Philippines - Economic growth

F% U -J'74 TO -f Rnnrt Nno WW IEl .51 ( N 1 This report may riot be published nor may it be quoted as repre- senting the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATTONAL BANK VCOR RECONrTR TjTTnJ AWn DEVETODMWT ECONOMIC GROWTH OF THE PHILIPPINES: A Preliminary Report Prepared by the Bank Staff January 19, 1962 A I nMO~4 v." r. r rnr% 'krr4e4^1R M^ MTnr. rn±irr±±'MWM Dragoslav Avramovic Chier or mission Chier, General Studies Division, Economic Starr, !BRD John A. Edelman General economist Staff member, Department of Operations - Far East, IBFW Ravi Gulhati Economist Staff member, Economic Staff, IBRD Samuel Lipkowitz Adviser on energy, Staff member, Economic mining and heavy Development Institute, industry IBRD Joe Motheral Adviser on agricul- Staff member, Agricul- ture ture Division, Depart- ment of Technical Operations, IBRD Stefan Robock Adviser on light Professor of Business industry Economics, Indiana University (U.S.) Jacques Volmuller Adviser on trans- Professor of Highway portation and and Traffic Engineer- communications ing and Transportation Economics. Delft University (The Netherlands) TABLE OF CONTENTS Page Summary of the World Bank Mission Report i-x Cnapter I. introduction I. Statement of the Problem 1 I!. Prospects and Programs for Major Sectors 10 A. Agriculture 1 B. Industry 19 C. Mining 31 D. Power 33 E. Transportation 35 F. Social Services 41 G. Implications for Over-all Investment, Output and Employment 44 H. Implications for Foreign Trade and Current External Account 48 I. Income and Expenditure 52 IV. Financing the Investment Program 53 A. Foreign Resources 53 B. Financing Public Sector Expenditures 55 C. Money Supply and Credit 64 D. Financing Private Sector Investment 66 E. General 68 SUMMARY OF THE WORLD BANK IMSSION REPORT Goals and Issues 1. The economic program suggested by the IBRD Mission for the period 1962-66 has four principal aims: acceleration of the rate of economic growth, substantial strengthening of the industrial and agricultural bases of the economy, increase in employment and improvement in external financial position. In order to achieve these goals, great increase in the development effort will be necessary. Also, meticulous care will have to be exercised in resource allocation and use. 2. A radical step-up in develoDment exoenditure is dictated by the gravity of the structural problems which the economy faces. Population is presently increasina at least at L.25%ner annum. with nrobable acceleration to a 3.5% rate in the latter half of the 1960's. Labor force growth exceeds 3% or 300.000-350.000 annually. In addition- thAr is a lroA hanklow of unemployed and underemployed. 3. The only lasting solution to the unemployment problem is a large increnna in thA rtnt of jnueq.mnnt anel nnnQunnnAt. ann1iarnt.iOn of Pnonnmin growth. The present rate of investment is insufficient to assure growth in incon in AyAqq of nonulaton ^4ncrana anA i+. ia alao inwffiient n employ the expected increment in the labor force. M'breover, there is a dnnap-r thn. t.hp 4nvoofman+ v-n mn%r -P.ll in +hn *-ana4tion -Pv^nm cotn+Y-ellaA to a more free economy, unless offsetting action is taken. If the investment -rm.p in -a .- a +1LA -114-11,a, 4+ -a I- c--P4A-n +1,, aJ A4 +nA that the employment problem will be aggravated and the present sluggishness of the economy cnt inuAd 4_ In t.he past +thp agrate 4iveatment ^iiItl waseatvl lwin relation to growth in output due to some special factors. There was growing utilien+Aien of iiviia=A .aaJ+w 4a g.4cul+i,e the -iin4"m A^c.m a +ha .r%ifal stock in transport facilities and the relatively low capital cost in the in- dusrie-mstl cosumrs anuactres-whchwers established. These1 factors will lose their force in the years to come. The economy has reached a o+nn a A-ralawn+ 4. Ak4nk +ka m.n'aCdun4.n winha 4- Up an+ - -41 1 - ta v a VA v &wLupmnu u wLasL n ULAV mow oUAu LLC&&AmuQ Wv.- vu 'mu mwU have, on the average, a higher capital intensity. The backlog in transporta- +4 n - n-+ I.- --A n T ---4+---+ 4- -. 4^1 am n m n w 4 k A- --+ 4 e A n . uaw v mw McC up. =. Lvusum in social ovaice--wa,Uch do U n Aow meAu wUC J increase output-has to be stepped up. In other words, the economy would have o mourr" a u.0Au-4 wi u e uA. L u J n_ A p1_ __ v u As .U_ ---'I w__ --1.. 46- m - U) LUU L1"61=1 W.L.LUILo U11= 1 U11V JD %3Vt:;1 .L LMJ rULJ WLO~ UILA.J VV. SIUM.Lr tain the past rate of per capita growth. And since we assume that the nation- al goal is to accelerate growh, the requirU invtmnUt out y mut be mnuc larger, particularly if a solid base is to be created for sustained economic deveopment in e I future. - ii - 5. The external economic position of the Philippines is vulnerable both over the medium term and in the long run. World market prices of coconut products and abaca - 40% of exports - will in all likelihood be lower in the next five years than in the late 1960's. Also, the dollar proceeds from U. S. expenditure in the Philippines will fall somewhat following the devaluation of the peso. The resulting deterioration in foreign exchange position and in real income must be offset by increases elsewhere if the nation as a whole is not to suffer. 6. Over the longer run, the economy must prepare itself for the time when its special position in the U. S. sugar market will no longer exist. The adjustment problem is not limited to sugar. The preferential position for other exports to the U. S. will also gradually disappear and veterans' pensions and some other receipts will taper off. New dynamic export products must be developed as quickly as possible to supplement the traditional export items. At the same time, import substitution in intermediate products and raw materials must be undertaken on a serious scale. These are the conditions for economic independence and self-sustained growth. They call for l4rge capital outlays in new lines of production and for highest standards of administrative and managerial efficiency. Suggested Program Outline Total Investment and Public Outlays 7. On the basis of an analysis of the capabilities of the Philippine economy and of production and demand prospects in various economic sectors, the Mission believes that the investment rate should and could be stepved up from an estimated level of less than 14% in 1956-60 to 17.5% in 1962-66. Total grmss investment hill for 1962-66. exnressed in assumed post-devaluation prices, would amount to P14.3 billion, compared to R8.5 billion in 1956-60, i-p- an incrasn in eal termn nof 705. rmnA fixYd nanital outlay alone would rise by close to 80%. If the Philippines met this target and then undertook Another mnior invARtmpnt and navinga effort in the latter 1960's. there is a prospect that ten years from now the country may have enough productive facil- itieA and qkill, to anqirP q+.AdAy anwth In real income and in the welfare of its population. 8. The largest increases in investment outlay for 1962-66 are suggested in 4wiustr wIl+rI +van-mn^Y+.A nv.en r an na +.Ar And cnnstru&tion. Capital formation in organized industry is projected as more than doubling in +h 1,AO-AA a 4;A .Ad 4" nrr41nin1o A A^1nh1ina. PrimArilv in sunnott of growth in these sectors, transport investment is also scheduled to double, Ahile -+414+4-4 4 r n,A +%p a,n+-4An t n aA1AOhilrl 'iral nrA- portionately even more. Capital formation in mining should rise by at least IAJYJ~ . Lil LL AJ. J.AI UUIL U LLA. - ~ outlay is expected to increase sharply during 1962-66. By contrast, the other ii.Lf.L iantlyin alute amounts, a projectedUVp to.V. sho an01S, e significant significantly in absolute amounts, are projected to show an equally significant Z---- d 1 t -- .j.i J.....4 4.-.,1t-I "1orr_f +_, 01 4n~ lok.JA The principle here is that commodity-producing sectors and their supporting activities should have nriority claim em toal resoc. avabla b en investment. 9. Of the total investment projected for 1962-66, direct public sector MAJVEhv nmw+.e M I. oq-44 M 0411.1a '~4~ 4- ln&f- ALo atr' assumed post-devaluation prices). The increases are particularly large in econrnmj1 ic develr-m"+ __...4 -..1 4--... .1.- -------A -11 4 construction equipment. Among the social services, a rise of 50% is foreseen inC~~S r%11^ 1 W+haA %AALA..U.L.UI1 %fELA. l quIuunbSe Meure 1U.LbV Lt~ OUgV0%- ion that a moderate public low-cost housing program be initiated in this period. 10. Government contribution to capital formation is not limited to direct VubliL instment. Ite Mission projects a large amount or public capital trans- fers to the private sector for purposes of investment. These transfers are provisionally estimated at %1.4 billion for the five-year period 1962-66. The largest components are government assistance, mostly through public credit to tne inaustrial sector, and government support to rural credit institutions. While the actual amounts will have to be determined from time to time depending on concrete needs, it is believed that a substantial financial assistance will be necessary in order to meet the investment and production targets set for the two sectors. Programs by Main Sectors U. The main items of the proposed investment program in organized industry are the establishment of the steel industry and the associated growth in metal working and machinery industries, several-fold increase in fertilizer production, doubling (or more) of capacity of the cement industry, establish- ment of the aluminum industry, doubling (or more) of capacity of the plywood and veneer industry, large-scale expansion in pulp and paper production, rapid growth in food processing industries and rounding out of capacity in textile manufacturing and petroleum refining. If the scheduled investment is carried out, the structure of the capital stock of the Philippine industry will, in the spaa of five years, have changed dramatically in the direction of basic indus- trial processes. 12. In agriculture,, the Mission envisages a large-scale expansion of the livestock industry, accelerated development of "new" crops (cacao, rubber, citrus, arabica coffee), substantial growth in corn production for the home market and for exports, and improvements in the rice economy. The use of fertilizers is projected to treble in the next five years; this will be facil- itated by a large-scale expansion of rural credit. Large increases in extension services are suggested, and also, a sharp step-up is proposed in government research work on irrigation and drainage. in order to make possible. at a later stage, a greatly expanded program of irrigation works. Major increase in the public resettlement program is su2gested. In forestry. the Mission urges the Government to adopt a firm and enforced policy of selective cutting; otherwise, there is a danaer of suicidal forest destruction Also. a mainr effnrt on re- forestation is needed in areas now suffering from erosion. The measures proposed by the Mission and involving cnnniderable volumA of maintenanna and cnnstrntion - iv - activity, amount, in effect, to a rural civil works program which could lead to a significant increase in employment. 13. In transportation, the Mission proposes a large increase in invest- ment expenditure on roads in order to catch up with past arrears and to lay a foundation for future economic growth. Resurfacing program embracing about 4,000 kms. of selected highways is suggested with the purpose of removing existing bottlenecks. In addition, the capacity of the road system should be exDanded to allow for increased traffic. Roads must also be constructed in order to open new land for cultivation, particularly in Mindanao. The expend- iture on nort construction and enlargement is proiected to increase consider- ably and the investment on airports and air fleet - the most dynamic of all node nf tran.norrt in thA Philinninpq - i. nrnnan.qH tn treble comoared to the past five years. 14. Investment in power will have to accompany the anticipated growth in n unr-1OtVn-OC Vntres and the exrctdA ermano4nn in hnshold une of electricity. Large additions to generating capacity will be necessary; rela- tivedaly greatest TjUl be the expasio of the MinA.na mr"A wMe-4,h rlhaet supply power to the steel, aluminum and other industries. Growth in Outnut, Employment and Income 15. The projected investment outlay, together with better utilization of exis ."ig capac'-ty. should lead to a gro-th rate Jln real outputofve6%i the next five years - a substantial step-up from the recent experience. Indus- trial output is expected to increase close to 11/ annually, muig i1 exueo of 8% and agricultural production around 5%. 16. Employment should rise at a rate in excess of 3% per year, thus creat- ing 1.7 million new jobs between 1960 and 1966, compared to an esUtmatUe 1.1 ml- lion in 1955-60. In addition, the projected increase in productivity per worker should be accompanied by a reduction of under-employment and by an increase in per capita income particularly in agriculture and manufacturing. Visible unem- ployment and under-employment is expected to fa." from an est,U U/ u. Uno labor force in 1960 to between 6 and 7% by 1966. 17. Despite the heavy increase in investment outlay and the expected deterioration in the terms of trade, the growth in real output is expected to be sufficiently fast to enable private per capita consumption to rise during the period. Between 1960 and 1966, the projected yearly growth rate is 4.0 or about 1.5% per capita. This is better than in the past five years, although, admittedly, it is not much. However, the Mission does not see any other alter- native. A degree of austerity in the next several years is an absolute condi- tion for the solution of the structural problems of the econorW and thus for a faster increase in output and consumption in the future. Resource Mobilization Financing the Program as a Vhol1 18. The national savings effort which is required to finance the suggested - v - investment program will be substantial. The Mission suggests a target savings rate for 1966 of 15% of gross national product, compared to an estimated 12% in 1960. This implies that between one-fourth and one-fifth of the increment to income accruing within the next five years should be saved (i.e., the mar- Rinal savings rate of about 22%). This is difficult, but not unattainable. Some other countries have done it. The Philippine economy itself, starting from a much lower average savings level, has succeeded on two occasions in the post-war period in realizing a high marginal savings rate. What is required now is another maior unward nush to a level which will represent a solid base for further advances in the latter 1960's. 19. If an effort of the suggested magnitude is made, the national economy shoulid he n-ale t finann ahnit. all_r bilIinn nut. of the fntal gross investment bill of P14.3 billion, or around four-fifths. (On a net basis, i.e., excluding Anvenvion, +h4a . il A Irk r%ii+ a+ &2 4 cri+l r l zain fhavi '7rW - ra A rinmetic -e.L c a , _'__. .. - -t -ts - --- b - -. ___ .-r-,. __-' effort along these lines, it is natural to assume that the Philippines will wish the P3.50 rate). The Mission has made the following illustrative assumptions (In millions of U.S. dollars) I - Gross Inflow 1. Unilateral receipts (a) Reparations 125 () Settlement of war claims with U.S. 70 (c) Grants from the UN, etc. 5 Sub-total 200 2. Conventional loans (a) Disbursement of existing loans 120 (b) Disbursement of loans to be negotiated 420 a/ Sub-total 540 3. Net new foreign investment and repatriation of Filipino capital held abroad 120 - 170 4. Reinvested earnings of foreign companies in the Philippines 190 5. "Soft" loans, i.e., loans repayable on "easy" terms, and grents 150 Total Gross Inflow 1,200 - 1,250 a/ For this amount to be disbursed, total loans contracted should aggregate $500 million -vi- II - Outflow 1. Repayment of conventional loans (a) Existing loans 225 (b) Loans to be contracted .7u Sub-total 255 2. Replenishment of foreign exchange reserves 150 - 200 Total Outflow 405 - 455 III -Net Inflow 1. Net inflow including reinvested earnings of foreign companies in the Philippines 800 2. Net inflow excluding reinvested earnings 600 20. It should be emphasized that both the totals and the components of the totals quoted above are subject to change depending on the assumptions made. In particular, with a clarification of policy towards foreign private investment, more private foreign capital may come in than projected above, thus reducing the burden on the domestic economy. Furthermore, the Mission has not explored with any possible source of finance how realistic the pro- jections of other flows are. They reflect only the Mission's guess of what the Philippine economy could, under favorable circumstances, wish to achieve. 21. In this context, the attention should be drawn to items 1:2, 1:3, 1:5 and 11:2. The Mission believes that it will be impossible to carry out the program unless foreign exchange reserves (item II:) are replenished to a level which is a reasonable minimum given the size and the character of Philippine ex- ternal trade. Indeed, unless international reserve is restored and the present currenev uncertaintiev removed- items T:2. (conventional borrowing) and 1:3 (net new foreign investment and capital repatriation) will not be realized. Further, the anial nimp nf the flnw under T!2 (ennventional borrowing) will depend on the composition of new indebtedness. Large short-term and medium-term borrow- inp will exhaust Philinnine creditworthiness more auickly than assumed above, thus resulting in smaller net capital inflow. Finally, all the flows, but nrticularly under Tt2 and T-1 (Isoft" loans) will be directly dependent on tle magnitude of the national savings effort which the country is ready to 22 'The num2rn net inflow of npitnal of A800 million is double the size the Philippines obtained in 1956-60. Moreover, if reinvested earnings of for- eign owne."u a"= a-veAAn in hnt.h naP ndA the nrnieted net "cash" inflow for 1962-66 works out at $600 million, compared with actual receipts of 4200 tions inludingthe solutio o t pubic f9ance probvie cartain condi tions, including the solution of the public finance problem* are met. - vii - Public Finance Problem 23. Fiscal policy will have to play a major role in financing during the Ue five years. As mentioned earlier, direct public investment for 19b2-6o is projected at P4 billion and capital transfers are provisionally put at V1.4 ubilLon. In addition, there are current government expenditures and some other items. The Mission has attempted to keep increases in these at a Minimum. Nevertheless, a substantial. rise is necessary if reasonable targets of econom"c and social development are to be achieved. The Mission has projected an expen- sion in current government outlays on goods and services of 45:' to a level of around P6.9 billion. Current transfers (mostly pensions and interest) are projected at about P500 million. Adding some minor items, the total bill for all levels of government in the period 1962-66 is estimated at V12.9 billion. Government Expenditures, 1962-66 (millions of pesosl Direct Outlays Current Expenditures 6.949 Fixed Capital 3,94D Inventories 10 Total Direct Outlays 10,920 Current Transfers Subsidies 90 Pensions, backnav. etc. 260 Interest 175 Total Current Transfers 525 Land Purchases Canital Transers rovisin l) 4. 