HOW BAD ARE THE ECONOMIES OF DEVELOPING WORLD, like the Philippines, IN THE WAKE OF THE WORLD FINANCIAL CRISIS?
By Kevin Stoda, just back from Manila
This last July 2009, IMPACT magazine in the Philippines published an article by Charles Avila. The article was entitled, “How bad really is the Philippine Economy?” Avila began his piece by reviewing the results of the high level U.N. summit in London June 2009.
In short, that hyped-up summit was considered by many to be a failure. “The first major conference on the financial and economic crisis to involve all countries ended with rich countries blocking substantive reforms demanded by developing countries. The UN conference did however push key issues up the international agenda, such as the need for a better system of international reserves, and for genuine policy space for developing countries.”
Avila notes, “The aim [of the UN summit] was to identify both emergency and long-term responses to mitigate the impact of the crisis—increasingly perceived to be the worst global economic downturn since the Great Depression—especially on vulnerable populations. The hope thereafter was to initiate a needed dialogue on the transformation of the international financial architecture, taking into account the needs and concerns of all countries of the world.”
Avila’s overall assessment for developing countries around the globe, and Philippines in particular, today is: “Prospects for an early recovery have faded, forcing countries to prepare for a prolonged downturn in trade, investment and employment.” This is quite in contrast to the claims by some economists around the globe that China and other countries were not all that badly affected by the global economic crises.
Avila charges, “The stark reality is that the situation in the world’s developing countries—which contributed least to the crisis and yet are the ones most severely affected—has led some economists to warn of ‘lost decades for development’ which could have catastrophic consequences for rich and poor countries alike. It seems to be bad news all around.”
In his report, Avila turns for evidence on labor and quality of life in the Philippines (and in other developing lands) to the “ILO, the United Nations’ International Labor Office” which points out that “global unemployment in 2009 could increase over 2008 by a range of 18 million to 30 million workers, and more than 50 million if the situation continues to deteriorate. Giving a report it called ‘realistic, not alarmist’ the ILO said that last scenario of 50 million unemployed would easily mean some 200 million workers, mostly in developing economies, could be pushed into extreme poverty. The number of working poor—people who are unable to earn enough to lift themselves and their families above the US$2 per person, per day, poverty line, may rise up to 1.4 billion, or 45 % of all the world’s employed.”
The ILO report for this year states clearly that “the proportion of people in vulnerable employment—either contributing family workers or own-account workers who are less likely to benefit from safety nets that guard against loss of incomes during economic hardship—could rise considerably in the worst case scenario to reach a level of 53 % of the employed population . . . .”
The bottom line for Filipino readers of that particular IMPACT magazine is that “in the Philippines, in its latest survey, the Social Weather Stations (SWS) reported last May that unemployment among Filipinos has risen to a record high of 34.2 percent. This would translate into 14 million Filipinos who had no jobs during the first three months of the year. Of that number, some 2.9 million had lost their jobs within the previous three months. Of these 2.9 million, 13 percent voluntarily left their old jobs, while 12 percent
were retrenched—9 percent were laid off and 3 percent had unrenewed previous contracts.”
OVERSEAS FOREIGN WORKERS
Like many Asian nations, a large number of Filipinos go abroad each year to earn money.
In both the United States and in the Middle East, Filipinos often stay for generations and annually subsidize development in the Philippines to a great extent. As of 2008, the Philippine Overseas Employment Administration (POEA) stated that “the number of Filipinos deployed abroad grew by 25.9 percent to 1.005 million last year compared with 798,731 the year before. And last year they sent home $14.4 billion, equivalent to 10 percent of gross domestic product. This year Manila is projecting remittances to exceed $16.4 billion, despite the crisis which could make the figure difficult to achieve.”
However, as Avila points out several times, there are already clear signs that “first world” jobs have dried up in the current recession. This means that remittances, i.e. which subsidize the countries’ development due to the failure of Philippines’ structure of crony capitalism and politicians, are expected to be lower than anticipated for the rest of this year—and next one, too.
