Philippines - Conclusions from the discussions with the Philippine Economic Mission

.. 14 7 . CO~~FIOENTlAL i .Puge 1. "' PHILIPPUJES Conclusions from the Discussions t·Ji th The Philippine Economic Hission I. The Pr..ili npine ~conomic Probl-em 1. 11 .A!"nong all countries emerging from 1·re.r and years of e~1emy occUTJa- tion, the Ph;_lipuines is in a unique economic position.nl/ It has nm·r a ree,l income per head at leF:!st eq_ual to pre-Nar; it has abunde.nt dollar resource~., a stt'lble currency, and a flo\·r of imuorts t·rhich is unrestricted and in gree.ter volume thf!n ever before in its history. This situation derives maii.".ly from le.rge United States Government payments for \•Jar damage and for pensions for "'ar veterans, and from United· States Army and l!avy e:c:;endit'.lros; in 19L:j- 1911-7 these recei~;ts totalled over $750 million and from mlcl-19L~8 to 1952 t-lill amount to $940 million (of 1:1hich, $693 million "Jill e.ccrue :rom :del- 1948 to 1950) ~ 2. This floH of dollars means that the country Iurin.g the next four years 'JJill he.ve, "'ithout loans, enough for~'ign e:~chanc-~e receipts to hny rough:cy hrice the amount of goods l'l.nd services ,.,hich it could buy v!i th the proceeds of its ex;~orts alone. IIIt is the good fort1me of the Phi1iT;i:i1':'s that, at a time Hhen it urgently needs imr>orted capital ec,uipment to rehab- ilitate and develop its industries and Agriculture, the means to buy it are abundantly at hand. The principal Philippine economic objective for the next fe,:r years should be to take r-dvantage of the extraordiner-<J op-portunity presented by this unusual flo~·' of foreign exchange. 11 3· The e.im of the Rehabilitation and Development Program is thus "to increase the productive cauacity of the economy to the point '''here it can currently earn the higher standard of living i•rhich the payments from America J./ All quotA.tions are from the Report .?lld Recommendations of the Joint Philippine-American Finance Commisbion, June 1947.  Page 2. "!ill temporarily support.n In the longer run, it should also prepare for an adjustment to the gradua.l lof:S after 195h of the favored position of the Philip0ines in the American market. If the foreign exchange available is \orisely used Pnd. i f internal finance measurccs and institutional cha11ges for the channelling of savings into the progr?m of econonic development are taken, the prosnects of achieving these aims look reason?J)ly gooC:.. 4. The Joint Finance Commission, reporting in June 1947, felt tl1.,:;1.t, 9ending the establishme!lt of the Central Bai"..k, there 1·rov.ld be a tem~,orc,ry shortage of funds to invest in economic de~relopment but thct, after the establishment of the Bank, the Government Is financit:".l :r)osition Fould ·oe eased. The Commission 'Jointed out that 11 In addition to the s~1ecia1 fund of approximately 200 million pesos t•rhich vill then be created, the Government should be realizing greater proceeds than :s.t present from taxes, domestic borrot·'ing and the sale of surplus property.ll The Commission therefore recommended 11 that after the establishment of the Cer..tral 3an1': the Philip:Jine Government strive to meet its entire investment requirem~r.ts from internal sources. In the event th~t such sources are insufficient to provide a de- sirable rate of Pgricultural and industrial exp~?.nsion, the Ur..ited States Government should give full and Syinpathetic consideration to ~:my req:uest of the Philippine Government for additional I"$Sistance ·" II. The Economic Develoument Plsn .5. The economic developnent plan 19L~9-J.953 presents the prospective Philippine investment program in the form of 66 projects involving a total exp~nditure of $982 million, of t'hich $450.3 million are foreign e~:change re- quirements and $.531.7 nillion (i.e. 'f 106).4 miJ.lion) represent local currency ex:oenditure. This is an estimate of the prospective net investment in the Philippines comprising both private and Government investments, including public "'orks, but excluding probably housing construction which is estimated CJ.t $62 • .5 million \orith foreign exchange requirements of $1).8 million. The distribution of this investment over the various sectors of the economy is shoNn in Table A.  