe as
the other Asian countries that had been directly hit. It is also evident that the external
shock from the crisis did not have as pervasive an impact on the larger population given
23
that the shock was manifested in sharp depreciation, interest rate spike and business
retrenchment.8
The self-rated poverty series of the SWS gives the long-term picture of subjective
poverty in the Philippines. While there seems to be a discernible downward movement of
the ratios, there are many fluctuations within short frequencies that do not seem to be
borne out by the movements of objective economic indicators. Figure 8 captures the longterm trend of self-rated poverty.
Figure 8
Self-rated Poverty: 1983-2001
Source: http://www.sws.org.ph
8
The 1991 crisis was sparked by power shortages and their subsequent impacts across the entire spectrum
of the economy
24
3.3
Income Distribution
The self-rated poverty is in a sense a mirror of relative poverty i.e., how the
conditions of a group fare relative to other groups. In other words, relative poverty can
reflect the distribution of income and wealth in society. The crisis would have
consequences on this. The lack of complete data in the post-crisis period constrains more
specific determination of distributional effects that the crisis may have brought about. But
it is possible to extract the likely impacts by looking at how they behaved in an earlier
crisis. In the period between 1991 and 1997 the incomes of different decile groups had
varying annual growth rates which implied that this led to changing distribution of
incomes. When the period is broken down into two sub-periods, 1991-1994 and 19941997, the distributional changes appear more prominent.
What the data in the Table 1
show is that different income groups are affected more during periods of downturn while
a different set of income groups is also affected in times of expansion.
Table 1
Growth of Annual Family Income by Deciles
Average Growth of Annual Family Income
(1988 prices, in percent, by deciles)
1991-1994
First Decile
Second Decile
Third Decile
Fourth Decile
Fifth Decile
Sixth Decile
Seventh Decile
Eighth Decile
Ninth Decile
Tenth Decile
1994-1997
0.8
1
1.2
1.4
1.5
1.5
1.3
1.1
0.6
-0.03
Source: National Income Accounts
1991-1997
2.3
3
1.8
2
2.6
3.3
4.6
5.3
5.9
10.4
1.6
1.5
1.5
1.7
2.1
2.4
3
3.2
3.3
4
25
In the 1991-1994 period all the income groups with the exception of the highest
income group experienced a slow but positive growth in annual real family income. The
richest group suffered a negative 0.03 percent decline in annual real family income. The
lowest decile had a slow, less than one percent annual growth (along with the second
highest group) whereas the middle deciles (fourth to the seventh deciles) had higher
growth rates though no higher than 1.5 percent annually. In contrast, in the period 19941997 all income groups benefited with annual growth rates at least 40 percent higher than
in the previous sub-period. Of course the highest income group experienced the highest
rate of annual increase with no other group even closely following this expansion rate.
The second decile is distant from this lopsided family income increases with apparent
concentration of increase among the top 30 percent of all families. Fundamentally, what
this means is that for the period when the economy was expanding, income distribution
became less equal compared to the period when the economy was suffering from a slump
and income distribution improved. If a slump approximates the effects of a crisis then
relative poverty did not worsen but this does not mean the lower decile families were
absolutely better off. In good times however it is the higher family income groups that
seem to capture more the benefits of increased incomes. The technical translation of this
is that the Gini ratios declined between 1991 and 1994 and increased between 1994 and
1997. Indeed the measured ratio, which stood at 0.4680 in 1991, fell to 0.4507 in 1994
before climbing to 0. 4872 in 19979 . Note that the ratio remained steady between 1985
and 1988 before rising in 1991.
9
The Gini concentration ratio went up slightly in 2000 to 0.4818 (National Statistics Office 2001).
26
3.4
Environment
There may be no direct consequence of the Asian crisis on the environment
except through indirect effects from other economic and social variables. Besides there
has been no systematic analysis attributing environmental conditions to the crisis.
Nevertheless it is important to note several issues relating to the environment in the
context of the Asian crisis. First, many of the country’s progress in the environment hinge
on sustained economic growth. To the extent that a crisis (including the Asian crisis)
leads to deterioration in growth the country’s ability to reach a threshold in
environmental balance diminishes (the so-called Environmental Kuznet’s Curve [EKC]).
