7D THE RISE AND FALL OF FERDINAND MARCOS

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THE RISE AND FALL OF FERDINAND MARCOS

Ferdinand Marcos became President of the Philippines in 1965 at a time when his country was viewed as one of the great models of Third World political and economic success.1 His presidency coincided with a great Pacific Asian economic boom, the broadest-based rapid economic takeoff world history has yet seen, and with a similarly broad-based political consolidation throughout the region except for Indochina.2 Marcos himself was widely acknowledged as one of the most brilliant lawyers and political leaders among a generation of great Asian leaders. When he proclaimed martial law in 1972, he pledged to implement the lessons of development learned by successful neighboring countries. Yet the confluence of all these auspicious circumstances was followed by national tragedy.


The Emergence of Martial Law As soon as Manila's political, civil service, and military institutions were partially revitalized after World War II with the help of the United States, the government defeated the communist Hukbalahap insurgency; by 1967, there were fewer than 170 communist guerrillas in the country. From 1950 to 1965, the Philippines' average economic growth rates exceeded all of Southeast Asia, Taiwan, and South Korea, and, after the defeat of the Huks, the Philippines had no rival in the region other than Japan for political stability. During a period when the population was rising from 30 million to 40 million, Philippine democracy maintained peace with total armed forces (army, navy, air force, and constabulary) of only 60,000. Democracy in the Philippines seemed far more complete and deeply rooted than in India, Malaysia, Colombia, and Venezuela. The press was freer than elsewhere. Two parties regularly alternated in office. There were no political prisoners or other human rights abuses. The democratic parties had deep roots in nearly every village, and their patronage system integrated an extraordinary diversity of competing regional and ethnic groups. Nonetheless, democracy could not cope with several vital problems. The U.S. -style judicial system, with an adversary process that emasculated the poor, and complex procedures that endlessly delayed decisions, could not cope with injustice and crime. Private weapons were more widespread than in any other country, and it was common for cars to be stopped and robbed in daylight on major streets. The democratic patronage system inhibited removal of corrupt and incompetent civil servants. Democracy directly inhibited measures designed to ameliorate some of the world's worst social inequality: a Congress of elected landlords dragged its feet in passing land reform legislation and then in funding it. A series of presidents who were landholders (including Ferdinand Marcos) initially refused to spend land reform funds. The landholders' lawyers defeated the valid claims of peasants, who could afford no lawyers, and exploited the complexity of U.S.-style court procedures to delay adverse judgments for a decade or more. Judgments were rendered by judges who were landlords and enforced by sheriffs and officials who were landlords.3 3. Marcos and his land reform minister, Conrado Estrella, relied heavily on these classic Marxist-sounding arguments, which are not valid for modern democracies but were entirely valid in the Philippines. They were formulated and brilliantly articulated for Marcos by former communist guerrilla leader Luis Taruc and liberal agrarian reform leader 

Toward the end of the 1960s, moreover, Philippine economic growth slackened. Import substitution policies, which interest groups pressed upon Philippine legislators, no longer encouraged rapid growth. The Congress passed contradictory laws, and bureaucratic corruption and red tape prevented implementation of sound policies. The Philippines' neighbors, from Thailand and Malaysia in the south to South Korea in the north, instituted reforms, became stronger competitors, and achieved superior growth. The late 1960s also brought Vietnam-era student demonstrations and a mass movement for U.S. statehood in which millions of Filipino petitioners for statehood embarrassed Marcos and Philippine nationalists. In this context, Marcos in the early 1970s faced a constitutional prohibition on running for a third term and the certainty that his life-long enemy, Benigno Aquino, would be elected as his successor. Marcos argued to close associates that the country's problems required drastic solutions. He initiated a two-year study of successful Asian martial law regimes. Leftist intellectual Adrian Cristobal, leftist leader Blas Ople, and others labored over a study of regimes that had successfully used authoritarian methods to impose reforms. Rightist defense chief Juan Ponce Enrile designed a detailed plan for martial law. 

Marcos also initiated a constitutional convention, justified by nationalistic arguments about changing an unsuitable American-imposed constitution. A crucial argument at the constitutional convention concerned the duration of the interim period between the two constitutions, when the chief of state would have both the powers of the president under the old constitution and the powers of the prime minister under the new constitution. Marcos wanted this period to be indefinitely long, whereas a majority at the constitutional convention wished for a brief period. One by one, the delegates to the convention were summoned by intelligence chief General Ver, who reviewed with them their various failures to pay taxes, occasions on which their security guards had killed people under dubious circumstances, and other misdeeds which, according to the general, the judicial system would of course have to confront unless the delegates saw fit to serve their nation by voting appropriately on the duration of the interim period.

The results of this process foretold much of the future. Marcos won. General Ver ensured himself a top role. The cream of the national political elite proved extraordinarily vulnerable to personal pressures and frequently valid accusations of felony.

