9
Export-Oriented Industrialization: An Assessment

From the early 1960s to the mid-1970s, the Philippine economy could have been characterized as an open dual economy, with a large rural sector engaged in traditional agriculture and a "modern" export-oriented sector based on agricultural exports (coconuts, sugar, bananas) and extractive industries (copper, logs). From the mid-1970s onward, the World Bank and the IMF contributed—through loans, training, institution-building, and their close tics to TNCs and TNBs—to creating a far more sophisticated dual economy, with the modern sector consisting of both an agricultural/extractive component and an equally important light-manufacturing component.

This chapter speaks to the wisdom of such a transformation. Based on their knowledge of domestic and international economic realities, did the World Bank, the IMF, and Philippine transnationalists in the late 1970s and early 1980s push aggregate economic policies that were likely to foster development in either the short or long run?

Events during that period suggest that this question should be grappled with on two levels:

1. Did the Bank and Fund adequately take into consideration the dangers of a development strategy based on export-led growth in an uncertain world market, one in which global trade began a steady slide toward stagnation after 19797 This must be addressed for the Philippines in a context where the Bank and the Fund were also promoting similar development paths for the other twenty to thirty would-be NICs, further heightening competition for export markets.

2. If the "modern sector" in a dual economy generates high value added and if a substantial proportion of that value added is channeled toward stimulating domestic economic activity, then the entire economy can be pulled forward. If value added and linkages to the domestic economy are low, then the "modern sector" becomes an enclave with a negligible impact on development. It is thus crucial to ask if export-oriented industrialization based on light manufactures in the Philippines was creating little more than a modern export enclave.

The analysis presented in this chapter is based not on hindsight but on knowledge available to the Bank, the Fund, and Philippine technocrats at the time of the industrial and financial restructuring (i.e., through mid-1982). Only in the final chapter will an assessment of Bank and Fund strategies beyond the time of Benigno Aquino and Ferdinand Marcos be offered.

Stagnation on Global Markets

An expanding global economy is a necessary prerequisite for successful export-oriented industrialization. If nontraditional exports were to be the so-called engine of growth for the rest of the Philippine economy, world trade that is, global demand for these products had to grow each year. There was no way to escape this logic in the aggregate.

Yet, at the time when the Philippines was induced to embark fully on its nontraditional-export path, these necessary conditions were decidedly absent. Over the decade from 1963 to 1973, the volume of world exports rose at a rapid average rate of 8.5 percent annually.^[1] By the years from 1973 to 1980 a deceleration was already evident; the average annual expansion slowed to 4 percent.^[2] At the end of that period, the rate faltered even more, advancing only 1 percent in 1980 and stagnating completely in 1981.^[3] Moreover, 1981 had the dubious distinction of being the first year since

1958 to witness an actual decrease of world trade in current dollar terms, a shrinkage of 1 percent.^[4]

Behind these global trade statistics lurked the industrial market: economies' domestic stagnation, or what the World Bank in 1979 termed the industrialized countries' "undistinguished performance of the present decade."^[5] According to IMF figures, the four years from 1976 to 1979 saw real GNP of industrial countries growing at a tolerable average yearly rate of 4 percent.^[6] By 1980, OECD growth crawled ahead at only 1.25 percent; the next year again at only 1.25 percent.^[7] By mid-1982, OECD revised its projections for its member countries' 1982 average growth rate down from a late-1981 forecast of 1.25 percent to 0.3 percent, and warned that stagnation would continue well into the following year.^[8] Likewise, the European Economic Community (EEC) executive commission shaved its prognosis of an average 1.5 percent 1982 annual growth to 0.5 percent.^[9]

Another pitfall facing LDCs' export-oriented industrialization in the late 1970s and early 1980s was that, according to the GATT, fully half of global trade had fallen under quantitative restrictions of some sort.^[10] At the same time, despite official encomiums to "free trade," OECD countries barricaded their economies behind what even U.S. President Reagan's Council of Economic Advisers admitted were "neo-mercantile" policies.^[11]

These defensive machinations to moderate the recessionary bite at home constituted what has been baptized the "new protectionism," which witnessed a proliferation of American, EEC, and Japanese trade barriers, notably quotas on LDC-manufactured exports. "New" referred to the widespread extension beyond tariff barriers, which had been regulated by the GATT since the Second World War, to a dazzling array of nontariff barriers.^[12] As the World Bank and the IMF imposed "free trade" policies on LDCs, the major voting blocs within those institutions retreated from any semblance of "free trade" at home. The retreat became inextricably meshed with the crisis: as OECD growth slackened, quotas were tightened. And the more successful the particular LDC export category, the more restrictive the quota became. With the new protectionism, "we are facing a situation as potentially dangerous as the 1930s," an OECD official said in 1981.^[13]