Even changes in social behavior (e.g., waste segregation) in part rest on a sustained
growth of the economy. Conversely some environmental indicators may show a declining
trend yet they simply reflect lack of economic activities and not necessarily as a result of
improvements in the effectiveness of environmental policies and programs. Air quality,
solid and hazardous waste management, land conversion and degradation, and watershed
degradation are just a few of the many environmental concerns that are associated with
economic activities. For example, the annual mean total suspended particulates (TSP) fell
in 1999 relative to previous years (although still triple the standards). Annual allowable
cut for Timber Licensing Agreements fell in 1998 (Philippine Forestry Statistics, 1998,
FMB-DENR). Dissolved oxygen (DO) levels improved in 1999 though still below
desirable DO levels (Pasig River Rehabilitation Commission, 1999 Report).
27
Second, there have been significant public and private responses towards
environmental responsibility which effects began at about the same time as the crisis
unfolded. The Philippine Agriculture and Fisheries Modernization Act of 1997 includes
the identification of Network of Protected Areas for Agriculture and Strategic Agriculture
and Fisheries Development Zone to stop indiscriminate land conversion and preserve
watershed areas and major aquifers. The Clean Air Act of 1999 (Comprehensive Air
Pollution Control Policy) mandates the promotion of alternative cleaner fuels, imposition
of emission charges, phase out of leaded gasoline and reduction in sulfur content in
diesel, among others. On the other hand, many private firms and industrial establishments
have sought ISO 14000/14001 certification to indicate adherence to international
standards and environmental responsibility. Both public and private initiatives have
mutually contributed to some slowdown in the deterioration of the environment in the
late nineties with or without the Asian crisis.
Third, whatever the lack of environmental standards in the country and their
further deterioration (or improvements as the cases may be) during the crisis, their social
consequences became even more highlighted. One has been their adverse effects on
health (e.g., healthy lives lost due to air pollution), and
human disaster (e.g., collapse of
major dump site killing those living within the vicinity). Another has been the
encroachment on upland agriculture principally driven by population pressure. With
fragile topography being eroded repercussions on the rest of the society immediately
follow.
28
Finally, it does not seem to matter what the form or substance of the crisis for
environment to be a serious consequence. In the case of the 1997 Asian crisis, one would
think of it as confined to a limited financial sector or the foreign exchange markets and
subsequently spreading to the external sectors of the economy but still far from inflicting
damage to the environment. Yet it is clear that whether in terms of “brown” areas
(pollution caused by industrial, urban, transport and energy sources), “green” areas
(environmental impacts caused by agriculture, deforestation, land conversion, and
destruction of protective species), or “blue” areas (all forms of water resources
management), the crisis triggers an all-encompassing consequence through its economic
and social impacts. While it would be difficult to attribute changes in the environment
solely to the crisis, it becomes an important vehicle of transmission.
In summary, the consequences of the Asian crisis (or any other crisis) can be
viewed as those that are immediate and direct and those that are indirect effects. The
immediate consequence of the contagion was for the country to devalue its currency
which eventually created a train of effects on the financial sectors. As the policy regime
reacted and the affected sectors adjusted, further consequences took place. The social
impacts of the crisis can be seen in terms of the associated employment changes the
adjustments triggered. From here one can trace the effects on poverty (objective and selfrated), income distribution, and the environment. The peculiar point about the social and
economic consequences of the crisis in the Philippines is the significant increase in
unemployment rate that is already on top of a long historical experience with high
unemployment. What is more the recovery did not seem to restore the unemployment
29
behavior to pre-crisis levels. The same can be said about poverty incidence and self-rated
poverty. The former of course did not appear to be worse than the poverty impact of the
previous crisis but the latter indicates a new surge of “feeling poor” that did not diminish
as the recovery took place. If the previous crisis is any clue, income distribution may
have worsened with the Asian crisis. All this suggests that the manner in which
institutional and public policies were crafted in response to the crisis matter to both the
objective and subjective social conditions of the country apart from private adjustments.
4.
Institutional Response and Coping Mechanisms
As the crisis began to take its toll and the official position was not to resist it (e.g.,
by defending the exchange rate), the government took policy steps to adjust to its
magnitude. In addition the government also instituted many programs to soften its
adverse social effects. At the same time private individuals and institutions carried out
their own adjustment processes to cope with realities of the Asian crisis. This section
aims to describe these.
