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The impact of macroeconomic adjustments on living standard' in the Philippines

Manuel F. Montes
School of Economics, University of the Philippines, Quezon City, Philippines

The most recent balance-of-payments crisis in the Philippines, which began in August 1983, has plunged the country into a prolonged period of falling incomes and spending cutbacks. In 1984 the country experienced its first decline in gross national product (GNP) of 5.5 per cent. This was followed by another 3.8 per cent decline in 1985. Because population is growing annually by at least 2.4 per cent, this has meant the per capita income has fallen by at least 15 per cent since 1983. The best that the economy can manage in 1986 is a growth rate of 1.5 per cent, although a year of zero growth is more likely.

Unless it succeeds in lowering the first priority that has been assigned to the servicing of its foreign debt, the country can grow at best by 4 per cent per year for the rest of the decade. This would imply that for the decade of the 1980s the country would have suffered a per capita decline of at least 10 per cent. Such a decline can only have disastrous consequences for the country's low-income groups, who must eke out a living within an economy whose income inequality, as measured by the Gini coefficient (an index which ranges from 0 to 1 as inequality increases), has been estimated to range between 0.5 and 0.6.

The assignment of first priority to debt servicing has meant that the adjustment strategy has been directed toward rapid improvement in the current account. For the Marcos government, overthrown in February 1986, such an adjustment strategy implied implementing and adhering closely to a monetarist adjustment programme inspired by the International Monetary Fund (IMP). In the case of the Philippines, such a programme was effective in the sense that it permitted the country eventually to achieve a current account surplus in 1985, which has meant that the country has serviced its foreign debt. It has also imposed hardships on those who could least afford to bear them. Such hardships can only be interpreted to have played a large part in the formation of broad resistance to the Marcos regime.

The new Aquino government inherited an economy in shambles. It is even more important at this time to understand the nature of the crisis and the nature of the adjustment policies that were previously inflicted on the economy. This paper attempts to clarify these issues. On the basis of the limited data available, I also discuss the effects of the crisis and the adjustment programmes on the population. At this point, these effects on low-income groups are known mostly in a qualitative sense, and I make the plea that future research effort should be directed at identifying the channels of these effects and quantifying their size. This should provide the means by which adjustment programmes can be better designed to reduce their harmful impact on employment, food consumption, and nutritional status.

NATURE AND MAGNITUDE OF THE CRISIS

In the past decade the Philippines had to weather a number of adverse exogenous developments: the oil price increases of 1973-1974 and 1979-1980, sharp deterioration in the terms of trade (see table 1), the international recession in 1974-1975 and 1980-1982, and the associated drop in the demand for Philippine exports. These developments led to persistent current-account deficits, which were financed through foreign borrowings.

The response to external shocks through foreign borrowings brought unpleasant consequences as the country's external debt grew at an annual rate of 25 per cent over the period 1970-1981. The Philippines' own cumulative current-account deficit for the period 1970-1982 was US$12.9 billion, and by 1983 the total external debt reached US$24.6 billion. The foreign financing of the deficit was encouraged by low interest-rate charges during the period 1974-1978. When the international credit market tightened in 1979, however, the country continued to borrow at higher real rates and increasingly shorter terms. In addition, amortization of previous debt became increasingly burdensome as interest rates rose and loans fell due. By 1982, net interest expense came close to US$2 billion and was responsible for 46 per cent of the current-account deficit.

While it appears that external factors were responsible for the economic crisis, a closer examination shows that domestic policy variables and the longstanding structural problems of the economy were the main causes of the country's inability to service its foreign obligations and the accompanying disruption in trade transactions [2].

Apparently, the strategy was to cushion the impact of external developments through foreign borrowings {instead of immediately carrying out an adjustment) without having to sacrifice income growth targets. During the past decade, the government engaged in a programme of infrastructure projects and investments that had long payback periods. A significant amount of government capital expenditures contributed insignificantly to the supply of goods and services. While they created demand, especially as they involved construction, they produced little output. This led to inflationary pressures quite apart from those contributed by external shocks.

To sustain this aggressive pattern of spending, the government adopted generally expansionist fiscal and monetary policies. The heavy spending increased government deficits that could not be covered by domestic savings. The gap between investment and savings widened from P1.9 billion annually in 1971-1975 (2.4 per cent of GNP) to P9.1 billion annually in 1976-1980 (4.8 per cent of GNP). The gap had to be made up by foreign borrowings, which rose from US$2.6 billion to US$10.5 billion between 1975 and 1980. The allocation of government resources to low productivity uses led to a dismal performance of the economy as compared to that of its Asian neighbours. The process of growth through government deficits can be sustained without huge increases in foreign indebtedness only if the expenditures are validated by increasing productivity per worker. Higher savings made possible by higher productivity could then offset the effects of the budget deficit on the balance of payments. The inefficiency of the investment strategy took a turn for the worse when, in 1981-1983, government equity investments became the single most important capital outlay, exceeding the share of infrastructure. This occurred when the government was constrained to bail out near-bankrupt private firms that had borrowed from government financial institutions. Non-financial public corporations themselves were recipients of equity contributions because of the large deficits in their operations.