By World Bank economists' own calculations in 1979, the most dangerous of the new protectionist barriers were in the sectors of apparel, textiles, and footwear.^[14] Yet it was precisely these sectors—along with furniture,

wood products, and electronics that they and the Fund had pinpointed to head the Philippine engine of growth. With the highly restrictive allotments of the Multi-Fiber Arrangement (MFA), textiles and apparel became perhaps the most heavily controlled sectors in international trade.^[15] Trade statistics showed the ominous results: over the early years of the 1980s, LDCs' share of textile and apparel exports began to shrink.^[16]

Likewise, talk of a multi-footwear agreement augured poorly for LDC footwear exports.^[17] The outlook for Philippine furniture and wood products was not much brighter: a 1981 U.S. exclusion of Philippine rattan furniture (and parts) exports from the generalized system of preferences (GSP) seemed a precursor of restrictions to come.^[18] Thus, for the Philippines, a proliferation of tariff and nontariff barriers on imports into developed countries seriously dampened the prospects of expanding its nontraditional exports.^[19]

Did the Bank and the Fund adequately address the impact of global economic stagnation on their policy directives? It is clear that, as early as 1974, the Bank and the Fund understood certain pitfalls that the 1970s and 1980s might hold for export-oriented industrialization in general and especially for the Philippine endeavor. That year Bank President McNamara had noted: "The adverse effect on the developing countries of . . . a reduction in economic growth in their major markets would be great. There is a strong—almost one-to-one—relationship between changes in the growth rate of OECD countries and that of oil importing nations."^[20] This was especially so, the Bank acknowledged two years later, in the Philippines, "with international trade the equivalent of almost half of GNP."^[21] As to the new protectionism, the World Bank clocked it from 1976.^[22]

Once the SAL and apex policy dialogues had begun, the Bank and the Fund continued the occasional admissions (both publicly and confidentially) of the incongruity between their favored strategy and prevailing conditions. SAL mission chief de Vries, his Philippine business accomplished, professed that "a genuine concern exists that export growth may be frustrated by protectionism and economic constraints in the industrial countries."^[23] And the head of the IMF delegation to the 1979 Philippine Consultative Group meeting commented that in "the period ahead, the emergence of recessionary tendencies and growing protectionism in the industrial countries will make the [Philippines'] adjustment problem even more difficult."^[24]

As is highlighted throughout this chapter, however, Bank and Fund officials planning paths for LDC development continually made assumptions that ignored such pressing problems. Their models, grounded in free trade and comparative advantage, depended on the absence of such conditions. Instead they opted for what they termed "one set of reasonable assumptions" concerning the growth of world trade—without explaining what might confer legitimacy on those assumptions.^[25] The set of "reasonable" assumptions about trade and protectionism that underpinned the Banks and the Fund's Philippine structural adjustment reports was some permutation of the following: industrial countries were to grow 4 percent per annum in the 1980s; "worldwide economic recovery" stood on the horizon; there were to be "no major setbacks in major markets."^[26]

Most disturbing was the often wide chasm between these assumptions and the private assessments of Bank and Fund officials. Although John Power, a member of the World Bank SAL appraisal mission, privately admitted his personal "doubts" regarding the successful outcome of Philippine export-oriented industrialization, given the gravity of the "world situation," his University of the Philippines background book on industrial restructuring refused to give credence to any such misgivings.^[27] In the same sort of contradiction, a 1979 assessment by two Bank economists acknowledged already existing "severe import restrictions" imposed by certain key developed countries and increasingly smaller quotas allocated for up-and-coming LDC manufactures exporters,^[28] but a later Bank report argued that there remained "considerable opportunities" for Philippine nontraditional exports.^[29]

What the effects of this unsubstantiated optimism might be on the Philippine economy was a question never seriously entertained by the Bank or the Fund. "What else could we do?" was the usual response. In other words, if the economic models did not fit reality, the solution was to filter transnationalist-colored perceptions of reality through the models, not to change the models. Their prescribed development path was transformed into a kind of dogma: "the more hostile the external environment, the more urgent" the need for restructuring.^[30] A Bank director, for example, took the floor at the Executive Board's final meeting on the SAL to question the management's scenario of Philippine "dynamic" export-led growth in light of "an adverse environment . . . [including] lower than pro-

jected growth rates in industrial countries and increased protectionism."^[31] Disguised as quasi-scientific forecasting, the response offered by the unnamed chairman of the gathering epitomized the unquestioning attitude: "If the environment turned out to be more adverse than projected, then the ultimate benefits under the adjustment program would be reduced, but the nature of the adjustment needed would not be changed."^[32] But the proof of this was far from obvious, and the conjecture remained unsubstantiated.

It was becoming increasingly clear that the World Bank (and the IMF) had no vision of development in a world economy of vastly reduced growth. That was, in large part, because they equated growth with development. To them, development did not mean providing adequate food, clean water, clothing, housing—in short, offering a standard of living consistent with human dignity. Those were secondary concerns, which would be met through growth. Development meant growth. In the Banks and the Funds view, no growth meant no development, and hence could not be seriously considered.