4.1
Macroeconomic Policy
The defense of the currency in early July 1997 after the Thai baht depreciation
was short-lived and feeble. The peso depreciated sharply – from a stable rate of P 26.4 to
a US dollar in June 1997 to a rate of P 42.7 by January 1998. It was through this route of
the exchange rate that the rest of the economic and financial sectors were immediately
affected (Alburo 1998a). As private foreign currency debt obligations were due (or refinanced as the case may be) their local currency requirements multiplied endangering the
30
viability of projects (and debtors) and threatening the financial system as a whole. The
peso depreciation raised the inflation rate, lowered the current account/GDP ratio
(through import contraction), and of course led to the decline in the overall growth rate.
The contraction of the money supply growth was equally drastic from 20.5 percent in
1997 to 7.1 percent in 1998. Central Bank policies were also brought to bear on some of
the regulatory and prudential weaknesses (that contributed to the crisis) including limits
to bank loans to the real estate sector, increased cover for foreign exchange liabilities of
the Foreign Currency Deposit Units, and higher overnight lending rates. These monetary
actions, reflecting an implied intention to stabilize the exchange rate, effectively raised
interest rates to over 30 percent in the months following the crisis crippling potential
investments and existing enterprises (those with foreign exchange obligations in local
currency terms and interest payments for those without). The domestic side of the
economy became worse than otherwise as even viable projects lost their viabilities at the
margin. The implicit support given the banking and financial systems confirms the
implicit guarantees government and international financial institutions provide private
transactions that do not reflect moral hazard (Krugman 1998). And despite the fact that
the Philippines did not utilize IMF windows to any significant degree during the height of
the crisis, these policy responses were analogous to those of the countries hardest hit by
the crisis. Recall that the IMF played a major role as the crisis deepened in Thailand and
Korea and thus in their policy prescriptions.
The fiscal side of the monetary and macroeconomic policy response to the crisis
seems to indicate a widening deficit as the crisis unfolded. But this apparent counter-
31
cyclical stance masks the actual track of the fiscal balance and its translation into
eventual government operations. In the first 3 quarters of 1998 when the crisis heightened
fiscal policy appeared to tighten as the central government fiscal balance remained
constant or tended towards a surplus. It was not until the last quarter of 1998 (when the
GDP had its sharpest decline) and the first quarter of 1999 that the fiscal balance deficit
widened. Translated in operational terms, the national government experienced a decline
in revenue with the onset of the crisis in July 1997 but maintained its projected fiscal
surplus by scaling down expenditures in early 1998 through an Administrative Order
imposing a 25 percent reserve on maintenance and operating appropriations of all
national government agencies and a 10 percent reserve on the share of revenues going to
local governments.10
This effectively was a cut in government program budgets by 25
percent in addition to the real cuts because of ensuing inflation that the crisis had
triggered. Given the nuances of government fiscal processes (delays in funds flows,
budget modifications etc.) the actual expenditure reduction may have been more. For
example, estimates of the actual expenditure obligations for economic services were only
30 percent of their programmed levels for the 1998 budget. This affected such services as
water resources development, power/energy, and transportation and communications. In
the social services, housing/community and social welfare/employment were similarly
affected (Reyes and others, 1999)
In order to protect basic social services and provide safety nets for those affected
by the crisis, the government gave exemptions to the mandatory reserves to major
agencies engaged in their delivery. This exemption was promulgated in July 1998. But
10
Administrative Order 372 issued February 1998.
32
this was not immediately carried out and in fact the slowdown of the cash flows, and
postponement of contracts for supplies meant that program cutbacks remained in effect.
Thus in health, actual obligations for drugs and medicines amounted to only 42.7 percent
of appropriation by the end of 1998. In education, expenditure obligations for textbooks,
desks, chairs, and instructional materials amounted to only 37.7 percent of appropriation
for the same time period (Reyes and others, 1999).
Local governments also provide essential services such as water, health and
sanitation, and education especially in areas beyond the reach of national agencies. The
10 percent reserve imposition on their share of national revenues resulted in actual
cutbacks that were higher. This came mainly from three sources. First the decline in
national revenues meant a corresponding decline in revenue allotted to local
governments. Second the crisis also resulted in reduction in local revenue sources mostly
from real property tax collections. Third overall finances of local governments meant
programmed levels had to be cut. Thus they imposed mandatory reserves that
approximated national impositions.
These illustrative but actual magnitudes can not be seen in the aggregate figures
of government operational responses to the crisis. Based simply on the budgetary
appropriations the per capita national government expenditures in real terms actually fell
only slightly in 1999 compared to 1998. And if one looks at the growth rate of national
government expenditures this remained positive throughout the period of the crisis. This
lends credence to the assertion that the government had acted positively to the impacts of
33
the crisis through the provision of adequate protection of the affected groups. But as the
closer examination of the actual program operations reveal, the responses even magnified
the impacts though it must be admitted that budgetary corrections were undertaken.