TABLE 1. Terms of trade (1972 = 100)

Source: ref.1.

The proliferation of new government corporations and various bureaucracies as well as state banks reflected the increasing role of the government in the market for products and financial assets. The extent of government activity in financial markets can be readily discerned as one notes that four government financial institutions (the Philippine National Bank, the Development Bank of the Philippines, the Land Bank of the Philippines, and the Philippine Veterans Bank) account for close to half of the total assets of the commercial banking system. The government's increased economic role has not been accompanied by any social levelling, nor has it improved the lot of the poorest in society.

As was mentioned earlier, the Philippines suffered from major exogenous shocks emanating from a volatile international economic environment. While external difficulties were a necessary condition for the crisis, the continuous weakening of the economy through the years can be attributed to the unproductive investment strategy described above. Although other developing countries faced the same external shocks, they did not encounter the difficulties that the Philippines is experiencing at present.

TABLE 2. GNP and GNP per capita, 1980-1984 (at constant prices; in millions US$; pop. in millions)

Source National Economic and Development Authority 131.

The crisis was long in the making. It was apparent that there was a downward drift in the country's economic performance. In 1981, real GNP grew by 3.7 per cent. In the next two years, GNP growth averaged less than 2 per cent (table 2) [3].

At this point, any major exogenous disturbance was bound to provoke a crisis. The assassination of Senator Aquino in August 1983 did just that. Immediately after the assassination, foreign financing halted abruptly. Without replenishment from short-term borrowings, international reserves fell from US$2.4 billion to US$0.7 billion in two months. The situation was exacerbated by the flight of capital, as residents as well as foreigners speculated on future political conditions.

In October 1983 the peso was devalued from P11 to P14 to the dollar. The devaluation triggered inflationary expectations that further raised prices and encouraged hoarding and further speculation. In October 1984 the inflation rate reached a peak of 64 per cent. Reserve requirements were raised to reduce money-supply growth. Budget cuts for the succeeding years were also announced. Foreign-exchange cut off the flow of imported material inputs to many industries. This, in turn, caused numerous firms to cut back, lay off workers, or simply close shop.

Simultaneously with these events, the Philippines began negotiations with the IMF and its private creditor banks. In the course of the negotiations the country religiously fulfilled its prior action commitments to the IMF, which included a reduction of reserve money in the first quarter of 1984. By the time an agreement was concluded in December 1984, the IMF could state that the country had made substantial progress toward adjustment as that agency conceives the meaning of "adjustment.''

CONSEQUENCES OF THE CRISIS ON LOW-INCOME GROUPS

The effect of the crisis on the social and material welfare of the people is difficult to document. From the limited data available, only intuitive assessments of the situation can be made regarding the relationship between trends of social indicators and the macroeconomic events. It must also be pointed out that the Philippines managed to postpone adjustment in the 1970s. Nevertheless, even the long-term trends did not exhibit a favourable pattern before the 1983 crisis.

Several unfavourable trends affecting living conditions in the Philippines can be observed over the past few years. Real wages for skilled and unskilled labourers as well as in the agricultural sector were on a generally declining trend during the period 1970-1982 (tables 3 and 4). A legislated minimum wage (which was in fact higher than the reported wage) in conjunction with inflation partly explains this trend. Real wages increased only for a short while during 1975-1978 because of relatively low inflation and high investment growth rates. Deterioration of the economic environment, slack labour demand, and the surge in inflation in the succeeding years led to erosion of real wages.

TABLE 3. Index of average daily basic wage rates of labourers in industrial establishments in Metro Manila. 1970-1980 (1972 = 100)

Source: ref 1.

TABLE 4. Daily wage rates of labourers in agricultural operations, 1970-1982

Source: Bureau of Agricultural Economics.

For the period 1971-1982, the labour force grew at an average annual rate of 3.6 per cent. This was due largely to the rapid growth of the working-age population and increased participation of females in the labour force. These trends placed downward pressure on real wages (on top of the inflation rate) and contributed to the growing levels of underemployment.