Page 3• TABLE A Estimated Cost of Economic Develo~Jment Plan. 1949 to 1953 Total Cost Foreign Exchange Local Currency $m. egui v. $m. ~.!.....!J.9Ei v. _ Agriculture 262.1 87.8 17~.3 j\1ining 32.6 17.0 15.6 Industry (including Po'ITer) 176.0 no.2 65.8 Transnortation and Communications 229.7 173.7 56.0 Public 1/orks 259.6 52.6 207.0 Housing 62.5 13.8 48.7 iVIisc. Service Industries 22.0 9!0 1].0 Total 1044.5 464~1 580.4 Total (omitting Housing) 982.0 450.3 531.7 6. An arrnroximate indication of the distri1n1.tion of this investment through time is sho~m in Table B. TABLE B Estime.ted Cost of Economic Develo:oment Plan 1949 to lOS) Total cost Foreign Exchange Local Currency ;pm. equiv. ;:f!n. h~me eg1dv• 1949 206 115 91 1950 211 105 106 1951 239 106 1:33 1952 177 72 105 195'3 2 41 ---~ 4_9_ 924 441 483 Public Works - Paid by ':far Damage - not distributed by ~ears 120 18 102 1044 459 585 Error in distribution of investment in mining 5 !)_ 1044 464 580  Page 4. 7. The pro,jects Rre, pri!Tl8_~, reasonably selected, 'but are to be considered a.s a (;'eneral descri "'Jtion of development objectives, reXh.er than as a detailed blueprint of a plan. The estimates of cost are pre- sented as an indication of the order of magnitude of the finance involved, and not as close costi:ngs. In so far as sl')ecific nrojects 'tdthin the -program m~=~,y be the sub,ject of loan a:n:Jlications from the I.J3~R.D., deta.iled cost estimates ,,Jill have to be su~;plied b;y the Phili··nine re1.1resent.::tti7es and examined by the I .:s.R.D. staff. Table J3 does not take account of rmy tec"P..nical lini ta.t ions in tir:1e for the mobilization and absorption of these investments, e.nd the estinates of foreign exchc·nge 11 req<::.irements 11 r-re basod on "commi tments 11 , and not on actual 11 )ayments 11 • The Balanee of ?~yments estimates for 1948-19.52 in Appendix I also ta]m account of tmports of 11 Deyment" 1! development goods on a "commitroent 11 , a.nd not on a bc"siso -1 8~ The financing of the de-velonment ·orogram invobre s consio.erat ior..s affecting both the external and intern?.l fiDx.,!1cial resources of the Phili:_opines. So far as external costs ere concerned, t~·Le position is ex- aminec't in Sections III and IV beloN. So fe,r as local costs a.re concernf'd. the position is exami11ed in Section V belo'·· III. The Ba1ance of' P::1vments 9. The Phillppine Hiss ion's Balance of Pa;vments estimates for the years 1948 to 1952:£/ are set out in some detail in Appendix I. :'he coBt of 11 development imports 11 for the development program is includ.ed in the cost of Im~1orts in Appendix I, 'but is shm·m sepe.rntel~" in the folloning smnmary (Table C). J./ :0Tormally, Hhen ord.ers are 'Jlaced, a. cleoosit of at least 25% is r.:~e.de; moreover, Hhen e letter of credit for the b~"l::>.nce is esta.blished, the Phili~Jpine bank hos to have sufficient c,ollar cover with the United St;::>.tes correspondent! .2.1 See sections 11-13 belot·' for clifference betvreen these and the I .:B.R.D. estimates.  r, • . Page 5'" TABLE c Balance of Fa~nuents 1248-!22 (in $millions) (Estimates of Philinnine !Vlission) 1248 12!±2. 1250 1251. 19~2 Total Receints 714 670 615 535 449 Payments (excluding Cost of Deve lonment Im'lorts) 6?2 6J8 560 503 422 Surnlus or (Deficit) 42 32 55 32 (30) 131 Add Deve lonment Imnorts. 119 113 114 74 420 Final Surnlus or {Deficit) 42 (87) {58) (82) (104) (289) 10. Estimates of Balance of Payments are necessarily uncertain and subject to large margins of error. :;;or the nresent ym;r:nose, both the Philinnine Ivlission and the I.?.R.D. have made the conservative estimate that future nrices of the main exnort itemr- will fall substantially (e.g. conra 'Prices by 60%, sw~ar ';rices by 14~, abaca nrices by 30% and lumber nrices by 25%, beh•een 1948 and 1952). It has been assumed that im"')ort prices 111ill fall by 5~~ ner annum (i9e. by 20% bet\'/een 1948 and 1952). The estimates are therefore based on the exnectation that, on the whole, the terms of trade \,rill move against the Philinnines. It has also been assumed thc.;t the investments made during 1948-1952 ·,..rill not yield any foreign exchange return until after 1952. 