10 meet this bill, the Government will have the funds resulting from taxes at existing rates, earnings of government corporations and accumulation of funds by GSIS and ESS. Provided total income of the economy increases accord- ing to the Mission's projection and provided some other favorable conditions, in- cluding better tax collection, are met, the Mission expects total government revenue to aggregate somewhat above P10 billion over the five-year period. This would still leave a gap of around P2.8 billion. A part of this gap will be financed by direct government borrowing abroad. The Mission has assumed that out of the total net capital inflow of $800 million (or net "cash" inflow of $600 million) as much as $300 million would represent public sector use. - viii - Source of Government Funds, 1962-66 (millions of pesos) Taxes at existing rates 9,200 a/ Surpluses of government corporations 410 Increases in assets of GSIS and SSS 510 Total Domestic 10.120 Total Expenditures 12.895 GaD 2.780 Borrowing abroad 1,050 Remaining gap 1,730 b/ at includes F150 million from the margin fee on the assumption that it will remain in effect through fiscal 1963. Without the margin fee, the total would drop to P9,050 million, and the gap would increase to P2,930 million. b/ P1,880 million without the margin fee (see a/ above). 25. The Mission believes that there is a scope for bond sales to the private sector other than the banking system. Conditions for this are financlal stability and a competitive level of interest rates on government bonds. We assume that the first condition will be met - indeed this assumption underlies the whole program; and we urge the government to adopt the second, i.e., to make government bonds attractive for private investors by raising the interest rate. If this is done, we would Droject the proceeds from the sale of government bonds to the private sector other than banks at P150 million. This compares with only a nominal amount in the preceding five years. 26. For all practical nurnoses, the Mission rules out any large amount of government borrowing from the banking system. Given the likely demand for com- mercial credit by the commodity producine sectors and by the trade. and given the limits imposed on total bank credit by the need to build up foreign exchange reserves and to avoid inflationary increases in money sunly - the scope for government borrowing from the banks is severely restricted if not non-existent. 27. This leaves an increase in taxes as the main source of additional government revenue The Missi on bel I eves that the -nn fr innreased taxation is large in the Philippines. Philippine government revenue as a proportion of crns. nntional nrnriiint in vypr lnw nnmn1rP_ wi th nt.h-e l A A -u a nPri aintri es The average ratio for the last five years is 10% in the Philippines compared ta) Tnnr thacn 2rW. in irTnra, Ceylon" a Taiwan. Mo7prever the niro-ll 07"lt.111- of taxation is such that revenue receipts are not sufficiently responsive to uncreasew tax inco-me wair tak impe . -s reve exenitu11 prl tob ems pace whic the unless new tax measures are taken. Given the expenditure problems which the flnro,rmn pac-nno +V- 1.4 'k dm- st n .4 n vrou, JV'..tI -~&l IJ .a- Q.o -*.~ WSLA . W' '%A. L a W * J.ILle PI.±iLssion±±i~±y~gg~~ ~b~ If.[±ULU LUJ r or a tional taxation the sum of V1,500 million for the period 1962-66. (If the margin fee does not remain in force Uhrough fiscal year 1963, the sum woula move up ou P1,650 million). If this target is achieved, tax revenue in 1966/67 would amount 0o ±4" of the estimated GivP. Even after achieving this target, the Philippine tax effort will remain modest compared to neighboring Asian countries which have lower per capita income. Seen in this perspective, the target appears realistic. If the Philippines implements this goal, it will be demonstrating a national determination to bear sacrifices in the pursuit of economic and so- cial progress. 29. The necessary tax reform must be preceded by thorough investigation. Nevertheless, the Mission has some suggestions which the Government may wish to consider even while the investigation is in progress. The Mission refers speci- fically to export taxes on selected commodities. Exports will be earning extra profits as a result of the devaluation, and a part of this windfall gain should be captured by the public sector. We suggest differential export taxes rather than a uniform export tax, on the grounds that the latter is detrimental to an appropriate allocation of resources. Large expansion in the export volume of sugar (beyond that for the U. S. market) and logs - and probably of abaca and copra - is likely to yield returns to the national economy lower than equiva- lent increases in exports of other aericultural. mineral or manufactured pro- ducts. Also, there are very strong economic atd social grounds for much higher taxes on real estate - both urban and rural. Ie would suggest that with better enforcement, faster progress on land surveys and registration, and an increase in rates. the vield of thiR tax may be increaed substantiallv. Another ob- vious possibility for increased revenue is a higher tax on gasoline. At 8 centavons a litpr the Phillnpinn as tav is among thO 1W;_t. in the Wnrld. Further, there is scope for increased yield of the personal income tax. The Mi nion mana~mnd k a upwa rvsion of the rate structure as well as vigorous steps to reduce illegal evasion. Finally, it may prove necessary to raise the cr-o'nrate t+nv rate. T.'c nve.preent rna .4 s Ie cw. , s low, raten would be vJ-r&-+-1 from the economic point of view if a large part of post-tax profits were rein- ZI CA £.L. va ±a V JUVL1i LLJU.Li,CUV0 W&ICL% L O kA10 .LtA LAU tj LIC)F.iULI _LL U 1 JCL. i L investigation should reveal that reinvestment continues to be low even after the ± JI..LO z"Ou CmIu .LAL. AXIL DJ.UUCLUXLJLJ DUUL.L.LZUU, ULI:= Lal= 0 U~ ).L '.'i.PU rate profit tax should be raised. Conclusion 30. The investment program which the Mission suggests is large. ihile a substantial provision has been made for foreign financing, the largest part of the burden will have to fall on the domestic economy. This is unavoidable. rurUnemore, L view Vf Ute DuuUbary increttu in governmenu outlays - Uiretu public investment, current expenditures, capital transfers - the success of the developmental drive will depend on the tax effort. The required Increase in taxes can and should be arranged in a way which would affect primarily if not exclusively the income groups which can afford a higher tax burden. Inflation- ary financing of development would defeat its own purpose. It would shift the burden to the lower income groups when the very purpose of the investment program should be to lay a foundation for a sustained improvement in their welfare. - x - This is particularly so in view of the existing inequality in income distri- bution which is a disturbing feature of the Philippine scene. Inflationary financing would also lead to distortions in the pattern of investment and it would reduce capital inflow and thus curtail the aggregate amount of resources available for investment. If the government and the society are not prepared to stand a considerably higher tax burden. then the investment program should be cut back. 31. On the other hand, if a savings and investment effort of the sug[ested magnitude is made. the Philioine economy could Innk ton.wards a hrighter future, To be sure, a further upward shift in the rate of investment and savings will be necessary in the later 1960ts- and this will call for A nwi mainr nffnrt- Hnw- ever, the burden will be proportionately less. The economy will have made a sig- nificant stAn forward in raiing thp inenm level An industriAl tnnnlpy orient- ed towards intermediate and eventually producer goods industries will be under Wav P1 Anti fu Iori t-n1 +.Irql reouce i.i11 fn on be ued in arationnp In ner. There is a possibility - indeed a likelihood - that with economic improve- ment nn iirl-in-i-7nfirm +Iia rae of --l+4 o - -+h ,-11 errenallr slor do-. Above all, there will be an increase in confidence that the structural problems of the Philippine economay are sUsceptible to SOl1Ution.- Projections and recommendations in summary Projected annual rise 1960-66 Net Domestic Product (excl. terms of trade effect) 6.30 Gross National income Uncl. terms of trade effect) 5.7 Population increase 3.25 Per capita private consumption 1.5 Import value (1959-60 to 1966) 5.5 Export value (volume 4.5%) 3.0 Money supply 1961-66 6.7 1956-60 1962-66 1960 1966 Ratio Investment/GNP 14% 17.5% 13.60; 18.6% Ratio Savings/GNP 11 14.0 12.0 15.U Marginal savings ratio 22.0 Ratio total public current revenue/GNP 10.3 13.2 11.0 14.0 Marginal tax rate 22.0 Public savings/GNP 2.7 4.9 2.5 5.0 Private savings/GNP 9.4 10.7 9.3 10.9 Net. capital inflow (ncl. reinvested earnings) 400m $800m ;68m %188m Net capital inflow (excl. reinvested earnings) $200m $600m ,30m 0140m Foreign debt ultimo 1961 and 1966 .390m $640m I. Introduction 1. This report summarizes the findings and recommendations of the Economic Mission of the International Bank for Reconstruction and Development which visited the Philippines in the summer of 1961. It will be followed by more detailed analyses of the major sectors of the economy. As these analyses are completed. some modifications of the targets suggested here may prove necessary. However, the essence of the nroblems which thi Philinnine economy faces. and the broad lines of their solution, are clear enough to warrant the submission of this Preliminnryu renny-f.t the+i Philinninp. GroVrnmPnt. 2. The reomnain f- the Miccinn na suiimn-ri7.ed in thp form of development objectives and suggested means to achieve these ojctives during the, periodA l6A0__AA The^ nature of then "nnmrnnnt.r should be clearly understood. No mission from outside could hope to produce ~ ..~ a ~ prga whih WOUIA 1 dei aeqal,,. -4- +1 0" the nh~le~rs k'1 ~ ~ ~ ~ ~ ~ ~ ~ .% "'~Ui a JLU±ILWL±~IVJ4. . LJ "j V~L Y ~ i- which an economy faces; only the national government can approximate development effort which seems necessary for the Philippine economy dUrinLg theu 1eXt five years. Thle dtaiUledu tarLIgts essentlUly.L lLus"- trate the general conclusions of the Mission about investment priori- ties; out only a further and more careful investigation of particular. investment projects can provide the substance of an investment program to meet Philippine development requirements. Furthermore, changing circumstances necesitate revisions in both the output and investment targets; and recommendations which are valid today may prove wrong tomorrow. For all these reasons, the program suggested here represents only an over-all framework which the Government may wish to consider in devising its own economic plan and the machinery for its execution. II. Statement of the Problem 3. The postwar achievements of the Philippine economy have been considerable. Rehabilitation from the heavy damage of the war was essentially completed by the late 1940's, when the aggregate prewar output level was restored. The economy was stabilized in 1950 and 1951 after a period of heavy drain of external assets. The prewar per capita income level was regained probably around 1953-54; since then, total national production has risen at an average annual rate of 5-6% and per capita output in excess of 2.5%. Judged by comparison with most underdeveloped countries in Asia, this is a fairly swift rate of advance. h. The major structural change since the war has been the growth of domestic manufacturing. Organized manufacturing (5 workers and over), which was limited to processing of agricultural products before the war. exoanded more than 10% per year during the 1950's. By 1960, it had become a significant segment of the economy, accounting for 12.7% of the net domestic product that year.1/ A vigorous Computed on the basis of relative prices expected to prevail after the nasmed ehanrna ne of Q3tWO tn TT.1 hPrnmA fuillv annlicable. At relative prices existing in 1960, the share of manufacturing in - 2 - entrepreneuriol class has emerged and the nucleus of a skilled labor force has been formed. The industrial base is still narrow; it consists essentially of a range of consumer goods' industries heavily dependent on im- ported raw materials. The direct contribution to employment is small - less than 3% of the labor force in 1960. Nevertheless, the foundation has been laid for future industrial growth. This future growth, however, will necessarily embrace costlier and more complicated manufacturing operations than in the past. 5. The established basis for manufacturing expansion is far from being the only asset with which the Philippine economy faces the future. Natural resources are rich and diversified. With suitable climate and wide variations in topography, the soil can produce, at low cost, an unusual range of food and agricultural raw materials for both domestic consumption and exports. A signi- ficant exception is wheat. Though diminishing, open spaces are still available for cultivation in Mindanao and other outlving islands. The mineral wealth includes sizeable, known deposits of iron ore and non-ferrous metals; during the 19190vs mining outnut more than dnbledPe Petronum exnloration is under way. although with still uncertain prospects. The Philippine forests, even after aith~ vi1Iitat.irm in t.hon YNe-._+jaT- %aiinA Of-ill v^iao fhp hnqi q fr fAst growth of wood-processing industries. Perhaps most important of all, the ArinnatAinal la-to in fha Philirninvnoa ia hrih miiieh hirrhi than in nn RvPrqie underdeveloped country, although the educational system remains more impressive in nanI+4+r +hianal4+w The rae aP 14+a-oe%r a avir flhi rmnhar rf r__- duates from technical schools and institutions of higher learning has exceeded, in he astfiv ye-s the capacit'y of the economy to absorb them at +q pnst- rate of growth. %J. LiLe X11.LJ.fL.LPin economiy wil LJ.IC%V= tlu U%-LL.L;"U ULCOV rL - - maximum during the next decade to solve the problems it faces. Five of these problems should be singled out: high and possibly accelraUting L-aC 0s uwt of.- population and of the labor force; low savings rate which may be further depressed in the transition from the old to the new exchange system; vulnerability of the Filipino.external accounts both over the medium term and over the long run; con- siderable backlog in overhead investment; and inequality of income distributIon which particularly affects the rural population of the Philippines. 1. Population Growth 7. The Philippines belongs to a group of countries with extremely high rates of population growth. The rate of increase was already high - and accelera- ting - before the war. Between 1903 and 1918, population growth amounted to 1.9% per year; it rose to 2.2% in 1918-1939. In the postwar period, the improve- ment in health standards has drastically reduced the death rate. The registered death rate is an understatement, but over time it can be accepted as a fair indication of the trend. 1/ The rate fell by 18% between 1946-5'# and 1951-55 and then by 22% between 1951-55 and 1955-60. On the other hand, most of the evidence suggests that so far there has been.no downward movement in the birth 1/ If anything, statistics on registered deaths tend to understate the decline in the death rate because the reporting of deaths probably has improved over time. - 3 - rate. Consequently, population growth has been sharply accelerated, with no obvious indication that this process has come to an end. 8. While the underlying trend is clear, field surveys and analytical work are not yet sufficient for a precise determination of the current rate of population increase. The intereensal rnte 1Q/P-1Q6 (3.8 ) is not a Viid because the 1948 census was unreliable.Furthermore, the past rate of iincrease does not take int. tAount .hp eonn trends in +ha Ao+h ra and +n lihelinno of further decline; the past rate also disregards the influence on the birth rate of cngesiq 4+Inntese g op-p of1 the- popultion Equally _V-- tions apply to using a rate calculated from registered deaths and births. As ~ V 4J~~L JULU~ L)V%OLI CL gI-t: ULJUV.L-r)Ua:LLUU, bility that births are understated more than deaths.i/ 9. After weighing the available evidence, the Mission believes that the rate of population grow-th in L9o-o) will not be less than 3.250 per annum, and may well accelerate to 3.4% in the second half of the 1960's. The under- lylir assumptions are that the crude bih rate will remain essentially unchangea - 48 per 1,000 of population in 1960-65- and that the crude death rate will tend to drop from an estimated average of 18 per 1,000 in 1955-60 to lb in 1960-65 and to 14-15 in 1965-70. This trend in the death rate is equivalent to a rise in life expectancy at birth of 2i years in each two succeeding five-year periods (starting from 47.5 in 1955-60), compared to an estimated increase of one year per annum in the period 1945-60.2/ 10. It is perfectly plausible to argue that the above estimate is an understatement. It may be that the current rate of population increase is as high as 3.5%. Theactual death rate may be lower than estimated above,A/ and its future decline may proceed faster than anticipated. But whatever the exact numbers, it must be assumed for purposes of economic planning that one can not safely assume less than 3.25% in the early 1960's and 3.4% in the late 1960's. 11. The economic implications of the above are far reaching. The rapidly rising number of children implies heavy expenditure on child care and education. There is a rapidly rising number of persons of working age, and this means a heavy investment in productive facilities to avoid increasing unemploy- ment, 1/ See Basilio Aromin, The Trend of Mortality in the Philippines 1903-1960, The Statistical Reporter. July 1961. 2/ This is equivalent to the "age-sex adjusted" birth rate of 53.07 per 1,000 women aged 15-44. as estimated by the UN-Government of the Philinnines. Ponu- lation Growth and Manpower in the Philippines, New York 1960, p. 45. 3/ The method used in the projection is the neomponent method"- where survival ratios are applied to the population within five-year sex-age groups. The survival ratios are obtained from arndel life thlAR (1QA.A4;oP = t5- loA(.70 0= 52.5). 0 A The revistered death rAtA in 1QAM wn 7-7 pa 1 _n-pn 4f 4t 4e aosmed +hot the degree of under-reporting of deaths is the same as that of births, and that the actuAl birth rate in Z4 (conmpaed +r +hp "4q+pv+A h4A++h re 29), the actual death rate would work out around 13, yielding a 3.5% rate of nonulation growth_ -4 - ras nu rrusuieP inureases ip Scnool-Age Population and In Labor Force, 1955 - 1970 1955-60 1960-66 1966-70 1955? Annual 1960 Annual 1966 Annual 197)-0 Average Average Average Elementary School Age Population (7-12) Number (in millons) 3.9 4.5 5.4 6.4 Average Annual-increase (in thousanc) 109 150 246 Annual Growtb,ate 2.6% 3.1% 4.3% Labor Force, including 10-14 Age Group Number (inmillions) 9.2 10.6 12.4 14.1 Average A;nual Increase (in thc1sands) 276 319 409 Annual c,owth Rate 2.8% 2.7% 3.1% Labor Force, excluding 10-14-Age Grous Numbe (in millions) 8.6 9.9 11.9 13.5 Averge Annual Increase (i, thousands, 257 331 37 Annal Growth Rate 2.8% 3.1% 3.1% Spcev Appendix Table 1. Population data are derived by using model life tables a indicated in the text. Labor force narticination rates far- 19 n"e +1- rtes Jsed in the UN-Government of the Philippines study, op.cit. Participation rates cor 1960, 1966 and 1970 are derived from the 1ntohelAn M1n !""ure- as app-- ing lo population not in school, adjusted for seasonal variations. 