Unfortunately the move towards discriminatory responses in the form of protecting basic
social services came too late and the impacts became worse.
The overall macroeconomic policy response to the Asian crisis appears to have
been unidirectional i.e., correcting an external imbalance through combined monetary
and exchange rate policy instruments. On the other hand the fiscal policy was initially in
tandem with this basic policy response despite a respectable central government fiscal
balance thus accentuating the deflationary impact of the crisis. A reversal of this stance
towards the latter part of 1998 in the midst of the crisis intended to be counter-cyclical –
but the earlier tightening had taken its toll on government operations and services with
potentially deleterious long-run damage to the economy.
4.2
Social Safety Nets
Apart from broad macroeconomic policy instruments at its disposal, the
government also carries out specific programs and projects aimed at supporting the
vulnerable groups in society that have borne the adjustments in an economic crisis. These
include food subsidies, employment programs, livelihood programs, and the regular
social security benefits such as emergency loans for displaced workers from government
and private social insurance systems.
34
The effectiveness of social safety nets as vehicles for responding to a crisis
depends on how these are set up. In particular, the more identifiable and focused are their
target groups the more cost-effective are the programs. Moreover to the extent that the
target groups are identical to the ones displaced and adversely affected by the crisis, the
safety nets become potent adjustment instruments. In addition, these safety nets are
considered temporary but important transition to a less-distorted superior alternative. The
programs themselves need to be tightly drawn up reducing leakages, redundancies, and
excessive claims. Finally, these nets have to be integral parts of existing bureaucracies
and do not require separate overhead that is often difficult to dismantle once the programs
are completed.
A summary review of these government safety nets concludes that many of them
have limited outreach if not inadequate targeting schemes, are not cost-effective, lack
sufficient funding relative to tasks, and do not really meet the objectives that have been
set out for them (Milo 1999). Indeed, given scarce human capacities and financial
resources the government’s Department of Labor and Employment (DOLE) actually runs
(“small”) infrastructure projects to generate employment intended to support those
displaced by economic crunch (caused for example by the Asian crisis). While
construction and operation of rural infrastructures may be employment generating and
eventually income generating, and various programs (e.g., facilitation of separation pay,
employment assistance, and skills training) for displaced workers may be beneficial in
limited ways, it is doubtful whether this is the best way of using a Department’s scarce
resource instead of advocating appropriate adjustment policies. A limited and incomplete
35
record of accomplishment would show that the impact of specific activities for displaced
workers has been at most 30 percent of recorded workers laid off in the first quarter of
1999.11
This does not include those who are currently unemployed or underemployed.
Various government offices also run credit-based livelihood programs which numbered
around 86 when the crisis broke out. The effectiveness of this type of safety net is uneven
depending on the institution undertaking the credit delivery. In general, while the
component activities under these livelihood programs may be important in stimulating
self-employment as adjustments to a crisis, it is doubtful if government-run directed
credit programs are the best under the circumstances.
The provision of safety nets during a crisis can also be turned on its head i.e.,
whether these can be preventive rather than affirmative. The crisis apparently triggered
social behavioral changes that have potentially large long-term implications. In terms of
education two modes of behavior have been observed. The first is a reduction in the
enrollment rate for elementary education between the school year 1996-97 and 1997-98
and the school year 1997-98 to 1998-99. This grew by 3.3 percent for all grades (and 0.1
percent in Grade I) with a decline of 0.2 percent in public school enrollment in the period
1996-97 to 1997-98. Between school year 1997-98 and 1998-99 there was only a 0.7
percent increase in enrollment with a decline in public and private school Grade I
enrollment of 2.9 percent and 10.1 percent, respectively (Reyes and others 1999). The
crisis may have forced parents not to enroll their school-aged children either in public or
11
These two safety nets are the DOLE’s rural infrastructure projects and program for displaced workers
(employment assistance and job placement, skills training, others). The former benefited 30 percent of the
recorded number of workers laid off while the latter provided direct assistance to 26.8 percent of those
permanently laid off (Milo, 1999, Tables 17 and 18).