 The nation's political parties, which  were almost exclusively instruments of patronage rather than principle, proved impotent at defending democracy when confronted by a brilliant manipulator of personal and family interests. A society riven by poverty, inequality, corruption, and crime, and accustomed to a view of democratic politics as mere conflict over patronage, proved utterly unwilling to defend democratic principles in the face of promised improvements in economic and social conditions.

With the new constitutional arrangements well advanced and the study completed, Marcos portrayed the Vietnam-era student demonstrations as evidence of a gigantic communist conspiracy and the stratagems of his political opponents as evidence of an equally threatening right-wing conspiracy. Government soldiers shot the empty white Mercedes Benz of Minister of Defense Enrile full of holes, and the government announced that communist guerrillas had attempted to assassinate the Defense Minister. Under orders, a sergeant from the Firearms and Explosives unit of the Philippine Constabulary blew up a series of minor power pylons and other targets around Manila, and the government announced that communist guerrillas were threatening the security of Manila itself. Using such threats to justify his policy, Marcos declared martial law in 1972.

In actuality, there were fewer than 800 communist guerrillas in the Philippines when Marcos declared martial law, according to interviews with the Chief of Staff of the Armed Forces of the Philippines. The Vietnamera demonstrations were no more threatening to the stability of the government of the Philippines than to many other governments. The threat from the right, which Marcos portrayed in equally dire terms, was just as remote. And these facts were widely understood. But the bulk of the population supported Marcos, and the U.S. government acquiesced in Marcos's declaration of martial law, out of a broad consensus on the need for social and economic reforms that the democratic government of the Philippines had been unwilling to carry out. Marcos proceeded to implement reforms seemingly modeled on those that had produced relatively broad and stable public support for authoritarian regimes in other Pacific Asian countries. He improved public security by prohibiting demonstrations and strikes and by confiscating tens of thousands of weapons, and introduced summary procedures to cope with street crime and other crime. The diminution of fear in the streets was palpable. He rationalized key parts of the bureaucracy, trumpeted the elimination of congressional corruption, and appointed to high office or strengthened the powers of a group of world-class technocrats such as Alejandro Melchor, Vicente Paterno, and Cesar Virata. 

These men inspired confidence on the part of foreign governments and attracted the support of international banks. Virata was subsequently elected the world's outstanding finance minister by vote of a group of senior international bankers.

Marcos introduced a series of wide-ranging reforms aimed at enhancing economic growth and social equality. He made huge investments to expand the nation's infrastructure. He improved the laws on taxation and investment, reorganized the management of foreign investment rules, and promised to attract foreign investments and promote exports rather than persisting with import substitution. He initiated projects and policies that attracted the strong support of the World Bank. He quickly implemented more land reform than had occurred in all 25 years of democratic rule. Associated agrarian reforms, including roads, subsidized credit for farmers, rural electrification, and irrigation led to a boom in rice production and to near self-sufficiency in rice by 1976. Dissidents nearly disappeared from Central Luzon, hitherto the country's hotbed of both religious and communist uprisings. Through various means, Marcos destroyed most of the old landed oligarchy that had dominated Philippine economic and social life since Spanish times. Marcos also reduced the Philippines' traditional discrimination against its Chinese minority by providing them greatly increased access to formal citizenship and to participation in sectors of the economy formerly closed to them.

 rs of the economy formerly closed to them. To provide the Philippines with analogues of South Korea's Hyundai, Daewoo, and Samsung, Marcos sponsored the formation of a group of large conglomerates run by trusted associates. In the early 1970s, the most notable was the Construction and Development Corporation of the Philippines (CDCP). For the entire democratic period, the Philippines had been plagued by poor roads that had been constructed with adulterated cement and thus were largely washed away every rainy season. When martial law began, Marcos's aide Alejandro Melchor fostered a consortium of construction companies, subsequently named CDCP, and told them to complete the Manila-Baguio road on their own, with the possibility of becoming wealthy from tolls if they did it properly and the prospect of severe retribution if they did not. This project, and many similar ones, quickly improved the transportation and irrigation systems. CDCP gradually acquired a $600 million portfolio of overseas contracts and did widely admired work even on such difficult projects as the renovation of Indonesia's ancient Borobodur Temple. Even more quickly than in South Korea and Taiwan, the Marcos reforms expanded the regime's political support. The growth rate under martial law appeared impressive and attracted support from foreign financial institutions and some domestic businessmen. The land reforms, rural infrastructure programs, and destruction of much of the landed oligarchy, along with massive credit subsidies, attracted the support of farmers.