12. The yearly increment in elementary schonl-age pplation will be around 10,000 in 1950-66 and 250,000 in 1966-70 compared to 110,00O in 1955-60. The year.y job requixements will exceed 3nn nn and 4nn ,nn 4 th n-ex two periods, compared to 275,000 in 1955-60. The annual rate of growth in the labor force - *xcluding thel0-1L nop gr up, ere the emplo.ment p m i pressing- is projecte to accelerate from 2.8% in the recent past to 3.1% in the futue. 13. The eMDlo?nont. p-r^i0 4. 'ed increase inw 13- The -m---~t ~bmem s- not limited to the expemtea increase in the labo force. There Ia large pool of unemployed and visibly under-employed unvkers n thbe labor markk 4- -AA4+-t-- 4-- 7- ------ - t-- l-- - -- -, -nA a U%n oU U O unempLoymeut :n agriculture. On the lasis of the latest-vailable RSSH figuress2/ (October 1960), it is =af mn++.A t th,. number o. 4,-n..- ..-- - I -. - ' ti d that the n r o may unemployu amountea to o7,Uu or b.37 of the labor fcace.2/ The visible nder-employment - people working less than 40 hours f- Phlippine Statistical SulAy of Households. 0 ~ ~ ~ ~ ." / I-.4 - -. -A4 e 4 a .a T , e, 1-sn= .r -a+A -.* unemploymernt and uder-employment data to the new astimate of the labor f ce a week - was about 1,240,000 or almost 12% of the labor force 4/ If the visible unaer-employment is expressed in terms of man years, and added to the fully unemployed, the total unemployment equivalent is of the order of 1,035,000. The view is widespread in the Philippines that this is an underestimate and that full unemployment exceeds two million. 2. Savings 14. The only solution to the employment problem in the Philippines is an increase in the rate of investment, and a consequent acceleration of economic growth. Foreign borrowing can help to finance this, but it is obvious that capital accumulation will have to depend mainly on the domestic effort. In this context, the critical variable is the national savinas rate. 15. The official national accounts indicate an extremely low rate of investment and savings - 8.4% and 7.4% of GNP respectively in 1960. These rates understate the real magnitudes of Anital formtin and navinan. As a qblv prepared in the Philippines has shown,2/ the official accounts contain an under- estimate of construntion AMi-vity nrA +hptr nlc^ o.+iinIn# nfl na+ af durable goods. Benefiting from the material supplied by the Philippine atho- rities. the Mission hns +_ +.va ttemnp+ of toset ukeactattmens and has arrived at a tentative conclusion that the gross investment rate in 1i60 WAs close ton lqcf nre; +1- o ~ - -e somewhat "less than '10e 16. dpethsajsen,bh the invstentan savings Wi nteIIIs11/ must be considered insufficient to assure long-run growth in excess of popula- tion incresSe. Ther - - ---.a A, L-r siDUL. rEat:.onsJ Why, With a probable recent investment rate of less than 13%, the Philippine economy was able to achieve a rate of gr-t as high sO 5-6. TueUe rtelon include the growing utliLzation o unused capacity in agriculture, the running down of the capital stock in transport f es, the relatively low capital cost of the esiablished industries, Inese special factors will lose their force in the years to come. The economy fas reached a stage of development in which the industries to be established will have, on the average, a higher capital intensity, The backlog in transportation must be made up. Investment in social services - which do not immediately in- crease output - has to be stepped up. In toto, the Philippine economy must mun a muc higher effort compared the past i l a 0id basis 1s to be treated for a sustained economic growth in the future. 17. There are additional factors which make the investment and savings problem serious. The rates in the past were achieved under somewhat special cir- cumstances. Economic controls favored the organized manufacturing sector. Manu- facturers were able to import capital goods and raw materials at the official rate of exchange (2 for US$l), while their selling prices for finished goods, protected by severe import restrictions, were much higher, probably equivalent to the present effective free rate (P3.50 for LIS$1). The result was an extremely high level of manufacturing profits. The high profit rate provided powerful incentives for investment in manufacturing; at the same time, it enabled the manufacturers to borrow easily from commercial banks. The counterpart was a I/ Derived by adjusting the PSSH unemployment and under-employment data to the new estimate of the labor force. 2/ Ruben F. Trinidad, Some Proposed Improvements in the Estimate of Capital Formation in the Philippines. The Statistical Reporter, April 1960. - 6 - lower level of profits in the export sector of the economy, which was selling 4 m.Q wt. the official rAte of exchange. 10 The past system of control - onen to abuse. favoritism, corrup- tion, and capital flight - is now being dismantled, accompanied by currency devaUation . TAhe immedate effect o the transition from controls and the managed exchange rate to a freer market mechanism and a new exchange rate, has been to squeeze the prf4-s ofr tha use vmmrted raw materials. This profit squeeze, coupled with the uncertainties regarding future cost-price relationships and government economic polcies, has damened inditrial invest- ment. In the last two years, the rate of growth of the economy has slackened to about 4% or less - considerably betow the postwar aveag. -t e of investment activity in the export sector of the economy appears to be under way, it is questionable whether this increase wIii quickly an uy offstL decline in manufacturing. Over the longer run, there is no doubt that the de- valuation will prove beneficial for the Philippines by raiaing exportS, PtAmu- lating basic industries at home, compelling the existing manufacturing plants to improve efficiency, and reversing the capital flight. Over the medium term, however - while income distribution is adjusted to the new exchange rate - there is a danger that the over-all level of investment may fall. This the Philippine economy can not afford. Strong and determined government efforts are necessary if the tempo of capital accumulation is to be maintained and particularly if it is to be substantially accelerated. 3. External Accounts 19. The export structure of the Philippines, while dependent exclu- sively on primary commodities, is more favorable than in most underdeveloped countries. Exports are diversified, covering a wide range of products. Never- theless, notwithstanding the expected beneficial impact of the devaluation, the external economic position is vulnerable both over the medium term and over the long run. And since exports and other current receipts account for 20% of GNP,I/ their develonment will have considerable effects on over-all income growth and on the rates of savings and investment. 20. The Mission is not optimistic regarding future prices for coconut products and abaca. at least over the medium term.2/ The world oils and fats market, although not under such pressure as in some other primary products, is weak and unlikely to Jmnrove in the foreseeable future. A large expansion of soyabean exports from the United States and of groundnuts from Africa is in prnsent. Prices have already fallen subtantially from the 1960 average and in the mid-1960's may well be even lower than the present depressed level. I/ This proportion is computed on the basis of relative prices expected to pevUn of+Ce devai1-+4tin hecoman fUly a-nabcola 4 -a- uniina m1irrpnt ~ V .L. a.. '~, a..ca.U~A*J au...J -r -- - -- ---*_ -- earnings ($724 million in 1960) at the 3.50 rate. 2*/ In 1960, these two commodities accounted for 40% of total export receipts anu I-7 Uf Ital current account eCArnings.O 21. Vegetable oils in general are exposed to the threat of tec- nological changes which reduce their use in some manufacturing processes. Paradoxically, there is a chance that over the longer run this progress may turn out to help coconut products vis-a-vis other oils, in view of the pre- ference for coconut oil in some uses, but this must remain uncertain../ In the case of abaca, as far as can be seen, the effects of technological advance are one-sidedly adverse. The increasing use of cheaper synthetic materials in rope making and competition from sisal for some purposes, will probably drive down the abaca price from the high level of the late 1950's. 22. There are three implications of these expected price movements. First. the Philinine terms of trade in the next five years are likely to be worse than in the second half of the 1950's. This implies that in the future, real income will Prow less fast than real outnut. Secondly, foreign exchange earnings from coconut products and abaca are unlikely to increase, since the ri., in unlimp will he rnohly offset hv riptlining nrices. Thirdly. the Philippines cannot expect to solve their long-range foreign exchange problem hvr rorvirr nn av nonvicin rf h- fu n nemn i Po% Thpv will rRmAin nn impor- tant part of the foreign trade structure and their contribution to income should not b -i ~vi,.A io7r ;bu dyn,-amJi I qmavni narl whinh i-, q npcpssarv condition for a rapid long-run growth in national output, will have to depend othe expanson of other export com ites ildng mnuifacturedi p-roducts, I . U iS L oo Cl a r a t~ L.L Villh i t _LL J1Jr'-L L"J V. '" F_ __C' Y second largest export commodity-, is not a dynamic element in tnc for'.gn trade LUr~. uv4. Ii-t IVV~ y_rS itn -1 41-,1y LI 1U 1i J I ~L4.l .' l substantially expand sugar sales to the United State-. This will allcviate the loreign exchange p 0aem, although the exact amounto e netu. pCuccud rv sugar is uncertaii-. In the longer run, however, the Philippines will have to 2/ In the United States, a stagnation in per capita utilization of coconut oil nas resulted from two qpposite trends. On one side, there has been a rapid decline in soap-making under the impact of synthetic detergents, and a sub- stitution of other oils in margarine and shortening manufacture. On the othr side, there has been an equally rapid increase in frozen foods, confectionar7 and bakery goods manufacture, and increased use of coconut oil in the manu- facture of fatty acids, glycerine, chemicals, resins, and synthetic detergents themselves. It is conceivable that once the substitution process in soap making, margarine, etc., is completed, the areas of expanding usage will re- sult in a rapid increase in the total utilization of coconut oil. The same phenomenon may occur in Western Europe, but only after a substantial lag because the substitution factor is still very large there. The difficulty in projecting a trend of this sort is that technological progre5s may ultimately enable other oils to be substituted for coconut oil in rapidly growing uses. 2/ 25% of export earnings in recent years. 2/ It will depend on the non-quota quantity (491,000 short tons in 1961) and on the price at which this quantity is sold (currently 5.5/ per pound, the same as applied to the quota). The non-quota quantity and the priceo fer both quota and non-quota sugar are subject to change in accordance with U.S. regulations. count with a normalization of the world sugar market. And looking into the 1970's, the economy must prepare itself for the time when its privileged position in the U.S. sugar market will no longer exist. 24. The problem of adjustment is not limited to sugar. There is the preferred position of Philippine coconut oil in the U.S. market and preferential U.S. import duties for all other Philippine exports. This preference will gradually decline and ultimately disappear in 1974. It is true that the pre- ferential treatment of T-q nroducts sold to the Philinnines al.o will be reduced, and at a faster rate; this will strengthen the position of the import- substituting indnitrie. in thp Philinninq t+. thiq con not pliminat. the problem entirely. If the supply of foreign exchange remains a bottleneck in the coulntrylsecPnnmit-~'pmn n this is likel- -1th 1 4 will have to obtain a firm foothold in the U.S. market, in as wide a range of 25. J.. in ILA I. -V -A. L 4-4-~. --LI 4--.L - e l n n T. d* J. Y 2LJ~JJ VA.LUL = .LD sl .L Uu.L"'111 UL CLUJ LU1 ,Llr 4A.V C2 UC .1-L U * government expenditures in the Philippines. These expenditures now supply 13% of. carren-Iti-accu-Itj receipts.J . ille Uol".ar amLount W.L.i IU." ~iL)LL1fr11eU Uluu U11C4I peso devaluation because some expenditures are incurred in pesos. And over the Long run, the veterans* pensions - which in 1960 represented ov million out 01 a total of $82 million of U.S. government expenditures - will taper off, while the amount of military spending cannot be forecast with certainty. The decline in all these items will affect not only the foreign exchange position, but also the flow of savings in the economy; this is particularly the case with veterans' pensions. 26. There are offsets to the expected reduction in foreign exchange earnings. The prospects for exports of minerals are good, particularly in view 3f the devaluation. Sales of plywood are likely to expand quickly. New primary Exports, principally corn, will develop.1/ There are prospects for substantial i,port substitution, both in agricultural products and in manufactures. But all th.se offsetting possibilities will require large amounts of capital, as well as a d6termined policy of export promotion and import substitution. Any delay now will iost the economy dearly in the future in the form of a sluggish income growth or balance of payments crises or, mostly likely, both. 4. Income Distribution 27. Inequality of income distribution is one of the most striking features of the Philippine scene. No studies have been made of changes in income distribution over time. However, public opinion in the Philippines and outside observers both are convinced that if any changes have occurred, they have been in the direction of increasing income disparities. 28. The 1957 PSSH Survey found that 10% of families in the highest income brackets received 45% of total personal income. Another survey has shown that average cash earnings of wage and salary workers in 1956-57 were substan- tially below the minimum wage prescribed by legislation. The state of rural 17 The net result of offsetting movempnts is an xnort pr-i. nti on for i960-66 which indicates an annual rate of growth in export receipts of around 3%. - 9 - families and farm workers is the worst because of both the low productivity of Fhilippine agriculture and of the land tenure system, which has been the cause of the long history of agrarian unrest in the Philippines. 29. The last detailed count, in 1948, indicated a rate of tenancy of at least 50%. It is doubtful that any imorovement has occurred since: land refnrm legislation has been applied half-heartedly and with meager results. Many of the large farms are ownershin units- onerated in small nnrnpA hV tenants; consequently, the disincentive effect of tenancy is not offset by economies of scale. The failure nf Philinninp nYagriltu r + cho in ran productivity of food crops must be related, to a large extent, to the land tenure system. 30. Theo inaqial1t4ma in income Aist-ribu+i, ar-nl-arl co-ected by the fiscalsystem. The ratio of tax revenue to gross national income is around -ION, 1--hich is lower than inL- other 'Asian countries - despit%e theU fact thatU the Philippine per capita income is significantly above the Asian average. A --"-Q,UL±p)uIu income, although considerable outlays on education and health do have some redistributive effects. Even more 4-~+~-P ro 4.1- --- -1 -_ grwh Io -F- WA&IQ, I. 'AIU V.tWpoirt of economic grownh, a low max ratio limits the ability of the Government to capture resources for purposes of capital formation. 31. It is possible to argue that the existing concentration of incore and wealth can be converted into a source of strength for economic development. But this can happen only if substantial part of excess income is mobilized for investment rather than used for extravagant consumption. The challenge facing the Philippine Government is the necessity for a development program that will require substantially larger capital accumulation than in the past and for economic policies that will effectively mobilize and utilize Philippine savings capacities for financing investment. - 10 - MII. rrospects and Programs for Major Sectors 32t The Mission's proposed outline of a development program has not been based only on the need to solve the structural problems described in the preceding chapter. In estimating the over-all magnitude and the directions of the required development effort, the Mission has had two additional sets of considerations. First, the Mission has attempted to stay within the limits of feasibility, as determined by the prospective supply of resources, financial and human. Secondly, an attempt has been made to analyze the development prospects of the major sectors of the economy. This latter in- vestigation has included a review of both demand prospects and production possibilities in the main sectors. In effect, the development program has been built from below, i.e. on the basis of sectoral analyses; the claims of each sector have then been adJusted. on the basis of rouah notions of priority and returns to the economy, in order to stay within the ceiling dictated by the feasibility criterion- 33* Thin chantAr nntainn an ahbreviated vpr.iAn nf the Miqi.,ns sectoral findings. The following fields are covered: agriculture, manu- fanturi ng, mrini ng, tranportation, n !n cn seri -cs- The nn,iv i_ is focussed on development prospects, policy measures which should be under- t;akP-n and ornXapnditnre lenvels ner-sa-wr +o WChienre +hn errlne+a4o4 Most of the sectoral analyses contain explicit projections of required in- summaried at end~.U-J ofJ. thUJJ UU e prnhfm an- growt moel f t swuimarized at the end of the chapter in the form of a growth model for the ~ -' ~.,+1- -^--;-A ;1 ) 1 OZ - 11 - A. Arinulture 3J4. Agricultur, ishingr and forestry togither account dir,-,ctl*y- for around 34% of the Philippine national product, for some 605 of oxports, and fJ . U./,) 01. IUo U-a.! VjJ± Y111UL1U Ld . .. ULMt Vd..LVUI C1UU1_AA UW3 -r, .4L~'-- products by processing, transport and trade is also counted, the contribution iS0 ZsUbstan1taL_LY highr,U1 i alL res::pect.; Agricu_JluUre has an 4-muenso 'Aditionnl potential in the Philippines. And, because of the sector's great importance oU the total economy, 1 is essenuial that Uhi potenUtal be uZU eUffectvely, if the chronic social and economic problems of the country are to be mitigated. 35. The past record of perfor.ance is a mixed one. Overall, the groith rate in outout has been around 4% since the mid-1951s but this is heavily influenced by the spectacular and ill-conceived rise in forestry output. In the basic domestic crops, mainly rice and corn, production growth has been less than 4% per year since the mid 50s; this is entirely the result of increased acreage. Among the traditional export crops, sugar alone has sholM increased yields. Coconut output has expanded with increased plantings, while abaca production has declined with a drop in acreage, In total the. exoort crops have grown by about 2.55 per year since the mid-50's. Output of livestock products has averaged only h per year over the last 5 or 6 years, although prospects for increased poultry and hog production are excellent. 36. Fish production has 4jXe than doubled in the last 10 years. The great marine fish rcsources ar ,-till scarcely touched, however, and some 500,000 hectares of fresh-water and mangrove swamolands are available for additional development of fishponds. Earnings from forestry and forest products have skyrocketed since orld War II, though at a cost which is beginning to resemble a bargain sale of the Filipino birthright. The combined effects of kainRin farming and "legal" slaughter of the forests include widespread erosion and a reported deterioration in climatic conditions. Every recent study of forestry has stressed this alarming and irresponsible destruction. 