36
private schools. On the other hand, there was a decrease in the dropout rate in elementary
schools from 10.3 percent increase between school year 1995-96 and 1996-97 in all
levels both public and private, and a decrease of 7.9 percent in dropouts between school
year 1996-97 and 1997-98. These two behaviors reinforce each other. Lack of resources
forces families with school-age children from new enrollment while lack of work
opportunities forces them to retain those already in school. A more useful safety net
would have been supporting these affected children from dropping out of school or
sustaining those already in school in addition to maintaining pre-crisis levels of
enrollment. In terms of health and nutrition, several sources of primary data seem to
indicate that crisis resulted in reduction in the coverage of immunization programs,
household eating patterns have been affected but not resulting in increases in malnutrition
rate especially among children, and a decrease in the contraceptive prevalence rate in the
rural areas of the country (Reyes and others, 1999). In the latter case, maintaining real
levels of government services would equally be an effective safety net. For both of these
social consequences target groups are readily transparent and immediate and the safety
nets are concretely palpable from the viewpoint of the beneficiaries.
The notion of safety nets as separate initiative ignores the symmetry between a
positive support and a preventive support both of which aim at minimizing injuries to
those affected by the crisis. In fact, in the 1999 Annual Poverty Indicator Survey, the
percentage of families that took their children out of school due to the financial crisis is
the same percentage of families that received assistance from the government (6.9
percent). One can imagine that those families who decided to take their children out of
37
school as their adjustment behavior could have been prevented from doing so through
direct support from the government in maintaining enrollment.12 What is interesting from
the survey noted above is that the dominant family response to the crisis has been private
behavior – change in eating pattern, migration (local and international), assistance from
family and friends, in addition to taking children out of school.
4.3
Private Initiatives
A large part of the country’s adjustment to the crisis has been borne by those
affected. And even among those affected there were those who received support from the
government including the banking and financial institutions. But the rest not only were
directly hit in the sense of unemployment but had to fashion private coping systems to
ride out the crisis.
Migration out of the country has always been an integral part of the country’s
buffer against high unemployment and underemployment rates. This crisis led to a spike
in the unemployment picture but substantively has not been different from historical
records. There were however dramatic increases in deployed workers in 1997 and 1998
in part reflecting a response to the crisis. But this could not be sustained for a number of
reasons. For one, the emerging destinations for Filipino OFWs have equally been hit by
the crisis and thus could not absorb more labor. Labor exports drastically fell in 1997 and
1998 in such crisis-countries as Korea and Malaysia as well as other nearby destinations
like Singapore and Hong Kong. For another, some recovery had already taken place both
12
Numerically, the number is not small – around 1 million families or 1 million children assuming one
family member in school before the outbreak of the crisis.
38
in the Philippines with delays in the other crisis-hit countries like Korea and Malaysia
that reduced some of the outflows (Scalibrini Migration Center 2002). Finally, even if the
absolute number of OFWs who leave country is quite large (a yearly average of 542.1
thousand between 1990 and 2000), when one looks at the yearly changes, the magnitude
of migration has been less than often thought. Nevertheless it remains an attractive
coping mechanism especially in an environment of severe unemployment. Indeed the
Philippines has even increased its share in total overseas workers in contrast to the
countries it was competing with in the early period of labor exports (Korea, India, and
Pakistan). This only means that despite the marginal impact of this adjustment process,
migration remains a viable option for those affected by the crisis expanding further the
labor services recruited from the production workers to professionals and highly
educated.
Families have also adjusted by seeking odd jobs in the informal labor markets
which are usually in the services industries. If the distribution of the annual changes in
employment is examined, it can readily be seen that it is not the formal manufacturing
sector nor agriculture that predominantly absorbs the incremental additions to the labor
force but rather the amorphous service industries. Within the latter are wholesale and
retail trade absorbing 15.3 percent of employment in 1998, transport, storage, and
communications (6.7 percent), financing, insurance, real estate, and business services (2.5
percent), and community, social and personal services (19.9 percent)13 . Although these
are employment options taken and not really unemployment options, they suggest that
13
The data come from the DOLE (1999)
39
there are really limited and private coping mechanisms available to families as they are
hit by a crisis. Yet these are wider than the safety nets described earlier.
A disturbing but clearly socially undesirable options that have appeared in the late
nineties has been the surge of crimes in the metropolitan areas of the country and
elsewhere. While crimes against property has always been a part of social life in the
country anecdotal evidence seems to show that crime has escalated even if not apparent
in official statistics. In addition kidnapping for ransom has evolved into a nascent
“cottage” industry with even differentiated “products” (petty kidnapping and high-stakes
kidnapping). Lack of alternative means of livelihood is obviously associated with this
social behavior which is unlikely to abate without increasing employment opportunities.
