Statement of Prof. Walden Bello
President of Freedom from Debt Coalition
On the Occasion of the State of the Nation Address
28 July 2008



Today is Mrs. Gloria Macapagal-Arroyo’s eighth State of the Nation Address. Again, she will be reviewing her performance in the past year and set the policy agenda for the next year. According to her staff, will tackle the issues of a national social welfare program addressing the crisis, value added tax, family planning and other policy statements.

After eight years in power you would think she would have been able to set the conditions for economic growth. Being an economist, you would expect her to have come up with an integrated and strategic development plan that would support the different economic sectors. Instead Arroyo has been more concerned about dodging political controversies, covering up for anomalies in government transactions and sometimes even resorting to theatrics to save her own skin from the issue of electoral fraud. Meanwhile, the lack of attention and investments in important economic sectors such as energy and agriculture has made the country vulnerable to crises.

Mrs. Arroyo would have us believe that the current crisis is not of her making, that external factors like the rise in the international prices of rice and oil are to blame, that before early this year, the country’s economic fundamentals were good.

The administration claims that in 2007 the recorded growth rate of the GDP was a high 7.3%. But that figure has been discredited by business consultant Peter Wallace and even the World Bank as a statistical fluke that masks a 5.4% decrease in imports. Instead, the real picture as painfully experienced by Filipinos every day does not look good at all.

The reality is indicated by the same brutal numbers: more poor people in 2007 than in 2000, more people without jobs, a real decline in average family income, the shrinking of the middle class as more people jump ship and swim to other shores.

The World Bank chimes in, with data illustrating an increase in poverty incidence between 2003 and 2006 with the level of poverty incidence very closely approximating the year 2000 levels. In 2006, 27.6 million out of 84 million Filipinos have fallen below the poverty line. So after eight long years, what has this administration really achieved?

For the past 25 years the record of the Philippines in terms of economic growth has been terrible, the worst in Southeast Asia. Second-tier ASEAN states such as Laos, Cambodia and Myanmar are faring much better with average GDP per capita growth rates ranging from 3.8 to 6.6 % in the past fifteen years or so. Compare that with the measly 1.6% for the Philippines.

So what has ailed the Philippine economy for so long? The usual culprits international financial institutions point to are protectionism and high wages. However as we will go to show, these are not the things weighing the economy down but the chronic inability to invest on economic infrastructure with annual budgets eaten away by debt service payments and the negative impacts of trade liberalization and debt conditionalities.

One scapegoat is the alleged protectionist policies and high wages. Contrary to the usual; claims, the Philippines, to its detriment, has pursued a more profound liberalization program compared to its Asian neighbors beginning in the 1980s. As for the high wages argument, High wages also benefit the Philippine economy because it stimulates consumption. In a situation where there is a dearth of capital investments, an increase in wages will lead to a higher level of aggregate demand that will result in a utilization of current excess capacity in industry, leading to faster growth and more employment.

So if those identified are not the culprits of the stagnation we are currently experiencing, then what are? Bad economic decision-making since the mid 1980s. Why do we focus on key policy decisions? The reason is that these decisions—in particular the fateful decision to channel government financial resources to debt repayment instead of capital expenditures—go a long way towards explaining why our neighbors leaped forward as we stagnated.

Owing to pressure from international creditors, the fledgling democratic government of President Corazon Aquino adopted the so-called "model debtor strategy" in the hope of continuing to have access to international capital markets. This approach was cast in iron by Executive Order 292, which affirmed the "automatic appropriation" from the annual government budget of the full amount needed to service the foreign debt. What this has achieved is channeling of government revenue to debt servicing. In 1986-1993 around $30 billion went to paying off interests to creditors, money which should have gone into public investments on infrastructure and social services that would eventually lead to attracting higher levels of private investments. Succeeding administrations have, including the current one, have followed the model debtor strategy.

As of December 2007, Philippines has an accumulated external debt of $61.83 billion, which amounts to 55.8% of the GDP. Apart from Marcos administration, Arroyo's has incurred the highest levels of borrowing. Debt incurred by her administration between 2001-2005 totaled P2.44 trillion compared to the combined borrowings of the Aquino, Ramos and Estrada administrations which stood at P1.46 trillion.

After making the decision to religiously service our debts at the expense of public investments, beginning 1994 our economic managers decided to pursue a radical program to unilaterally reduce all tariffs to zero to five percent by 2004. If the hemorrhage of payments on the foreign debt blew a hole on the expenditure side, trade liberalization, by reducing a very critical source of government revenues, blew a hole on the revenue side. Aside from crippling local industries owing to the entry of cheap foreign products, trade liberalization resulted in a radical decrease in customs collection. The overall result of this double punch was a state that could not invest because it had so little to invest—a government that could not act as an agent of development. As with the model debtor strategy, the Arroyo administration has not broken with the policies of trade and financial liberalization.

The Philippine experience has shown how important economic decision-making is in determining economic success and failure. When coupled with massive corruption, such as that which pervades Malacanang today, wrong policies can condemn a country to permanent stagnation. This corrupt and unimaginative administration that is compliant with foreign financial interests is one that most Filipinos would like to put behind them.

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