The Banks 1981 World Development Report (as in previous editions) did formally present a quantitative global model incorporating "slower industrial [country] growth" and "increased protectionism." Yet at best the exercise was a questionable one; at worst, it was deceptive. Although admittedly lower than either the accompanying "best case" scenario or previous World Development Report estimates, the "low case" scenario for 1980 to 1985 still promised a 2.6 percent annual GDP growth rate for industrial countries and a 3.5 percent yearly increase in world trade volume.

Given the unimpressive performance in GDP and trade arenas in 1980 and 1981, as well as the virtually unchanged outlook by mid-1982, the Banks "low case" must be seen as another excessively optimistic scenario. This much was practically admitted in the World Development Report forecasting attempts: "Still lower growth rates arc not considered here, not only because they are thought unlikely, but also because they would be associated with structural changes in trade and other relations between countries that could not be captured in the present analytical framework."^[33]

In any event, the "low case" projections were largely ignored in specific country plans and projections. When incorporating global growth estimates in aggregate economic work for various LDCs, the Bank used

figures closer to "high case" yields. This was done without any caveat explaining that an alternate set of somewhat less optimistic Bank forecasts existed.^[34]

With Bank and Fund officials failing to assess adequately the negative repercussions of global developments on national policy, it should come as little surprise that transnationalist Philippine technocrats generally toed a similar line. The sentiments of many were summed up in Ortaliz's comment: "Bank friends are very optimistic about our future in nontraditional exports, so why shouldn't we be? They certainly have a better, more knowledgeable grasp of the world economic outlook than we tucked away here in Manila can ever hope to [have]."^[35] Similarly, as the global economy worsened, transnationalists in the Philippine government joined their Bank and Fund colleagues in digging their heels in deeper in defense of the strategy. Former Planning Minister Sicat put it well: "If you're sick, you don't postpone going to the doctor when the weather is bad . . . or you might be sicker when the weather is fair."^[36]

That attitude toward global events would merit objections even if the Philippines had been the only country pursuing this export-led policy. It was not. The Philippines may have been a guinea pig in terms of early Bank structural adjustment lending, but the Bank never viewed its work in the Philippines during the late 1970s to early 1980s as an isolated instance. Quite the contrary—if anything, it was a model. By mid-1982, Bank and Fund officials were already fostering and working with transnationalist factions in many of the other would-be NICs, pushing their economies onto paths parallel to that of the Philippines.

Who were these countries, these thirty-odd LDCs that, like the Philippines, had by the early 1980s begun the transformation toward light-manufacturing exports in hopes of moving from the periphery into the semi-periphery? Table 8 provides an illustrative set of these thirty-one second-tier LDCs. As Tables 9 and 10 reveal, it was largely these would-be NICs who had received the big loans and concomitant amplified attention from the Bank and/or the Fund since the mid-1970s. Indeed, of the twenty LDCs who had received IMF extended fund facilities of over $50 million as of mid-1982, twelve fell into the would-be NICs grouping and two were NICs. Of the ten LDCs who had been rewarded with a SAL of $50 million or more as of mid-1982, eight were would-be NICs and one was a NIC. The remaining country, Jamaica, although not formally a would-be

NIC, was certainly moving in that direction under transnationalist Prime Minister Edward Seaga's rule (since 1980) and heavy Bank and Fund involvement.

Just as the IMF had its model of austerity, so too the World Bank pushed its own brand of structural adjustment on these middle-income countries. SALs were designed to move the balance of payments from the red into the black find thus focused exclusively on trade-related sectors. The Banks SALs to Kenya, Turkey, Senegal, the Ivory Coast, Thailand, and Pakistan—and its Philippine SAL—all concentrated on improving export incentives and performance.^[37]

Take the case of Thailand: in mid-1979, a central bank official had vowed that the Bank's suggested export-oriented industrialization policies, contained in a World Bank report dubbed the Balassa Report by the Thais, would "never be listened to or followed by top people here."^[38] But a few years and a SAL later, that country had implemented a set of aggregate economic policy changes almost identical to those of the Philippines.^[39] Just as Cesar Virata and his transnationalist team had strengthened (and, in turn, been strengthened by) the Bank's powerful presence, so too Pakistan's Mahbub ul-Haq, Peru's "Dynamo" team led by Manuel Ulloa, Turkey's Turgut Ozal, and other transnationalists finessed the transformation of Bank SAL advice into actual policies. In still other cases, would-be NICs—notably Chile and Indonesia received the Bank blueprint for an export-oriented development path, which they followed, without a formal SAL.^[40]

In other words, the Bank and the Fund, using weapons similar to those deployed in the Philippine experiment, were helping to create the Philippines' competitors in export-oriented industrialization.^[41] The result of all this was a battle to offer cheaper, more docile labor forces and more alluring incentives to attract TNC assembly lines away from the other countries. As Teodora Peña, then Export Processing Zone administrator, noted in 1980, "We are in a competitive situation. We are competing with all the countries around for investment."^[42] Sri Lanka's 1981 appeal to "expansion-minded manufacturers" said it well: "Sri Lanka challenges you to match the advantages of its Free Trade Zone, against those being offered elsewhere. . .. Sri Lanka has the lowest labor rates in Asia."^[43] As variations on that theme were issued by one LDC after another, TNCs found themselves in choice positions from which to bargain the most lucrative investment or subcontracting deals.