The  appearance of roads built with real cement attracted the enthusiasm of the middle class. The improvement of law and order attracted the approbation of nearly everyone. Apparently decisive moves to deal with crime, corruption, and security problems attracted the support of many generals, and Marcos exiled to ambassadorships all the powerful generals who opposed martial law. The political left came strongly to the support of Marcos. Blas Ople, formerly a leftist labor leader, became Minister of Labor. Adrian Cristobal, formerly a leftist intellectual and bookshop owner, became head of the Social Security System, a principal speech writer for President and Mrs. Marcos, and the President's official spokesman. Luis Taruc, formerly Supremo of the Hukbalahap communist guerrillas, became a land reform organizer for Marcos and a principal spokesman for the Marcos land reforms. Jeremias Montemayor, head of the reformist Federation of Free Farmers, became the single most eloquent advocate of the martial law regime. The financial elite and the Chinese community supported Marcos because of reforms favorable to them. All of this occurred in the context of dramatic improvements in the cleanliness and attractiveness of Manila inspired by Mrs. Marcos

There was opposition, of course. Democratic politicians, the press, and supporters of democracy in the universities, the Catholic Church, and significant parts of the middle class demanded a return to democracy and an end to political arrests and military courts. A Christian-Muslim conflict, which had simmered for generations in the southern Philippines, exploded into a revolt of 10,000 Muslim guerrillas when the largely Christian military sought to implement the national policy of collecting firearms. To ensure military acquiescence, Marcos had to exile the country's leading military officers, including the immensely respected General Ileto, who became ambassador to Iran and later Thailand. Most businessmen other than those close to Marcos adopted a "wait and see" attitude, appreciative of real and promised reforms, but cautious regarding ultimate implementation.

 Thus, the vast majority of Philippine society strongly supported Marcos. Most of the rest acquiesced in his reforms. Most people were convinced that Philippine democracy could not in any case long survive the perpetuation of crime, inequality, poverty, and incoherent economic policy. Marcos dealt ruthlessly and decisively with the senior democratic politicians and generals who represented the only serious elite opposition to martial law. Opposition by the senior generals was in any case inhibited by a strong tradition of respect for civil authority and by their own abhorrence of the social disorder and corruption that Marcos promised to abolish. Opposition by the democratic political elite was muted by the patronage orientation of so much of that elite and by the vulnerability of  an overwhelming proportion of them to blackmail. Both at home and abroad, human rights protests were muted by the reassurance that "Martial Law Philippine Style" was accomplishing needed reforms with a much lighter touch than had been used in South Korea and elsewhere.

Post-1 975 Deterioration The Economy: The progress of reform and the expectation of further reforms, and subsequently of further successes on the models of Singapore and South Korea, persisted through 1975. After 1975, the reform drive stagnated, and even reversed. As Adrian Cristobal said to me in an interview, "It was like an old lady taking off her girdle. Everything just fell out." Land reform became bogged down in corruption and red tape. The Ministry of Agrarian Reform announced that growing numbers of Certificates of Land Transfer were being issued; it failed to mention that, after being issued, they were stored in a safe at the Ministry rather than being given to tenants. Only 10% of tenants made payments on the government loans they received to purchase their land. Hence, despite enormous early land reform efforts and successful investments in rural credit and rural infrastructure, reforms slowed and the problem of rural land ownership was deferred to the indefinite future. Gradually, peasants began selling their land back to the landlords illegally. Many Marcos cronies, including General Ver, became wealthy by accumulating supposedly land-reformed land for their own crops or fishponds. The old landed oligarchy that Marcos had destroyed was quickly replaced by a new oligarchy composed of gigantic business conglomerates run by the President's cronies. Instead of promoting employment by focusing investment on labor-intensive industries, the Marcos regime focused on nuclear power, steel, aluminum, copper, and other capitalintensive industries, known as the eleven major industrial projects. With these developments, all hope for a reduction of the country's crushing unemployment and for a more egalitarian social structure disappeared. The eleven projects were justified by the rhetoric of nationalism and dependency theory: the Marcos regime would relieve the oppressed Filipino people of their excessive dependence on imperialist Western corporations. Much of the liberal academic and media elite believed these arguments. The business community understood the real reasons: these huge projects, utterly unsuited for the nation's skills and comparative advantages, permitted equally huge foreign borrowings, and much of the foreign borrowing could be siphoned off to Swiss bank accounts. Marcos had substituted a ruthless elite for a merely inefficient one.