In all, during the crisis a large number of affected families received assistance
from friends, increased their working hours (assuming they continued to work), or a
household member migrates to the city/abroad. It is these self-driven coping mechanisms
that rely on immediate networks or internal behavior that is resorted to when a crisis
erupts not on government machineries that are often inadequate, biased against locations
or sectors, and sometimes work at cross-purposes for what they are intended for.
V.
Conclusions and Directions
Despite not being in the eye of the 1997 Asian crisis, the Philippines exhibited
characteristics similar to other countries in the Asian region that were directly affected or
were contaminated. The country was not spared from the contagion. Two things were
40
going for the country – its accelerating external financial transactions came at the tail end
of the trend among the hardest hit countries thus the shock did not have enough ripple
effects throughout the system, and its external balances continued to be strong (helped
along by remittances) even if these were not sufficient enough for the country to launch a
stout defense of the exchange rate. The country’s weak macroeconomic fundamentals and
the fact that it has just recovered from a crisis in 1991 would have led to a more severe
damage to the country if it were directly hit by the Asian crisis.
Just like the other crisis-affected countries in the region, the Philippines exhibited
a V-curve though relatively less sharp. That it was not in the eye of the crisis can be
appreciated by it quick and early recovery – less than half the time of the other countries
affected. The country experienced only 3 quarters of negative GDP growth rate compared
with the others which ranged from 5 to 8 quarters. What is important to note is that the
main driver of the recovery of the country was trade itself which had earlier brought the
recession in apart from the sustaining strength of private consumption expenditures. And
as growth resumed fixed investments and changes in stocks regained their influence as
components of growth. Thus even as exports began a slide as technology stocks fell and
with them electronics trade the growth momentum had remained. What remains true is
that the external sector carried the contagion and sparked the recovery.
The impact and consequences of the Asian crisis on the country’s financial sectors
are readily tractable. In fact these have been subjects of a number of comparative studies
on the crisis. What is little known is its social and welfare consequences as well as
41
environmental implications. Since these seem far-fetched, the argument heard often is
that they would not be that important to the country. But, on the contrary, the social
consequences are equally if not perhaps more important in terms of the future capacities
of the country. As shown in this paper, the crisis inflicted increments to unemployment of
a magnitude that would have been lower without the crisis. Poverty rates went up and the
gap between objective measures of absolute poverty and self-rated poverty widened.
While income distribution does not worsen in a crisis period (actually improving) it is
doubtful if this can be considered a superior alternative to the period of increasing growth
and worsening distribution.
The policy regime responded to the crisis with macroeconomic policy
instruments. Monetary, exchange rate, and fiscal policies were brought to bear on the
financial system. The peso devaluation and the train of associated policies and changes in
regulations corrected the macroeconomic disequilibrium created by the Asian crisis while
positive measures were instituted to support the recovery of the financial sector.
Subsequent monetary policies (e.g., interest rates) were meant to reduce anticipated
adverse effects from the core macroeconomic policies such as inflation. But the overall
policy regime was clearly in the direction of stabilizing the economy from the shock
imposed by the crisis, safeguarding the financial system from further deterioration from
weak prudential standards, and reducing non-performing loans. Fiscal policy began as
pro-cyclical as budget deficits were cut through reduction in programs. The monetary
contraction was further reinforced by fiscal policy and it was not till the depth of the
crisis that budget deficits eventually widened. But damage was already done in two fronts
42
– cuts in expenditures were immediate (in terms of budget releases) and reversals of
program budgets that were discriminatory took time to filter to the field.
Private initiatives consisted of increased migration as OFW, falling out into the
services industries, and other socially undesirable options including petty crimes,
kidnapping for ransom, and engaging in drug trafficking. The way families responded to
surveys of how they coped with the crisis included change in eating patterns, taking
children out of school, migration of working family members, receiving assistance from
friends, receiving assistance from the government, and increased working hours.
These streams of institutional and coping mechanisms were not really mutually
reinforcing each other in the evolution of the crisis. While government programs and
projects may have provided some relief to crisis beneficiaries private behavior did the
opposite as in the possible case of taking children out of school. Within macroeconomic
policies is the classic tightening of the economy by monetary policies but compensated
by easing of fiscal policies so that some growth is preserved even as adjustment takes
place. This counter-cyclical policy setting took place only after the crisis was well
underway contributing perhaps to it deepening.