(table continued on next page)

The competition was decidedly fiercer in times of stagnant or shrinking global markets, when one country could export only at another's expense. The most that could be hoped for, Philippine technocrats conceded by the early 1980s, was to use a mixture of "offensive and defensive" battle plans to forestall TNC departures.^[44] (They said this even as they put the finishing touches on the financial and industrial restructuring.) According to Deputy Governor Bince, "We've got to always be careful now, . . . always watching, on the lookout for other [developing] nations' next moves. . .. And then we've got to make sure we meet their offer and better it."^[45]

In the Philippines, as elsewhere, bettering that offer and thereby main-

(table continued from previous page)

taining the so-called comparative advantage necessitated labor repression and exploitation; a police state facilitated success. As one Manila-based TNC executive commented quite matter-of-factly:

We tell the [Philippine] government: you've got to clamp down [on labor rights and wages]. We need to be assured a stable planning horizon, you know. . .. Or we threaten to move elsewhere. And we'll do just that. There's Sri Lanka . . . [and] now China too . . . and there'll be others after those.^[46]

Bank and Fund documents sought to downplay the problems associated with the growing competition among NICs and would-be NICs. In a

1979 assessment of LDCs' manufacturing export potential, two top Bank economists forecast that "the increasing number of successful competitors may make it increasingly difficult for newcomers to get established" and that the success of a "few" would leave "too little" opportunities for the rest.^[47] Regarding the Philippines particularly, McNamara's final report on the SAL acknowledged that "the benefits that will result from the strength-

ened export incentives will depend very much upon . . . the degree of competition from other developing countries."^[48]

However, this concern was never taken very seriously, became it was the Bank, in collaboration with the Fund, that had set this chain of competition in motion. At one moment, the Philippines was counseled to take advantage of the fact that its "wages had declined significantly relative to those in competing . . . countries," notably South Korea and Hong Kong.^[49] Almost simultaneously, the Bank helped steer Indonesia onto a parallel course, advising that "incentives for firms to locate there rather than in some other Southeast Asian country . . . must be provided."^[50] In the meantime, Sri Lanka received a $20 million World Bank loan to establish a new offshore production platform for apparel subcontracting.^[51] The entrance of the People's Republic of China into the competition was aided by the Bank, with the encouraging assessment that "the outlook is promising, given the abundance of skilled low-wage labor."^[52] Thailand too entered the arena, followed by some of the Caribbean Basin countries and others.^[53]

The Philippines faced additional competition from the nontraditional-manufactures exporters of an earlier era: the Asian NICs of South Korea, Taiwan, Hong Kong, and Singapore. As a United Nations economist explained in 1981, these NICs were not jumping fully from textiles, apparel, and electronics assembly into higher stages of industrialization; their economies "remain firmly rooted in textiles and apparel (accounting for just under a third of South Korea's exports and just over a third of Hong Kong's)."^[54] When these "miracle economies" found it difficult to penetrate viciously competitive high-technology export markets, they retreated partially back into their sanctuaries of proven expertise.^[55]

Yet even with this flexibility, the Asian NICs were finding it hard to match the stunning average growth rates of 8 to 10 percent they had experienced in the 1970s. In 1982, for example, as world trade stagnated, the NICs found themselves fighting what Business Week termed a "double-barreled attack": as they tried to step up into high-tech and more capital-intensive exports, OECD protectionism confronted them; if they fell back into light-manufacturing exports, they had to compete with the would-be NICs' cheaper labor.^[56] In this setting, rivalry among the NICs also grew.

Thus, one set of objections to the Philippine shift to light manufactures includes the timing of and competitive conditions surrounding the shift, along with the lack of serious consideration of the timing question by the relevant national and international officials. Another set of objections concerns the wisdom of the strategy even under the best of external conditions.

A Modern Enclave

In assessing whether the leading sector in an open dual economy induces development or becomes an "enclave," Nobel Prize-winning economist Arthur Lewis proposed two criteria: (1) what proportion of the value of exports is domestic value added? and (2) what proportion of domestic value added is spent on buying domestic goods?^[57]

Before the late 1970s shift toward light manufactures, several economists and Philippines specialists characterized the island nation as an open dual economy with a land surplus, as opposed to the traditional labor surplus studied by Lewis.^[58] The late 1970s and early 1980s shift can be said to have diversified the "leading" or "modern" sector to encompass both agricultural/extractive exports and the new nontraditional light manufactures.

Using Lewis's criteria, it is possible to assess whether the shift facilitated genuine growth and development, as argued by the Bank and the Fund, or engendered enclaves disarticulated from, and with negligible positive impact on, the economy as a whole.