37. Along with this spotty production record, the rural Philippines has a long history of social unrest, resulting from underemployment, extreme ineaualities of income distribution, and from overcrowding and a high per- centage of tenancy in areas such as Central Luzon, The land reform program initiated in the mid-1950's has moved extremely slowly. Some help has been provided by legislation protecting the rights of the tenants, and by resettle- ment to less crowded areas .-- rarticularly to Mindanao. But a serious problem remains. Government efforts to help provide better agricultural credit facilities have, been successful thus far in the case of the Rural Banks -- which provide credit on a commercial basis to farmers in relatively sound finnninl andtin. Thit the ALricultural Cooperative and Credit Financing Administration, and its subsidiary cooperative associations have suffered eriously from mismannnament. However_ nresent efforts to rehabilitate the organization show promise of success. 38. 7br the future, therre are a number of favorable elements. The change in the exchange rate will uAncbtedyA stimulate. a higher rat.m of' mitnit in a number of enterprises both for the home market and for export. As mentioned n14 Ca T ia h ulo fonr cnnra and nlbacn on thel wor%rrl mai-rkets is not+ - 12 - bright while sugar is heavily dependent on decisions by the U.S. on the allocation of the former Cuban quota. However, rice, corn, native tobacco, livestock products, and a number of tree crops all have prospects for more rapid growth than the rate achieved in the last 5 years or so, especially if more effective government sunoort is provided in the future. A q1ia.t.d Puhlin Prnram .39. Amng t.he P-sen+Ai1 smnnnrt.inrP services of a well1-conceived afgri- cultural public program are: (a) research, (b) extension, (c) credit, and (d) mrketing. One ApoIat eeac rdPlopyAent. hA 'hppn thp recent establishment of the International Rice Research Institute at Los Banos, ,Vrt th financial and technical aid poded by the Ford qiA+~~ nrl t.he Rockefeller Foundation. If the history of similar institutes in Latin- lAmerica . U -Luse"" . manIUly ofA Me1 UC1111CCil Y U00L01110 V-. A -_-L IU ~ 4' solved within a decade. Dissemination of the Institute's findings to Filipino farmers wil Uepend on Ie uve1r1menU, and t is none toV early to begin expanding and improving the Bureau of Agricultural Extension and correlating its work with that of the institute. 4o. A considerable increase in public research and extension work on other crops is also needed. The Mission reco-mends that present services be strengthened by: (i) making greater efforts to attract more and better qualified people, both Filipinos -- and, as necessary, more foreign experts; (ii) providing more ample transport facilities to field staff; (iii) seeking the cooperation of private enterprises and helping to coordinate the results of research work being done by commercial agricultural firms. 11. Agricultural credit is peculiarly critical because, if credit is available on favorable terms, it eases the stresses of inadequate marketing and supply distribution systems and facilitates educational work with farmers. Despite a half-dozen public agricultural credit agencies, probably four-fifths of the farm credit is supplied from private, mostly usurious, sources. The growing network of rural banks has partially compensated for the deterioration of ACCFA, but much remains to be done in establishing adequate and reasonable farm credit. The Mission recommends that public funds for the rural banks and for ACCFA be increased from the total of around P100 million in the past , years to P200 million in the next 5-year period. 42. On the side of marketing and price stabilization we suggest that public storage facilities be constructed and that funds be set aside for building up reserve stocks of rice and corn. As a rough a'?proximation of -the funds that might be required for these two purposes, we have allowed 1?60 million in the proposed public sector program. Trrigation and Drainage Tn t.hp miin %Tnr rAir(. havP been develoned by fits and starts under strong political influence. Maintenance has been mediocre; water charges 61 th^"gb un iw- hnve not been naird by many farmers: and research and planning have been relegated into the background. Drainage, an -- 4-resigly ^krou prblm in omre areas_ haq suffpred fro lack of - 13 - vision and inadequate financial sup?ort. The Mission cannot recommend sizeable Iw vrigation projects unuil a baoIc stuUy of water resources, naticls In scope, is undertaken. Such basic research is costly but more economical in the long run than the haphazard programs of the past, 1aintenance expenditures on existing irrigation works could be usefully increased, and there are several river control and drainage projects on which sufficient information is or soon will be available to warrant expanded outlays in the next 5 years. Capital expenditures on these purposes in 195b-60 were around P100 million (at constant 1961 prices). He suggest that for 1962-66 an allowance of about P210 million be made. Current outlays for maintenance and research work should be at least doubled -- from about R25 million in the past to P50 million or even more in 1962-66. Resettlement -. n the last 5 years, some 22,000 families have been settled in public resettlement projects, at an average direct cost of approximately P1,500 per family. Many of these families came to the settlements on their own and have not yet been officially "approved" by the settlement agency (MARPA). Cmber- some procedures are involved in the official process, and far too high a pro- portion of the staff is in Manila instead of at the sites. But there is a nucleus of trained field officials which could be exnanded substantially, given some reorganization and more attractive pay scales. 45. Because g-od uncultivated land is growing scarce in the Philippines, even in Mindanao. it seers highly desirable that it bc developed as efficiently as possible. The continuing need to absorb workers on the land together with the social problems existing in Central Luzon stronglv argues for an enlarged resettlement effort. Assuming that the necessary staff and management skills can be recruited- we sugygest that a target of 75.000 f'milie. h st for resettlement in the period 1962-66, Assuning an average current cost of P2,000 per family- thi.q vnii1r invnlu nn ptint.rd +.)t.l nngf. of 1 n0 million a against about P30.million in 1956-60, Regional Development 46. The question of resettlement has obvious relevance to the broader ques- tMn- of aivina mnrp. Phrr rni roinnil Aavrlnmnt. Thi. Pmnha'q'. which is relatively new in the Philippines, is sound in principle, but the first two the Cagayan Valley - have extremely variant developmental potentials and should and the Sulu Archipelago) is a huge territory which is still predominantly a rich fPr,n+4n"e Th 14-+^A nP h hdm n7 vrA n +n v lli-Ir on r, nx _ _ .v - .4I4 U 0 "Wiqy. 'JJ -A'J' - __ _ -_ - the other hand, is already intensively cultivated and heavily settled; a high badly eroded areas that are no longer tit for cultivation. The potential of ~JL.~4O 1O. 1 CIC'. 'VJ.V'ICLUU Ut-M3 01IUJ I D~~ IS .L_II_VUAU UII.LVLJ J-.L O.'XY U. J.I" s in assessing the magnitude of the costs and the prospective benefits, while the IuUti." 01 UII UEGEyaLI L LLI anLd%betLtU wUater.uLtLUa.tio, andcontsro tii,n and better water utilization and control. - I)b - Land Surveys. Land Reform and Land Tax Policy ),7- As arrrmiqi+.P nf n miinA la;ndi fpniir andi +.qY;tAn nnl1itv_ a considerable increase in land survey work deserves the highest priority. At resennt.A+ iti ematnedr that3+ 80l of agiutrlIndA hnldings. haverr sz+ill nnt been surveyed or officially titled. Aerial photographic techniques might iin u--A ton ,reA-- th b-laklog faster, TJ- - n1,, f,nres 4- - 4-,.r ,r,rn i-nA+,r - ".J W, LJA %LA .1. ~ -~- ~ ~ ~ M-~- on this purpose from the P30 million spent in 1956-60 to P100 million in the next 5 years, are deserving of the fullest support. Although expropriation procedures have not been entirely satisfactory in the past, the principle 0 reducug the number of large and generally inefficient landed estates, particularly in Central Luzon, hasa frm economic, social and legal justification. A high-level study of the administrative machinery for carrying out exoro- priation should be instituted at an early date, but not at the expense of a curtailed land reform program. It is pronosed that funds for this purnose be increased to about Y35 million and that owners of exproDriated pronerty be reimbursed at the productive value of their land over a five-year period or longer, rather than immediately. For current government exoenditures by the agencies responsible for tenancy conditions, we also propose an :increase from P5 million in 1956-60 to P10 million in 1962-66. 49. The resistance to land reform might well be reduced with improve- ments in agricultural taxation. Agriculture is a haven for tax evasion. In 1960, total real estate taxes amounted to less than 6% of direct local and national government tax revenues and probably most of this ias on urban property. Only slightly more than 3' of all personal income taxes was collected on agricultural income. The chief explanation for this is the sorry state of farmland records, which underlines the urgent importance of a land survey and title registration program in rural areas. Policy for taxing agriculture must distinguish between the economic effects of taxes on land and taxes on earnings from land. Property taxes become a relatively fixed cost which, if they have any effect on taxpayers at all, tend to serve as a production incentive, A steeply progressive income tax, on the other hand, may become a disincentive to extend and intensify production. Property taxes are also more difficult to evade than income taxes. Forestry 50. A irm and enforced policy of selective cutting of timber is becoming imperative. The public should be shocked into a realization of the consequences of continued suicidal forest destruction. A national forest police force of considerable size, an extensive educational program, training and employment of ka-inin farmers anti abandonment of qhort-term timber concessions are among the first requirements. A major effort on reforestation is a1so needed in areas nowq sffering frnm Prnsion We sggant ernenditnren on these nurnoses be increased in 1962-66 to around A120 million, as against total public out- I~n-u nn frnvPq.v"Trf ~'21< ni'llirnn in 10AO_ Sb. Ine paramount needs for extending the use or fertilizer are better research and demonstration work and more tinely and larger sunplies of credit. Fertilizer suosidies have a way of gravitating to those who least need them, they are expensive and they should be nhased out in favor of expanded domestic production and distribution in private hands. The subsidy on Virginia tobacco will continue to be a national scandal until its demise, which should be now. It has cost the Government over P160 million in the past 5 years. He have allowed for a tapering off of the fertilizer subsidy in 1962-66 (30 million as against 50 million in 1956-60) but no further expenditures on the tobacco subsidy. Community Development 02. The community development nroLram in the Phiinnines has had consi- derable success in organizing "self-help" orojects in the rural areas. It has also heloed Lreatlv to stimulate more artivP nartcin'qtinn of vill1p people in their own political affairs and marks a first step in the direction of creating badlv npPi- rPnonqih1P I,l anvernment. Tn vit nf thene benefits expansion of this program seems desirable and we have allowed P30 millinn for t.hp n.rt y trm onmnro +n L9' millinn in +hn 'MC+. Pivn_ ments are required in the Philinpine transport system, and above all, in ~ ~ S L~ 5 LES~JU ~ L itz '±L±t UII I U.LLIOjJ . U. Li_LUII _. _i[I .LZ:LLU largely justified by its Totential benefits to ag riculture. Rural Civil Works 5*6 The public sector program outlined in the foregoing paragraphs has umportant implications for providing employment in construction and mainte- nance activities which should help significantly in reducing rural unernploy- ment an undU1remp7yment. The extent o This impact depends not only on the overall magnitude of the program but also bn the capital-intensity of the tchniuJus used. we suggest that whenever there is scope for increasing the labor component relative to the capital equipment used without signific5ntly increasing costs or time required, that this be done., It seems likely that there are a number of possibilities for relatively labor intensive types of activity in smal scale irrigation and drainage works, clearing land for re- settlement, reforestation, community development projects, and the construction and maintenance or reeder and barrio roads.. Private Sector Investments D>Q Identifiable investment by the private sector in agriculture during 1956-60 amounted to around A750 million, of which P110 million was in livestock inventories and P250 million in expansion of tree crops. The rest, consisting mainly of agricultural machinery and equipment is impossible to allocate by sector. In addition to these identifiable components, there was undoubtedly - 16 - a substantial amount of investment of a "non-monetized" nature. An estimate made on the basis of a sample survey in 1956 put the amount for the year 1955-56 as high as P100 million in that year alone. 56. For the future, we would expect, that with the type of public program rm have gangested and i+h +.h incentives nrovino d hv the chang in thp nx- change rate, private investment will grow considerably, '.e have projected in 4 m,+^L, A,-iihl In nAn a c , Y-izn in n-iin. intro-zs.me-nf.i tree crops. In the latter group, we would expect a relative shift away from i n-sne ntn J nn's,e. .n ~,n ma A --.,.n Im, rn..n+ar n ,,en,v in r.nrln arabica coffee, rubber and citrus, all of which have a large domestic market. iLLr are~ &L±~ U U~4 ~U~L.L_L_LU_LV1 .IA.L Otillu Vi. ULVO UL!J OO - J iLJ. _ ' W private investment in agriculture is projected to rise from P380 million in 57 Among the other sectors where the biggest increase in private in- vestment is foreseen are opening up new land for corn and livestock production. Both of these should grow at even more raaid rates than the past, given the high level of domestic demand, and the export possibilities to such countries as japan and Hongkong, Investment in rice farming is also likely to expand, and it is possible that by the late 1960's, a modest export surplus could be achieved in this crop too. Other attractive opportunities for expanded in- vestment lie in fruits and vegetables for which demand is increasing rapidly, :xpanded investment in the construction of fish ponds and deep sea fishing vessels is foreseen, in viewof the considerable possibilities V.1hich still exist for import substitution and rising domestic demand for fish. Heavier investment in forestry will be required if a rational forest policy is to be enforced and if there is to be the shift which should take place from the more accessible but overworked areas to the less accessible areas. (The reco-mendcd expansion of the public road system will also be necessary to achieve this). 58. Chemical fertilizer is one of the principal keys to accelerated oroduction and the goal for the next five years should be not less than a three-fold increase in fertilizer use. With substantial plantexpansion, the domestic industry would be able to meet the bulk of these requirements. The private sector is capable of handling the distribution of fertilizers. As previously noted, however, public support through additional credit facilities will be required, if fertilizer use is to grow at the projected rate. 59. Taking public and private investment together, the total nrojected for the period 1962-66 amounts to 1ust about P2 billion as compared to P1.0 billion in the 1956-60 period, while current public sector outlays in agricul- ture are proJected to rise from P255 in the past to P515 in 1962-66. Current transfers including "investment" in tobacco inventories drop in our projection from P210 million in 1956-60 to P30 million in the 1962-66 period. Ca3ital transfers through rural credit institutions, on the other hand, rise from about P100 million in the Past to P200 million in the future. Output and Employment An. With such financial sunnort. and granted administrative imorovement in the main public agencies in the agricultural field, it should be possible - 17 - to increase the overall growth rate in agriculture, forestry and fishing to nearly $.00 during the next five years, as compared to 4.65 in the past five. 1/ Projections by major sector are indicated below. 1960 Value of Output 1/ Annual Average (million P) Ratcs of Gro-:th 1955-60 1960-66 730 Rice 3.1 4.0 150 Corn 7.O 8.0 320 Other domestic crops 4.2 $. 340 Coconuts 2.0 75 Tobacco 12.0 820 Subtotal comercial crops 2.5 3.7 870 Livestock products 3.3 7.0 qRpo Sub+tol Agicul+ure .1 1 .2 775 Forestry 10.2 3.2 1.9)V l- - _1. 1. A n 34 L- lO ' - ._ L4 OL4 4075 Total Agr. Forestry & Fisheries 4.6 b9 ;crea7e Tmnolications 61 To achieve thARP rntpq of grnwth i, PRtimatp that it Tvniild h np- cessary to bring under cultivation for crops alone approximately one million additional hectares in the neriod 1Q2__ an avornap. inorPqqP of p per year over the estimated cultivated area of 7.7 million hectares in 1960. Thiq comnares with a rate of aroundarl 2% in +.he nns+.- This imnlie- mn increa in average yields for all crops of around 2% per year as against virtually none inL +ho nee+jJ -----e m v -- +his + l from our estimate that a larger number of coconut trees will come into maturity t-Hn -rq th nnzo in +ip 10EA_A nPv-ir% (A hia in,-Anan in nrw nntnc thought to have started during the high prices of the Korean boom and to have Cntn+ ued +hrough +hth n wme P10 1'Al n - -A-+-m+-;,' -,+ --F +I,- higher yields also derives from our expectation that use of better seeds and uP U-x ---an el ca 4u1- _-vuuo Pu o-nza x ll. -"I 'Ia _xoy aoe c n z 'J. _LU1 UL_L_LZjU.L %,CLI LJI- %--ky 1ULltLL Z)UU~ DU UL JL.L.L_LY _.11 Ul It- LAZJ, U L _ 1 V hY t: CA S* L _w I A .JI. J it should be noted that the projections of rapidly increasing livestock pro- QUU J.UULl dLJ3OU JJ[11J_LY CL %.;1UL L U _t:: 1-,)t: LdLI a U ww, .U I-1 cjc U LU',- F.liploUymILe1 D and Incuome 62. The employment effects of the projected expanlon la output (and acreage) are likely to be substantial. After making allowances for increases 1/ Both projected and past growth are calculated on the basis of post-devalu- -v v 4.4na w__o _-uou- _au a c one -e v v- -u -n u - -x p - --- 41 - - 4 C LU.LU[i P1_LUt . J.A4 1 CLL IJ.Y 4 . UL-- V9V.L,11Va 1J.L UI J.J')LU '.' particularly forestry. On the basis of 1960 prices - giving lower weights to forestry the overall growth rate was aUuIU 4.0 per year between #"d and 1960. - 18 - in oraductivity per farm orkor (which would be reflected in some reduction of underomployment) it is still estimated that employment could grow by around 3,' a year. This would crcato around 1 million new jobs in 1962-56 as compared with the rise of agricultural employmont of around 800,000 in the past five years. The improved pese terms of trade for agricultural export crops and forestry would increase average real output nor workor from P600 in 1960 (at 1960 prices) to P700 even without increased nroductivity. Al- though a drop in copra and abaca prices on the world market is ex,ccted, the change in the exchange rate for all export comodities will more than offsct this. With the increase in productivity assumed here, output per worker would rise to around 5780, a total increase over the actual 1Y60 level of lust 20!, Alonc ,with the measures desiened to holn redistriOute agricultural income (resettlement, land reform and agricultural extension), there should be a sitnilicnnt inrovemnnt in tha well-beinc: o7 the aver;c Filipino farmer by 1966. - 19 - R. Tndustrv General 61- After a decade of imnressive dAvelonmnt. PhIlinnine industry is undergoing a readjustment because of alterations in cost-price relationships. These PaTafina -nan hu +.hp nw evehane ratec tAfll iifliipinn t.hp pattern of future industrial growth and this can only be to the good. However, there 4 dange tha+ thn hnnlf%t m e ^f waA4ctmw+ anfttr Avn? ni+ avd lAn f i a slowdown in the rate of industrial growth. Deceleration has in fact already 4'. ., A 7 W .LAl4I4 WAS.LCIL.L %.LJtO%A% J OV UJV O.IVVLAU .OR %oI.UjJFC. LV.