An Escalating World Bank Presence
Signed in September 1980, the Philippine industrial structural adjustment loan (SAL) must be viewed in the context of almost a full decade of World Bank and IMF initiatives in the Philippines. It was Ferdinand Marcos's declaration of martial law on September 22, 1972, that moved the archipelago centerstage as far as the World Bank and the IMF were concerned. Marcos's declaration not only assured him the presidency for more than the maximum two terms, but it also brought an end to the Philippines' two decades of competitive two-party politics, a system that had seen frequent changes of power among the elites in terms of both party and region.
Privately, Bank and Fund officials viewed the authoritarian regime from a perspective that glorified efficiency above all else. The martial-law state, in Bank terms, became a "public sector assuming a much more important and dynamic role," and authoritarian decrees, promulgated by a stroke of Marcos's pen, were referred to as "legislation."[26] In this, the technocrats' world, democracy of the pre-1972 Philippine vintage—especially the heightened factional struggles of the late 1960s—was to be frowned on for the "political and economic constraints on economic and development management" it had engendered.[27] In its place, the "New Society" (Marcos's favored term for his martial-law regime) held out the promise of "considerable progress."[28]
By 1976, the Philippines had climbed into the ranks of the World Bank's top ten loan recipients, with a promise of another five years of Bank largesse at a level "higher than average for Countries of similar size and income."[29] AS the Banks Philippine division chief, Michael Gould, acknowledged confidentially that year, the archipelago stood With distinction as a Bank "country of concentration."[30] Or, as Philippine government, officials phrased it somewhat proudly, martial law had transformed their country into a Bank and Fund "guinea pig," a "favorite testing ground,"[31] a "ripe field" in
which to push development, "free from the endless legislative debates" of a democracy.[32]
A presidential decree, issued just three days after the declaration of martial law, merged the descendant of the transnationalist planning agency built by the Bank in 1962 with a less powerful nationalist government economic agency to form the National Economic and Development Authority (NEDA). NEDA's designation as the highest economic planning and policy authority suggested that the formalized long-term planning historically nurtured by the Bank would have an even more important place in the mid-1970s Philippines.
When the World Banks Russell Cheetham was posted in-country for a year to draw up a "basic economic report," he worked out of NEDA.[33] In keeping with the Banks practice, the all-encompassing economic report was strategically timed to serve as a key input to the Philippines' 1978-1982 five-year plan, which emerged from that same government office in 1977, one year after Cheetham's report. Cheetham's work was only one of several references used by NEDA, but the resulting five-year plan, as the Bank has noted ad infinitum in subsequent documents, was "broadly consistent" with the report in almost every respect.[34] Undoubtedly this consistency was enhanced when the draft plan was sent to the World Bank for comments.[35]
The five-year plan was drawn up in the context of a ten-year plan (1978-1987) as well as a long-term plan to the year 2000, and these also became "broadly consistent" with the Banks basic economic report. The World Bank was left on fairly safe ground when it asserted in its own 1976 confidential five-year lending plan for the Philippines that the government had accepted the basic economic reports "broad framework for future development . . . as a basis for its future economic plans."[36]
This statement must be interpreted with care. In the Philippines, as in many LDCs, five-year plans—let alone ten-year or twenty-five-year plans—do not usually mean much. But the Philippines' 1978-1982 plan did provide an indication that, overall, the country's economic advisers were aiming at what the World Bank consultant to NEDA wanted: "take off" based on foreign loans and investments that would flow into labor-intensive export-oriented industries once domestic impediments to a free market were removed.[37]
By the end of the decade, the stage was set for the Bank to move from
reports and plans into explicit policy formulation and implementation. By then, NEDA, the pinning ministry, headed by officials sharing the Banks transnationalist perspective, was joined by the no less technocratically oriented ministries of Finance and Industry. It was only a matter of waiting for the right moment to launch the SAL.
On August 12, 1980, less than a year and a half after the Philippine government's three-year experiment with its first and only extended fund facility had officially terminated, Marcos's finance minister, Cesar Virata, sent a letter to World Bank President McNamara. There Was nothing unusual in such correspondence per se. Minister Virata and Governor Licaros had drafted many such letters to the Fund's managing director as part of the established regimen initiating new standby arrangements. Indeed, all over the world, LDC finance ministers and central bank governors had penned and would continue to pen analogous dispatches to the Fund. But this one was to be delivered across the street—to the Bank.
On the surface, Virata's note was a formal but friendly communication to share with the Banks management the Philippine government's new directions for the industrial and financial sectors. Assuming these policies met with McNamara's approval, the letter requested a SAL to help defer financial costs. Lest the policies be misunderstood, they appeared in triplicate: first, outlined generally in Virata's letter; next, presented in the context of a broader statement on Philippine industrial policy for the 1980s (a twenty-page, single-spaced attachment); and, in a last attachment, meticulously chronicled in terms of specific legislation, past, present and future. The government's policy-reform commitments emerged distinctly in five areas: (1) lowering protective tariffs, (2) liberalizing import restrictions; (3) taking action to promote and facilitate exports and investment in export-oriented industries; (4) following a "flexible exchange-rate policy . . . to reflect basic market forces"; and (5) restructuring specific industrial sectors to integrate them with the overall export effort.[38]
Here was the Philippine state announcing its intention of implementing a policy package combining many initiatives similar to those that went unheeded when affixed as conditions to the IMF's extended fund facility. But this time, what was involved was much more than simply sharing good intentions. Many of the new reforms were already underway, and a precise implementation timetable to cover the rest was attached.