First, the Bank, Fund, and Philippine transnationalist version: in confidential documents as well as public statements, the Bank and the Fund left no doubt as to their firm belief that export-oriented industrialization represented the sole strategy able to bring sustained economic growth to the Philippines (and, it should be added, to address Philippine poverty).^[59] Most Bank and Fund documents concentrated on disaggregated technical concerns, shifting to this larger picture only in sweeping—often undocumented—phrases.

In this fashion, the Bank's 1976 five-year Philippine lending plan explained that the outlined export-oriented industrialization strategy "would provide sufficient food for the expanding population, insure a minimum increase in the standard of living and provide the number of jobs necessary to prevent an increase in unemployment" as opposed to "the policies of the 1960s, which if continued would have made it impossible to maintain the inomentum of economic growth."^[60] World Bank Vice-President Shahid Husain reiterated this stance to the 1978 Philippine Consultative Group meeting: "The Philippines' export-oriented growth strategy provides an opportunity for both more rapid and more equitable growth than does import substitution."^[61]

In short, echoed Industry Minister Roberto Ongpin, export trade was "the lifeblood of the economy."^[62] A late-1970s advertisement for the Bataan Export Processing Zone brandished the vision shared by the Bank, the Fund, and Philippine technocrats as incontrovertible fact:

Exports spur development. New jobs are created. Foreign earnings are generated. Trade relations with other countries are forged. And the Philippines is prominently placed in the international trade map.^[63]

But data from the Philippines supports not this prognosis but, rather, Arthur Lewis's criteria for enclaves. First, the issue of value added. A prominent feature of the Philippines' light-manufactures-export—oriented industrialization was the gaping disparity between the gross value of industrial export earnings and the value added to the product in the LDC. When brandishing the nontraditional-export strategy's triumphs, the Philippine

government (like the Bank and the Fund before it) naturally focused on the far higher of the two figures, the gross value. An Export Processing Zone Authority advertisement, for example, flaunted yearly gross exports of $74 million in 1978 as definite proof of the Bataan EPZ's vast "impact to the economy."^[64] Government officials, by and large, were unwilling to concede that this total export revenue concept was delusory as a gauge of the Philippines' share.^[65] But it was. Only when stripped of import components' costs does that figure approach the "value added" by the domestic side of production.

With the Philippines importing cartons for its banana exports, cans for some food exports, and a wide assortment of machinery and component parts for its phase of apparel and electronic global assembly lines, value added in most Philippine industries was quite low. Although the public version of the Banks economic memorandum to the 1979 Consultative Group meeting admitted the aggregate value-added statistic for Philippine nontraditional exports to be "at best only 40 percent," its confidential apex loan staff appraisal report revealed the precise Bank calculation to be a figure of 25 percent.^[66] In other words, for every dollar of nontraditional-export earnings, twenty-five cents stayed in the Philippines, with three times that amount siphoned off by import payments.

The individual industrial sectors of course differed in the amount of value added. According to a Manila-based consumers' association, apparel exports' value added, for example, was 44 percent in 1979.^[67] As calculated by a Philippine economic research group, the figure remained at 44 percent the following year.^[68] World Bank statistics concurred: "Some 60 percent of the value of garment exports lies in imported fabric," its 1979 SAL report alleged.^[69]

The Philippine electronics industry was given a wider range in value-added estimates, but no matter which were closest to reality, the domestic gains were far less than in apparel. Using World Bank figures, the 1978 value added for electrical equipment and components overall (mainly integrated circuits) was only 13 percent.^[70] United Nations statistics for the narrower standard international trade classification (SITC) 729.3 (thermionic valves and tubes, transistors, etc.) disclosed a comparable 12 percent value added for electronics assembly in the Philippines in 1977.^[71] A United Nations report, however, incorporating 1977 U.S. Bureau of the Census data for U.S. electronics assembly in the Philippines, placed the figure at 32 per-

cent.^[72] But these numbers do not yet tell the full story of export-oriented industrialization. Inasmuch as a considerable percentage Of subcontracted goods flow between a parent TNC and a Philippine affiliate, repatriated earnings represent yet another leakage.^[73]

Low value added was a fact of life inherent in the Philippines' position in the new international division of labor. While the Bank described the rapid "growth in payments for raw materials and intermediate goods from $1.3 billion in 1976 to an estimated $2.3 billion in 1979" as "somewhat puzzling," its own explanation was clear. "One factor has been the rapid increase in imports of inputs such as textiles and electronics components for labor-intensive industries," the report continued.^[74]

Value added in the apparel industry could be increased through large-scale buildup of the textile sector, but the Multi-Fiber Arrangement offered incentives to the contrary. An Outward Processing Traffic clause granted subcontracted apparel (where cloth is imported and clothing exported) larger quotas in the EEC.^[75] And in the electronics industry as well, the overwhelming import reliance was "unlikely" to diminish, as the Bank itself acknowledged.^[76]