Likewise, policies to promote greater efficiency and growth stagnated. Administrative reform never proceeded beyond the top. The ministers were frequently world-class managers, but underneath them there remained a morass of corruption and incompetence. Key technocrats lost jobs or confidence: Melchor was fired; Paterno eventually quit; Virata began his decade-long, Hamlet-like contemplation of a move to Washington. Instead of forcing the favored industrial groups to become more competitive and efficient by gradually increasing domestic and international competition, Marcos decreed an endless series of measures to protect his friends' conglomerates from domestic and foreign competition. CDCP became a bloated, subsidized organ of patronage. Using leftist slogans about avoiding dependency on exploitative multinational corporations, the regime created vast monopolies that squeezed the Philippine poor to the physical limit and destroyed the Philippines' system of independent entrepreneurship. Industry eventually became an incredible gridlock of monopolies. Red meat, aluminum, paper, and even videocassettes (a monopoly created especially for the President's son-in-law) became monopolies or near-monopolies enforced by presidential decrees and by special action of the tax authorities, the customs authorities, the licensing authorities, and numerous other agencies of government.

 Using similar leftist and nationalistic slogans about replacing exploitative foreigners and corrupt Chinese intermediaries and improving the welfare of poor farmers, the regime created monopolies for the sugar and coconut industries. These monopolies taxed the farmer for benefits that he would never receive, increased the difference between what the farmer received and what the world market paid for his crop, and successfully siphoned off a large proportion of farmers' incomes into the hands of Marcos's cronies. Even as the regime published its denunciations of exploitation by multinational commodity firms, Marcos issued decrees that forced companies like Lever Brothers and Proctor & Gamble out of coconut products markets, where they were paying market prices to farmers, and enforced a monopoly run by his friend Eduardo Cojuangco, who paid half the world market price. The farmers' funds were used to fund three banks, which were then employed to transform the ownership of much of the Philippine economy into a small group of gigantic conglomerates. The sugar-based conglomerate expanded to include a major newspaper, radio and television stations, shipping, bus lines, automobile repair shops, and a host of other industries. The ruthless means by which this was accomplished quickly denuded the center of the country, the Visayas, of much of its middle class. The coconut conglomerate was even more far-reaching. The siphoning off of a large proportion of farmers' incomes decreased standards of living and prevented modernization of these industries in the face of foreign competition. Improvements in certain kinds of infrastructure were offset by key lapses. The power industry greatly reduced planning and investment for the future. Eventually this created a massive shortage of capacity and spare parts and left much of the Philippines, including Manila, to experience almost daily power failures. Enraged at the efforts of an American telephone company to comply with U.S. anti-corruption laws, the regime turned instead to vastly inferior European equipment, thereby worsening the unreliability of the national telephone system for the ensuing decade. Despite impressive paper revisions of the foreign investment laws, red tape and corruption continued to hamper foreign investment. Whereas foreign investment expanded enormously in Pacific Asia during the Marcos years, and although the Philippines had previously been a focus of foreign investment in Pacific Asia, during the Marcos years the Philippines became the least favored site for foreign investment among the marketoriented economies of Pacific Asia.4 Foreign investment incentives were offset by dozens of presidential decrees and restrictive practices that created monopolies and near-monopolies in nearly every imaginable corner of the economy. Export promotion policies, including the creation of export processing zones of the kind that have been so successful in Taiwan, South Korea, and elsewhere, could not overcome the flood of protectionist decrees. Despite export-promotion rhetoric and individual export promotion measures, Marcos's policies on balance inhibited exports. Tariff reductions that should have reduced exporters' machinery and material costs were outweighed by quotas, licenses, customs practices, and tax harassment. Currency overvaluation penalized exporters. Export taxes were imposed. Efficient producers with export potential were driven out of business to protect inefficient friends of the President with no export potential. Multibillion dollar corruption constituted a prohibitive tax that fell disproportionately on importers (thereby raising exporters' input costs), exporters, and foreign investors.5 In consequence, by the late  1970s, growth rates were well below the disappointing growth rates of the late democratic period

Meanwhile, the regime began accumulating a huge debt. The emphasis on capital intensive projects contributed greatly to this debt. Other contributors were massive expenditures on hotels, showcase cultural projects, and expensive international assemblages, ironically including an annual meeting of the International Monetary Fund where every delegate was assigned a brand new Mercedes Benz that was sold as a used car after the meeting. Above all, a nearly complete substitution of foreign borrowing for domestic investment ensured the rapid accumulation of foreign debt. The net effect of these policies on the economy can be summarized in a single figure: the incremental capital-output ratio. In order to raise annual national output by one dollar, the typical Pacific Asian country had to invest two dollars. Indonesia, hobbled by inefficiency and corruption, spent four dollars. India, with worse inefficiency and corruption, has recently been spending six dollars. The Philippines in the early 1980s was spending nine dollars.