BANKING & INFLATION
Due to widespread economic corruption and cronyism in the Philippines, foreign investment and lending in the country is consistently below what its many natural resources would lead one to expect. As noted above, this underdevelopment and corruption leads many Filipinos to try their luck abroad each year.
This widespread dissatisfaction with the Philippines political economy is also reflected by the fact that international investment exposure in the form of foreign banks is lower than in neighboring Southeast Asian countries, such as in Hong Kong, Taiwan, Thailand, Malaysia, and Singapore. However, this very lack of exposure to international banking standards has been a blessing for the Philippines in 2009 as the country has, in fact, been less affected by bank closures and financial stress than has been the case for other developing states in Asia.
The worldwide economic squeeze is also reducing inflation in the Philippines this year as a whole. However, since early summer, the US dollar has been rising against the Filipino peso. National interest rate cuts in the Philippines are continuing with the hope that such cuts will lead banks to lend more. NOTE: Whether this policy will function as desired is questionable based on USA and Japanese experiences over the last decade.
Meanwhile, the national debt burden has hampered the nation’s credit ratings both nationally and internationally. This means that at a time when Philippine government spending is needed, fiscally and politically the time for developing and implementing is not quite right. On the other hand, 2010 is an election year, so pork barrel spending is likely to be deployed soon by the most powerful congressmen and kingmakers.
EXPORTS? and Production?
Like many Southeast Asian states, the Philippines is dependent on the exports of natural resources—e.g. from coco nut oil to fish to timber. The call for bigger spending projects this year have led to a greater national call for more mining, but horrible abuses by the mining industry in the past in the archipelago are likely to keep investment in large scale coal mining off the table for the next year. Meanwhile, lack of production of all types in “first world countries” today has significantly reduced the market for national resources.
Avila is interested in social welfare production and improvements for his homeland. So, he turns to the economist, Paul L. Quintos, to understand the global mess that the Philippine’s economy is embedded in.
Quintos, who is considered a radical but logical economist (quite like Nobel Prize winner Paul Krugman), “quite perceptively wrote last year that the current global financial crisis — with the US economy at its epicenter — is merely the latest and so far most severe in a series of financial crises that have erupted since the 1970s. At the most basic one finds the capitalist system itself to be in fundamental contradiction between social production which enables great strides in productivity on one hand, and the private ownership of the means of production which ensures that only a few profit from production by exploiting the many. The contradiction inevitably leads to crises of overproduction relative to the capacity of people to buy the productive system’s commodities and products. Before long, real production that cannot realize enough profits gives rise to shadow financial products that enables some to make tons of moneys until reality catches up with the shadows, derivatives and other profitable mental figments and thereby manifest real crisis.”
According to Quintos [here cited by Avila], “In 1980, the value of the world’s financial stock was roughly equal to world GDP, itself bloated. By 1993, it was double the size, and by the end of 2005, it had risen to 316% — more than three times world GDP. Government and private debt securities accounted for more than half of the overall growth in the global financial assets from 2000-2004 – which indicated the role of leverage or debt in driving this process. In 2004, daily derivatives trading amounted to $5.7 trillion while the daily turnover in the foreign exchange market was $1.9 trillion. Together they added up to $7.6 trillion in daily turnover of just two types of portfolio capital flows, exceeding the annual value of global merchandise exports by $300 billion.”
Early on in the 2008 financial crisis, Quintos had already asserted: “While the value of financial assets is ultimately grounded in the value created by the working class in the process of production in the real economy and cannot [should not]diverge too far from it, asset bubbles can form for a period of time driven by ‘irrational exuberance’ (in the words of Alan Greenspan). The positive expectations of financial speculators feed on each other, bidding up asset prices in a seemingly endless virtuous cycle. But like all ponzi schemes, reality eventually takes over and all it takes is one negative development, e.g. rising home foreclosures, to reverse expectations and send the entire house of cards crashing down.”
This is exactly what happened.