According to one of the few in-depth analyses of LDC electronics sub-contracting, the long-term outlook for the industry in LDCs was even bleaker. As this United Nations report detailed, the percent of value added in new LDC microprocessor production lines rose until 1973, but by 1977 value added in the newest LDC factories had already begun to fall. This was so even as the gross value of semiconductors re-exported to the United States soared tenfold from I970 to 1978.^[77] Of the seven LDCs studied, the Philippines was the last to be launched into silicon chip assembly. Entering on the downswing of the curve, value added in its factories was the lowest of all (see Table 11). In other words, since 1977 an increasing share of the value was being retained in the electronic TNCs' home countries. By the 1980s, the United Nations report emphasized, "as the complexity of circuitry increases, more value added is produced in the early wafer-fabrication stage, i.e., in the U.S., in Japan or in some locations in Western Europe. Furthermore, the more complex circuits require much more complex, computerized final testing, which again is usually done in OECD locations, particularly in the U.S. and Japan."^[78]

As the international manager of Motorola's semiconductor group explained to Business Week in 1982, it was not that electronics companies

were planning to pack up their Southeast Asian assembly lines (as some scholars contended);^[79] it was simply that "those countries will miss out on the growth."^[80]

In the process, the problems plaguing the Philippines' nontraditional exports' already low value added could only be aggravated. By United Nations calculations in the early 1980s, LDC semiconductor employment figures were almost universally "stagnating if not declining."^[81] Philippine women workers in 1980 were performing only one of the ten major operations of electronics production^[82] —a reality that belied conjectures that labor-intensive nontraditional exports would enable the Philippines to construct a vigorous, viable industrial base. The Bank's and the Fund's version of export-oriented industrialization was not engineered to leave much behind in the domestic economy in terms of value added, employment, technology, or capital base. Rather, it was creating a new enclave.

Lewis's other enclave criterion was the proportion of domestic value added that was spent on domestic goods. Theoretically, nontraditional-export endeavors were forged with an eye to enabling an LDC to amass substantial foreign exchange that could stimulate the rest of the domestic

economy. What was conveniently underplayed by Bank, Fund, and Philippine technocrats was the paradoxical reverse side of the coin: transforming a given LDC into an alluring location for TNC light-manufactures production required large outlays for modern infrastructure, much of which was imported. Peter Evans had earlier noted a similar trend in Brazil:

Trade balances are not a problem for the "real" periphery. During the period of classic dependence, Brazil's balance of trade was always favorable. . .. It is when a country begins to move from classic dependence to dependent development that the balance of trade becomes a problem. . . .

Dependent development is import intensive and cannot be otherwise.^[83]

In the Philippines, physical infrastructure for the Bataan EPZ alone cost an estimated $150 million in government funds to which should be added the nearby $2.1 billion Westinghouse nuclear power plant that was being constructed essentially to guarantee Bataan and Manila industries a power supply.^[84] And that was only one (admittedly the largest) of at least fifteen EPZs to which the government was then committed. Indeed, the bill for Philippine infrastructure over the decade of the 1980s was projected to reach a staggering $27 billion.^[85] This burden along with the weight of export-oriented industrialization's ponderous machinery, raw-materials, and intermediate-goods requirements promised to leave (and, indeed, was already leaving) the Philippines with an onerous inheritance: a massive foreign debt and its attendant balance-of-payments deficit.

By the late 1970s, Philippine debt was spiraling upward. Business International wrote in 1980 that the Philippines' "rate of growth of debt has consistently outpaced expansion of exports."^[86] In 1979, while the country's outstanding external debt grew by $1.8 billion, export earning (in gross, not value-added, terms) expanded by only $800 million, less than half the debt increase.^[87] In 1980, the current account deficit passed $2 billion, the approximate value of that year's nontraditional exports.^[88] Between 1980 and 1981, external debt soared nearly 20 percent, from $17.4 billion to $20.8 billion; export earnings in the meantime dropped 4.3 percent, from $4.65 billion to $4.45 billion, while the balance-of-payments deficit swelled nearly 50 percent.^[89] At the end of 1981, that Philippine external debt of $20.8 billion equaled more than half the year's gross domestic product, and the IMF, tacitly acknowledging that the Philippine debt bur-

den would outstrip earlier projections, raised the country's annual external debt ceiling over 70 percent from 1980 to 1981.^[90]

The Philippines' annual repayment commitments underwent similar revisions. During the heart of the policy dialogue in 1979, the Bank had forecast that the Philippine debt-service ratio would stabilize at 22 percent annually in the first half of the following decade.^[91] That was already above the Philippines' statutory 20 percent limit (and further beyond earlier projections of a 19 percent peak).^[92] According to a 1982 IMF assessment, however, the ratio (as calculated by the IMF) would leap to 28.4 percent by the end of that year and would "continue at high levels thereafter."^[93] By Morgan Guaranty estimates, in 1982 Philippine debt service, had it been paid in full, would have demanded an astounding 91 percent of earnings from goods-and-services exports, the highest percentage in all Asia.^[94]

What these statistics boiled down to was that by 1981 the Philippines had been forced into the no-win situation of taking out new loans simply to repay the old.^[95] But as one Bank analyst divulged, the Philippines' ability merely to hold its ground could not be taken for granted; meeting future debt payments was "possible but not probable."^[96] Concerning Arthur Lewis's criterion, domestic value added from manufactured-export earnings was largely being channeled into debt service, with only a small percentage buying domestic goods.

