7
Industrialization and the Financial Sector

Shifting the Philippines to export-oriented light manufacturing had to extend beyond the confines of industry to be successful. It required effective mobilization of domestic and international finance, and hence a transformation of the Philippine financial sector. Unavoidably, this involved extensive dealings with the locus of nationalist power in the Philippine government: the Central Bank.

That such radical restructuring was well underway by the early 1980s is evidence of the World Bank's skill, as well as the experience gained in the SAL negotiations. Aided by constant advice from the IMF, the World Bank injected a tight cell of technocratic transnationalists into the larger organism of the Central Bank.

Through a $150 million loan, new legislation, and careful co-financing arrangements with transnational banks, the cell expanded its domain until it was able to push the entire Central Bank in a transnationalist direction. For the World Bank, this represented a resounding success in the simultaneous deployment of its major tactics of influence: the training and strengthening of technocrats, the reshaping of LDC institutions, and the creation of new institutions.

During 1981, keeping abreast of the flurry Of activity in the Philippine financial sector proved no simple task. At centerstage, a wave of consolidations and mergers rippled through the sector, the largest commercial banks linking formally with the biggest investment houses. On the sidelines, Philippine depositors watched the mergers nervously, and many transferred their funds from smaller banks to those larger banks that boasted TNB backing. These transfers only added to the merger flurry. Then the government made its move, employing government-owned banks to infuse equity into the merging banks, which were, in turn, encouraged to channel funds into export-oriented industries through equity participation. Against decades of established Philippine financial policy, each stage of this rapid transformation stood as an aberration. And, event by event, each stemmed from the World Banks financial-sector loan to the Philippines.

Taken in sum, the changes foretold a tighter working alliance between the Philippine state, big export-oriented industrial concerns, and large financial institutions. Fostering that close relationship became part of the World Bank's and the IMF's strategies for more effectively and fully restructuring the economies of relevant LDCs toward export-oriented industrialization. Whereas the Banks industrial SAL prompted the inter-meshing of the Philippine state with the bigger Philippine export industries, the Bank's and the Fund's financial-sector reforms remolded the crucial third element, the banks, and brought the three together.

Fathering Domestic Legislation

In May 1981, the World Bank and the Philippine government sealed an agreement for what was termed the "apex loan." Just as the SAL marked the Bank's pioneer venture into an overall Philippine industrial-sector loan, so too the apex loan stood with distinction as the Bank's "first financial sector loan" for Philippine industrial financing.^[1]

Step by step along the path toward this final agreement, the interactions between the Bank and the Philippine government closely paralleled the pattern already narrated for the SAL negotiations. (See Figure 3's timeline.) The March 1979 financial-sector mission followed on the heels of the February 1979 industrial-sector mission. A June 1979 draft financial-sector report was discussed with the Philippine government along with the draft industrial report in August 1979.^[2] This marked the commencement of "policy dialogues" that, within the year, carried a series of financial

Figure 3.
Timeline: Industrial- and Financial-Sector Negotiations, January 1979 to July 1981

reforms onto the Philippine legislative slate. Once again, the germ of each reform was to be found in the Bank's report.^[3]

With the reforms in place, Virata could dispatch his requisite letter (March 13, 1981) to the Bank. Just as Virata's industrial policy letter of eight months earlier had been skillfully drafted to camouflage the Banks leading role in domestic legislation, this letter feigned total Philippine government autonomy in recent major financial policy changes.^[4] Then, and only then, was the apex loan sanctioned in Washington.

Given the mirrorlike pattern of interactions over the two loans, detailed elaboration of the apex loan's chronology analogous to that presented for the SAL in Chapters 4 and 5 is unnecessary. Rather, this section will highlight key maneuvers and debates in Bank, Fund, and Philippine government interactions over the financial sector and will bring some critical questions into perspective:

1. How did the two sectoral loans work together to further common aims? Why were they conceived as separate loans rather than one loan?

2. What was the IMF role in this Bank loan? How did the loan shuffle the boundaries of Bank and Fund historical roles?

3. Why did the Bank deem it necessary to move inside the Central Bank for this facet of its Philippine policy dialogues? Could it not have been assured greater success if it had concentrated on its alliances in ministries outside Governor Licaros's realm?

4. How was the Bank able to surmount strong domestic opposition to the enumerated reforms?

Just as Philippine government officials often slipped into more comfortable references to the industrial structural adjustment loan as a program loan, so they tended to refer to the apex loan as either a structural adjustment loan or a program loan.^[5] For World Bank purposes, this was not so: the apex loan never reached the "nonproject" loan classification in which structural adjustment loans (the Philippine SAL among them) are categorized.^[6] The confusion among Philippine government officials is, however, understandable, for in the Banks quest to restructure the financial sector, it deployed the apex loan in the same all-encompassing fashion as a structural adjustment loan: it pinpointed a sector and helped reshape it according to Bank specifications. If the apex loan was not a sector-specific structural adjustment loan in name, it certainly was in essence.

Part of the mistaken terminology on the Philippine Side undoubtedly also grew from the two loans' shared birth. At the outset, the Bank framed its Philippine restructuring as one package of "industrial and financial policy improvements" that would "provide the basis for . . . World Bank financial support for the industrial sector."^[7] By the time of the August 1979 aide-mémoire and the commencement of policy dialogues, the Bank was willing to concede that a single packet might not be the most efficacious: "Changes in the financial sector could be introduced either simultaneously with or independently of industrial policy measures as deemed most effective for achieving the acceptance and objectives of both."^[8] As the Banks structural adjustment experience grew worldwide, so did its realization that the magnitude and complexities of the reforms it demanded were such that the programs were better spread over a period of years.^[9] By late 1981, it became established Bank policy to bifurcate structural adjustment programs to achieve maximum leverage. The split was accomplished, a Bank official explained, "either by sector, as in the Philippines, or by stages . . . as was done in Turkey." ^[10]

Traditionally, the World Bank had left all lending geared toward financial-sector restructuring to the IMF. Still, in addition to technical assistance on such matters as capital-market development and local-savings generation, the Bank had managed to leave its imprint on LDC financial sectors in one area: the fostering of national development finance companies. It had entered this activity by an ingenious route. The Bank's desire to fund certain private enterprises in LDCs was greatly restricted in practice by a statutory requirement that all such loans to nongovernment entities be guaranteed by national governments. LDC governments often shied away from this activity, to avoid accusations of favoritism to individual enterprises. A further restriction on deeper involvement was that only the International Finance Corporation within the World Bank group and not the overall Bank could undertake equity investments.^[11]

To circumvent such criticism and limitations, the Bank had found it could underpin private enterprise instead through project loans to provide (in its own words) "catalytic support for either the creation or reorganization" of development finance companies that, in turn, pumped equity or loans to the private businesses.^[12] Such Bank loans served the dual role of aiding private industry and strengthening financial institutions that the Bank felt could play a more central role.^[13] Until the late 1970s, these in-

stitutions stood as the World Banks main contribution to LDC banking systems worldwide.