As in other developing countries, the unemployment rate is a poor indicator of the population's well-being. In fact, during the quarter immediately after the then emerging crisis {fourth quarter of 1983), the lowest unemployment rate of 4.1 per cent was recorded. This perhaps indicates the need for relatively more people to work and to help families to cope with the crisis. As can be seen from table 5, no visible trend could be discerned from the movements of the unemployment rate. The lack of employment opportunities is better manifested by the lack of full-time work, when, in fact, persons would like to do more work or when those with full-time work want more work to augment their income. In the same table, the highest underemployment rate of 30.5 per cent was experienced during the fourth quarter of 1983, the quarter immediately after the Aquino assassination. The data also show the increase in the percentage of the visibly and invisibly underemployed through the years.

The trend in income inequality is also disconcerting. Data on quintile shares for 1971 and 1980-1983 (table 6) show that the income share of the top 20 per cent increased from 53 per cent in 1971 to 59 per cent in the third quarter of 1983. On the other hand, the shares of the bottom four quintiles declined. Positive economic growth rates in between the periods did not in any way help to reduce this degree of income inequality. In 1984, when the economy experienced a high inflation rate and a negative growth rate, it can probably be said that, at best, the situation did not change.

Various studies by international organizations, individual researchers, and government agencies using different nutritional norms have come up with different poverty lines. All studies are in agreement, however, as to the high frequency of poverty in the Philippines. The prevalence of poverty and problems of malnutrition are inextricably intertwined. The latter can be attributed to food demand and supply conditions. Despite various government programmes (e.g., Masagana 99) and extensive research on high-yielding crop varieties, the Philippines has yet to achieve self-sufficiency in food supply. Modest growth in agricultural production in the past decade failed to keep up with the rapid population growth. Intermittent fluctuations in supply due to weather disturbances led to unwanted movements in food prices and encouraged hoarding. Stabilization of food prices through imports and stockpiling were the measures used to protect low-income consumers at the expense of food producers who receive lower incomes. The objective of keeping food prices down is achieved with the help of an overvalued exchange rate; however, overvaluation lowers incentives for agricultural production, which, in turns, reduces demand for unskilled labour.

TABLE 5. Population, labour force, employment, unemployment, and underemployment, 1971-1983

Source of basic data National Census and Statistics Office [4].

a. Working less than 40 hours per week (60 days per quarter) and wanting additional work.
b. Working 40 hours per week (60 days per quarters or more and wanting additional work.
c. Data for 1971 and 1976 are for population 10 years old and over.

TABLE 6. Distribution of income among families by quintiles, 1971-1983 (percentages of total income)

Source: ref 4.

Computed by straightforward interpolation of cumulative family income distributions.

On the demand side, there is no doubt that income disparities lead to differing food expenditure patterns. World Bank 1983 data on household expenditures in Metro Manila, with the households classified according to their per capita expenditure (table 7), reveal high percentages spent on food in the lower per capita expenditure classes. In addition, the average household size decreases, the higher the expenditure class. It is clear that the poor, with larger household size, spend a greater proportion of their money for food than the non-poor.

Malnutrition can be attributed to the unequal distribution of nutrients across groups in society as well as within the household unit [5].

Table 8 shows the percentage adequacy of energy and protein intake for the Philippines as a whole as 88.6 and 102.9 per cent respectively. These figures taken alone are misleading, however. The same table reveals the variation in nutrient intakes according to income groups, rural or urban residence, and section of the country. Intake levels and therefore the adequacy percentages for all nutrients are high for higher-income groups. Furthermore, the nutritional status in urban areas is slightly better than in the rural areas.

Intrafamilial nutrient distribution data from a study of 100 households in the Metro Manila area in 1980 by Florencio and Aligaen [6] show that household heads had the highest diet rating in both rural and urban areas. Fathers and male off spring had more nutritionally adequate diets than female household members. Preschoolers had the best nutrient intake among offspring, while adolescents had the poorest.

TABLE 7. Total expenditures and expenditures for food by households classified by expenditure per capita, Metro Manila

Source: World Bank, 1983. a. Table is based on 1,602 households for which the data were available, out of a total sample of 1,688 households.

TABLE 8. Mean nutrient intake per capita per day in the Philippines, by income group, urban or rural residence, and island group of residence, 1978

Source: FNRI First Nationwide Nutrition Survey, Philippines, 1978.

a. Cutoff points currently in use: for energy, 80 per cent adequacy: for protein 70 per cent adequacy.
b. Average requirement.
c. Recommended daily allowance.

Given the limited data, the nutritionally at-risk groups could hardly be identified. What is clear, though is that the nutritional status of low-income groups should be examined and intra-household nutrient distribution be given due attention.

continued

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