  Politics: Political trends followed economic trends. Marcos had initially reduced disorder and created a broad coalition of left and right. Such coalitions come in three varieties. In India during the Janata period, the broad governing coalition represented pure electoral opportunism and quickly fell apart. In Pacific Asian countries like Taiwan, Singapore, and South Korea, a broad coalition sternly implemented reforms that created strong institutions, increased economic competition, improved income distribution, and focused the economy on serving international markets; by doing so, they created rapid and egalitarian growth, followed by substantial political consolidation. In Spanish America, the leftist rhetoric of antiimperialism and dependency theory has been used to justify import substitution policies abroad and statist, monopolistic economies at home, which protect the interests of entrenched inefficient industries and landed oligarchies. The elite keeps national institutions weak and therefore pliable. The result is stagnation rather than competition, accumulation of debt rather than foreign and domestic investment, huge unemployment, and rising social inequality. This Spanish American pattern leads to bankruptcy, unrest, and political turmoil. Marcos promised the Pacific Asian program, but delivered the Spanish American syndrome. His nation suffered the familiar consequences.

Crime began to rebound. Initially street robberies in broad daylight had been suppressed. But then quiet burglaries gradually increased until they completely offset the decline in street robberies. Then street robberies began to increase also. The 167 communist guerrillas in 1967 became 800 in   1972, a small guerrilla presence in four key regions of the country by 1975, and five to ten thousand guerrillas by 1980. This rise was offset temporarily by increasing successes in dealing with Muslim guerrillas, but gradually Muslim discontent and the collapse of the coconut industry gave the communists an opportunity to create organized guerrilla units in Muslim areas, supplanting tribal dissidence with modern guerrilla warfare. Businessmen, the middle class, and certain groups of farmers became gradually more concerned that the regime was not promoting their interests


ually more concerned that the regime was not promoting their interests. The defunct democratic patronage system no longer ameliorated strong conflicts among ethnic and regional groups, so regional antagonisms surfaced with a vengeance. The Marcos regime invested funds heavily in the Ilocos provinces from which the president's family derived. It also invested quite heavily in Manila, as Mrs. Marcos promoted beautification; in central Luzon for strategic reasons; and in Mindanao to combat the guerrillas. But other regions were systematically starved and exploited. The Visayas, home of Marcos's former rival, Vice President Lopez, and of major political competitor Osmena, were neglected by the regime and ruthlessly exploited by the sugar monopoly; many areas of the Visayas looked physically worse in 1983 than they had twenty years earlier, a rare occurrence in rapidly developing Pacific Asia. The provinces and regions of other political competitors were also systematically starved. Batangas Province, home of opposition political leader Salvador Laurel, had to watch its roads decay almost beyond the possibility of economic use. Marcos's early problem with the Muslims developed in microcosm in many other parts of the Philippines.


many other parts of the Philippines. By the mid-1970s, an inexorable decline in military performance had become apparent. Martial law had begun with the sidetracking of the nation's most able officers. It had begun with the shift from a competent, culturally sensitive, small unit, intelligence-oriented strategy of dealing with guerrillas, a strategy that had been totally successful against communists and Muslims alike, to a strategy of using massed heavy artillery against tribal guerrilla groups in the southern Philippines. This strategy was totally ineffectual and was deplored by the U.S. army attache at the time as "nothing more than competitive ejaculation," and it produced huge numbers of refugees.6 Just at the time when Marcos had weakened the military's senior leadership, the war with the Muslims chewed up the central core of the armed forces, the lieutenants and sergeants. So many junior officers were lost that the Philippine Military Academy for several  years graduated classes early to replace the casualties. To augment his political power, Marcos installed blood relatives or compadres in all the most sensitive commands, placed Ilocanos in most senior jobs, instituted a logistics system that controlled all supplies from Malacanang at the cost of crippling local commanders' initiative, and despite the warfare against Muslims and later the communists, kept the most effective units in the Manila area for political advantage. By the end of the decade, the Philippine military was no longer an effective fighting force. The latter 1970s saw the establishment of a unit inside Malacanang Palace to direct assassinations and the emergence of a squad of soldiers, nicknamed the Monkees, who had a wide-ranging license to kill during their operations in the southern Philippines. Soon the Monkees were matched by a communist New Peoples Army team, the Sparrows, with a similar license to kill. Martial law, Philippine style, was by now far more brutal and arbitrary than its South Korean counterpart.


The Roots of Failure Thus, by 1976, the Philippine program of authoritarian reform had begun to fail despite its rhetorical similarity to the extraordinarily successful programs in Singapore, South Korea, Taiwan, and elsewhere. While authoritarian reform governments in South Korea, Taiwan, and Singapore (and even Indonesia to some extent) were moving to create strong military, government, and business institutions, the Marcos regime was systematically destroying them. Under Marcos's martial law, there was no vice president, and therefore no orderly succession, because Marcos cared less about orderly succession than about avoiding competition for his job. An executive committee set up in 1981 was simply an excuse for not having a successor. In the President's absence, his wife chaired the cabinet-not because of her government positions, but because she was his wife. Imelda Marcos controlled public and private funds equal to 50% of the total government budget, with little accountability. As Minister of Human Settlements, she possessed the right to seize any urban property without recourse.