The Philippines had been no exception to this institutional practice. From 1962 to 1980, the World Bank had channeled its limited lending for the Philippine industrial sector through three development finance companies, molding and strengthening these institutions in the process. As of 1978, the Bank had allocated ten loans, totaling $225 million, to the government-owned Development Bank of the Philippines, fostering what Bank officials termed "heavy involvement" and "close dialogue" with that institution.^[14] Referring to a second beneficiary, the foreign-backed Private Development Corporation of the Philippines (PDCP), the World Bank bragged of its "considerable impact" on the corporation ever since it had been created in 1963 at the urging of the Bank itself.^[15]

In 1978, a Bank assessment of its Philippine industrial support admitted to "increasingly serious misgivings" about the level of industrial development supported through its development-finance-company loans.^[16] It was simply not meeting the growing needs. In order to accelerate the transformation of the Philippine economy toward export-oriented industrialization, then, the World Bank resolved that

future loans to financial intermediaries would concentrate on the resolution of major financial sector policy issues. In order to widen the institutional coverage of Bank financing and address sector issues more effectively, industrial lending to financial intermediaries will be channelled through an "apex" unit in the Central Bank. . . Such "apex" lending would replace conventional finance company lending.^[17]

Switching to the more centralized "apex"-type loans was a careful strategy to shift the World Bank from the periphery to the center of financial-sector decision-making. As the Bank reported elsewhere, "The most important justification for the loan is that it would enable the Bank to work closely with the Government on policy issues concerning the country's financial sector."^[18]

The Bank decision ushered in a third stage of external influence on the Philippine financial sector during this half-century. In the 1940s, in line with the pattern of U.S. dominance over Philippine macroeconomic policies, a U.S. mission had fabricated the grand designs for a new Philippine financial sector, legislated through the General Banking Act of 1948.^[19]

With the 1963 creation of the IMF's Central Banking Service, the preeminent role in remodeling banking systems in the Philippines and other developing countries had been transferred to the IMF.^[20] For newly independent African nations, this meant relying on the IMF to chisel the outlines of central banking systems and to supply senior officials to staff the infant central banks' highest offices. For countries like the Philippines, with a financial infrastructure already in place, the IMF's role entailed advisory missions offering technical advice on both central and commercial banking.^[21]

Therefore, when the Philippine General Banking Act was amended in the early 1970s, the reforms built on IMF recommendations. Following a pattern initiated by the United States nearly three decades earlier, the official formulation of the proposed reforms was presented as the culmination of a six-month study by a Joint IMF-Central Bank Banking Survey Commission composed of three representatives from each side.^[22] But there was never any question as to who was in command. As Armand Fabella, a Filipino Commission member, recollected, "It was called the IMF-CBP [Central Bank of the Philippines] Commission and not the CBP-IMF Commission for good reason. On these matters in which we in the Philippines have little expertise . . . we defer to the greater experience and wisdom of the IMF."^[23]

"Coincidentally," Fabella continued, "if I'm not mistaken, our ninety-nine recommendations were published officially in September of 1972, the month martial law was declared."^[24] Mistaken Fabella was not; nor was it coincidence. With martial law in place, the translation from suggestions into domestic law proceeded smoothly and expeditiously, unencumbered by the nationalistic debate over the banking sector that had rocked the Philippine Congress immediately prior to that month.^[25] In order to facilitate matters even further, the commission took it upon itself (in the words of then Central Bank Governor Licaros's cover letter to the September 1972 report) to draft "bills for the suggested reforms which require legislation" and to prepare "plans or programs for the implementation of recommendations which need only administrative action."^[26]

Thus, in the first years of martial law, the financial sector was overhauled in accordance with IMF proposals. Minimum capital-base levels for commercial banks were hiked fivefold, from a long-standing P20 million to P100 million.^[27] Room was thus conveniently created for the 40 percent

Figure 4.
The Philippine Financial Sector Prior to the 1980 Reforms

Source: Adapted from figure in Ibon Databank, The Philippine Financial System—A Primer (Manila: Ibon Databank, 1983), p. 8.

TNB equity presence newly allowed in domestic banking institutions, a policy that reversed a historical Philippine de facto prohibition against foreign-equity participation in banking.^[28]

The reforms also included provisions that would be rethought in the 1980 banking reforms. The 1972 decree reinforced and further delineated the separation of functions among the various types of financial institutions originally outlined in the 1940s legislation. Mirroring the 1933 U.S. Glass-Steagall Act, investment banking—that is, underwriting of government and corporate securities,^[29] stockbroking, and buying and selling securities—was split off from the normal functions of deposit-taking commercial banks. This left a financial sector dominated by commercial banks (both domestic and foreign) with an array of other banking and nonbanking financial institutions performing specialized functions (see Figure 4 and Table 6). This was not so much a new move as an attempt to update statutory distinctions and to cover more thoroughly the new banking activities for which demand had evolved over the decades.^[30]

Finally, in keeping with the centralization of power inherent in martial law, the early 1970s reforms sought to strengthen the hand of the Central Bank, enlarging its domain to encompass nonbank financial institutions as well as banks.^[31] The Philippine Central Bank summed up the rationale: "The pressures in 1972 were related to the consolidations of the banking and non-banking sectors of the financial system under the supervisory and regulatory powers of the Central Bank so that the primary responsibilities of maintaining domestic and external monetary stability could be more effectively discharged by the Central Bank."^[32]

Opening the Floodgates

In 1972, a strong Central Bank was perceived as an important component in modernizing the banking sector. Before the decade was out, however, the strengthened Central Bank under Licaros began to plague the World Bank and the IMF. For, as these two institutions understood, there was no conceivable way to circumvent the Central Bank in consolidating the banking sector so that it could serve as a drive wheel in export-oriented light manufacturing. Unlike the industrial sector, which lay under the multiple supervision of the Central Bank, NEDA, the Ministry of Industry, the Ministry of Trade, and others, the Central Bank's jurisdiction over the financial sector had become unambiguous and comprehensive.

The dilemma then was clear-cut: new reforms could come only from the Central Bank, traditionally IMF territory. Yet the IMF was in no position to conduct amiable policy dialogues with Licaros. That left the World Bank. Admittedly, the Central Bank was not totally alien territory for the World Bank. On occasion, when no other suitable national financial conduit had existed (and when it was not deemed necessary to inspire the creation of an appropriate institution), the World Bank had channeled its loans through the Central Bank.^[33] But this had been done as a matter of convenience, rather than with an eye to major financial-Sector reform. By the late 1970s, however, the virtual handcuffing of the IMF vis-à-vis Licaros necessitated its replacement by the World Bank.

Easing the World Bank into the IMF's historical domain at the Central Bank without provoking suspicion and tainting the Bank's unsoiled reputation required time and finesse. Financial-sector missions in 1979 were joint efforts, composed of members of both the IMF and the World Bank, but a Bank official was placed at the head.^[34] In this way the IMF could introduce the World Bank to the Central Bank without the World Bank appearing to overstep its bounds. Then the IMF could move into the background, still sharing technical advice but deferring to the World Bank in the actual process of negotiation.