Again, the question should be posed as to the Bank's, the Fund's, and the Philippine technocrats' attitudes toward these developments. Confidential reports disclosed that these institutions understood the potential quagmire as early as 1976. In that year the Bank admitted that "failure to reduce the dependence on foreign loans would, in a few years, result in a serious balance of payments problem and economic dislocation."^[97] In 1978, another confidential assessment reiterated that the current account deficit "will have to be reduced in coming years . . . in the interest of prudent debt management."^[98] Two years later came still another admission: "Without balance of payments adjustment, growth would decelerate to 5 percent or less, thus dimming the prospects for poverty alleviation."^[99]

Yet the Bank and the Fund were the very institutions encouraging the Philippines and other potential light-manufactures-exporting LDCs to accelerate investments in energy and industrial infrastructure, with all their attendant debt commitments. In the case of China, for instance, the Bank suggested that the government swell its $3.4 billion outstanding debt in

1980 to as much as $79 billion by 1990 (in 1990 dollars) and onward to $214 billion by 1995.^[100] The Fund remained a bit more cautious overall on the question of LDC debt, but concurred that high debt was an "unavoidable" part of the Philippine plan.^[101]

One of Virata's staff offered an explanation: "Sure, we're up to our eyeballs in debt, but to 'take off' you have to spend."^[102] That was a "basic economic law," said the Central Bank's Zialcita, adding that some of his technocratic colleagues were willing to let borrowing soar exponentially and for an indefinite period.^[103] To paraphrase top Philippine technocrats, the dollar amount of external debt was irrelevant, for the loans were being channeled into productive export-oriented industrialization.^[104]

But the state of the Philippine economy told another story. Indeed, by the early 1980s, the problems of export-oriented industrialization were becoming too clear for even the Bank, the Fund, and the Philippine technocrats to avoid. "Actual events have deviated somewhat from . . . expectations," World Bank Vice-President Shahid Husain was forced to admit in late 1979 in his assessment of the Philippines' initial years of building a nontraditional-export nucleus.^[105] Or, as a confidential Bank report re-phrased it a year later, "expectations have been overtaken by recent events."^[106] Yet, even as "expectations" continued to be so "overtaken," the Bank and the Fund repeatedly instilled undue optimism in their new statistical forecasts, thereby camouflaging the fundamental weakness of their development strategy and the assumptions on which it was based.

Overall Performance

Thus the culmination of the structural adjustment loan, the financial-sector restructuring, and other Bank and Fund initiatives was to create a few large enclaves of light manufacturing for export. That the enclaves were not generating growth, much less development, was seen by the early 1980s even in two indicators which these institutions consider extremely important: GNP and export growth.

While the Philippine 1978-1982 five-year plan had originally called for an 8.0 percent GNP growth rate in 1980, Marcos and Economic Planning Minister Sicat debated at year-end whether the realized official rate was 5.5 or 4.7 percent.^[107] (To play it safe, Industry Minister Ongpin cited the lower as "an excellent growth rate.")^[108] As might be suspected, both figures were

inflated; independent analysts claimed a more realistic figure to be at best not quite half the initial goal—around 3.7 percent.^[109] But whichever of the above statistics is used, the Philippine growth rate for 1980 stood as the lowest of all Southeast Asian nations.^[110] Also in that year, apparel exports (the Philippines' leading nontraditional export of the 1970s) actually declined in volume, falling into second place behind semiconductors and electrical appliances.^[111]

If the Philippine government refused to divulge the extent of the disarray in 1980, it was even more circumspect concerning the state of the economy in 1981. A mid-cycle revision of the 1978-1982 five-year targets had set 6.3 percent as the goal, with 5.0 percent termed the "unfavorable scenario."^[112] It was, however, somewhat more unfavorable than that. Central Bank officials announced a preliminary estimate of 4.9 percent, later clipped to 4.0 percent.^[113] An IMF confidential document suggested 2.5 percent (a figure less than the population growth rate).^[114] At the IMF's mark, the performance was worse than any other Asian market economy except Papua New Guinea, but a number of commercial banks put the correct fig-are even lower.^[115]

That same year, Philippine exports fell in both value and volume.^[116] Central Bank figures disclosed a 1.7 percent drop in value (from $5.79 billion to $5.70 billion), and Chemical Bank recorded a 2 percent drop.^[117] Those aggregate figures hid even more ominous trends. Nontraditional exports' growth slowed to half of the previous year's percentage increase.^[118]

It was not simply two bad years; the situation looked even grimmer toward the end of 1982. Indeed, at the close of this one more year during which exports tumbled in value and volume, the Philippine government itself was holding out for only 2.4 percent GNP growth.^[119]

Looking back, it is remarkable to note in a 1978 World Bank in-house report the forecast for the Philippines that "the desirable annual growth rates . . . for the next decade [the 1980s] may well exceed 8 percent."^[120] Just four years later, many top government officials could only predict "things getting a lot worse before they get better."^[121]

Add to these figures the escalating bankruptcies of national entrepreneurs, mass layoffs of industrial workers, and the grinding, degrading poverty that permeated Philippine cities and countryside, and the development horizon becomes bleak indeed.