 In the business community, competitiveness and efficiency were replaced as criteria of success by access to the personal patronage of the President. After nine successive, self-serving constitutional revisions, the constitution had lost all institutional force. In a characteristic justification for destroying the institution of law, Supreme Court Justice Barredo declared that the country must move beyond the rule of law to the rule of justice. In the military, an extremely competent, professional, and successful military of 60,000 men had been replaced by a corrupt, incompetent organization of  more than 200,000 in which all the senior generals were Ilocanos and all key promotions were based on political patronage. Thus, while Park Chung Hee, Lee Kwan Yew, and their counterparts in successful authoritarian regimes elsewhere were above all institution builders, Marcos was above all an institution destroyer. When a Park Chung Hee or a Lee Kwan Yew passes from the scene, one knows in advance the future shape of the society. The military will retain the same shape and will be run on the same principles. Businesses will retain their basic structure, ownership, and competitive relations. The laws will change only by orderly processes. By creating these institutions, such leaders created skeletons for their society and thereby endowed their societies with form, continuity, predictability, and confidence. Marcos took over a society with far more highly developed governmental, business, and military institutions than those that existed anywhere else in developing Asia, with the possible exception of Malaysia. But, by crippling the institutions and turning them into instruments of patronage, he deprived Philippine society of its skeleton. The Marcos policy of deinstitutionalization cast into doubt the future forms of business ownership, economic structure, military leadership, civil management, and law. (Indeed, because of the degree to which Marcos associates had accumulated control of every source of wealth and power, no successor regime could hope to survive without sudden, sweeping changes of ownership, structure, and rules). Recognition of the resulting uncertainty by the business community compounded the economic rigor mortis and decay promoted by Marcos's economic policies.


The Crisis of 1981

This across-the-board deterioration after 1975 so weakened the economy that a cyclical world downturn in 1981 led to a broad political-economic crisis, based on the collapse of the coconut oil market, a financial crisis, a new constitution, a new election, political polarization, wide-ranging military misbehavior, and deterioration of President Marcos's health. While few recognized at the time the seriousness of the crisis, it foreshadowed the successive national "heart attacks" of 1983 and 1986. Economic downturn: In a world environment of slow growth, high interest rates, and low commodity prices, the Philippines-whose exports depended heavily on coconuts, sugar, and copper-suffered a 42% deterioration of its terms of trade, far more than its ASEAN neighbors. Later, the deterioration became still worse. But the consequences were nonetheless disproportionate. In an environment of generally weak commodity prices, the new National Coconut Authority, noting that the Philippines possessed over 60%

 of the world coconut oil market, believed it had a one-country cartel (nicknamed COCOPEC, mimicking the oil cartel) and raised prices drastically. This occurred at a time of maturing investments in palm oil elsewhere, notably in Malaysia and West Africa, and consumers easily switched from coconut oil to palm oil. The subsequent collapse affected 16 million Filipinos, a third of the nation

The Philippine financial system was sufficiently fragile that the departure of Chinese businessman Dewey Dee with 635 million pesos created a domino effect. Most of the leading Marcos-associated manufacturing firms (most notably CDCP, Herdis Group, Disini Group, Silverio Group) suffered financial crises, leading to an emergency five billion peso bailout program by the government. Bancom had to be rescued, and Philfinance, the country's leading brokerage house, with one billion pesos in assets, suffered a run from which it could not recover. Consolidated Mines went under, and Marinduque Mining experienced a crisis. Leading textile and auto distributing firms failed. Major banks had to be consolidated. (The Benedicto, Cojuangco, Floirendo, and Romualdez business empires remained intact). The root causes of the crises were Central Bank mismanagement and corruption; overborrowing by manufacturing and construction firms which salted away high proportions of the borrowed, government-guaranteed funds in foreign accounts; underbidding by major firms which later had difficulty delivering; the inefficiency of gigantic monopolies; loss of political confidence; and a series of interlocking management and financial arrangements that rapidly turned a localized problem into a chain reaction. The foundering of large firms with government guarantees soon made the government the new owner of 230 firms. Henceforth, government budgets were grotesquely unbalanced by the cost of subsidizing these firms. Once again, deinstitutionalization was the ultimate cause of the crisis. South Korea also experienced wrenching economic adjustments: oil price rises, recessions, global debt crisis. South Korea in the early 1980s experienced several scandals more than ten times the size of Dewey Dee's. But South Korea's effective institutions absorbed these shocks and adjustments with aplomb.