Although the combined effort behind the financial reforms was clear,^[35] the World Banks apparent domination left most Philippine government officials emphasizing its role. Reinforcing this perception was a logical deduction: "What was at stake with the reforms was a World Bank loan," reasoned Carmelita Areñas of the Central Bank. "Therefore, the World Bank [not the IMF] had the upper hand."^[36] Government technocrats who saw through the joint mission setup framed it in their own terms. A top NEDA official, for example, offered his explanation:

They had to do this . . . jointly, you see. The IMF deals with the Central Bank, so the World Bank had to include them [the IMF]. . .. But, after that, we [the Philippine government] were really talking to the World Bank. We were negotiating with the World Bank. . .. By having a joint mission . . . it was good for us too. . .. [We were] able to get around the usual IMF stubbornness . . . [and] its patronizing attitude.^[37]

It was important, however, that the IMF's public posture not be erased altogether, as had been done with the SAL. Given the nature of the desired reforms, it would have seemed strange to have only the Bank exacting pol-

icy changes in areas mandated by the IMF less than a decade earlier. This was especially true because the new reforms strove to undo some of the very characteristics of the Philippine banking system that had been created according to IMF (and, earlier, U.S.) specifications. To leave the IMF out at this juncture would have provided an already recalcitrant Licaros with the perfect excuse for charging the World Bank with trying to overturn policies sanctioned by the IMF and not budging an inch during the policy dialogues. As an IMF official with years of experience in dealing with the Philippines explained further:

Now we see the need for long-term lending by domestic banks to export enterprises. That fact wasn't always so clear . . .; it wasn't in 1972. Times change . . . needs change . . . demands change. What the IMF helped do with the financial sector in 1972 was critical. We're not saying it was a mistake. What we are saying is . . . demands on LDC financial sectors are different now. . .. But right now, it's easier to have the World Bank in on this, to pass the buck a little.^[38]

Thus, one rationale for splitting the financial-sector loan from the SAL was to allow IMF and World Bank collaboration in the area where it was essential and to let the World Bank go in alone where an IMF presence might have proven a liability. Another motivation for the loans' separation was the far greater complexity of and resistance to the financial-sector component. The Fund's and Bank's maneuverings vis-à-vis the Central Bank on the financial-sector loan were more uncertain and the loan-related policy dialogue dragged on more hesitantly. By purposefully circumventing the Central Bank as much as possible, the SAL negotiations advanced more expeditiously. Explained SAL interagency committee member Noriega, "The apex loan made lots of problems for the World Bank . . . because it can be so difficult working through the Central Bank. Not like the SAL work with us, where we're moving along quickly and satisfactorily."^[39]

Foremost among the banking system restructurings that the Bank and the Fund sought to implement through the apex loan was what Governor Licaros described as "letting any bank [or nonbank financial institution] do what any other can do."^[40] Slated for obliteration was the enforced specialization between commercial and investment banks that the IMF (and the United States) had built into Philippine banking law. Instead, what the Fund and the Bank called for was a variation of the German and Swiss models of universality in banking. Combining the full domestic and inter-

national banking functions of commercial banking with the underwriting, securities dealership, and equity investment powers of investment houses, "universal banks" (or, as the Philippine government preferred to term them, "expanded commercial banks") would be created. That title would be bestowed only on those banks that were able to meet specific criteria regarding past performance, enlarged capital base, and technical expertise.^[41] As Licaros recalled, "The World Bank had it in mind that we would consolidate our banking sector into superbanks, each offering a supermarket of services."^[42]

The expansion of commercial banks into equity participation in corporations would open up vast and unprecedented opportunities for the enlarged banks. As before, expanded commercial banks (ECBs) were to be encouraged to control up to 100 percent of the voting stock in most categories of allied enterprises that is, other banks and associated businesses. But there was more. In nonallied enterprises—agriculture, manufacturing, public utilities—ECBs could hold up to 35 percent ownership.^[43] As the Bank and the Fund viewed the proposal, it would have two major consequences (when taken in conjunction with the increased capitalization requirement):

1. Domestic savings flows and thus the amount available for loans and investment would be expanded.

2. Increasingly, this lending would be done on a long-term basis (over five years in the Philippine context), complementing ECB equity investment.^[44]

An elaborate legal foundation for expanded commercial banking was written into Philippine statutes through seven April 1980 amendatory laws and four July 1980 circulars of implementation, hailed by government and media as a crowning achievement of Governor Licaros's eleven years in office.^[45] Yet, once again, this was but a well-orchestrated ploy to shroud Bank and Fund initiatives in the vocabulary of Philippine nationalism. At the time the universal banking idea was first launched by the 1979 joint mission, Governor Licaros was not among its proponents.^[46] Joining him in firm opposition to the move were certain officials within the Central Bank—some of whom would later share Licaros's public billing as motivating forces behind what were dubbed the "magnificent seven" pieces of legislation and their accompanying "gang of four" circulars.^[47]

What expanded commercial banking boiled down to was a scheme for funneling more domestic resources into export-oriented industrialization or, as the World Bank euphemistically phrased it, into meeting "the country's long-term development needs."^[48] A successful nontraditional-export drive, the Bank had counseled the Philippine government repeatedly since at least 1977, required "larger credit reserves" as well as a firm commitment that none of these would be squandered on national entrepreneurs' more capital-intensive, import-substitution projects.^[49]

As Virata reiterated in his August 1980 dispatch to McNamara, the financial reforms were being geared to "improve the efficiency of financial intermediation for export-oriented and labor-intensive industrial development."^[50] With expanded commercial banking in place, applauded a Bank staff appraisal of the apex loan, "important milestones . . . in mobilizing and channeling resources to meet the financial needs of the Government's new and ambitious industrial policy" were reached.^[51]

The export-oriented industrialization motivation behind these changes, however, was hushed up, given the controversial climate surrounding other Bank and Fund industrial restructuring, particularly the late-1970s tariff reductions and import liberalizations. Instead, a different, less controversial rationale was articulated: the need to further economic efficiency. Larger banks resulting from consolidations of commercial banks into universal banks, it was claimed by the Bank, the Fund, and certain key Philippine technocrats (among them Virata), would achieve significant economies of scale.^[52] Expanded commercial banking would "open up" and "strengthen" the Philippine banking sector.^[53]

Armand Fabella, chairman of the late-1970s Central Bank Banking Survey Commission, was a staunch convert to this line of reasoning: "The aim of expanded commercial banking is to take advantage of scale economies by permitting growth on the argument that the bigger you are—and the more diversified, too—with the ability to amass more assets, the faster you grow. . .. [With the reduction in enforced bank specialization], with more competitive financial conditions, your more efficient private banks would manifest themselves more vigorously."^[54] Eight years earlier, as Filipino co-chairman of the comparable 1972 IMF-CBP Banking Survey Commission, Fabella had echoed the IMF's previous contention that exactly the opposite was true: compartmentalized banking of the U.S. genre was more suitable for the Philippine context.