& VV.. LJ Q-1 average of more than 10%, in 1955-59, and preliminary data suggest that facilitating the readjustment faced by the existing industries and at speeding UP Wie Uesalihmeo UAn iUW e H.M e D0 ULABUl1e UOLI.U SO V UO L0U.L0.Dt the industrial growth rate and to bring about a major change in the industrial Muructure. MTe main areas of expansion are intermediate products for the home 3arket and those industrial exports in which the Philippines have comparative 4dvantage. 64. Philippine manufacturing is at present heavily dependent on imported inputs, although some improvement may have occurred in recent years. The lirect import content of industrial output was estimated at around 30% in 1960 1/. Such a high import coefficient in the Philippines can be explained by three factors. First, industrialization started at the finishing end of the manufacturing process with inputs supplied from abroad. There was already a market for consumer goods, capital requirements for an optimum size plant in assembly, finishing and light industries in general were lower than in more basic processes, and the technology was simpler than in the production of intermediate products 2/. Secondly, the Philippines lack raw materials re- sources for some of the industries; and these industries happened to develop very fast in the postwar period (flour milling, cotton textiles, refining).3/ iowever, the third factor conducive to import dependence and directly related lo the prevailing foreign exchange system was that raw materials and inter- xediate products were bought at the official rate of exchange of P2 to $1 through the import and exchange control mechanism. and were also exempt from all import 4uties under the "new and necessary industries" legislation. By contrast, sales prices of finished consumer goods at home, heavily protected by controls eid tariffs, were geared to an exchange rate considerably in excess of P3 to $1. Cbeap imported inputs militated against the domestic development of imnort sibstitutes in intermediate products; domestic entrepreneurs were maximizing t1tir profits per unit of equity when they maximized the use of cheap imported materials .A 1/ Imports valued at the rate P3.50 to $1 plus allowance for tariffs, trade orofits. etc.. exuressed as nercentage of gross value of outnut. If imports were valued at the past rate of F2 to $1, the import coefficient amounted to 179. 2/ G. Y. Itchon, Speculations on the Course of Industrial Development, Bulletin of the Central Bank of the PhilippinneA_ qeptmher 1QI1.- 3/ Attempts are under way to develop cotton growing. S Sixto X_ nnt The PAnin TnAinatrIc A-t, MnIla TimAa July 7- 101. - 20 - 65. Devaluation will-affect adversuly the segment of industry which is most dependent on imports. This includes textiles, footwear, paper products, rubber products, some chemicals and metal working industries. In most cases profits have been so high in the past that the cost-price squeeze only means that returns are brought to more normal levels. However, our analysis indicates that some firms may be wined out unless there.is rise in sales prices or a dramatic improvement of efficiency. On the other side of the spec- trum a the export industries - sugar mills, nlywrod plnts, cconut oil factories, some other food processing industries - which will earn extremely high profits- A similar situation exists in the relatively few,. *idustre that produce basic materials for the home market in competition with imports which have now become much-'more exnensive than in the. past (rolled stcoll pulp, paper). The net effect of these mutually offsetting changes iould be a sharp decline in aggregate profits if sales prices remained unchanged. Some price increases have already taken place. Investment Program 66, The momentum of past industrialization was derived from substitution of imported consumer goods, As a rosult, the demand for imported raw materials and intermediate products has risen considerably. In 1960, imports of un- processed raw materials amounted to :60 million, imports of semi-processe! products 6250 million and supplies .05 million. This is the main field for import substitution in the future. In addition, import substitution possi- bilities still exist in the consumer goods field, although they are becoming less significant. In the meantime, the country has acquired a considerable body of managerial experience which may now be used in more complicated manufacturing operations. Finally, the change in relative prices resulting from devaluation will provide a powerful stimulus for production of inter- mediate goods. 67. The mission's program of investment results from a review of market and production prospects of each industry. The mission has interviewed a wide range of industrial interests and government officials and has examined existing ideas regarding future industrial possibilities. The investigation could not cover all industries and some industries could be analyzed more intensively than others. Consequently, the proposed program is no more than a general outline. Detailed project analysis is required before investment decisions are undertaken. Nevrtheless, the suggestad composition of investment clearly indicates the broad lines of the Missionts thinking. Or.anized Manufacturinp: Ivestment in Fixed Canital 1962-661/ (net of replacement, millions of pesos) Industry Group M4ain Products Investment Cost Basic I1etals Steel, aluminum, cop.er 785 r'"Mica.1s 114* 4 -1 4T _4 - Ve'L..Le Lnu t.L chemicals, synthetic PletauI Uabcating Metal products, machinery 240 industries electrical machinery transport equipment Non-metallic minerals Cement, glass 239 Food processing Sugar, flour, meat 130 packing ood and Cork Plywood, veneer 125 Textiles Balancing of the industry 100 Oil Refining Petroleum products 100 Paper Products Pulp and Paper 88 All others Rubber.products, tobacco 144 products, beverages, printing Total net investment 2283 Allowance for replacement 686 Total Gross Investment 299 1_At post-devaluation prices. 68. The main items of the proposed program are the establishment of the steel inin.trv and the associated growth in metal working and machinery industries, sharp increase in fertilizer production, doubling of capacity of the cement. induStry, atblishment of the aluminui:q industry,. doubling of capacity of the plywood aad veneer industry, largc-scale expansion of pulp and aper prod-ctioen ranid growt.h in food processing industries and rounding out of capacity in textile manufacturing and in petroleum refining. If the ejvi imryo+mnndn c nn-ri nmit.- t.hp Rtninturp of the canital stock of Philippine industry will, in the span of five years, have changed draiatically .;n 4-b- . -4 1,1~4, A,n~& n c~ _L Il "AhLeteel o proawsAgeatitcnu~toni uretya level of about 360,000 tons per year. If the over-all investment program proposed by the ibslion L ubed ab generaL freworA forL soment pi and private planning, demand should rise fast, probably around 101 nor year. 70. Two projects are currently being contemplated to meet domestic demand: an integrated operation at Iligan City in 'indanao which will produce electric pig iron for conversion into semi-finished an, finished products with an initial capacity of 230,000 tons; and the Santa Inez project in Luzon which involves production of 110,000 tons of billets for use by the existing re- rollers as well as 20,000 tons of pig iron which will be used rainly b; foundries now processing imported materials. 71. The capital cost of the Ili an olant is nPrhans high hy int.rnationa1 standards for a comparable operation. This may be partly due to the high price quoted for caital ecuinnent and also- to thf, rplAt.Jvcly small scale of initial capacity, although the latter is not inherently uneconomic. The ultimate capacity will be some io00oo tons larr an th unit canitai onst. of this incremental capacity will in all likelihood be less than the initial outlay. The technological nrnozesn to be used - produtin" of iron through heavy dependence on power as a partial substitute for the metallurgical cokpe tradi tj nnn I Iy usedr 4- the cnve1rn+-*ion,I blas qu~nc St P- fully operated elsewhere. 72, The unit capital cost of the Sta. Inez project is much lower, which is art y - a-J ne ' r 1 t I IZ U IV U-Ly .LIp I U cLUJ.U11 ULJ,±1U _LZ) U1IJ.LU U Estimates of production costs indicate a level competitive with imports at exusting tariff duties0 The main problems are in mianagement and inancing - the sponsors are allegedly trying to keep the equity proportion to a minimum andC"aximize4the UlotanJW f1naulCe. 73* Given the composition of present demand for various kinds of steel, the two steel plants may involve some excess output of non-flat products (rods, bars a-id billets) and insufficient output of flats. This subject requires further examination, and the .overnment may wish to reconsider the proposed composition of output. The .Iission wants to underline the urgency of making the necessary decisions in this field. 74. The steel industry is quite new to the Philippines and its success or failure will have far-reaching consequences for the country's economic growth. It would be unfortunate if because of poor planning and inadequate technical and executive management, the domestic users of steel were compelled to pay high prices for this basic input. In particular, the prospects of domestic metal-working and tiachinery industries would be jeopardized. For all these reasons, the Mission suggests that the Government arrange beforehand for high level technical and perhaps managerial assistance from abroad, with sufficient authority to cope with the various technical problems that may arise both in the construction and in the operating stages of the two projects, including the timely training of personnel. Success or failure will be determined largely by the speed with which the industry attains the scheduled level and quality of marketable products. Successful execution of the present plans would open the way for further expansion of steel making capacity later in the decade. 75. Metal-working and machinery industries are already established in tho Philippines, although on a modest scale. The Mission envisages their rapid expansion in the future. Growth of metal-workine will be a necessary consequence of the establishment of the steel industry and of the scheduled increaq.se in rnqf.-mitinn activit. Tn rnnrhinPYr_ thc'v'p- nro nnn-iipVrhp possibilities for the increased production of agricultural equipient, re- f ri aay-n+l nn i rnn~,,)i~vi Y)Yr- r^., i-~c v, i-' , o r. m-- c' nciv r] i ciln1 engines, simple mining macinery and spare parts for general industrial vlmu L'-" i 1. 1 are-L ,;)CI pai U_k'.L:iL brLiht fo oupu expanLion of electrical machin-ry and appliances, including electric motors, machinery aLnd appliances group has been one of the fastest growing industrial group in te past five, YUear; adio1UU t 1L.Lhe.Jt Phii1pUe ri1cLhVe_ a_lrt_Edy acq uired- a comparative advantage in this field. The Mission would not be surprised if the ruilippineS Degan to export some electrical products and expand Une exports of agricu2tural machinery. Finally, the proposed aluminum industry, based on cheap Maria Cristina power and imported bauxite, would yield a substantial surplus for export while the supply directed to the domestic market would not only substitute for imports but would also tend to stimulate the aluminum fabricating industries. The timing of the aluminum invesTment should be determined after careful scrutiny of the channels through which export sales would. be made. 76. Next to steel, the costliest set of invest.rent projects included in the Mission's program are fertilizer plants. Fertilizer use has crown rapidly in the last five years. It is the Iission's impression that Philippine agriculture has attained a stage at which a very large and f-ift rise in the input of fertilizers is likely. Such jumps in dei.,and have ben encountered elsewhere. The 1ission expects the use of fertilizer to treble b; 1966; allowing for import substitution, this implies almost the quadrupling of existing domestic capacity. This, of course, does not imply that all the plants should be started right away: their establishment should be distributed over the period following the trend in demand with temporary Laps in supplies beine filled by imports. 77 The proiected growth of cement canacitv (,6 million ba.s in 196f compared to 23 million 1961) is related to the expected doubling of ccnatruction activitv A similar rat nf inprp:-p in ermnt consumption was observed in 1955-1960, despite the fact that over-all construction activity expanded much less than that postulated for the future neriod. The projected capacity expansion may therefore turn ouu to be an underestimate. 78. The plywood industry of the Philippines had become the chief inins.ralPynn_m+ny. h%vr thi lnf+n Cf mect frPyhronr expansion are favorable, primarily in the U.S. market, but iodest quantities culd alsk- b0e sold in. oth-er areas.e o h xotAvir .~1. several difficulties have to be overcome. In the U.S. market, the plywood Philippine timber. They obtain the Philippine logs at lower prices than t,e at least be equalized and probably reversed by introducing an export duty on -Lg . AI 3 o .c Y p a! st C..LL AALk J.j;%oL .Lr, P 111 "%VCA~y i4.W1.L J.V .iUV OuPP-.J should not be repeated and adequate forestry concessions should be made avail- able to dome6tic processors. A further major proulem s that of fiuancing. If efforts are :Lade to find appropriate solutions, the plywood industry could continue its rapid expansion and attain by lyOO, a level of output and exports double that of 1959-60. Even this may turn out to be a low target.,. - 24 - 79. If plywood is one of the mair honc' for industrial export expansion in tenear future, another Jndu tr-- - e on -od-A _l_ a-d paer- _a turn out to be a major saver of forei,r, exchange through import substitution. ihe industry has started from tne finishing end of the pro(uction process - manufacture of paper products - and has been integrating backwards, developing the prodAuction of paper, ard, lately, pulp. The industry has technical pro- blems, particularly in developing processes suitable for hard woods. The bechnical uncertaintiei have inflienced the 14ission in suggesting a more modest scale of investment ou6lay than the existing and prospective market demand would justify. o0. The scneduled investment in textile manufacturing is intended primarily to balance capacity in different scgments of the industry, which will result in large foreign exchange saving. The primary emphasis is on investint in looms whose present capacit is inadequate in relation to the capacity of the spinning mills. As a result, large quantities of yarn and grey cloth are imported. There is a:Lso an allowance for further expansion of textile capacity in general in order to meet the prospective increase in demand; tae implied target is that by 1966, 75% of total consumption of textiles will be supplied by do.aestic manufacturers. This ratio could be placed at a higher level if the industry succeeds in overcoming the difficulties which it now faces; the latter result partly from large-scale smuggling of imported imaterials and partly fro:i inefficiencies almost unavoidable in a period of rapid expansion. Impact on Output, Imports and Employment 81. The M,ission expects that the suggested investment program, together with better and more efficient utilization of existin carnacity. would raise the organized industrial output in 1966 to a level 80% higher than in 1960. The hi,her output level. as is onl y normal rinri :he n-mr.!n nf i n(lu- trial- ization, will lead to hiher requirements for imported inputs. However, the, - a jLL ±IL±~.Ly ~.I U t;UJLLU_LLVU P)±-U~Jt-;;U~ JUI .1 Uk..L -1.u S ,1 ,1 . I- U. W i.ndicates that the growth in imports fop industry would amount to abcut 35, statement, 1I/ T'hp nrni.r-fin ic hncaA nnr n- -,-Just-b - inA -z+-., an,c-Js -P the execte changes in gross value of output, domestic inputs and imported inputs. Wi ~ ~ ~ ~ '~ h e-r anlllcblC 6UjMss vtalUl _- -,,.-4 1- ~ 1,- -4-4-A -income elasticities of demand, derived from the Philippine data or from other "1~ ~ IU CL Q-LJ11LCLLO. 111LU Lt U.L*e . 1CLt.1r 1_C;UJLtU Ul fixedi coe. - ficients of imported inputs have been used, in order to allow for the ~~~~~~~. .~11~ ±1 L4 aUIe~L UUUL± 0± UdW UIidUU±±U i .t products. Three sets of historical input coefficients have been used as a oertirng poinut u WaULybZ: ki-) vile input-output table lur oUne year- 1956, prepared by a private research organization in i4anila, 'conomic 1evclopment Consultants, Inc., wno nave generously suppIled tne monLQ11 with their research papers; (2) coefficients derived from data for 1958, collected by the Central Bank and cover1ng a large sample of fins; and (3) coefficients derived from data for 1958 and 1959, collected by the Department of Finance and covering all tax-exempt firms. rhE.vsn so, theI r-aer fTV1r+)1 -Inin 4riiar.Ale,% niu c+nAn1t ' below t.he r,ate, of growth in industrial output. This relationship between the two growth rates is goods, which will substitute for imports. It also reflects the anticipated expan- son of acrricultural raw materials for procesing indusbries kruvber, cocoa, uc1, livestock products) which were formerly imported. The net effect of these develop- ments would be a reduction in the import content of gross value of proauction Irel.i 32% in the late 19/00s to 25% in the mid-1960's. 82. The direct impact on employment, while not large in relation to the expected growth in the labor force, will be much greater than in the past. Between 1955 and 1960, employment in the organized sector rose by only 50,000 people. ror the period 1960-66, the increase is estimated at 100,000, giving a total in 1986 of around 350,000. The rate of growth in industrial employment should accelerate in the mid- and late 1960ts as new industriesand supporting services start to cluster around the large production units contemplated in this program. Problems of Industrial Finance 83. Total gross fixed investment requirements are substantial, almost P3 billion during the next five years. This corpares with an estimated capital outlay, of P1.2 billion in 1956-60 in post devaluation prices (at current prices PO.8 billion). Future investment in inventories in relation to sales will presumably be lower than in the preceding period. since past purchasing policy was influenced by expectations of devaluation. Aggregate financial requirements for industrial investment. fixed and inventory. (and includina Purchases of land) should be about P3.6 billion., 8L. Mobilization of funds on this scale will be a major task. All sources of finannp- r1mP.qiAP fnron- Yuq.n nj Ih ,i p~r Tri II 'nr +. 