 Lifting of martial law: Responding to rising pressures, Marcos lifted martial law in January 1981. One of the most important pressures proved a bellwether of the future: an upper middle class business group, led by the editor of Business Day (the local Wall Street Journal) launched the Lighta-Fire movement, fire-bombing buildings as a protest against the regime. While Marcos retained most of the apparatus of martial law, there was significant liberalization. Rule by decree dwindled (although for sometime decrees were backdated). Somewhat greater press freedom and political organization was permitted. In August, the right to strike was returned, subject to revocation if the government declared national security to be involved

to be involved. A new constitution, the ninth revision of the Philippine constitution under Marcos, was approved by a plebiscite in April with the usual irregularities. Its highly centralized, French-style governmental structure was quite appropriate to Philippine conditions. Although there were some peculiarities (no vice president in order to avoid creating a competitor, a minimum age of 50 for the president in order to eliminate Benigno Aquino from running), its basic structure was quite sound. The flaw was that nobody, including the elite around Marcos, viewed it as anything more than the latest tool for implementing the personal wishes of the current President. The context of deinstitutionalization deprived the document of all force and legitimacy. Following the constitutional plebiscite, Marcos held a presidential election in June 1981, but he allowed the opposition only 28 days to organize and campaign, restricted opposition access to the media, refused a new registration of voters, and carefully controlled the Commission on Elections. Only two governorships in the country went to opposition groups. The democratic forces joined with the leftist and communist forces for the first time ever in a united front to boycott the election. But the boycott, and the success of Marcos in coercing 62% of the population to vote (of which 14% spoiled their ballots), convinced most Filipinos that the democratic opposition was impotent. In the conservative elite, this was regarded as decisive evidence that, whatever they thought about the President personally, only Marcos was capable of governing. But conversely it convinced many former members of the democratic opposition that only violence could depose the dictator and thereby pushed them into cooperation with the New People's Army. One former close Marcos associate estimated that 25% of those who had supported his own election were now collaborating with the communists. Thus, Marcos's political reforms and termination of martial law, and the democratic politicians' decision to boycott the election, severely polarized Philippine society. The old democratic politicians, previously a frail force, now became a negligible force


force. Outside Manila, the most significant social development aside from the coconut collapse was widespread military brutality. As a large-scale phenomenon, this was new on the Philippine scene. Assassinations and disappearances actually declined in most of the country, except in very remote areas and in Mindanao, where the Monkees killed at will. But everyone from farmers to pro-Marcos members of the National Assembly to active  generals agreed that widespread beatings of suspects and casual abuse of property became a potent force of recruitment for the radical opposition. General Ver was appointed Armed Forces Chief of Staff, edging out the West Point-trained, honest, professional General Ramos. Subsequently, Marcos and Ver gradually gutted the Constabulary, which Ramos ran, and throughout the armed forces sidetracked the careers of professional and pro-Ramos officers

and pro-Ramos officers. It became known that Marcos suffered from lupus erythematosis, which affected his kidneys, and this worsened business fears. While most businessmen by now disliked the regime, in the absence of stable institutions they were terrified of a post-Marcos upheaval, so business confidence deteriorated. Economic hardship, military brutality, and the impotence of the democratic center strengthened the radical left. The communist-supported National Democratic Front acquired massive support from students, large segments of the middle class, human rights groups, teachers, dispossessed businessmen, and respected Catholic and Protestant clergymen (including two bishops). The communist New People's Army, once confined to four limited areas, became influential in Cagayan, Samar, southern Leyte, Bataan, Laguna, western Pangasinan, Bicol, Panay, southern Negros Oriental, and five provinces of Mindanao. Whereas the old communist guerrilla movements could be decapitated and defeated by the capture of a few charismatic peasant leaders, the new version had leadership in depth, with impressive professional qualifications. The former leader in Samar, Morales, had been Deputy Director of the Development Academy of the Philippines. Another was a leading Jesuit, a medical doctor, and former dean of a prestigious university. Many NPA leaders had advanced U.S. degrees and senior business experience. The NPA may have developed the most highly educated leadership in the history of guerrilla warfare. The financial crisis triggered by Dewey Dee brought nearer to the surface rising resentments of the role of the Chinese in the Philippine economy. While Marcos's pro-Chinese reforms were good in human terms and good for the economy, Marcos had ensured ethnic tension by making the Chinese community a major political and economic partner of his resented regime. Nine of the ten leading Philippine banks were under Chinese control by 1981. Kidnappings of Chinese businessmen became frequent. A leading bank prepared a paper on the role of the Chinese in the economy, and a leaked version was circulated around Manila. Expressions of antiChinese sentiment reached the highest point in a generation-although they never approached the level that is common in Indonesia in the best of times. 