Virata's letter to the World Bank was part of a larger, carefully precon-
ceived plan. Although both parties went to great lengths to camouflage it, those policy changes emanated from the Bank itself and, by the time of Virata's letter, stood as de facto World Bank directives. Buried in a government file, a working draft of Virata's second attachment provides a clue. Written in late 1979, its original title was less benign than the Industrial Development Program chronicle that landed on McNamara's desk: Measures/ Steps Taken by the Government in Connection with the Industrial Policy Recommendations Contained in the World Bank's Industrial Sector Report .[39]
The governments acceptance of suggestions it had vigorously rejected when they had been packaged by the IMF was neither as sudden nor as shocking as it may appear. Virata's letter followed years of intense "policy dialogue" between the Bank and top government officials, as well as vigorous sparring among those top government officials themselves. The framing of what eventually evolved into the industrial SAL dates back to 1976 and the EFF.
At the time of the mid-1970s drafting of the Philippines' EFF, there had been a commitment within the Bank to concentrate on agricultural lending in the Philippines. To a certain extent, the Bank agreed to leave broader policy parameters involving industry and finance to the Fund and its EFF.[40] But by no means did the Bank totally leave the formulation of industrial policy to the IMF. In broad terms, the Bank outlined a framework for industrialization in its basic economic report. More specifically, the Bank's confidential 1976 five-year lending plan for the Philippines (the 1976 Country Program Paper ) reveals that even then the Bank had quite explicitly defined its list of necessary "major changes in the existing policy framework": removing import restrictions, restructuring and lowering tariffs, overhauling the investment incentive system. There was no mistaking the Banks priorities: "rapid growth in labor intensive exports" stood as "the most important goal."[41]
But the Bank, like the Fund, realized that simply enunciating the desired industrialization strategy for the Philippines was only a first step. As the EFF's first year progressed and sticky "problem areas" emerged, the Bank began to look beyond its overall agricultural and rural development thrust. It launched "a series of sector and special studies," with topics to include export potential; effective protection; labor-intensive, regionally dispersed manufacturing; and, later, the financial sector.[42]
The World Bank effort was closely paralleled by the University of the
Philippines School of Economics' research project on protectionism and industrial-promotion policies (July 1977 to March 1979). Although the official word was that the Philippine government commissioned the study, the research was aided considerably by American economist John Power, who joined the University of the Philippines' team through the aid of a World Bank education loan. The resulting Industrial Promotion Policies in the Philippines , published in book-form by NEDA in 1979, provided a mathematical analogue to what had been the Bank and the IMF argument all along: poor industrial performance was rooted in the highly protective trade regime and the capital-intensive bias of investment-promotion policies. With the book's publication, certain top government technocrats—including such staunch believers in these reforms as then Economic Planning and Policy Minister Gerardo Sicat (now at the World Bank)—were able to hold up the policy changes as suggestions emanating from the Philippines' own prestigious university, which in turn were simply accepted by the World Bank.[43]
Although the results of the University of the Philippines' exercise would prove useful in the ensuing negotiations, the World Bank by no means planned to wait for the final calculations. A midsummer 1977 Bank mission was posted in-country for two weeks to prepare the Bank's semiannual Country Economic Memorandum for the Philippine Consultative Group.[44] Launched by the World Bank in 1970, the Consultative Group brought together all the Philippines' major bilateral and multilateral aid donors to discuss and coordinate strategies and policies for that country, as well as to review past official-development-assistance initiatives with Philippine government representatives. Each annual gathering has a special focus which, according to a NEDA official who attended almost half of the first decade of meetings, was "usually requested by the U.S. government."[45] Subsequent foci would include poverty, energy, and population; in 1977, Bank mission chief Lawrence Hinkle and his crew of four Bank staff members were instructed to pay particular attention to industrial development.