'hp +.,qnnprl- i f th P investment target is to be met. Unfortunately, no lstematic research has been done ahont the past pattern of industrial - --/ evertheles, nm ganonl observations may be made. 85. Commercial banks provided considerable amounts of industrial finance in the nas+. This is unlornier to be re+ed in the fu+ure The expected reduction in profits to more normal levels will make it difficult to _- ._ --I'- -_ VJi ; i UUJJ Q L. L i . U_V J...a J.&.L O CIhlLXaOJ. -.O UlC *CU. for developing the long-term securities market. Despite encouraging advances 4. U Vl iJJIi 04. IIUid.±U±~ [e±~.0 U U4 LL_L 4~~ U± _LIIAi1 particularly for industrial equities, is disappointing. The problem of -idening the capital market deservesuspecial stdy, but there _vera steps tihat may be taken immediately. The Development Bank of the Philippines sould n-Lae its ±enuxung to successfl companies conditional on tne sale o.f equity paper. Private lending institutions should be persuaded to apply the same principle. These measures may divert some resources from luxury real estate to industrial investment. They may also attract some export 1A pioneerin- work has recently been undertaken by David .Cole, Institute of Economic Development and Research, University of the Philippines. - 26 - profits which may otherise be invested abroad. Lqually important, the sale rf Wh1n r hinln zPr_iiritiA.q will innrnn:i';. e-n,dfi rlrrno in 1.hgn zc.nk mqrkPt. Qndi will change its character from a gamfbling arena for highly speculative oil nne mini nr f r +.t-l +r% +tin+ ^P nn i no+ ^+ n P 4 V nan in nr - ni + ol norn_inni -n o1 u .uc yThvevp movepuosm'enriu 1wn1 4 . nuu-u ve, -e1 up as _-4. as possible. The iission wants to urge the autiorities to continue to give high priority to the estaLishnaMent of this institution. It woulU 111 a gap which now exists. If its operations are conducted imaginatively, the Bank can be particularly helpful in setting up enterprises in new linei of production. 87. There is need for clear-cut policy regarding private foreign investment. The most recent pronouncerients indicate that ambiguities and conflicting policies will soon be cleared up. Of decisive importance will be t e actual decisions of government department and monetary authorities with respect to freedom of operations and disposal of profits of foreign-oUned companies. 88, An illustrative pattern of industrial finance for the next five years is set out below: Million Pesos 5 distribrticn Conmercial banks 550 15 Foreign, total 850 23 Foreign loans (net of repayments) 500 14 Other foreign (excludtni re- invested profits) EI 350 10 Equity sales to non-industrial sectors and borrowina fron other financial institutions-h/ 200 6 Reinvested gross earnings c 1,150 32 Transfers from tPe Government 850 24 3,600 100 a!/ New fcreign direct investmernfT 3 million) and transfer of reparation 8 1 i 17-r -. b/ Includes mobilization of some of the Filipino capital expected to be v'r-natr4 +cat Prr,' abroad- c/ Includes reinvestment of earnings of foreign-owned companies. A/ Tnt-Iidinc DIM millinn fr)r Tlin n o0+ ,n+ + + fM ure n ann he mt all connared to oast flous, the implication is that the proportion of investment financed by coprierc bL anks u,411 *a11 .w1ile the rlnative roles of the domestic capital market and of capital inflou from abroad will increase. It is also assumed that a 'Larger~~~ prprto o.ill beA,Ln-, reinviste comvparec! to -97 - what~ anpears LAo. hadvc~ h lane in~ +4~ a,'-*'~-.,- --- liklihood remain which would hav to be fil lld by ?overnment transfors of one ind or another. Such trans'Crs have tLaiunn tw.u hu a. - I" -n 1956-60, government direct investment and not lending by government financial institutions amiounted to aDout P15U mi0ion (in current prics c Ln audition7 the value of tax exemptions enjoyed by "new and necessary" industries amounted to P550 million (in current prices). Aggregate resources clanneled thrOugh the public sector thus were around P700 million; at-post-devqluation prices, tmis would be substantially higher. 901 The Hission's estimate of the size of the required government transfers in the future - P850 million - is highly tentative and could easily turn out to be off the mark by several hundred million pesos. Net new foreign capital inflow may be larger than the a3sumed '30 million 1/. Also, the rate of reinvestment of profits may be higher than implied in the amounts of self-financing shown in the table. We have assumed a reinvestment ratio (proportion of profits after tax used for self-financing) of around 40% gross and 20% net 2/. These ratios are low by international standards 3/. However, all the available evidence, admittedly tentative, indicates that reinvestment was extremely small in the past despite very high profits in manufacturing. Given this evidence, the upward shift in the reinvestment rate nrojected by the Mission may turn out to be over-optilnistic, More conservative assumptions regarding reinvestment and regarding canital inflow would raise the need for government transfers considerably above the figure suggested by the Mission. 91. The whole subject of industrial finance requires much more examin- ation than the Iission was able to attempt. The results of such an examin- ation may change substantially the estimated flows. As far as the next few years are concerned- however_ there is no doubt that the needs for movcrn- ment finance will be very great, and they will have to be taken into account in detprmininr tax and biirantarv nolinies. Tn mid-1961. the Develconment Bank of the Philippines was considering 560 industrial loan apilications for more than P200 million, onmnared +n i2 million slx months earlier.. The Bank, in June 1961, required an additional P150 million in loanable funds to rary-r nut th-.ir nrpdit nroaram for the fiscal year 1961-62 alone. 0 . Srrni, pnezrinyv-niAn qhoild beo given to thA techniques of trans- ferring capitc.l to safeguard efficiency and flexibility. A large part will nlir-un h-)nhnnn1c A l^nnc h-r thg TNulnrnt. Pink The nant method of straight tax exemption, while raising the profit rate and thus the in- t--n+Ar +n irvro. Pnor41O +.n !nrna -n oiifN-ient.1v high rntp of rpinvestment I/ Tn~ +h, i' no,4 +hrv.t %T nf t-nni-giei rraAi1rT,Trnf.agnittnde - Se3 the Chapter on financing. 2 / These ratios are n-r%'idc tNkno prft 4rc%e to eeae ohb the existing industries and by the plants included in the proposed -I vo 4 via_A u j. _ b- 10 3/ Net reinvestment ratio of 35% would cut the need for government transfers oy --- c.ru-3u r%un o0f1 pro '*it s. THlis leistJLU-nf isLb filow UA-' J[1 - r 11-1 The Gvermicnt~ the possibility of lending back to a firm the amount of its coroorate tax liability, provided the latter is used for now investment. Meet J11c may be for 10-15 ycars and the rate of interest nay be low or zero. This may be combined with an increase in the rate of corporate income tax. 93. The establishment of enterprises of high priority where risks are great and capital needs are lumpy, requires urgent attention. A scheme could be envisaged by which a development institution takes the initiative in promoting such ventures by canvassing interested parties (domestic and foreign). Furthermore, such a development institution could hold, if necessary, the securities of newly established enterprises until they became marketable. Tariff and Export Promotion Policies 94. The Mission has examined with great interest the Basic Industry Act. The legislation exempts imports of machinery and equipment by industries classified as "basic" from import taxes. Almost all industries are defined as "basic" in the final law. The effect is to cut capital costs by more than 201. Althouah the Mission symnathizes with the intention of the law. i.e. to stimulate industrial investment, it has serious reservations regarding the technique used. Eftrenreneurs will prefer foreign eoninment to domestically produced items, even when the latter are priced at a level less than the import cost including tariffs. Consequently- thr 1oislation will nfeat one of its major DurDoses - i.e. the stimulation of the domestic capital goods industries. Secondly%. the leislation i,rill tnd to lhift rctor nrnio-+.in in th a±nt.1rnn of capital (anr foreign exchange) intensive operations, It may, of course, be armied that hoe is li++l noo - -i i + n in an one --+,c,la- -ind)+t-r However, the legislation will favor the use of capital-intensive methods in employment objective, 95. Existing industries affected by rising costs of inputs require in- -ea' t- -PP p ruo uo to gain JUAMe d[r reauustmtn u J As-0 newV .iauusuri's should be protected against foreign competition during their growing up stage. The dree rc ofP prT-,w^+moA shoul A be P4- ~ -- aspects of the devaluation, including the reduction in the real costs of labor. LJIIJ. V44 s1 S-o -that c,Urrent4L propo scaI for taIff"- changes have been based on a thorough examination of all factors bearing on CostIVs3. This wa prbal impssile given th fludit of_ fato prce &-n a_ _-_ period of transition from one exchange rate to another. A re-examination of t f raes s uncesary as sou as uevaluaUton is compleLed. In eerInining the rates, the authorities should bear in mind three factors. First, there is no, need to develop intermediate producs, Und tnUy wiJ.L IeU protecLoU. Secondly, excessive protection of the latter would raise the over-all cost StruUre fU riLippine inuu:sry. ThirUly, tne geograpnical location of the Philiopines and the prevalence of smuggling sets a limit to effective pro- tection, particularly of more expensive consumer goods. I that 11mIt is crossed - the limit is determined by the cost of smuggling - the protected in- Justry dves not benefit from tlarilfs. - 29 - 96. The Gover-mcntts industrial policy in recent years has placed more emphasis on imoort substitution than on the promotion of exorts. The M.ission is convinced that given the now exchange rate, a number of oportunitics will arise in the field of manufactured coods. includin riibher nrducts. electrical goods, processed foodstuffs, chemicals. Energetic action is required to seize theip onnnrt.nnitirq. W_ reon mond thnt +he Governmen+. ronder al nn-iible assistance by removing ta. and tariff anomalies, and possibly, by providing taive nrsif+ia t nnA of Nr the-rt-n c s -tructur - t on "A of fuiIcz+nMg uined___ biversifi.cation of the export structure' is the cnly way of -i 3sring a -,-ustainP_d exuniU1 On.1 in eAernal U-(-IL-LLkg, 71. Ie ruiiLion expeuuL; that non-organizea manuLacturing - firms witn less than five workers and cottage induotries - will continue to expand their production. The problem of adjustment they face is not very serious since small-scale manufacturing was already buying ito inputs at high prices in the past. The moderate income elasticity of demand for mo3t products of this sector - clothing and footwear, grain milling, other food processing, furniture making, other handicrafts - sets over-all ilmits to growth of the sector as a whole. However, there is the export market for some products which has not been exploited sufficiently in the past. With devaluation completed, some items of home industries - articles of wood, embroideries and other specialities - may achieve substantial expansion. Conditions for this are an agressive sales organization and careful quality control; and the Government should urgently examine what steps it can take in this field. Another area due for rapid expansion are repair shops in the metal-working industries; they will increase their output ErEi Dassu with the exected over-all growth in the supply of machinery and transport equipment. 98. Small-scale manufacturing is a large employer in the Philippines, although its aptregate net output is small. All figures are tentative: the Aissionts guess is that it may be employing at present around 850,000 Deople. Probably less than on-hq1f nf thp.i ar =nPqnd in thp cottage industries, at extrenely low level of productivity and with only part-time emnlovmPnt Thr rpmindlr i.q cnanap in -mnll nnrrr1ie+.+inVn iinitq in the cities, where productivity is considerably above that in cottage industries. The ainuftirin n av agwho.atu ih n sei wtn in tment in m.ai scale manufact-uring as a whole, although shifts within the sector may be cornsidrbe - 31 - C. nr. 99 The post-war period has bee- one of steady pro,,ress in base metal minin, particularly copner a .d chrone. Prospects for increased output of these ores and of iron ar- .riTht. Iron orc exports will rise less rpidly than out- put as iron ore is converted to iron and steel products. Precious metal, partic- ularly gold, have been subject to the uorld-wide force of a cost squeeze against an unchanged dollar price. 100. The mineral potential of the Philip,ines has not been adequately explored as yet. Adoption of a unitary exchange rate may increase the confidence and willingness of investors (both foreign and domestic) to increase their expenditures for base metal exploration and developonent. Government policy recognizes the n,2ed for clarifying and stabilizing the rewards, incentives and responsibilities of private firms and for imorovin, such services as ,eolorical maping. 101. The presently known coal resources of the Philippines are lim.ited largelv to Cebu and a fe-u other areas. A rPcrnt TAPIA rpnnrt. rrecommends a "policy of exploration and developmert of coal resources". It is understood t.hait technical a ssistanoe hrouh n e ITM has .en initiated recently Th-r studies should develop a clearer notion of the exploration and development involved in modernizing coal output. Our necessarily limited inquiry in this resources, offers probably the best opportunity to concentrate ecfort on 3) developing a market for coal in economic competiti-n with other energy 5ources. As wurk proceeds in oter arcas, icw coal sources .ay be unummou. High priority in ;overnmcnt expenditures should be accorded to research or exploration projects which oier promise of improving coal resource ava, particularly of potential economic .;ources of r.etallurgical coal, needed in connection nith the smelting of ferrous and non-ferrous ores. 102. There is a pressing need for the review of government policy w43n regard to nickel-iron deposits, which tQ date has envisioned massive invest:_ent projects premised on presumed hi,?n profit potentials. It is clear that privE:C investors havc not evidenced equal optimism. Consideration .hould be given to the alternative of encouraging investment in thls sphere with a more livited objective, nanely the marketing of an iron product obtained by processing to a more limited extent that portion of the deposits most ar.enable to such treatment. The obj-_ctive would be to determine whether some benefits could be derived from the deposit over the next few years as contrasted with delaying exploration in the hope of obtaining larqer benefits at a later date through technological improvement which no one can say with a6surance uill be realized at all in the near future. It should be stressed that the massive size of these deposits makes it possible to initiate a modest short-term prograi without prejudicing - 32 - a chanCe in nolicv at a later dat,. if technolorical nhan Le or discoveries warrant. Provision could for example be nade for var,ing terms of contracts in the event nf pro-letenAiqed chanFc' in circonEancao .1. Tlcr wou~J *.JAld. also'. appear~C tot bet a psingne o eriign- training a small staff in the Bureau of .ines to keep abreast of the ecoaomic asetso the LI miingII ±industry. it1 is) our[ imprecs~,.Jin Wa1t emhai 4a Men overly concentrated on the geological, engineering and legal asaects of the Bureauls work and the overnentis rule* Relatively sallz vutayL in vhsa field could benefit not only the Bureau but otner branches of the Government dealing with economic aspects of mininb e.g. gold subuidius, foreign trade in metals and minerals, and investment activities of agencies such as the Development Bank. - 33 - n. Power 104. In recent years the consumytion of electric power has increased rapidly and the growing needs '.a%o been met reasonably well particularly in the more developed areas. Plan, for the expansion of capacity and the exten- sion of the existing grids have beer made to meet expected needs quite far into the future. 105. The main problems in achieving an orderly and efficient development of the nation's power supply lie in (a) improving the coordination between NPC and the Manila Electric Company (1eralco) in planning the expansion of and operatins the large Luzon irid- (b) nlannin the exnansion of the smaller Agus grid in ]1orthern Mindanao in step with tb lumpy development of industrial demand and (e) imnroving the sunnv of nnwer to ares not vet connected to these grids or not capable of being so connected. 106. The Luzon grid is the most developed area of the country and is estimated to supply abont Rt of the pover con.uma. The annnrity of the eid is divided about equally between NPC hydro plants and ieralco thermal plants. The trnnsminsion line are 1%Clt* Mrnion nmmn !nd nnrntF the distribution system in the Manila urea and is by far the most important customer for NPC Penernted nner Althnnah rncn'nne hnri hoar mnrie in nrhipuing n closer co- ordination of operotions between XPC and heralco there is still more that can be done ton impnrovnirn noo-- c +Jit tn.rr e41i ±h r Anc n .inmo_ Tho r)rnh- lem of achieving the most efficient selection and timing of new capacity in rc ~ ~ ~ ~ ~ ~ n-nn laP nn +noAc4i -n-l-+ Aerctdgot fdmnd anbqu complex. The Mission suggests that a study of this problem be made in order to establish a- basis for effective pla-n4- ndA opeat-iona coodination nn the Luzon grid which could lead to an appreciable improvement in efficiency and a Suc rtpvoudaA cav ov -.u -4u-dyy, suUur a euuuj 2 rgonuay neCdUd ot only on planning and operations but also to decide a reasonable schedule of .,Lesa.a.c anuA ± eua.L.L. rate JU Ut Lit iLagou fOr -the p0wtr generaueuL aLnU :)V-L L)J the two systems. This question is especially important because the operating cost- ofP both sysem are likel to be affeted eseill_ntePaeo Meralco,by the change in the exchange rate. 107. The problems of NPC's Agus grid in Northern Mandanao are those of coorduiating supply a very LuMpy development 01 ueianu io SUCI a way cl ou minimize idle capacity. The curve of future demand in this area depends heavily on the taming of new heavy energy using iUOUriL plas. For example, the new Iligan steel mill will use some three times the power ge j---- I . __ - . - 1^ ^fL - - -. 