Both the left and the right found it useful to blame the U.S. for many of their problems. The left said the U.S. had imposed Marcos. The right blamed Marcos's problems on the legacy of Carter's human rights policy. New U.S. Vice President George Bush consolidated the left's case when he toasted Marcos, "We love your adherence to democratic principles and practices." This foreshadowed diplomatic difficulties later in the decade. The simultaneous occurrence of all these problems constituted a major crisis in the regime, although both the Philippine government and the U.S. government refused to recognize it at the time. (The U.S. Embassy emphatically rejected reports of the spread of suffering and of NPA organization.) Nonetheless, the Philippine government's crisis response was coherent, decisive, and tactically effective. Virata and the economic managers competently contained the financial crisis. Marcos's imaginative political moves contained the political crisis. But, once the national heart attack was over, the buildup of social arteriosclerosis continued: the financial situation deteriorated steadily, political support eroded steadily, communist guerrilla organization proceeded, and Marcos's health slowly worsened.


 The Crisis of 1983

By the beginning of 1983 the Philippine economy was weak, its finances perilous, and its political support nearly gone. The government was running huge deficits in order to finance the bankrupt companies of cronies. Privately and publicly, in such organizations as the Makati Business Club, businessmen were actively expressing their dissent, and a leading group prepared a paper systematically and overtly challenging government policies. The Catholic Church decided in the spring to initiate publication of two newspapers designed to spread truths the government was attempting to suppress. These developments signified the shift of the center of the business community and the Catholic hierarchy from passive discontent to active opposition. The core of the Philippine elite now actively opposed Marcos. Financial developments paralleled political developments. By the autumn of 1982, at least one major U.S. bank had warned the Philippine Central Bank that immediate rescheduling was required to avoid an economic tragedy. Awareness of looming crisis had led the Central Bank to begin massive falsification of its reserve and current account statistics. Official reserves declined by $1.4 billion between December 1982 and July 1983, the month before Benigno Aquino was assassinated, and another $0.2 billion in August-September. In April-May 1983, months before the assassination, Development Bank of the Philippines Governor Melchor   and Prime Minister Virata successively visited Prime Minister Nakasone of Japan to say that the Philippine financial situation was hopeless without a Japanese bailout. The "errors and omissions" row of the balance of payments, the best single indicator of capital flight, hit $1.9 billion in 1981 and $1.2 billion in 1982. During the second week of August, President Marcos experienced a health crisis and announced that he would take a three-week vacation to finish writing several books. That announcement triggered a spasm of capital flight.7 Because these developments had proceeded so far, the assassination of Senator Aquino could cause very little additional capital flight and hastened the country's debt moratorium by at most a few weeks. Along with the political and financial crisis, there was a further problem that went critical in 1983-a moral crisis. It is common in the Third World for leaders to enrich themselves, and most Third World populations, including Filipinos, take a good deal of this for granted. The family of President Suharto in neighboring Indonesia has become exceeding wealthy, but despite considerable sensitivities surrounding the issue, Indonesians know about this and tolerate it as long as the Suharto regime is clearly contributing to the building of Indonesia. By early 1983 it had become clear to both governments that Indonesia, because of falling oil prices, and the Philippines, because of mismanagement, faced a potential financial crisis. President Suharto immediately curtailed billions of dollars of projects, mostly run by his family and friends, and imposed on them a reign of austerity that averted an Indonesian financial crisis when OPEC counterparts like Mexico were going under. Marcos's reaction was exactly the opposite. Imelda Marcos went on a wild spending spree, making sure that a great deal of money was moved out while there was still opportunity. This accelerated and deepened the Philippine crisis. Knowledge of her behavior served to confirm that the regime was morally bankrupt.8 The assassination transformed moral indignation into political action.














The experience of the less developed country borrowers is filled with irony, but nowhere is this more apparent than in the Philippines. At the end of the 1970s the country seemed to have joined the third generation of rapid Asian industrializers. Economic growth had accelerated in the mid-l970s, despite the first oil shock and the recession in the industrialized countries. Investment rates were comparable to those of Korea. The structure of exports had shifted rapidly away from primary commodities, toward light manufacturing goods. Even agriculture expanded, as irrigation investments and new strains of rice turned the Philippines into a rice exporter by the end of the decade. Economic policy was managed by a group of universitytrained technocrats, who enjoyed the confidence of the country’s external creditors, and the Philippines was among the first countries to take advantage of the new, extended financing facilities of the IMF and the World Bank. The Philippines was also favored by the international banking community, and the “Philippine desk” became a path for rapid advancement within the international divisions of many commercial banks. All of this would unravel rapidly after 1980. The Philippines was hit hard by the second oil price shock, as were other LDCs. A domestic financial crisis led to the failure of a series of major companies, many of which were bailed out by the government at great expense. The balance of payments deficit widened and was financed by more rapid external borrowing. The domestic growth rate fell year after year, even as surrounding countries were beginning to recover from the world recession. Political opposition to the government of President Ferdinand Marcos grew and spread to more The opinions expressed in this study are those of the authors and not necessarily those of the National Bureau of Economic Research nor of any other sponsoring institution. Financial support from the United States Agency for International Development