The dominance of the private sector means of coping with the crisis is evident in
the small share of families receiving assistance from the government (with bias towards
urban areas), the lack of interaction between whatever government is supporting and
assisting affected families from taking steps that reduce the future growth potentials of
43
the country, and the strength of trade in restoring the growth process. What directions do
these suggest?
The most important implication here is to jibe whatever government institutional
machinery is in place as crisis handle with the coping behavior of (poor) families or the
affected population. The problem here is that the coping steps depend on how deprived
they feel i.e., their self-rated conditions as opposed to an objective measure of absolute
poverty. Indeed the gap between self-rated and objective poverty has increased during the
course of the crisis. It is therefore not sufficient to suggest that growth will assuage the
effects of the crisis or its poverty impact but more importantly that it will lead to greater
consistency between government efforts and private initiatives in responding to the crisis.
This means that we have to have an analytical understanding why the poor feel poor in
addition to the traditional income measures.
Second, the short review of the safety nets under government auspices suggests
several ways for improvement. These range from consolidating the varied programs (e.g.,
credit-based livelihood projects) to better criteria for the distribution of subsidized food
programs. There is an implied need for locating these safety nets in bureaucracies that
have comparative advantage in running them efficiently while allowing policy-based
institutions to concentrate on their mandates. And it goes without saying that these safety
nets should be tied closely with the broad policy responses to the crisis so that their
effects lead to stable recovery and sustained growth.
44
Third, in the Philippines, the crisis came in the context of a high unemployment
rate that is structurally embedded in its economic history. Comparatively speaking all the
crisis-affected countries suffered surges in unemployment as the crisis progressed. Yet,
with the exception of the Philippines, these same countries unemployment rates fell (back
to historical rates) as soon as recovery took place and growth resumed. The spike in
unemployment rates associated with the crisis only highlights addressing the underlying
structural causes of lack of labor absorption in the country.
Finally, despite the fact that the country was not directly hit by the crisis its social
consequences were as serious as all the other countries affected. It was not really because
the country had strong “fundamentals” to begin with that it was the first to recover, but its
weak integration with the global economy (a function of strong “fundamentals”). Yet, as
with the other affected countries, the very external sector that placed them on a high
growth orbit was also the same external sector that brought them back into recovery and
growth. One can argue that the social impacts of the crisis on the Philippines were not as
critical as the rest but simply because of low levels of base incomes. Indeed the evidence
that lower income families even experienced positive growth in real incomes compared to
higher income families is nowhere comforting if the absolute levels of incomes are still
below poverty thresholds. The implied improved distribution of income that partly came
with the crisis does not change the equally stark fact that poverty rates remain high and
self-rated poverty remains even higher.14
14
The 1998 and 1999 Annual Poverty Indicators Survey shows that real incomes by decile groups has
increased between 1998 and 1999 with the exception of the tenth income decile which experienced a real
decline of 2.3 percent. But an overall real increase of 4.1 percent for the lowest 40 percent of families and a
growth of 0.1 percent for the highest 60 percent of families is hardly a social accomplishment.
45
The country’s bout with the Asian crisis has again brought out its weak
underlying economic structure.15 Thus in regional comparisons there is a common
observation that the Philippines is the “Latin America” of Asia. In many ways there could
be some truth to this although there is no historical information on self-rated poverty
among South American countries to compare with objective measures of absolute
poverty. But it is a useful area for empirical understanding.
15
In Alburo (1998b) comparisons are made among the crisis -affected countries in terms of what can be
considered as “fundamentals”.
46
REFERENCES
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Philippine Review of Business and Economics (December).
Alburo, Florian. 1999. “The Asian Financial Crisis and Philippine Repsonses: Long-run
Considerations,” The Developing Economies (December).
Balisacan, Arsenio. 2002. “Poverty, Inequality, and Welfare,” in Arsenio Balisacan and
Hal Hill (editors). The Philippine Economy: On the Way to Sustained Growth?
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De Dios, Emmanuel, Benjamin Diokno, Raul Fabella, Felipe Medalla, and Solita
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http://web.mit.edu/krugman/www/.
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47
Reyes, Celia M. Generoso de Guzman, Rosario Manasan, and Aniceto Orbeta. 1999.
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