Their report pinpointed impediments to a "freer trade regime" as the root of Philippine industrial-growth problems. But the report did more than just point fingers; within the main text and its-special appendix-on labor-intensive, export-oriented industries (garments, handicrafts, electronic components, wood products, and nontraditional agricultural and food products including bananas, seafood, and unroasted coffee) appeared
policy suggestions that would return to the Philippine government in more detailed form in later negotiations. Paramount among them were cutting nominal tariff rates to an across-the-board average of 20 to 30 percent, removing all import restrictions, modernizing textile plants, and setting up trading houses.[46] Fueled by that report (and by the strong convictions of many participants), the December 1977 Consultative Group issued a call from Tokyo for "intensive efforts" to set Philippine industrial-sector reform in motion.[47]
By 1978, with the EFF in midstream and the stalemate between the Fund and the Philippine government fairly obvious, a World Bank reappraisal of its role in the Philippines led to an official (if confidentially stated) change in strategy following on the heels of the Consultative Group initiative: "Industrial and financial policy improvements should be the major objective of future Bank lending."[48] This would require a great turnabout. Previous Bank loans to the Philippine industrial sector totaled a mere $398 million, and the value of actual loans to agriculture and rural development for fiscal years 1976-1980 was three times that of industry. However, by FY1981-1986, the two sectors were programmed to assume approximately equal billing, each bringing in about one-third of the World Bank's Philippine program.[49]
In late 1978, with the Philippine extended fund facility almost completely drawn down, a World Bank industrial policy adviser in the Industrial Development and Finance Department, Barend de Vries, was dispatched to Manila to confer with the Ministry of Industry on a preappraisal mission of the industrial sector.[50] Three months later, in February 1979, he returned with eleven colleagues for a full-fledged industrial-sector-appraisal mission. Several high government officials and Bank staff members insisted that this mission had been requested by the Philippine government; others conceded that it grew out of "shared concerns" between the two parties. However, in light of the new twist given to the Bank's Philippine program a year earlier, it seems most likely that the Bank's Washington office played a fairly pivotal role.[51] The mission's invitation, for formality's sake, was happily extended by NEDA chairman Gerardo Sicat and his core of technocrats battling the Central Bank,
Whatever the circumstances of its birth, the mission's mandate was clear to both parties. As the minister of industry told a local newspaper, "The study team will determine what changes the country can adopt so it can
better achieve broader and more rapid industrial growth, generate more employment . . . and promote exports,"[52] Exactly what de Vries had in mind as he evaluated the industrial policies and incentives became unmistakable in a press conference at the end of the three-week mission. Because of "very competitive wages," he announced, preliminary findings had indicated that Philippine exports could replace those of Korea and Taiwan "due to the changing economic structure of these countries."[53] His words were splashed across Manila's tightly controlled media in stories that did not fail to add that the mission was relying heavily on the University of the Philippines' study.
More than a year later, in May 1980, the World Bank published in red-book form (that is, available to the public) what was ostensibly the product of the three-week mission: a three-volume set entitled Philippines: Industrial Development Strategy and Policies .[54] Unknown to the public, the mission's report had reached the "restricted distribution" stage by October of 1979, which meant that a "confidential" industrial report had been drafted and discussed earlier with the Philippine government.[55] Rather than offering new insights, the Bank used the mission to put down on paper the ideas concerning the Philippines' role as a light-manufactures exporter in a new international division of labor, ideas it had been developing over the previous three years. As the mission wrote, "The greatest Philippine comparative advantages lie in labor-intensive and resource-based products."[56] In less than six months, de Vries and his colleagues had integrated all recent Bank and Fund work into a coherent overall industrial-policy proposal that became the basis for negotiations over the SAL.
Those negotiations and the initial discussion of a possible SAL through which the policy changes would be implemented began in August of 1979, when a four-man Bank mission traveled to Manila. Again headed by de Vries but this time including 1977 mission chief Hinkle, the mission arrived with a definite goal: to attain "a comprehensive understanding . . . at the highest levels on the objectives that could be reached through a series of staged industrial policy reforms, the initial stage of which could be supported by a structural adjustment loan."[57]
In setting up the mission, the Bank vice-president for East Asia and the Pacific, Shahid Husain, had acted on his understanding that "structural adjustment loans do go to the heart of the political management of an economy." Husain had instructed the mission team that the Philippines was a
prime candidate for the first industrial SAL.[58] Thus charged, the ten-day mission began policy dialogues with a wide range of top government officials on the need for "greater freedom" and more competitiveness in Philippine export operations. These officials included representatives from five ministries and an equal number of other high-level public institutions.[59] Among the relevant powers in the Philippines, only the Central Bank, the "fortress" that had constantly frustrated similar IMF endeavors, received an unmistakable and deliberate snubbing.[60] The Philippine Central Bank was too central an institution in this policy realm for its exclusion to have been simple oversight.
More of what a SAL might entail was unveiled to the government at this time. For individuals in certain ministries who did not press the point, the Bank mission tended to fall back on references to an initial $200 million loan (and a possible series of loans totaling $1 billion) for "program-type assistance."[61] This term was undoubtedly chosen to please the Philippine government, which had been denied in both its 1975 and 1976 unofficial requests for the Banks old-style program lending.[62] It is understandable that the concept of structural adjustment lending was somewhat foreign to Bank clients, as McNamara's official announcement of the new loans was still a couple of months in the future.
These years of meticulous preparation for the SAL by the World Bank were in large part responsible for the speed with which the loan was subsequently disbursed. Preparation, however, was only one step in the operation; achieving a sufficient degree of harmony and consensus within the relevant Philippine ministries was the other.