Key non-Central Bank transnationalists such as Minister Virata underwent similar transformations, for they could readily perceive the crucial role of such a banking revolution in underpinning Philippine light industrial exports. To many Central Bank officials hostile to complete reliance on such a path of industrialization (among them, Licaros and Deputy Governor Legarda), however, the 1972 legislation was still far more prudent.^[55] One of these high-level officials countered the Bank's and the Funds rationale, expressing a different philosophy of development: "Some of us have a feeling there are actually diseconomies of scale. Big banks with lots of tie-ups to big industry probably have passed the point of economic efficiency, and now favoritism takes over."^[56]

These hesitations Fabella disclaimed as "the nationalistic drivel of small-business fanatics" or the thinking of "nonscientific pockets remaining in the Philippine bureaucracy . . . that do not understand that we must acknowledge that the IMF and World Bank can conduct superior empirical investigations."^[57] Fabella, a transnationalist with close ties to ministries outside the Central Bank, understood the benefits of bowing to that superiority. Indeed, ever since the early 1960s, when Fabella had headed the government agency overseeing the implementation of the IMF's 1962 packet of economic reforms, the Program Implementation Agency, his reputation had been wedded to his role as skillful translator of external advice into domestic policy. In this sense, confided an IMF official, Fabella was a perfect "liaison. He knew how to work with us, and he accepted the World Bank's new dominance here."^[58]

Was there empirical evidence to support the economies-of-scale argument? Since the Bank's and the Funds rationale for the financial reforms was based on the benefits redounding to export-oriented industries, and not on the economies-of-scale argument, they made no further effort to give substance to their assertions. Instead, in a footnote toward the end of their report, they passed the responsibility back to the Philippine government, in the process destroying Fabella's justification for why advice had been sought from these institutions in the first place: "No empirical research could be carried out to support this [economies-of-scale] contention. Most data needed for such an exercise are available to the research department of the Central Bank who should be encouraged to carry out the studies."^[59]

Neither side conducted any such studies. Yet in the introduction to the

July 1980 Central Bank circulars accompanying the expanded commercial banking legislation, the relationship had miraculously become conclusive: "economies of scale would result" from the 1980 financial reforms, the Filipino public was informed.^[60]

"What It Means to Be a Guinea Pig"

The question of economies of scale was only one of a number of issues surrounding universal banking that provoked controversy inside the Central Bank. Although by the late 1970s Licaros found the idea of interacting predominantly with the World Bank over the financial restructuring rather than with the IMF "a welcome change," his first choice was clearly that both institutions stay out of any major Philippine financial-sector activity.^[61] Why, he argued, should his Central Bank have anything to do with a World Bank loan destined for industry? Carmelita Areñas of the Central Bank echoed him: "Our position initially was that the World Bank should just lend to industry . . . like it has all along. Why should we commit our whole financial sector to either the World Bank or the IMF?"^[62] Let the World Bank give its loan to the Development Bank of the Philippines, suggested one Central Bank official.^[63] Or, offered another, pass it along to the government-owned Land Bank of the Philippines.^[64]

After the joint Bank and Fund mission of March 1979 detailed its suggested reforms, the debate within the Central Bank halls rose in pitch. An October 1979 internal Central Bank memorandum provided an indication of how vehemently some ranking Central Bank officials opposed the reforms. Signed solely by Licaros's special assistant Arnulfo Aurellano, the nine-page memorandum continually lapsed into the "we" form, revealing that it voiced the objections of others besides Aurellano, Licaros undoubtedly among them. Fears of economic concentration and collaboration between big banks and big industries were strong. Aurellano wrote, "We have strong reservations" concerning: (1) equity involvement of banks in non-allied industries; (2) direct equity financing by banks through underwriting; (3) mergers between commercial banks and other types of financial institutions; and (4) deposit taking by nonbank financial institutions. In other words, although the memo was too diplomatic to say so directly, the objections covered every key facet of the universal-banking concept.^[65]

If all the Bank and the Fund sought was more long-term financial back-

ing for industry, the memo argued, that could easily be accomplished through broader incentives geared to encouraging commercial banks "to provide medium and long term funds for industry via loans or bonds," rather than equity. Indeed, Aurellano charged, recent tax and interest incentives had already elicited "positive results" in amplifying commercial banks' long-term funding bases. Why, then, call forth the specter of a handful of unwieldy universal banks "which may be able to dominate the financial system" and were likely to cater discriminatorily to the "requirements of larger and well established firms"?^[66]

Even the six-man Central Bank Banking Survey Commission whose task it was to "coordinate with the joint . . . mission on the report . . . and proposals arising therein"^[67] was hardly unanimously in favor of the universal banking reforms. One panelist represented the Investment Houses Association of the Philippines, an organization whose members feared that universal banking would spell their demise as independent entities. The substantially larger commercial banks had an uncontestable head-start over investment houses in reaching a universal banks requisite minimum level of capitalization. That was one likely negative vote.^[68]

The other private-sector panelist represented the likely commercial bank beneficiaries, but even his constituency had doubts about the full financial reform package. Memories of the rash of mergers and foreign partnerships that had followed the 1972 financial reforms were still fresh. Seven years later, only the biggest banks wanted to gamble on an even more deadly round of such mergers and foreign partnerships that were likely to be precipitated by universal banking and its further expanded capital-base requirements. Such overall hesitations and conflicting views among the commercial banks led to what was called a "noncommittal" sentiment on the part of this representative of the Bankers' Association of the Philippines.^[69]

Among the Central Bank deputy governors who joined Fabella to round out the committee, at least two were negatively inclined toward the proposals. Deputy Governor Gabriel Singson had strong forebodings about this new World Bank role vis-à-vis the Central Bank, reservations that had to do with his own power base at the Central Bank.^[70] Perhaps the deepest antagonism came from Deputy Governor Legarda, as was explained by NEDA's Noriega:

Legarda said it was ridiculous. Every time the IMF had a new whim or fancy as to how our financial sector should look . . . were we supposed to switch around

every time that view changed? We've done enough for the World Bank and IMF in the past—that's what Legarda said, and why he felt we should do as little as possible for this loan now.^[71]

Credit for transforming these hostilely predisposed committee members and the overall Central Bank into financial-reform advocates was attributed to various phenomena. Noriega, whose view was shaped by what his Bank "friends" on the SAL missions confided to him, credited the World Banks skill at sensitizing its apex team to the delicate situation at hand:

The World Bank wasn't oblivious to Legarda's negativism. It reacted by trying to adjust its team to the needs of its [Philippine] counterparts. . .. It is much better . . . than the IMF at this. . .. So you had on the mission an Indian guy who was very patient . . . a good listener. . .. His job was to listen and listen to Legarda's [and others'] complaints . . . and to win confidence.^[72]

Fabella, however, insisted that no such persuasion of the Philippine committee was necessary. As he recounted it, the Bank and the Fund were the ones coaxed into compromise, while the Philippine government never acquiesced to the full IMF and World Bank prescription:

The decisions were exclusively the Philippine Panel's decisions. . .. The IMF was pushing for a stronger recommendation, more similar to the German universal-banking system. . .. We didn't think German universal banking would fly in the Philippine setting, so we picked out the good parts [of the joint financial-sector report] and toned down the not-so-desirable aspects—or not-proven aspects—into expanded commercial banking.^[73]

In theory, there was a distinction. Expanded commercial banking gave each specialized financial institution a choice: to remain as it was, or to increase its capitalization, in the process taking on an even wider range of responsibilities. Finally, at the P500 million milestone, the title of ECB would be bestowed, placing all financial functions under the auspices of one bank.^[74] Under strict universal banking, implied Fabella, no such options existed: all banks, by law, had to become P500 million ECBs or cease operations. "But we believe in the free-market philosophy of choice, not compulsion," emphasized Fabella.^[75]

Yet, in reality, little distanced these two financial-sector setups that time would not erase.^[76] Even Fabella himself conceded that his "successful" scenario for Philippine expanded commercial banking visualized "a club of

big boys . . . a handful of banks controlling the financial sector" within a matter of years.^[77] Like small Filipino textile enterprises, many small specialized banks not "choosing" to broaden their capital bases and expand their repertoire of functions would eventually be liquidated or taken over.