11. In line ':lith the recommendations of the Joint :Finance Com:nission the Philinnine Govern;nent is nrenaring for the adontion of ne1.'l devices for limiting the volume of imnorts: such as imnort controls, excise taxes,  Page 6. and selective credit control. It is imnortant that every encou.ra,=;ement should be given to the adoDtion and imDlementation of all devices airaing at a reduction of imnorts. As an immediate basis for realistic pl<mninf;, a 20% reduction by 1951 or 1952, '1Thich is the Philinpine theoretical target• may vell be over--o·(}t:i.mistic; but i t may be useful to keen in mind that each 5~6 by 'vhich the reduction falls short of the 20~ target \•rill cost the balance of Payments approximately ~25 million per ~~ar. The Philiu-nine ;vassion estimates that the total value of imnorts \•Till 'be reduced by 6% in 1949, l D;b in 1950P and 15% in both 19.51 end 1952. The Bank, \'fhile believing that the target of 20% reduction \•;ould be attain- able by 19.52, considers it reasonable to ex1Ject reductions of 10% in 1')49 and l5$b in 1950, 1951 and 1952. According to the Banl:i s esti:nates; the total reduction of imnorts accomnlished in 1949 and 1950 \·Till be greater by $48 million. lv. The Forej_gn Ex~hange Reserves 12. The dollar balances of the Phil:i.pnine s on December· Jl; 1947, v1ere as follm·rs: Official balances in u.s. Treasury and banks $424 million Private and ba.nk balances __§4 million Total 4)488 million The Philinnine lvlission's estimate of total balances as of December 31, 1948• is as follovrs: Balance January l) 1948 $488 million Surulus in Balance of Payments 42 mil.li.Qn Balance December 31, 1948 $530 million. 13. Using the Philippine t.Ussion•s estimate of import reduction (6-10-15-15:)), the tote1 dollar reserves of the Philip;1ines t'il1 dec.U.~·. to !'lbout $303 million at the end of 1951 and to about $199 million, at the end of 1952, Phili:)nine Hisl'lion Estimate (in $mUlion) Total 'i:'ot<.1 DoJ.lar Dollar Bal. of Payments surnlus Development 3p1ances at Balances of deficit at end of ye~r Imports e~d of ~'eftr beginni¥ of .excluding deve1o_Ement imports 1949 530 +32 119 44J 1950 +55 113 385 1951 -f 32 ll4 303 1952 - 30 7!~~ 199 Using the Bank's estimate of import reduction (10-15-15-15;0), these reserves will be $351 million a.t the end of 1951 and $2!~7 million n.t the end of 1952, I.B.R.D. Estimates (in $million) Balances at Balance of payments beginning of surulus or deficit 8t Total Do2.1ar end of yeDr excluding Development Bal.?nces at develonment imnor~ Im'"lorts end of V88.r 1949 530 f 54 119 1950 465 f 81 113 433 1951 433 f 32 ll4 351 1952 351 - 30 74  Page 8. 14. The Bank is in agreement vrith the Philippine I'-iission thc-'lt the total clollar balances as of December 31, 1948, \·rill amount to a:p;noxi;:;ately $530 million and that the 11 officialtt balances ':rill be about $470 million llrhich 1-rould correspond to currency in circulation of e.bout f940 million. The ne1N" Central :Sank legisll:>t ion does not require a 100% dollar reserve for currency in circulation. The Joint Commission recor:1.rnended thAt, after the establislliaent of the Central :Sa~~. the currency reserve should be calculatedas a ratio of possible foreign exchange requirements anci 11 thB.t a conservative ratio t•ould be 50%. 