0M.114-lr 1T 1I generalted a Naria Cristina i. LyU Wen ± UCoxlie s -Unto LU u ptI u-%-m.n -1- aluminum plants under consideration would each use more than the total.1,60 output, 10U. Tne problem of improving the supply ul puwer in aeasu -her conc- nor capable of being connected to one of the grids is a difficult one. There are many isolated plants and small systems ..uin I. category - a nuMIer being supplied by small NPC hydro and diesel plants, hey vary from systems such as that of Cehu City served by a power co.) pany ith L;one modern thcrmal units to small isolated communities which obtain an uncertain supply of expensive power from diesel plants. In addition ther- arc many areas not now served at all. In some cases there would appear to bc scope for interconnection and coordination of investment and operations between adjacent jystems, but probably in.most cases there is little immediate hope for gaining economies in this way. 109. Even though the possibility of supplying these areas with rela- tively cheap power is remote, there is no doubt that considerable improvement can be made in the existing situation. These operations varj widely in efficiency; some are subject to frequent breakdowns as a result of poor main- tenance and old equipment,.while others are well run and well maintained. There is an obvious need for technical assistance in operations, planning and maintenance of standards. and for new equipment. One of the main difficulties of dealing with this problem is the very scattered and unorganized nature of these sunoliers. A necessary step in developing a policy to improve elec- tricity supply in these areas would be a program of organization of these sman1-1 utilities thrnurh which they could obtain financing and technical assistance provided certain conditions were met including standards of tech- nical P.id + ffnrn n mintnanoP of rates at a satisfactory level. Such a program financed in part by a small revolving fund could also - 35 - E. Transportation 110. Philippine transportation services barely kept pace with the movement of aggregate output during the last five years, The volume of road transport, as measured by gasoline consumption, increased by 30%. Cargo moved in inter- island shipping rose by 32% and that carried by the lianila Railroad by 29/o. The only dynamic element in the transport scene was the more than doubling of the traffic carried by the Philippine Airlines. Road Transport 111. The sluggish growth of motor transport results from (1) the rresent state of the road network and (ii) the unavailability of sufficient foreign exchange to replace and expand the trucking fleet. There is cumulative inter- action between these two factors. On the one hand, the poor riding surface of most roads reduces the useful life of vehicles and inflates the demand for imported spare parts. On the other, the shortage of trucking sp.ce e-ncourac'es overloading and hastens the deterioration of pavements and gravel surfaces. 112. The Mission is of the opinion that road transport is a serious bottle- neck in the Philippine economy. Remedial steps ought to be taken. We propose a resurfacing program embracing about 4,000 km of selected highways, whichcarry a traffic volume of more than 100 vehicles a day. Such a prograrm is likely to cost about P250 million and should yield benefits to the economy in terms of doubling the average life of vehicles and reducing the cost per ton- km by 30% or more. The main objective is to arrest further deterioration in the road network and to restore its normal state. 113. In addition, the capacity of the road system must be expanded to allow for increasine traffic. Broadly sneakine. the Mission endorses the con- cept of the Pan Philippine Highway as an ultimate objective. The real problem is to select snecific proiects on the basis of traffic studies and engineering designs. Spending huge amounts on grandiose bridges spanning the ocean is obviously less important than modest outlays on structures which will accom- modate anticipated increases in traffic. Te have allowed '500 million for this nro7ram of adding traffic anes rnonstru.tion of hnnsses- rrnlacement of temporary bridges, etc. Considerable preliminary investigations must precede actual ennditures under this heading, 111. Public investment in improving the highway system will not be fruitful unless complementary private investment in expanding the trucking fleet is forthcoming. The nresent demand for trucking snace is not being met efficiently. Despite the elaborate system of foreign exchange controls, the stock of passenger nPrs nnd other vehinle for consumntion nurposes increased at a faster rate than the trucking fleet during the recent past. 'e suggest that, if necessary, nriorities be reversed in the future to assure satisfactory transport cf goods and services. Compared to a 46% expansion in the over-all stock of motor vehit-les, the number of servinable trucks should rise by at least 66% during 1960-66. This must be regarded as an essential component of the nation's over- P11 trnnsnort nrogra,m. theIn e hau e culvtion on Ahcriclta wt lav set un the tar t of increasin the area under cultivation by 1 million hectares duringc the next five years., In - 1(6 - this connection, the country hasa chine hwaon nning "rimary emnhai on the "ribbon" type of land development, as in the past, or stressing the "block" tvne of land dPvPlonment. Tn thp "ribhnn +,na rof Avlo ment, new areas are made accessible by a long main road built to high-standards and connectine two traffic noles ERnAripnnp Rhrwn thnf. in qnrh a nse ari- cultural development takes place on both sides of the highway up to a depth of only one or two ri. By tNnt.rnat. biek" Anonment eni cos +.he ne- tration of virgin territory by one main road and a network of low-standard narnlP1 nd re-nrn : fanda OnaAincy t1ho Ynnin hihA naijili.nl riavolon- ment can take place up to a much greater depth on both sides of the main road And di+innon from +.ho market ne nnofll-r vMaller +hn in t.he -ean of "ribbon" development. The Mission recommends that the Philippine Government adopt the nincinl of bhlsk envelomen+ mherever this is fasnible. The over-all transport cost of land development is likely to be significantly smaller in nasp or suggestion is ancnted. Hp have allowed for an expendi- ture of P250 million to cover the cost of new roads associated with plans for land re-Ptt1emPnt-. 'Rnrrin Prnlc Thn4 r% n, +_ -r-%A i -mr -~Ir~ ovr+.ornea +.-% )i-I ) krf n hitv- cirly 7c/, of it is motorable. The remaining earth roads and trails are used by carabao drawn vehicle anc r nndostr n. !rffort ha'e h0-n mad in the nat to convert these into motorable roads. This Milision was not impressed by the administra- tve mechanism br which this work ws handled Not.only was the AeTastion haphazard and the construction frequently poor, but we noted instances in wnich recnn+1t com,!,,le+ed roAs hA eod for lack. of ma-inten-Mn11-. 1?. Dcspite~ thiS reor we hkav al--e fo a 1-ree increas i-n expenditures for the upgrading of barrio roads, on the premise that it ought to ve pun-"-v to instil method and efficncy into the axr4ni4stra,in of t.he Public Vorks Act (popularly known as the "Pork Barrel" System). The conver- sion of barrio earth roas anu trails into movoAvil rvads is an &uporant form of rural capital formation and one which can generate considerable empunuent. e recommenu uha stepu vvaKen ou uei. taken tuucavu purposefully, to elicit the cooperation of those directly affected and to --- 4 C -- .- M -a +kP^-nm+ramnae aiv+btannt Caga,yani Vd.J..L LtG.Lc..y problem of the Cagayan Valley. A rational choice between a.repaved, structur- a11 improved h ,da a lroad onncwtn fen Rnn .Ta-n i-+n Tnainaran turns on the ouestion of which is chearci from the national economic point of viw. Th ca l -- . cos.o ebuilding the ran is about.DL9 million The project can be finished in threa years. The capital cost of the railroad extnso- T-1[r D -41140- a + + +!nL-p mgmovAn ynly n nnrt. of the projected traffic is expected to use the railroad; the rest will con- 4-.. - * . *U --- A - ^ +i"b ^f +Aha rinin hi0hWn-1v mint. hp runqvpd in any case, costing P17 million. Altogether, the capital cost of the railroad contrast, the operating cost per ton-Ikn is more than 40% higher on the road -1 - - .L)L __- 1__ _3 UllanI oll LliU d.J.OU - 37 - 119. Which mode of transport is preferable Lo the Philippine economy depends on the anticipated flow 01 traffic. T.e economic ju3ilication for the railroad would be strong if there was reason to expect a very large ex- pansion in the volume of uraffic, soon ater the raiioad came into opera- tion. The large capital outlay would be spread over a. big traffic volume and the railway would be utilized to full capacity, Hovever, traffic studies made by the hanila Railroad ouggert a modest increase in traffic. Using this projection, we calculated the total cost to the economy of producing the required transport services. If the road solution was adopted, the cost over the next 25 years would be P143 million expressed in 1961 values. The corre- sponding cost of the railroad solution would be P215 million. The annual out- lay in each of the 25 years was expressed in 1961 values by using a discount rate of 8%. 120. On the basis of existing evidence regarding the production and export possibilities of the Cagayan Valley, the road solution is clearly preferable. The balance might well be tilted in favor of the railroad if new mineral resources were discovered. However, the Mission would not advise building the railroad on the gamble that large deposits might be found. Inter-Island Shipping 121. Coastal shipping plays a crucial role in the Philippine transport system. These ships carry raw materials and some export products from the outlying island to the big urban centers and take back locally-produced or imported manufactured goods. The inter-island fleet has an estimated capacity of more than 2h.000 net tons. with an average capacity per vessel of only $7 tons. Althour:h, seasonal fluctuations in the traffic occasionally cause deli:vs. the mission doubts whether there is presently any serious shortage of capacity. On the contrary, the fierce competition among carriers and the wirpnread nrntion of granting rebates suggests that supply exceeds demand in the shipping business. 122. The Mission heard many complaints about the high level of shipping rAtPA- It was sug&ented that a reduction would take place if the fleet was modernized. Neither proposition is borne out by the evidence we have been able to collect. The actual freight rates average between 75/ - 90% of the official rates, established by the Public Service Commission, Compared with prevailina -rices in coastal. and inland shipping in Western Europe, Philippine rates do not seem excessive. For some commodities, inter-island transport chrges npr ton-km are. of course. higher than in international shipping. Lower rates are possible in the latter on account of economies of scale (both bulk nnrl Inna distance). 12L Th hplief that modernination of the fleet would immediately reduce costs and prices does not stand scrutiny. True, most of the existing fleet, converted from military vesels. involves a higher operational cost than commercial craft. However, these ships were acquired from U.S. war surplus stocks at nominal picor! Lower onerational costs of a modern ship would be more than offset by higber capital costs. Only when replaceuent proceeds so hr tn%t te avr'nap PHiz of the fleet rises to about 3,000 tons and capacity is fully utilized, economies of scale may permit lower freight rates. This s a dA- t To4e over_ rates on particular commodities, say logs, may fanll in t.he nonyr 'riiir if t.hp trnracP.re spncia purpose bulk carriers. I )I. Thep averag a reNf the n-ca+ fl po i q n 1 ri-PO .rF,-r 'Je expect that these ships can be economically operated for another 10-15 years, alhnh +han miscno v linoivt mnin.enannn t -may% r-limh iniriri- BAvrnri certain point, it will be cheaper to buy a new ship rather than spend enormous amounts On repa"rs. Lt that time, th + hlppI-,vrnet-a find it necessary to extend financial assistance to shipping companies. 12. The Mission expects that the volume of traffic in inter-island rapidly. We have allowed for capital expenditures by the industry to expand form of petroleum tankers associated with the expansion in refinery capacity, dry cargo bulk carriers to carry commolles sucr a.s lugs, btel uiu feti::ier and possibly, general cargo passenger ships. Ports 126. The Philippines has 351 public ports of which 25 are open to inter- national shipping. The rest cater exclusively to the inter-Island traffiCe.. Some of the international ports - notably Manila, Cebu, Za.boanga Davao, fabaco - are presently experiencing congestion owing to the shortage of deep water berths. He recommend a sizeable expansion in the traffic handling capacity of these ports to eliminate the existing bottleneck and to keep pace with anticipated increase in foreign trade. In this context, the Mission has some reservations regarding the scale of the hanila port project to be partly financed by a loan from the U.S. Export Import Bank. It seems t' us that by more than doubling the number of berths during the next five ye& , this pro- ject will build considerable excess capacity. We would also sugcest a re- examination of the need for additional deep water Derths in Uig3n and Cotabato. The Bureau of Public Works Plan for expansion does not allow suf- ficiently for rising traffic volumes on account of the proposed steel comnlex in Iligan and the likely exportable surpluses of Cotabato. 127. Port facilities for domestic trade are generally adequate to handle the existing volume of traffic. However, congestion develops during seasonal peaks in a few ports. In broad outline, we subscribe to th B.P. .'s Plan for expansion. In many instances, this program implies douiling existing port capacity by building a second berth. This will inevitably create capacity ahead of demand. The Mission hopes that ample provision of this 1orm o social overhead capital will stimulate economic activity. Air Transport 128. We expect that the rapid development of air traffic in the recent past will continue in the foreseeable future. Large investments are requirea to prepare for this expansion. The Philippine Airlines will need additional aircraft and ground facilities will have to be improved considerably. 129. The Mission suggests that major airfields be reconstructed to accommodate Viscount aircraft. Secondary airports should be prepared to handle Fokker F-27 Friendship planes. The remaining airports should be - 39 - designed for D.C.31s. The program should also aim at equipping the larger of the fleet. Conclusion 130. The transport sector cannot be neglected for long without the economy suffering auve-be consequences. Tne system 01 aistribution may cease to function properly. Prices in local markets may fluctuate excess- iveLy. Inventory requirements may become abnormal. Production incentives may sag and resources may remain idle for lack of access. A determined effort must now be made to catch up with past arrears and to lay the founda- tion for the economyrs swift advance. - 4o - Public Canital Exnenditures on Transnort and Telecommunications million P 1963/67 1956/60 Total Roads and Bridges 1L3O 538 Resurfacing program 250 n.a. New roads for agricultural development 250 n.a. Feceder and bari roads -n0An Manila flood control program 70 n.a. kianlla ourughL -Cave plan nu trN ~Iad.ILa~ J port U0 Ut; II.U1CLI.EU Other major ports h3 noao hreug.ulg pruogrami 25 use Municipal ports 10 nea, isce'laneous 10a. Total other 237 143 Air ports ou 27 Air fleet (P.A.L,) 70 25 Railways (M.R.R. 75 60 Telecommunications 12 12 iscellaneous - 13 Grand Total 1,725 730 - 41 - F, Social Services Education 131. The Philippine educational system has a high rank alongside neighboring Asian countries and indeed among most less-developed countries. Four out of five children of elementary school age receive instruction. The proportion of elementary to secondary enrollment is similar to other countries at the same stage of development. The ratio of college students to the total population is much higher than in any other country, except the United States. 132. The Mission was impressed by the quantity of Philippine education. At the same time, the Mission is aware of its qualitative limitations. The shortage of elementary school buildings has led to overcrowded classrooms and reduced hours of instruction. The shortage of textbooks has forced teachers to rely heavily on the recitation and rote methods of instruction. A 1960 survey of Philippine schools (by the United States Operations Piissicn) revealed a serious deterioration in pupil achievement. 133. Secondarv ;nd hipher education is Drovided to a considerable extent by private,non-sectarian schools run by profit-making corporations. Some of these institmtions are obvionsv insnired mnr-- by cnmmercipl values than bV regard for scholarship, 134. The Mis-ion is convinced that the Philippine educational system is not fnnQq on the noeds of a ranidiv ornong conomy Education is re7arded more as a constitutional right than as an instrument of economic progress. The accent is on Social cJonumptin rather than on purnnPful inv.tment- 4..2 -J P r, &O C1 14LEJ L U. U WkL L UF - JU V LII LfUt i _______ 63% of the children who enroll in Grade I fail to complete elementary school. go to school intermittently for a year or two are unlikely to become educated workers. Although there is considerable interest in vocational schools, their efetiees e,n o e~Their jj+)-ojn o%f p-eiitp - there were 32,000 in 1958-59 - is heavily weighted in favor of tailors, stenographers ad fashion experts. The pl of% gradate finin EI 'J to --I-- -- their training is disquietingly low. As far as the Mission knows, there has the sphere of higher education, little effort is made to influence or control enrol.Iment in. particular courses of stuy0, The resu.Lt isaguto6hemre of teachers, lawyers, liberal arts graduates,and sore others. - - 4-- 4 -4- ine rassion- recoWFenUULeius art baved on te VII ULIC JI0 % education can make an important contribution to rapid Philippine progress. This premise will hold only if primary Importatce 13 aUachue oU prblUmt V quality, and if an attempt is made to anticipate futurc demands for vocational and professional skills. 137. Public expenditures on elementary education should be increased to meet three objectives: (1) a rise in school age population of 23% during - 42 - 19519 and 1966, (2) a rise in expenditures per student from P69 to R90, and (:3) the reduction in the drop-out rate which can be expected from a more adequate school program. 138. The Mission recommends that the national. government extend financial sipport to general secondary schools, which rely heavily on tuition fees at the present time. Onerous charges prevent children with demonstrated academic ability, but whose parents are poor. from completing their secondary and higher education. This is not only inequitable; it deprives the nation of a vcluable intellectual resource. Furthermore, the expansion of vocational education must be related to national plans for industrial and agricultural development. In the full report. we will indicate the emoloyment imnlications of a possible set of investment decisions. If this program is to be implemented, consider- able thought. mns be h iven to the skills rPrniiirP. These in turn must be trans- lated into appropriate curricula and enrollment, Health 139. Philippine health standards improved rapidly during the last decade. Tife gnv-nr-tynni n+ 1I rth inrae o"n yer per nn ir ain evxtrordinary rnf.p compared with 19th century experience - and this improvement has had a signifi- can imac onI recentA nd UOetie popuLatinns growuh,, asweavdicsd earlier in this report, The increase in life expectancy is largely the result project was launched in 1953,and since then the registered deaths attributed U0 LILo~ U_LVCJ_ wdV e U L.LlitU LJ U /O Illu ± J~ J.