Fabella's semantic charade may initially have soothed a few fears and quelled some debate, but it certainly was not the deciding factor in the Central Banks eventual obeisance. In due time, Fabella's terminology was transformed into a joke among Philippine government and banking circles (by both friends and foes of the financial-reform package)—a laughing reference to "universal banking, or, as Armand Fabella wants us to say: expanded commercial banking."^[78]

Other factors beyond the patient Indian's proddings softened the objections of Licaros's Central Bank and the rest of Fabella's committee. Above all else, it was a matter of pragmatism, an understanding of the enormous power these multilateral institutions wielded with the Philippine government, as well as of the declining importance of the Central Bank vis-à-vis certain other transnationalist-dominated ministries that were being upgraded in importance as the SAL process unfolded. Legarda was asked why he finally came around to seeing the merits of the financial-sector reforms. There was no lengthy explanation, no admission that he ever doubted the wisdom of universal banking, just a simple and direct, "You have to see this in its proper perspective: it is a matter of our own involvement with the World Bank. . . Ours is a good relationship, with lots of loans."^[79] Echoed Licaros:

It does not matter whether I originally wanted it or not. . .. That's what it means to be a guinea pig. We keep having to experiment with new ideas the IMF and World Bank might have. . . It's not always easy. Sometimes it's like a Straitjacket. But it is necessary.^[80]

In Licaros's case, the reason for his final submission was also rooted in his maneuverings to survive. By late 1979, said One of his confidants in the Central Bank,

You could see his power slipping . . . and Virata taking over. [Licaros] realized he should have played along better before . . . in the past. It was silly in a way: he was so stubborn . . . over little things. . .. He thought Marcos would always need him for . . . his skill at the negotiating table . . . but Marcos needed Virata's closeness to international circles more.^[81]

Licaros faced a World Bank whose concurrent SAL work involved many policy changes he disapproved of, at a pace he could barely keep up with, and with ministries he had no control over. The most he could do was to make some last futile efforts to regain his standing as policy innovator at the helm of the Central Bank. And so he took up the banner of universal banking and brandished it as his own. But it was too late: when the Central Banks governing Monetary Board approved these amendments to the banking laws in early 1980, board member Virata, not Chairman Licaros, was handed the accolades.^[82]

By April of 1980, just one year after the World Bank and the IMF set the process in motion, the seven universal banking laws stood on the books. President Marcos had given the rubber-stamp Philippine legislature exactly two weeks to turn the Central Bank proposals into law. If not, Marcos vowed, they would be passed as presidential decrees.^[83] In this fashion, what critics in the Central Bank continued to deride as "the seven shotgun amendments to the existing bank laws" were born.^[84]

As comprehensive as the financial reforms of 1980 were, they were only one component of what the World Bank and the IMF sought to implement through the vehicle of the Bank's apex loan. Institution-building stood as a major element of the Bank's and the Fund's blueprint for reshaping the Philippine financial sector to better fit the Philippines' shifting role in the new international division of labor of the late 1970s.

Seeding the Central Bank

On August 15, 1980, the Apex Development Finance Unit (ADFU) of the Philippine Central Bank formally came into existence.^[85] About a month earlier, in Washington, D.C., Minister Virata and his entourage had ironed out the final details of the agreement for the Philippines' first structural adjustment loan. A month prior to that, the government-owned Philippine National Bank (PNB) had signaled the commencement of a new era in Philippine banking by applying for the first ECB license.^[86] The three events were all firsts. And they were all closely interrelated.

While the Philippine press paid homage to Virata's international renown and to PNB's farsightedness, the ADFU opened without much ceremony. There was little fanfare from either Central Bank Governor Licaros or his six deputy governors in welcoming ADFU head Eduardo Villanueva, fresh

from intensive training in the Bank's Washington headquarters,^[87] to the Central Bank ruling team. As far as the rest of the Central Bank employees were concerned, the new ADFU staff seldom opened their doors or their work to outside scrutiny. Only the frenzied activity in the ADFU suite of rooms on the Central Banks prestigious top floor revealed the existence of new life within the bureaucracy.

As the months passed, little more than a skeletal outline of the activity filtered out from that suite, even to other Central Bank offices. Employees from these other offices who requested an explanation from ADFU personnel had to settle for a vaguely worded circular containing less substance than many of the rumors floating through Central Bank corridors.^[88] Even top Central Bank officials tuned in to the apex loan negotiations were reluctant to divulge activities underway inside the ADFU.

Ironically, approaches to Central Bank officials outside Villanueva's dominion to learn more about ADFU invariably ended in requests: "You find out what's going on [in the ADFU] and tell us. . .. You're an outsider; you don't work here . . . so it's easier for you . . . to find out [than for us]."^[89]

When presented with the paradox of a Central Bank unit that stood as an enigma to the vast majority of Central Bank staff, ADFU head Villanueva offered no apologies. There was no reason, he argued, not to let "the quizzical attitude about what it's all about" remain as it was.^[90] And while Villanueva admitted that the January 1981 inauguration of a transnationalist Central Bank governor ushered in "a friend" privy to "all our secrets,"^[91] the secrets were not shared with those below new Governor Laya. In Central Bank offices other than Laya's—from that of the senior deputy governor on down great bitterness and resentment toward the ADFU festered.^[92]

Why all the mystification and evasion? Part of the answer lay in the need to distance the creation of the ADFU as much as possible from the billing it rightly shared with the controversial universal-banking reforms as pre-conditions to the flow of apex loan money.^[93] It also reflected a decision by the ADFU staff, who understandably had a vested interest in the loan being signed, to say little so as not to jeopardize the final months of negotiation.

These were reasons enough in themselves, but there were still others. Apex lending through the ADFU, it turns out, was a pivotal piece in the puzzle of the World Bank and IMF strategy to reshuffle power in the

Philippine government while assisting the country's shift toward export-oriented industrialization. When Bank officials decided to experiment with this "new approach to industrial lending in the Philippines,"^[94] the move was engineered to circumvent a number of problem areas in one swift maneuver.

In the World Bank's own words, the creation of the ADFU was a central component of what it termed its "major justifications of the [apex] loan": "the broadening of the Bank's institution-building assistance to cover not only the three development finance institutions financed by the Bank in the past, but also other institutions in the financial sector, including the Central Bank ."^[95] Rather than entangling itself directly in a cumbersome reconstruction of the whole of Licaros's Central Bank, the Bank had embarked on a much simpler form of institution-building—that deceptively small Apex Development Finance Unit. As a local newspaper explained in the most general terms, the "ADFU is intended not only to be a trend-setter, but an activist institution that will play a critical role in helping implement the government's industrial development strategy and would provide leadership."^[96] The ADFU represented even more. By constructing this new institution inside the Central Bank, the World Bank sought to realign the traditional nationalist power centers there.