11 The I .::S.R.D. ,,:,ithout using a r.1athematical formula, and making full allo,ance both for the effects of i:rroort lir:Jite.tion e.nd for the presently conceived development ')rogram, makes the equally con- servative assum·:Jtion th.at the Central ::Sa-c:k vill "tish to maint;:·.in for the next fe''' years a currency reserve of at least $)00 million. It is evident, therefore, thA.t the Philipi)ine authorities can draliT u~Jon their foreign exchange reserves to some extent for financing soundly justified development projects. Assuming that the figures of total dollar balances in the te.bles in section lJ above include from $50 to $60 million of urivate and bank balances in 1950 and 1951 (a reasonable estimate), development iuports as planned by the Philippine Goverr~ent can continue until 1951 before the minimum balance of $300 million for currency reserve is endangered. The tables in question (section 13) show· that this minimum l:rould not be reached, according to th9 Phili~1pine estimate, until early in 1951, or, according to the I.::S.R.D. estimate, late in the same year. V. Interr~l Financing 15. The peso requirements of the development ')rogram are estimated at about "fl060 million for the period 1949 to 195), or ebout '1212 million  Page 9t ner annum. A survey of the Philinnine national economy estirr.a tes the resources available for consumntion and investment at 14•5 billion in 1947. The neso requirements of the develonment 1Jrogram renresent a net inve::;,t- ment ann~~lly of 5% of the national income• This is by no means excessive for that level of incol!le (roughly ;!220- 240 ($110- 120) ner canita). If the internal mechanism functionB smoothly and -orovides for the YJroper channeling of savings, no inflationary danger need result from an invest- ment nrogram of this magnitude. 16, The following sources of canital can be envisaged. A> Pr~vate Sources (a) Canital ne1vly 1'l&id into cor1Jorations 1 rertnershins and coo-ceratives amounted to around "150 million ner annun in 1946 and 1947• This does not include capital in- vested in enterprises organized as individ~l proprietor- sh~psi It is not too ~~ch to exnect that, <Lider the imnroved economic conditions of 1947-53, 170 million per annum will be forthcoming on that account, or a total of 1350 million for 1949-1953. (b) Individual and business savin6s are on the increase, but no estimate has been nresented at this time~ Bo Governmental Sources (a) Taxation;. The present annual budget, vthich i8 be.lanced, amounts to about i"JOO million, that is; about 7% of the national income. Already it is financing a conoiderable amount of goverTh~ent reconstruction. It seems reasonable to assume that increased taxation revenues could be achieved which 'vould raise total revenues to :/350 million per annum. The use of the resulting budget surnlus of :/50 million ner annum for capital formation would yield 1250 million for 1949~53•  Page 10. (b) Domestic Borro1·:ing uill be one of the important features of the financial program of the Government.. Uo o~uantitative estimate has been given. (c) Borrm·ring from Central Bank. The Rer.abilitation Finance Corporation expects to rt::ceive, e.s a subscri.)tion of capital and loans, an amount up to fl50 million to be used for the financing of the development program. Borrovings from the Central Bank during the first years ought not to exceed this a!:JOunt, in order to este_blish and maintain confidence. 17. Incor;1ora.ted capital (f350 million), budget surpluses (1250 million) and loans from the Central Earur (fl50 million) thus accocu1t for {750 million of the 11060 million envisaged. A gap of f310 million remains to be financed by borro~:ring. This does not aupear to be unduly high if it is remembered that the establishment of the Central :Ba:lk \·rill induce com- mercial banks and insurance companies to invest more of their fu~&s in the country. Even i f the establislu'llent of a governtJent securities market is a slo~:r process, the ·orosuects for it should be good. The raising of the internal finance needed for the costs of the development program does not therefore present insurmountable difficulties. 18. There are additionf>.l :problems Hhich are presented by the hanr_Hing of the internal financing of the dollar requirements. These are still to be discussed 11rith the Phili''1)ine Government. They are important problems, because the distinction behreen the pesos required for "local c~pital 11 and the pesos required for dollar eY.:penditures is not essential from the point of vieH of internal fina.ncing.  