Okay, Reader. So you didn’t have time to look up “Analysis of the Philippine Economic Crisis”(APEC) or “Martial Law and the Philippine Economy”(MLPE), as I recommended last week. No problem. I was going to give it to you anyway, in a more “fun” form, that is, less taxing on the brain. Just a few facts and figures from these papers that tell a great story.
But first I want to share with you a fact which just recently came to my attention, although it has been staring me in the face for at least forty years. Did you know that at the end of 1985, the last year of the FEM (Ferdinand Edralin Marcos) period, the real per capita GDP (the total final output of a country divided by its population, or GDP growth rate minus population growth rate) had fallen to a level lower than it was in 1973, 12 years earlier: real per capita GDP 1985 = P39,440.76, real per capita GDP 1973, P39, 890.86. (See slide 1)
Put in a different way, when FEM first came into power at the beginning of 1966, the Filipino people had a per capita GDP of P33, 178.72; 20 years later, when he left, their per capita income was P39, 440.76, an increase of 18.87 % which means that
during his 20- year regime he managed to raise their income by, on the average, less than 1% (0.94%, if you want to be exact) a year. Good grief. Golden years?
His immediate predecessor, Diosdado Macapagal (DM), managed to increase GDP per capita by 8.6% in the four years of his presidency, or an average yearly rate of 2.15% a year, more than double what FEM achieved. Just for comparison you, understand.
If you prefer, Reader, we can divide the 20-year FEM regime into three periods: seven years of Democracy (1966-72) during which he was elected and reelected, eight years of Martial Law or Dictatorship1 (1973-80), and the last 5 years or Dictatorship2 (1981-85). Why Dictatorship2? Well, because although FEM lifted martial law in January 1981 (in time for Pope John Paul II’s visit, but from all accounts, the Pope was not fooled), he kept all presidential decrees, all legislative powers, and kept suspended the writ of habeas corpus.
But I digress. Anyway, during the Democracy period, per capita GDP grew at a yearly average rate of 1.9% a year (less than the DM performance). During the eight-year Martial Law/Dictatorship1 period, that growth rate increased to 3.5% annual average, almost double the Democracy period (which may have been the basis for the “golden years” myth).
Unfortunately, they ignored the third period, Dictatorship2, during which per capita GDP did not grow, it contracted – the annual average growth rate was minus 2.3%.
And as was stated earlier, the result was that the Filipino’s average income (measured as GDP per capita) in 1985 was less than what it was 12 years before (1973). All the growth during the Martial Law period was washed out, with Juan and Juana de la Cruz holding a much-depleted income bag. And it would take the Philippines until 2002 to regain the real per capita income levels it was enjoying before the collapse.
The second set of facts comes from either the APEC or MLPE, or both, and gives us a very good idea of what drove the Martial Law /Dictatorship1 growth, and what drove the collapse in the Dictatorship2 phase. Starting during the Democracy and throughout the FEM regime, fiscal and monetary policy were expansionary, moving away from the conservatism of his predecessors. This was reflected in the rising national government and public sector deficits, as well as steadily increasing growth in money supply (which tripled between the first and second half of the ‘70s), in the current account deficits (in his 20 years, FEM had only one year of surplus), and in the increasing foreign debt. That’s what drove the growth.
With the increase in quantity, the composition of government expenditure changed: By economic classification, the share of capital outlays rose from 15% in 1965 to 38% in 1982 (it is noteworthy that by sectoral classification, the share of education declined from 37% to 12% in the same period).
But the nature of capital outlays was also changing: infrastructure (roads, bridges, schools, irrigation), which on the average accounted for 50% of all capital outlays in 1970-75, declined to 36% in 1981-83. What increased in share were corporate equity investment (to corporations involved in infrastructure) and “other capital outlays”, which were equity investments in corporations and ministries not involved in infrastructure activities.
In any case the deficits were financed by national government and public sector debt, both domestic and foreign. The Philippines’ foreign debt went from $2.7 billion in 1972 (representing 34% of Gross National Income) to $24.4 billion in 1982 (the year the FEM regime had its highest GDP per capita), and $28.2 billion (91% of GNI) in 1985. Thus, the growth of the Philippines in the Martial Law/Dictatorship1 and the Dictatorship2 period was debt-driven.
Now, Reader, a country can borrow any amount it wants: what matters is that it invests it in projects whose rate of return will ensure that the loan can be repaid. Korea and Indonesia, were much heavier borrowers than the Philippines , and Korea had a larger proportion of commercial bank debt to total debt. They did not fall into a debt crisis.
In fact the Philippines was the only country in Asia that did (fall into a debt crisis). Why? Because investments we made with our loans obviously had poor rates of return. Why? Cronies and corruption.
Decreasing Productivity of Capital
What is the evidence for this? MLPE cites three. One is the data that show that the productivity of capital – the amount of output that one unit of capital can produce – took a downward plunge from 1972 to 1985 (see Slide 2).
It fell by over 40% — meaning that if one unit of capital could produce 100 units of output in 1972, it could produce less than 60 units of output in 1985. The capital was borrowed not to necessarily produce output, but for private gain in the process of borrowing (commissions, dollar salting). Since the amount borrowed – behest loans – was guaranteed by the Central Bank, foreign banks had no qualms about lending.
Another evidence that capital was getting less and less efficient is the so-called Incremental Capital Output Ratio (ICOR) which measures how much additional capital is needed to produce an additional unit of output. Obviously, the less the ICOR is, the better. ICOR rose from 3.9 (for 1967-72) to 4.57 (1974-80), which was the highest among its regional neighbors. By 1983 ICOR had reached 15.72. Overpricing the project costs and other corrupt practices would definitely increase ICOR. A negative ICOR comes about when the return on investment is negative. (See Slide 3)