To what extent Licaros and his six deputy governors sensed that the institution-building component of this $150 million World Bank loan was conceived with an eye toward rendering many of them superfluous is not clear. According to Licaros (who was in office for much of the negotiations), he and his deputies were willing to allow the ADFU "to handle exclusively this World Bank loan," but they were not willing to "let it grow or take on more functions."^[97]

To Licaros and others at the Central Bank, one worrisome aspect of the ADFU was the Banks insistence on its autonomy.^[98] Prior to the ADFU, the Central Bank hierarchy had been well demarcated: five "sectors" or groups of departments, each headed by a deputy governor on whom the governor kept tabs through a single senior deputy governor.^[99] From the outset the ADFU stood as a unit, outside the bounds of any sector and beyond the reach of any deputy governor. It achieved what the Bank called "maximum operational autonomy," for, although it reported directly to the governor, the Central Banks Monetary Board exercised authority over operational procedures.^[100] This arrangement gave transnationalists outside the Central Bank the deciding voice. As Villanueva told it: "The World

Bank and the governor of the Central Bank [Licaros] agreed it would be best if [the ADFU] were permitted to develop on its own, . . . to be rather autonomous because of the unusual character the World Bank wanted it to have."^[101]

The ADFU's unique position in the bureaucracy immediately distanced it from other Central Bank departments. But what elevated it above them was the status its staff members carried. This was no accident; precise staffing specifications formed a critical component of the World Banks institution-building blueprints and hence of the Bank-Philippine government negotiations.^[102] As Governor Licaros recalled, "The World Bank felt strongly that [the ADFU] should not be organized according to the normal ways the Central Bank is organized."^[103] The contrast was striking: traditionally enormous Central Bank rooms spilling over with a swarm of lower-level bureaucrats, versus Villanueva's sedate suite with its initial dozen high-level staff members.^[104]

To lead the unit, Villanueva was recruited from one of the highest executive positions in the Philippines' largest and most prestigious accountancy and auditing firm, SyCip, Gorres, and Velayo (SGV).^[105] With him came his SGV assistant, who explained that the World Bank wanted a core of ADFU staff members to come from the private sector.^[106] Having its top executives transformed from transnationalists in the private sector to key transnationalists in the Philippine state was nothing new for SGV. Indeed, at the time of the ADFU's formation, SGV boasted an impressive list of such alumni, most notably former senior partners Virata, Laya, and Roberto Ongpin.^[107]

It was no secret that the World Bank was kindly disposed toward SGV. Many World Bank loan contracts with the Philippine government specified that the project auditor could be none other than SGV (an arrangement undoubtedly facilitated by the closeness SGV's Washington, D.C., office maintained with the Bank).^[108] When queried about this bias, a Bank official explained that the more likely auditing candidate, the Philippine government's Commission on Audits, was, "by definition, not an objective auditor."^[109] The result, bemoaned an inside observer, was that "there's an SGV mafia in the government today. It's a good part of our problem . . . for these are systems people . . . technocrats . . . without a feel for the national interest."^[110] To the World Bank, these were laudatory epithets, descriptions of potential and real transnationalist allies.

For the potential allies, the World Bank added a training component to

the loan, transforming a willing SGV (and associated) team into a Bank team. During Villanueva's intensive Bank training, he learned to "lean heavily" on World Bank insights and advice gained then and in a number of subsequent expeditions to Washington.^[111] Another staff member spent two or three months studying at the Banks Economic Development Institute, a sojourn that earned him the prestigious title of "EDI fellow" in the Philippine press.^[112] Further training sessions for the other ADFU professionals became part of the apex loan agreement.^[113] The World Bank went a step further to ensure transnationalist standards: at the Bank's suggestion, a United Nations Development Program (UNDP)-financed, but World Bank-recommended, foreign consultant would be dispatched to oversee the first two years of ADFU operations.^[114]

Trained by World Bank personnel to employ World Bank criteria and evaluation methods, the ADFU staff was originally mandated to conduct a single operation: processing the industrial loans to be financed through the Banks apex money. Almost immediately, however, the ADFU began to emerge as a key domestic institution that would play a central role in the economy-wide restructuring. Both the industrial rationalization (stimulated by the Bank and the Fund through the SAL and associated loans) and the concomitant financial rationalization (with its origins in the Banks and Fund's universal-banking reforms) were to be sustained and amplified by the ADFU. Just as the IMF had earlier ducked into the wings to cede to the World Bank the leading role in their combined restructuring efforts, so now the Bank was to employ the ADFU as a Philippine shield to deflect attention from the Bank.

To further financial-sector restructuring, the ADFU spent early 1981 examining the soundness of local financial institutions to determine which merited accreditation as suitable conduits for the apex loan. Applicants, the Bank staff appraisal report for the apex loan affirmed, would be judged against the following criteria (criteria, Villanueva's assistant added, that had been set by the Bank itself):^[115]

a. sound financial position and performance and a healthy portfolio;

b. sound operating policies and procedures, and a development-oriented strategy for future operations;

c. an organization, management, and staff with the requisite expertise to undertake term lending operations including the technical, economic, and financial appraisal of projects and their supervision.^[116]

"After an initial review with the World Bank on how you should look at an organization," Villanueva explained, "we assess the [financial] institution before its accreditation . . . and can suggest some minor changes."^[117] "Minor" was not quite the best description. Given a sweeping mandate in this endeavor, the ADFU was empowered to stipulate conditions covering capital structure; operating policies, strategy, and planning; organization and staffing; and dividend and reserve policies, among others certainly an open-ended, if not all-encompassing, list.^[118] Indeed, the ADFU wielded power enough to demand step-by-step restructuring of nearly all facets of both public and private financial institutions.

Bank confidential documents confirm that even before the apex loan was signed the Bank and the ADFU had agreed on a list of candidates to be put through the ADFU institution-building regimen. Names filling the roster, according to Villanueva's assistant, came "at the World Banks suggestion."^[119] In addition to the three earlier recipients of Bank loans (DBP, PDCP, and the Philippine Investments Systems Organization [PISO]), the "most promising channels for the proposed Bank loan" included an impressive array. Eight of the existing twenty-six large private Filipino commercial banks (the eight included the six largest commercial banks and together controlled 42 percent of the total private commercial bank assets) as well as four of the ten remaining investment houses (all four with minority foreign ownership, and together shouldering nearly half of all investment house assets) were the first candidates.^[120] An ECB license was not an ironclad prerequisite for accreditation by the ADFU, but the Bank clearly Understood that it had selected fifteen institutions among those most likely to evolve, through mergers, consolidations, and TNB equity infusions, into the ECBs of the near future.^[121] And as the ADFU began its process of accrediting "participatory financial institutions" in the early 1980s, this was exactly what happened: of the eight accredited institutions, by 1986 only one was not a universal bank.^[122]

In other words, the ADFU accreditation process accelerated concentration in the financial sector and a buildup of the leading financial institutions. But there was a deeper significance to what the Bank acknowledged as reliance on Villanueva and his technocratic team as a means of "broadening . . . the Banks institution-building assistance to cover . . . commercial banks."^[123] Over each ADFU step, it must be recalled, the Bank exercised control and veto power ("not necessarily forever," explained Villanueva, "but at least for the first year or two, just to help us get the feel of things").^[124]

Not only had the Bank and the Fund set the Philippine universal-banking reforms into motion, but also, through the ADFU, the World Bank hoped to shape the growth of the universal banks.