Page 11. VI. Conclusions 19.. The 191~9-.53 economic development program e,l! 1er.rs to be ':!ell- conceived. Its cost will be approximately $980 million, of Fhich abo1.;.t $L~50 million Hill be in foreie;n exch1mge and the balance of $530 rnillio;;.t (fl060 million) in loc.nl currency. 20. The provision of the necessa:ry local currency should be •·Tithin the capacity of the Philip!)ine economy, so far as the percent~ege of hwestment to national income ls concerned. It (loes not follo1·~, of course, that the mechanisms for assuring this pr011ortion of savings "rill be Rdequate or successful; great care should, therefore, be exercised to see that this internal financing should not be a source of infl'ltion. 21. l\fanr;o>ver vrill not be a liraiting factor in the economic development ;_Jrogram, provided thFt vocatiorutl training and guictence is undertaken ~')romntly a.nd on an adequate scale to :Jrovide for the needs of the :orogrp,:::. These needs are expected to be especially critical in the building and construction in- dustries. 22. The dollar resources of the PhiliplJines l·rill be sufficient to meet the foreign exchange costs of the development :Jrogram, even on a co:rwlitnent or prepayment basis, through 19SO e.nd possibly lot1ger, '·lithout drr:.i·ring UJ)Oll foreign exchange holdings vrhich 'lrmuld h..ave to be regarded as currency reserve. 23. Beginning in 1951 .... - assmaing that the entire developne;nt p!'ogram is carried out - it may be necessary to r"'sort to external borro,·ing to nvoid excessive dra\·'ing U110n the currency reserve. 24. External borro\,ring FOUld raise the follO\''ing very import[;.nt problem. Ability of the PhilipJ:lines to service exterMtl lonns after 1951 Hill depend upon the success of the country in adjusting itself to tvo major changes in its economic circumstances: (1) the sharp reduction or cessation of  Page 12. extraordinery United States exl)enditures; £<_nd (2) the gradU8.l l.os"l of the U.S. ryreferentia1 market. It 1·rill be difficult to meet the effects of these changes unless measures a:re taken :::>romptly to carry o·J.t the recom- menda.tions of the Joint Philippine-Americe.n FinAnce Commission. TLe }eriod 1948-50 11 ill afford an op·•Jortunity to adopt measures for conservi:'lg fore exch2nge (including private holdings and accretions); chal"~!lelint; loenl savings into the economic develo:oment 'Jrogram; $'nd for observing the re.- sults of these measures, Estima.te of :B~1?nce of Payments, 194-8-1952, as presented by the Philip:_Jine m~,sion. October 27, 1948, I'  BALANCE Ol!, P.b.Yl,[!L'i,T'I:S as submitted by Philippine Mission • (~lllions of pesos) 1949 1950 1951 1952 HECEIPTS 1. Exports ............................•• 695 698.4 714.9 711.6 6?3.1 2. Remittances of FilipL1os in U. S •••• 30 25 20 15 10 ). Tourist expenditures ••••..•....•••••• 20 25 25 25 25 4. Interest and dividends from government investments •••...•.•.•• 6.5 6.6 6.7 6,8 7 5. U. S. Army and Navy expenditures ••••• 300 112.5 88.5 73.5 73.5 6. Pens ions to '::rar veterans •••.•.•.••••• 72 88 98 100 100 7. Hospitalization of war veterans •••••• 3 30 20 14 10 B. War Damage nayments ••••••• !•••,•••••• 300 355 256 125 Total Receipts ••••••• ! ••••••••••• 1,340.5 1,229.1 898.6 PAYMEJITTS 1. Imports •....... , ................... ,- •• 1,113 1;248.9 1,150.2 1; 0.59. 3 9)8,0 2. Freight and insurance •••••••••••••••• 111 105.2 95~2 84.9 80.5 ). Interest and dividends (gov 1 t) •• , •••• 5 3.5 3.5 3.4 1.4 4. Expenditures of Philippine Govern- ment abroad.................... 5 5.5 6 6.5 7 5. Tourist expenditures •••••••••.••.•• ,. 23 20 15 10 10 6. Amortization of long-term capital.... 6 56 6 6 8 7. Remittances of foreign residents..... 65 60 55 50 45 8. Others •.......•...................•..• 15 15 15 15 Total Payments. • •••• ~ •••.•...••• , 1,341 1.514,1 1,345,9 1.2J'j.l 1,104.9 Surplus (Deficit) ......•. (Pesos) ..• 8).5 (173.6) (116,8) (164.2) (206.3) · (Dollars)~·· 41,75 (86-,8) (58.4) (82.1) (103 .15) $41.75 • $(J)0.45) ($288.7)