Meanwhile, Quintos has predicted that both the global economies short and long term responses in this crisis will continue to be to put pressure on workers to give up still more earnings and benefits. This continued pressure on employment has affected the Philippines adversely for many years as University of the Philippines, Professor B. Diokno, has noted “In 2007, 924,000 new jobs were created; in 2008, the number was down to 530,000. This level of job generation is unacceptable for an economy that is expected to generate between 1.0 to 1.5 million new jobs every year.”
Furhtermore, “[a]ccording to Diokno, a responsive jobs creation program should address five sets of unemployed and underemployed workers: those who are currently unemployed (2.7 million), those who are underemployed (6.6 million), those entering the labor force (1 to 1.5 million), those who will lose their jobs at home, and finally, Filipino overseas workers who will lose their jobs abroad.”
Avila, in early August 2009, noted that the Philippines government has discussed--but not yet implemented a large 330 billion peso spending program. This program is alreacy called the PERP (Philippines Economic Resiliency Plan).
According to Avila, the plan includes:
• PhP160 billion in incremental government allocations;
• PhP100 billion for government corporations, financial institutions and the private sector;
• PhP40 billion for corporate and individual income tax breaks; and
• PhP30 billion for temporary additional benefits from the social security institutions – Government Service Insurance System and Social Security System – and Philhealth [national healthcare program]
However, this plan is very short on details and with a major national election brewing in the Philippines for Spring 2010, it is not likely that any well-integrated spending plan will be implemented till then.
OTHER DEVELOPING LANDS
China, South Korea, and a few other Asian countries have already developed & targeted investment and redevelopment plans. Many were passed and implemented in the past year—while countries like the Philippines are dragging behind the response-curve during this global economic crisis.
On the other hand, many Asian nations—from Dubai to Hong Kong—have had to be bailed out from abroad over the past year.
Nonetheless, China is legging behind in the area of structural reforms. Lack of such reforms will keep China from disentangling itself from the same sort of historical national inequalities and economic bubbles across its geographic and economic landscapes that developed nations are facing today.
In this manner of failing to tackle structural change in 2009, China and the Philippines are quite similar. They are lands divided between (a) economies of the wealthy and (b) economies of the impoverished. This division leads to institutional corruption and cronyism which will continue to hamper growth and progress for these nations as a whole for decades to come.
On the other hand, the USA (which behaves like a developing country these days) certainly has multiple economies as well.
For example, already those who are enamored with the elite American banking and Wall Street way of life are discussing a better economic world but most Americans still suffer and will continue to suffer despite signs that the recession or depression may be over for the upper-level US economy.
In short, as Max Fraad Wolf, author of “One Nation, Two Economies” stated recently on Democracy Now this past week, “[E]veryday, . . . mainstream Americans kind of felt like they’d somehow skip [the recovery] it. They had an outlook on the US economy that I would call ‘it’s fine and dry down here at the bottom of the hill, but, boy, they’ve got quite a rainstorm up there on the top of the hill.’ And as often happens, when there’s a rainstorm on the top of the hill, the water finds its way to the bottom of the hill. And that’s what we see with nine-and-a-half percent unemployment, with 350,000 foreclosures a month, and with, you know, crazy stories coming out yesterday of people in California, which has better than ten percent unemployment, not even bothering to look for work anymore, but to get into backyard prospecting for gold that may have been left behind 150 years ago. I think that’s a pretty quirky indicator, but it’s not a good sign.”
In other words, if the developing world (including China) wishes to follow the USA capitalist model—as the Philippines has traditionally done—greater and greater divisions in national development are too be awaited. However, Charles Avila and other reformers in the Philippines would prefer a national revolt to get the political economy properly jumpstarted for all Filipinos.
This is why Avila concludes his piece for IMPACT magazine with his allusion to the Philippines’ People Power Revolt of 1986—which toppled the then-dictator Ferdinand Marcos. Avila notes, “To be sure, unless people-powered participation is organized by change agents of all persuasions, the plan will be short of details and long in sub rosa appropriations and last minute looting may lead to worse economic misery and heightened social unrest—or, maybe, at last, to real change.”
Such a revolt would be the Chinese Communist Cronies’ Nightmare.
COMMENT: I know the USA needs a people’s power revolt.