This chapter has assessed the recent Philippine development record through both statistical analyses and the perceptions of the major actors for an important reason. These perceptions, advanced with the utmost confidence by Bank and Fund officials, kept them from developing policy alternatives to export-oriented industrialization and led them to ignore the strong misgivings that had been voiced by at least one World Bank staff member as early as 1977:

Look at the handicrafts you may say. Indeed I am delighted with the success in this area, but in a fiercely competitive and fickle international market, Philippine handicrafts will be in fashion today, and [gone] tomorrow. The bread and butter market and the basis Of a modern manufacturing sector will always be at home.^[122]

Neither Bank, Fund, nor Philippine transnationalists had built any safety nets under the Philippine economy as they restructured it. Instead, by acting on their conviction that reforms must be aimed at "increasingly integrating" the domestic economy with "the export effort,"^[123] they systematically destroyed whatever safeguards had existed. There was no economic planning for possible alternative scenarios: that OECD growth stagnated; protectionism tightened; competition intensified; and/or nontraditional exports, value added, and employment slipped backward.

This stands as one of the most telling commentaries on Bank and Fund development advice. In brushing aside any uncertainties or incongruities in their chosen strategy,^[124] they lumped scarce domestic resources (present and future) in one all-encompassing effort. It was no piecemeal economic restructuring, but a shrewdly strategized package of economic and financial reforms complemented by individual World Bank project loans. Urban loans (in the Banks own words) were "designed to support" the objective of "increasing employment and productivity in view of . . . the high level of skills, education and low comparative wages of Philippine labor which should enable it to expand exports."^[125] Vocational training loans set up manpower training centers in the middle of EPZs (enabling TNCs to forego labor training costs).^[126] Education loans strove to downplay the importance of liberal arts education and replace it with training more suitable to the light-manufacturing demands at hand.^[127] In the agricultural sector, projects like the so-called "cash crop Mindanao"—furthering what the Bank itself acknowledged was the poverty-inducing impact of commer-

cial export crops on the poorer rural community—became the order of the day.^[128]

Furthermore, when a series of leaked confidential Bank and Fund documents in the early 1980s brought a wave of scathing critiques from all parts of the globe, neither the IMF nor the World Bank attempted publicly to defend themselves or their models. Instead, the reaction was to further cloister themselves from public scrutiny—threatening suspected leakers with lie detector tests and tightening top management's control over who said what to outsiders. Rumors spread in the Bank that the FBI had been summoned to plug the leaks.^[129] It was not the response of institutions confident that their policies were promoting growth and development in the developing world.

In Manila, Ferdinand Marcos and his ruling New Society party seemed equally impotent to defend the economic policies implemented under Bank and Fund tutelage. When queried about the administration's major economic accomplishments in a first-of-its-kind televised debate one month after the lifting of martial law in January 1981, Marcos's two representatives came up with what can only be termed a feeble reply. As painful gyrations within the early 1981 Philippine economy were too conspicuous for even Marcos's team to deny, they chose the circuitous path of brandishing the World Bank's heightened "confidence" in the Philippine economy as the centerpiece of their response.^[130]

More typically, in public and in formal interviews, government technocrats produced a confident (if somewhat vague) chorus of belief in ex-port-oriented industrialization's present achievements and future potential. But in private and informal conversations, many responded differently. They returned to reiterating that there was no choice, given the Philippines' reliance on the international capitalist market:

Look, we haven't any choice. We rely on Western banks. Without the World Bank and IMF, we won't get any loans. . .. Sure, we could sit back and take a negative view and say: yes, quotas will increase; the world's economic problems will continue, or even worsen. . . But it's better to have a positive attitude and give it a try.^[131]

At that moment, prospects for rejuvenating the Philippine economic transformation seemed grim.^[132] The Conference Board predicted that industrial countries' "sluggish demand" would be the story "throughout the

1980s and beyond"; Business Asia envisioned continued "weaker demand for Philippine manufactured export items."^[133] IMF Managing Director de Larosière himself admitted as much. "There is nothing routine about the present recession," he conceded bleakly in early 1982. "There are, as yet, no convincing signs of an early recovery."^[134]

In the next four years, all these warnings would prove to be understatements. Stagnation of trade and rising protectionism would be joined by plunging primary commodity prices and an explosion of the debt crisis. In the Philippines, a political crisis would follow the economic and social crises, leading to the possibility of change.