There was still another step in the apex loan disbursement. Under the coverage of this World Bank loan, the ADFU—and the World Bank behind it—extended into the industrial sector. Here, ADFU operations took over certain traits of the Banks traditional loans to development finance companies. Once accredited by the ADFU, the "participatory financial institutions" would select industrial enterprises with projects deemed worthy of the apex loan money, primarily to finance the foreign-exchange cost of improving plants and equipment.^[125]

Although Villanueva emphasized that the definition of worthwhile projects was open-ended and "a matter of ADFU discretion," there were definite bounds.^[126] Indeed, only "export-oriented" and "labor-intensive" industries with total assets between P15 and P50 million (then $2 to $6.7 million) could send their project proposals to the participatory financial institutions for consideration.^[127] The World Bank publicly claimed that such a range covered medium- and large-scale industries, and a scrutiny of the then top 1,000 Philippine corporations revealed about 550 eligible firms in the 300-to-900 range.^[128] As many of the top 300 had foreign equity participation and experienced little difficulty in raising loans, the upshot of these eligibility requirements was to buttress large (but not the very largest) nontraditional exporters. The Bank estimated that the apex loan, if lent in full, could be stretched to assist some 170 such labor-intensive, export-oriented industries in their "establishment, expansion or rationalization."^[129]

"The export-oriented and labor-intensive guidelines . . . are the same guidelines that have been used by the World Bank in the past," noted Villanueva's assistant proudly.^[130] That was not fortuitous—these specific guidelines and priorities were agreed upon during the loan negotiations.^[131] As the Banks final report and recommendation on the apex loan emphasized, the ADFU would "closely monitor" the disbursement to ensure that funded projects furthered the government's "industrial policy . . . of encouraging industries which have an inherent comparative advantage and need minimum protection . . . or can compete effectively in the export market."^[132]

"The Apex loan," boasted a Philippine newspaper in mid-1981, just

prior to the signing of the loan, "is in line with a new World Bank concept, and the Philippines has been chosen as the most suitable country for the demonstration of the concept in Asia."^[133] All indications were that by World Bank standards it was to go down as a successful demonstration. The SAL and apex loam were to become self-reinforcing. Between them, they bestowed on the Bank and the Fund astonishingly broad leverage to build, reshape, and buttress Philippine economic institutions.

Beyond the Apex Loan

The World Bank had longer-term visions for the ADFU; the $150 million was only a beginning, merely seed money. When the loan agreement between the Philippine government and the World Bank was sealed, the ADFU was given control not only over the Banks $150 million but also over a $100 million "co-financing" fund to be supplied by transnational banks for the same apex operations.^[134] Co-financing with TNBs was a 1974 innovation by the World Bank aimed at increasing its reach and—at no cost to itself—the funds available for its projects.

Such channeling of TNB loans to augment specific World Bank lending had been a rarity during the 1970s. But the opportunity to benefit from the World Banks nearly flawless default record and its expanding economic role through its nonproject lending changed that: co-financing operations increased from one $55 million loan with just one TNB in 1975, to an average $200 million a year through the rest of that decade, to $1.8 billion with twenty TNBs by 1980.^[135]

Recognizing that its co-financing arrangements still covered only a small, albeit growing, percentage of TNB lending to LDCs, the World Bank was now moving to use its policy-based loam to further extend its collaboration with TNBs—especially in what the Bank called the "higher-income" LDCs.^[136] The Bank viewed its co-financing arrangements as ideal for the thirty-odd industrializing (and more debt-ridden) LDCs. Included were not only the seven NICs but also the next group of would-be NICs being groomed by the Bank and the Fund to take over as labor-intensive locations for TNCs' global production lines.

Moreover, to facilitate the shifting international division of labor, the World Bank steered its TNB co-financing into export-related sectors of these countries. For the Philippines, therefore, the Bank in 1980 pin-

pointed financial and industrial restructuring as top among the "particularly appropriate vehicles for co-financing," the amount of which "would increase significantly in the next several years."^[137] Thus was born the apex loans companion TNB loan.

In the case of the apex loan, co-financing not only placed $100 million in TNB lending under the World Bank "umbrella," but it also amplified—indeed, nearly doubled in monetary terms—the ADFU domain. As such, it was a move not warmly received by Licaros's Central Bank during the months of policy dialogue.

The altercation over whether the apex loan would include a co-financing component was one of the rare debates that could be followed by reading between the lines of Manila's newspapers. In November 1980, the media announced (under the attention-grabbing headline of "WB Plan Spurned") that although the World Bank "wants [the proposed apex loan] to be funded through a co-financing arrangement," Licaros's Central Bank was not "in favor of raising [the then-discussed] $50 million counterpart."^[138] By the end of that year, Licaros's oppositionist stance was reported to have hardened further. The central Bank, relayed the newspaper reports, "does not intend to increase" the ADFU loan fund by $50 million in co-financing, but "will make do with the proposed loan" of $150 million.^[139]

Making do, however, tamed out not to be an option. As Licaros recollected events, sometime before he vacated office (just weeks after these newspaper reports depicted his firm opposition), he finally acquiesced to co-financing upon realizing that the "World Bank people were dead set on this matter."^[140] With Laya as governor, the World Bank easily increased the co-financing requirements, doubling the stakes from the original $50 million to $100 million. Even then, however, the Bank took no chances: an April 1981 confidential report revealed that co-financing had become one of the "special conditions" to be met before the apex loan was signed. Indeed, the central Bank had until July 31, 1981, to secure $100 million from TNBs for the apex project.^[141]

This requirement proved among the easiest to fill of the whole array of Bank and Fund conditions accompanying the SAL and apex loans. As World Business Weekly explained to its predominantly business audience, the $100 million appeal was answered rapidly and on extremely favorable terms from the Philippine government's perspective. This was, in large part, because co-financing with the World Bank "had a special attraction to

banks" because they "know the World Bank is a stickler for prompt repayment" of both principal and interest.^[142]

This—and an optional cross-default clause ensuring that the Bank would employ its "good offices" should repayment problems arise—was an important catalyst for the TNBs' largesse.^[143] A 1976 World Bank booklet on co-financing provides a somewhat more exhaustive picture of why a consortium of TNBs might so readily accept the Bank's Philippine proposition. Among the general advantages cited were the following:

The Bank, with the consent of the borrower, provides them [TNBs] with information on the country and the project. This aspect of the co-financing relationship is very important for private investors, who are usually not in a position to conduct as comprehensive an analysis of the projects for which they make loans. They also benefit from the regular Supervision of the project by the Bank's staff.

The World Bank assumes certain administrative responsibilities in respect of the private loan, such as assisting in its disbursement and acting as a channel for service payments by the borrower. . . .

