8B The Political Economy of Reform during the Ramos Administration (1992–98)

The Political Economy of Reform during the Ramos Administration (1992–98)


Background The Long-Term Growth Context Charting the Philippine’s economic growth record reveals a boom‐bust picture with the economy unable to sustain growth of over 5 percent for more than six years (figure 1). The only time that growth stayed above 5 percent for six years was in the late 1970s. Even then, the economic expansion, financed by massive foreign borrowings (from 1975 to 1982, the country’s foreign debt stock quintupled from $4.9 billion to $25 billion), paved the way for a deep external payments crisis in the early 1980s. The Marcos dictatorship (1965–86) ended soon after in February 1986. The first twelve years after the restoration of democracy in the Philippines coincided with even more volatile growth. A brief “boom”—two years of over 5 percent growth—was followed by a “bust,” where growth became flat or even negative. While this was a period of significant economic reforms—both the Aquino and Ramos governments espoused liberal economic policy—and capital buildup, it was also a period marked by political difficulties (several coup attempts through 1992); natural disasters (including a major earthquake in 1990 and a devastating volcanic eruption in 1991); and, toward the end, the Asian crisis. A debilitating power shortage moreover contributed to the economy’s contraction in 1991.

While the growth episodes were brief, the quality of growth, grounded on employment‐generating investments in plant and equipment, may be deemed superior to the current remittance cum consumption‐driven economic expansion. Investment activity then was based on tremendous amounts of domestic and international goodwill and, especially during the Ramos administration (1992– 98), a lot of consumer and investor exuberance and confidence in the Philippines. As reported in one international magazine,2 “new businesses, once discouraged by the unfair domination of Marcos cronies, are busting onto the scene,” and projects in the hundreds of millions that businessmen “could only dream of before” became regular fare. The macroeconomic environment was moreover characterized by stable prices and record tax collection as a percentage of GDP.3 Reforms—trade and investments liberalization, tax policy reform, privatization of government assets, restructuring of government enterprises— enabled investments to come in while improving government’s financial position. The Philippine government under President Ramos was finally seen as one that could “set its mind to do something and actually do it.”4 Indeed, the reforms brought the economy within sight of newly industrializing economy (NIC) status and by 1997 the Philippines was one step away from an investment‐ grade rating.5   Philippine growth today owes much to the reforms introduced over this 12‐ year period. Outside of workers’ remittances that have allowed the economy to  tread a more stable growth path since 2002, some of the economy’s most dynamic sectors (for example, electronics exports, telecommunications, business process outsourcing) would not have been possible if not for the reforms during this period. Likewise, in light of the present global rise of oil, food, and other commodity prices, a number of the reforms during the period (for example, removal of oil subsidies, creation of an independent monetary authority, tariff reduction) have directly contributed to current macroeconomic stability.

The Reform Context When the Ramos administration assumed office in 1992, the Philippines, in analysts’ view, remained the sick man of Asia. Per capita income growth continued to lag versus neighboring economies (figure 2). In a region where most other economies were growing robustly, the domestic economy, weighed down by a large public debt inherited from the Marcos regime, coup attempts, and a severe power shortage, had failed to keep up, with output even contracting in 1991. Indeed, a lot of the traditional features of the economy that observers have noted to be more Latin American than Asian persisted.   Inflation rates and interest rates were at double‐digit levels; public debt stock was high, which resulted in government devoting over a third of its revenues on servicing interest payments; and domestic savings were low (figure 4), in part due to persistent government deficits, such that investment financing relied heavily on foreign capital (figure 5). There were, moreover, extensive end‐ user subsidies in basic sectors (for example, power, water, fuel, transport) that not only worsened public corporations’ bottom lines but also, coupled with an ill‐defined regulatory regime, discouraged private investments.

Political analysts regard the Ramos administration as a reformist government. A year before it came to power, the Philippine senate had voted to reject a new treaty that would allow U.S. bases to stay in the country. Expecting dwindling American support following troop withdrawal, President Ramos had “made Filipinos responsible for their own fate,”6 fostering closer ties with neighboring economies, and exploring other avenues for expanding international trade and investment (including accession to the World Trade Organization in 1995 and acceleration of tariff reduction to a uniform 5 percent rate under the ASEAN Free Trade Agreement).   The administration’s vision had been to pursue reforms that would create a level playing field, which was seen as the key for competition to thrive and for the Philippines to be globally competitive and prosperous.7 President Ramos had a broad reform agenda covering not only economic liberalization measures (for example, continuing trade liberalization, privatization, dismantling monopolies and cartels) but also institutional reforms (tax and customs administration, bureaucracy, judiciary), redistributive reforms (social reform agenda)