Commercial banks also have investment quotas for the countries in which they do business. . .. Some of the bankers have expressed the view that co-financing arrangements with the World Bank might enable them to make some additional funds available to a country even where their lending quota for the country was virtually exhausted. Whatever the possibilities for some of the higher-income developing countries to tap the longer-term, private institutional market in the United States, they are likely to be greatly enhanced if the private loans are arranged on a co-financing basis with the World Bank.^[144]

Co-financing was also a way to set the stage for a growing proportion of Philippine borrowings from TNBs to be funneled through the ADFU. According to Villanueva's assistant, the ADFU expected to be the recipient of "higher and higher amounts of World Bank money after the first two years,"^[145] a point reinforced in Bank and ADFU documents that made reference to apex loans rather than to a single apex loan.^[146] Beyond the Bank loans, disclosed Governor Licaros, "the World Bank wanted part, if not all, of our [foreign] commercial loan borrowing to be channeled through the ADFU."^[147]

Licaros elucidated his objections to the proposal:

I did not agree to this, because the ADFU will be controlled by World Bank policies and reviewed by the World Bank. . .. My thinking is that the more money the World Bank channels to the Philippines through ADFU, the better. And if those World Bank loans involve co-financing, that too can go through

ADFU. But no more. . .. Having all our [international] commercial borrowing go through ADFU as a general rule would subvert approval of all our borrowing to World Bank conditions and evaluations . . . but I wouldn't be surprised if Governor Laya thinks differently.^[148]

Less than three months after Licaros's dismissal, his intuition was borne out by an April 7, 1981, World Bank staff appraisal report. In assessing whether or not the Philippine government had adequately implemented the array of financial reforms on which subsequent approval of the apex loan hinged, the report noted:

The guidelines approved by the Monetary Board were generally satisfactory but some modifications were necessary to bring them in line with the basic philosophy of the proposed Bank financing, as are some additions, to make them more comprehensive. First, instead of being restricted to administering foreign exchange funds obtained from the Bank and ADB [Asian Development Bank], ADFU should have the capability of mobilizing and administering funds raised from other sources including foreign commercial banks. This is needed not only for raising the overall resources required for the project [i.e., for co-financing], . . . but also for the long-term development of ADFU. . .. The Central Bank agreed to incorporate the necessary amendments in the operating policy guidelines and has since obtained Monetary Board's approval to the revised guidelines.^[149]

Before the month of April drew to a close, precisely such expanded authority for fund-raising operations was bestowed on the ADFU by the Philippine government.^[150]

When earlier that same month World Bank staff drew up a statement delineating the ADFU's "operating policy guidelines," there was no pretension that the apex loan stood as the ADFU's main mission. At the top of the list of the ADFU's "major functions" came the much broader role of administering "financial resources provided/loaned to the Central Bank by international lending agencies and other sources . . . for financing the medium- and long-term needs of the Philippine industrial sector, all in accordance with national economic priorities."^[151] This, explained the Bank elsewhere, "should improve the Central Banks institutional capacity as an onlender of funds for development purposes."^[152] It was as Licaros had feared.

The World Banks ADFU venture arrived none too soon for TNB lending to the Philippines. By 1981, as Philippine export growth dwindled,

external debt spiraled, and a spate of bankruptcies shook the industrial sector, international bankers saw hazards ahead.^[153] "In general, but especially in times like these now," explained an IMF official with special reference to the Philippine scenario, "the more influence the Fund or Bank . . . has on an economy's development path and . . . on making sure money is used rationally . . . to economically viable end uses, the better it is for other foreign lenders and investors."^[154]

International bankers seemed only too happy to accept a new structure whereby the majority of their loans would be channeled through a transnationalist-controlled, domestic institution operating on World Bank specifications and under World Bank oversight. From their perspective, such a setup greatly enhanced the chances of repayment. And as far as the World Bank and the IMF were concerned, this latest attempt at institution-building opened new vistas, for with it came a guaranteed structure for funneling loans, to the maximum extent possible, into export-oriented industrialization. If co-financing had, in the Banks words, "prompted more efficient and economic use of the total external resources available," how much more effective would the ADFU be in ensuring the Philippines' strict adherence to Bank and Fund priorities.^[155]

Another indication that the World Bank had built the ADFU with an eye to extending the Banks and Funds domestic control came in early 1981, months before the apex loan agreement was sealed. The official story was as follows: the January 1981 revelations of fugitive businessman Dewey Dee's huge debt default generated severe apprehensions among Philippine industrial creditors. Fearing that Dewey Dee was but a symptom of a deeper economic malaise, most local and international lenders halted short-term lending, and some began recalling past loans, leaving Philippine industries in a potentially deadly credit crunch. To "keep the whole economy from crumbling until the Dewey Dee mess was sorted out,"^[156] the Philippine government threw together a $650 million (P5 billion) "industrial finance fund" (more commonly referred to in Manila as a "rescue troubled companies fund"). The government office slated to administer the rescue operation was none other than the World Banks spinoff, Villanueva's ADFU.^[157]

Placing the blame on Dewey Dee's shoulders was easy, but it was not quite the whole story. A year and a half before the Dee default broke into the headlines, Bank and Philippine government officials had agreed that

precisely such an "assistance program" (above and beyond the other SAL-related "rationalization/rehabilitation programs") might well have to be initiated for companies in the industrial sectors hardest hit by the "tariff reduction program."^[158] Dee's textile sector would certainly have been high on the list. In other words, although Dee's departure sharpened the crisis, it was not the root cause. Salient among the causes of the ensuing credit squeeze were the strict, IMF-imposed restrictions on the growth of domestic credit and money supply, which exacerbated the tightness of short-term funds in late 1980.^[159]

But the Dee caper provided the ideal rationale to broaden the ADFU focus. The ADFU described its task in administering the industrial finance fund in words that seemed to come out of the apex loan documents: "The fund is aimed to be used to provide basic structural changes in the financial make-up of a qualified company accompanied by required changes in the management, ownership and organizational structures of the enterprise."^[160]

Not just any enterprise could avail itself of the largesse. On this point, the industrial finance fund's statement of policy left no ambiguity: only "industries and specific enterprises" playing "a critical and crucial role in the national economy"—gauged by the "economic importance of the industry" and, in turn, the "relative importance of the enterprise to the industry"—were eligible.^[161] Indeed, Governor Laya himself whittled the list down to a choice "13 companies/Groups" to be aided.^[162] "An important criterion for assistance," explained a government official, "was, of course, the company's actual or potential foreign-exchange earnings. This way we can use the fund to further our other development goals."^[163]

The ADFU's reach through the industrial finance fund extended beyond the industrial sector to the newly created universal banks. As with the apex loan, industrial rationalization was undertaken by the ADFU through what was basically a subset of its accredited financial institutions—either potential or actual universal banks, or the major institutional shareholders of such banks. In turn, these financial conduits were encouraged to go about their task by purchasing equity in the troubled companies.^[164]

Indeed, Villanueva and his staff put their World Bank training to good use in resuscitating and reshaping a select group of major transnationalist Filipino-owned conglomerates with international business ties. As head-

lines of international magazine articles noted, the rescue operation was a classic case of "A Little Help for Some Friends," a "Helping Hand" for the "Sweetheart" firms.^[165]

In the process, those who had come to be known in the Philippines as Marcos's cronies whose companies had grown rich and powerful Over the previous decade more as a result of favored positions than of business acumen were (at least for the moment) to be saved from a fate the ADFU admitted was "eventual insolvency and bankruptcy," as long as they put up with the requisite remolding.^[166] It was necessarily a painful process for the cronies, but the adjustments were certainly preferable to the uncushioned bankruptcies plaguing the smaller, unfavored nationalist entrepreneurs.

Once again, the World Bank was playing a critical role in exacerbating the concentration of economic and political power in the Philippines. But this time, the Bank perfected a way to work from afar through a domestic institutional substitute. Creation of the ADFU allowed the Bank to continue its and the Fund's program for restructuring the Philippine economy toward export-oriented industrialization while maintaining the illusion of unsoiled hands.