[ UVU.LU.L1 VL w1l. pu u..CL X - - in malarious areas has declined from one-third to cne-tenth, However, the aLW1.L.LL_L0U1c.ULL O.L thLisL mL .Ld-UJILU1L . UJtO L1k U 1CL I lkJUCZ1 CUL U1ILU4% .J.L success; its completion faces formidable obstacles. The anti-malarial project should be converted into an Uer7cy campaign, backeU wvith wUolehcear u financial and technical support.. Unless malaria is eradicated before resist- ance to D.D.T. is developed - which can be expected wlitin the netAu five Yeas - the nation's program of land settlement will be in jeopardy. 140. Only a beginning has been made in combating tuberculosis. Though mortality from this disease has declined by 22% during the last twelve years, it still remains at a high level. Present facilities for didgnosis and treatment are grossly inadequate. The mission's recomendations for public expenditure allow for a substantial increase in the scope of the tuberculosis control program. 141, The availability of potable water has increased diring the last five years. According to rough estimates made by the Mission, nearly h$;i of the total population has access to a safe water supply compared to 33;p in 1955. The improvement is more marked in rural areas, resulting from the installation of a large number of artesian wells. As a result, mortality due to dysentery and typhoid has been substantially reduced. The problem still remains large, however, and the solution will be expensive. The Mission's Drogram implies an increase of more than 50% ih investment outlay on water- 11TSee The Current Status of the Malaria Eradicltion Proram in the Philippines, 19)61. - 43 - works and artesian wells. 142. Facilities for medical care are well developed in the Philippines, compared vith other countries at similar levels of 7er capita income. The ratio of population to hospital beds a.id t. doctors has declined in recent years. However. iedical -acilities are verj inenuitably distributed am-on the geographical regions and between urban and rural areas. The Mission heard serious on1Iaints about never. shortwA of drur.. e!iuinment and renair facilities in public hospitals. Budgetary data confirms our irpression that nublin hinitAls have ehoon in ft,.- denid sufficien+ financial nnnort. Actual expenditures per hospital bed have averaged less than P6 per day Government must take steps to assure that the nation's present hospitals e.qpansion in public hospitals on the grounds that continued progress in [1tJLUU ±. LUL1 Z UUL1UdLEU j is LA:!UUtir. LLLUA1.Ltjj-U11I UOU=i 11,J 1U1-UOfzU CULJ sizeable expansion in private facilities. If the Mission's program is carr-ud ouu, the capacity of public hospitals will increase by 6,, Lte number of inhabitants per hospital bed will fall to 1100 from the 1220 in 143. Although Rural HeaLth Units have provided valuable services, ineir mork has bEen hampered by three factors. First, there still is an acute snortage of professional staff in relation to the needs of a widely dispersed ponlation. To some extent, this problem may be alleviated by providing more motor transport. If every doctor and dentist had a suitable vehicle at his dislposal, the increase in the value of his services could be i-any Limes the e:tra cost. Secondly, the present ratio of intermediate level technicians to professional staff appears to be disproportionately low. To ;ake naxi use of professional manpower, the recruitment of nurses, midwrives and dental a.ide3 ill have to be accelerated. They can perform many medical tasks quite satisfactorily and enable the doctors to devote their time to suDervisory and specialized functions. Thirdly, Rural Health Units seldom have adequate sup?lies of drugs and medicines. ;ithout these, medical facilities in the barrio can hardly be satisfactory. The Mission recommends a substantial rise in ex0enditures for toe rural health prograi. 1L4. The Mission's general conclusion is that future progress in Philippine health standards is continaent on exDensive and time-consuminF measures. The easiest battles have already been won. The serious health hazards of the 19 01s - oneumonia. bronchitis. tuberculosis. gastro-enteritis - must be tackled by improverients in environmental sanitation and curative medical facilities. Lifp namecntancv at birti7 -ll mont likely continue to rise, but the advance is likely to be slower than in the past decade. 4k4 - G. Inplicationc for Dvr-all InvEt.-;ont, atput and Employment 145. A program along thu lines outlined In the pr vious sections should make t possible for the econo7yr to acnieve a grov"n rate in real out7ut of more than 6% per year during the next five or cix years, to reduce materially the rate of unempioym.eTnt and underemployrcnt, and to provide some improvement in per capita standards of social services during the period. It Toild also help greatly to provide the basis for meeting the problems of the future. -4Ue The financial costs iTould be substantial, both in tenis of invest- ment outlays, and of current public development expenditure. But as indicated in the following chapter, we believe it should be feasible to finance these costs. Prom both an ezonoric and social standpoint, the increAs7 in eflort required to do so would seem am=ly justified. Total Investment 147. The investment projected for the five year period 1962-465 -ould aZgregate 14.3 billion pesos, as comnared to a total for 1956-60 of 2.L billion (both valued at post-devaluation prices) - a rise of 70,. As a -ercentage of the national product. investment would grow from inst under lh: Jn the laqt five years to 17.5% in the 1952-66 period. Between the year 1960 and the year 1966, the ratio would rise from 13.6r to 18At The hrnakHo-6m of -nveit- ment by broad sector is indicated below: Gross Investment (billions of pesos at post devaluation prices) 1956/60 1962/66 1960 1966 Agriculture - Fixed .8B 1.80 0.16 0.49 Agriculture - Livestock .11 .22 0.03 0.06 Sub-total .99 2.6f 0.19 -.5 Manufacturing - 5 workers & ovor 1.20 2.97 0.30 o.66 Nanufacturing - less than 5 workers 0.64 0.75 0.13 0.17 Sub-total Fixed 1.Uk 3.72 0.43 0,53 iing 0.30 0.k5 0.05 0.10 Transnort C: Communications 1.26 2.43 0.39 0.53 Power and 'iatur 0.42 0.92 0.09 0.22 Construction Trades 0.12 0.29 0.02 0.07 All other 2.83 3.7h 0.52 0.90 Total Fixcd 6 13.77 Livestock increase .11 .22 .03 .05 Other Inventory increase .70 .77 .10 .17 Grand Total U~0E T2o rTE 1k8. It will be seen that in both aericulture and marinufacturing. !anital formation is projected as doubling in the 1962-66 period. Primarily in sunport of the growth in these sectors. transnort investment is also nroiantdrl to dnule - 45- uile utiiLties kmainly noer) anc, tne construction truus u-1-u txpan u- portionatoly even more. Can)ital outlays in mining should rise by at least 50,. Invcstment gro-wth in other sectors is likely to be slouer because, in general, the rate of canit-l spendiag was already fairly high in the 1956-60 period; e.g., i the case of residential construction, and school buildings, some of the backlog was made up in that period, resulting in some per capita improvements. Anproximately the same rates of per capita inprovement are allowed for in the projections for 1962-66. Inventory investment is expected to grow at a sloier rate than in the past, for two principal reasons: 'first, no further increase in government tobacco stocks is projected; second, ma- nufacturing inventories were built up abnormally in the 1956-60 period (to a level corresDonding to nearly four months' sales); for the future reduction to a more normal ratio (three months' sales) is projected. The Public Eector Program 149. Of the total investment projected for 1962-66, direct public sector outlays anonrit for PE.0 billion. as against P2.2 billion in 1956-60. Current expenditures by the Government will also have to rise substantially if reason- qh1r ftret. fnr econnmic nd qonial development are to be achieved. -e have projected a rise of 4S in current outlays on goods and services - from shA billion to DA Q billion This would 1r0ing the total public bill for direct outlays to P10.9 billion in 1962-66, against P7.0 billion the last five iro"o-Tn _nr1+Jn n cnhitantin1 nmoint of public loans and transfer payments to the main commodity producing sectors will be required. This is dscussed in the nev+ chapt+r. Thedistmribution of the direct current and capital outlays is indicated in the following table: Direct Public Sector Expendituresi/ Current Outlays on Capital Outlays Goods e Services Total Outlays 1956-6ol/ 1962-66 1956-60 1962-66 10,Y-6O iq62J FY Agriculture Fixed 230 150 255 515 bJU 1,0u1 Agriculture Inventory 15 50 Transport 740 1,750 600 810 1,340 2,5ou Poi,er and Water 340 690 25 30 365 720 Construction Equipment 40 125 - - LO 125 Commerce & Industry 105 50 110 165 215 215 Health & Education 210 310 1,735 2,990 1,945 3,300 Housina & Social Welfare 35 115 115 200 150 315 Defense & Constab, - - 96 1,080 945 1,080 All Other General Government 345 450 815 1,10 1,160 12600 Total 2,190 3,990 4,605 6,940 6,790 10,930 - 1. ne21 7 ran2/ 1/ Consolidated totals for national and local governments, government oruprU- tions and expenditures financed from foreign loans and grants. For the latter two expenditure groups, capital outlays only are incudcd. 2/ Estimated calendar yer- totals. - 46 - 1501 Among public sector capital outlays, it will be seen that the major increases su2rrested are in the economic devnlonmcnt Ret.orn! n -'riertmre (other than inventories), transport, power and water. A dccline is envisaged in dirnn., rnvPArnmPnt onn i +AI ninvIe--ic in manni n rin nr in Iinne irn+ ni-oc?gnt fovernmental policy. However, as shown in the.- next chanter, an increase is - rJected in capi - - - tr n f r * Tos * or U h major 1 J l I r inL nJu bOL e con.4" tior. activity resulting from this program - particularly in roads, norts, etc., net investMent -in construtIn.JU__ ltt U ULLi. ZCL ;". LUEI the line indicated - even if, as assumed, a good portion of the increased activiVy s aldtU Uy prJ.VLte contractor AmLto0g the socil rUVice, a rie of 50' is foreseen in public health and education canital rnquirements, In bos-ingfl.f,.. n soc I- --fa I.- o U .uLe wt!jLre, E;ne increase reflects rie suggestion that a mo JeratLe scale public low cost housing program be initiated in the period. 151, Tn current outlays, a large rise is projected for agricuture to r c a our suggestion of considerable exnansion of work in agricvItural extension, land survey, forest protection, :tc. The transoort item reflects Ue reco mendation of amoderate increase in maintenance expenditures. The largest absolute increases in current outlays -will, of course, be required on ed4cation. An increase would be necessary just to maintain present standards per nupil. Our projection allows for a moderate per capita improveent tn both education and public health facilities. * Considering the current and capital together, public outlays for economic purposes amounted to around 40% of total public expenditures in .L5(-O, with 315 for social services, and another 295 For defense and geeral government. The suggested program for 1962-66 allots 45% for economic, 31. for social, and 2V'b for defense and general government. Output and Employment 153. As mentioned earlier, the nrojected investment outlay should lead to P rrTtth rat. in Y- Pn+.nni of evro A? beta 0tn l9Nn and 10A91_ TAkinry .1961 as a base the rate might be as much as 6.5o in the next five years. Under these condit.ions- rninhmnt qhld P-an by a-rond T n,r vear for the period, with the creation of about 1.5 million new jobs in 1962-66, or enouh to absorb the increns in the linaor fe in +. he oerl_od n I Jnnireted increase in productivity per worker should be accompanied by reduction in i indP-renplomrminn (and iAnc rease im ,-n p c +it incoe p^r-n cni^-1rn i neric^u>1 ture and manufacturing* This wou. involve a reduction in visible unemployment and undeemnlaoen+.1/ PI an +4m-+-A 11 _-P +1,^ h P- n 410 +r, between six and seven percent by 1966. Projected grorth by main sector is in/r inf I.M~I ~~'~fI~ ~lelII - 47 - li:t Outnut at constant prices ?Tployment (billions of nes (000 workers) 1955 1960 a966 19? 196o 1966 Agricuture 31 3i5 520 5020 580C0 6oo Organized Manufacturing 0.89 1.46 2.67 200 250 350 Small scale Manu- facturing 0.3 0.60 0.82 830 070 930 Transport & Utilities 0.28 0.38 0.57 250 320 430 Commerce & Trade 1.06 1.32 1.68 860 860 880 Services including govtL 2.17 2.oo 14.uu 990 10u ic-, Total 8.4O 11.1 6O1 838 9475AC Oh 11200 54. it b.l e seen +han these prectiomns agricul+ural ermmen+ does not change as a percentage of the total. Sectors which are likely to construction, Small scale manufacturing, commerce and trade are expected to declie relative VU the total. With the growth in the 1dusral base, hovever, a decline in agricultural emeloyment as a percent of the total shold~LL begLin LU tak ;liace towad~LJ the~ endI U.L the~ deca.~ 155. iL all seorsJ, rLses in prouuctivity per worker are projcUUd, with the greatest rise, as one vould expect, projected for the organized manu- facturing secor. These prouuctivity icreases Urive vasically, of couse, from the projected rise in investment discussed earlier. - 48 - H. Implications for Foreign Trade and Current External Account 156. Considerable changes in the volume and composition of foreign trade likely to expand by around 4.5% per year between 1960 and 1966. However, due tu expected lower prices lor coconut products and aucdn anU to the propoed cut in the volume of exports of logs, aggregate export earnings are unlikely to increase faster than 37 p.a. In the latter nall of the IYOU's, as dynamie export products gain greater weight in the total, the rate of growth will probably accelerate - unless this is offset by a decline in sugar sales. In any case, the Mission expects that as a result of the investment program, the compz)sition of exports will change gradually in favor of commodities for which foreign income elasticity of demand is high. Summary of Export Value Projection (in rillions of U. S. dollars) 1955 1960 1966 Stagnating Group Coconut products 153 179 a/ 180 Abaca products 30 Lo Logs and lumber El 92 80 Tnf.al 22, 71Zi a! -10 Snon/ h 112 LI3 17A Ilinerafs 4O 60 85 P1 -irw.AA nvr irnn-n I inC~~ Corn - 20 Fruits and vegetables 7 10 15 Total 19 N7 390 Grand Total 400 560 a/ 690 a/ Exclusive of non-recorded copra shipments estimated at a minamum 0r $20 million, b/ Expansion due to non-quota sales in the United States. c/ Depressed in 1960 because of U.S. recession; $18 million in 1959. d/ Of which: aluminum $9 million; rubber products $7 million; electrical goods and other machinery $5 million; chemicals $2 million. J_.Je I 4u v1 FaOey Wn= ounu11,; n tA oi.A,teueuy ourLvaaU t mpuL1.Ju1 U OOULVo V of manufactured consumer goods, in maintaining a fairly high rate of growth in output (nore than 5)70 with a much less than proportionate rise ir- mrchandise - 0 _ Jmnnrt tavoTnn 2ir 1/. With fiwrther imnnort in+tittion in cnonumqe manufan- tures and a substantial advance in the production of intermediate goods and rwu mase.i-la iman^v-+ l ann%0 +4 +- l ." hA -i+-ii+ ^L+ ueu1rr -- WA. V4 - -a~JJ - -u -1-1J.. ---A --L& 5A 6 - -11 A'*A 4 -J~ -JJ - -.J -n - the difference between the two growth rates will diminish substantially in the capital goods. Between 1959-60 and 1966, the value of imports is projected to rovisional %st.mate of Nerr-anai/e Import- (in millions of U. S. dollars) 1959 1L6 vaLue Percentage Value tercentave Composition Composition Capital goods 125 22 280 a/ 32 Inputs into organized industry 276 b/ 48 395h/ 45 of which: crude oil (21) (4) (70).2/ (8) Finished fuel products 46 8 12 c/ 2 Others 130 23 187 21 of which: materials for construction (20) (3) (40) (5) consumer goods (70) (12) ( 16 miscellaneous 408 (( (1) Total 577 100% 874 100% a/ Derived from the difference between estimated total requirements for capital goods and projected domestic supply of capital goods. b/ Preliminary results of the study on inter-industry relations. c/ Aggregate fuel consumption is estimated to increase at slightly above 6%. The lower rate of growth in import value results from the decline in crude oil prices since 1960 and from foreign exchange savings on account of domestic refining of crude. 158, The tentative character of the above estimate should be stressed. Further work may well lead to changes in the nrojected composition of imports by increasing the shares of capital goods and raw materials and intermediate nroducts. Tn that case. in order to leave the over-all nrojection of import value unchanged, adjustment will have to fall on the group "consumer goods and minnAllaneAs" which is presentlv nrnjected at around 8150 million. Except for some foodstuffs which can not be substituted (probably around $40 million), there phould he cnmp rnnm fnr imnprt rennament here, If that nroves necessary. Of course, only actual life can show how realistic any import 1/ Volume change between 1952-54 and 1958-60. of ships ($70 million). Growth rate between 1960 and 1966 would work out 4. 1 - au o P.ae projection is; the past experience has not been very fortunate. But on the face of it, it would seem that the transfer problem, once the investment program is completed, is manageable - provided adequate financial measures are taken at home and provided the country does have an import capacity excceding V'850 !illion by the mid-1960's. much 159. Invisible earnings will not provide/assistance in meeting the increased import bill. Moderate growth in a number of items - tourist receipts, trans- portation, remittances from abroad, etc. - will be offset by a decline in U. S. government expenditure in the Philippines as a result of the devaluation.1/ By contrast, invisible paym3nts will rise considerably in the next five years. The laraest increases are expected in interest payments on foreien debt, both on that existing and on that to be contracted in the future. Net payrnonts of factor income abroad which were favorable to the Philinnines in the past will turn adverse. Balance of Invisibles (in million of T1 S. dollars) I OAr) IAA Receipts Services (exc11udng factor income)-/ 70 r7 8 Factor income / 8685 Services (excluding factor payments)c/ 39 50 XA~UJ ±LIUWI-Of 117 Total 126 167 Balance Factor income -1 e/ -32 Total 38 -4 Nu Non-monetary gold, tourist receipts, transportation, insurance, government receipts, U. S. military and other expenditure ($22 mlUllon in 1960, vl5 million in 1960), miscellaneous. ./ Investment income, veterans' pensions paid by the United States (06 million in 1960, $51 million in 1966) and private remit- tances, c/ Foreign travel, government and others. a/ Including reinvested earnings of $28 million in 1960 (abnormally low; annual average in 1956-59, 146 million) and p45 million in 1966. ./ Positive in the preceding years. / See page 8, paragraph 25. - -1l - 160. The next chapter discusses the problem of financing the investment program, including financing from abroad. It s prUjcteUU there that net -nFlo of external resources may amount to 0$00 million over the period 1962-66. Given the likely disbursement schedule, the implication i tat in u96U, net uaplM imports could be around $180-200 million. This, added to export receipts, appears sufficient to meet the import requirements at the projected level of output and income for that year. Foreign Exchange Balance, 1956-60 and 1960-66 (in millions of U. S. dollars, current prices) 1960 196 Annual 5-year totals Annual Growth 6-60 62-66 Growth Rate Rate 60-6 Merchandise Exports 560 690 2,456 3,200 Invisible Receipts 164 163 848 754 Capital Inflow a/ 68 188 7926 _3 Total Resources 792 1,041 4.7% 3,730 4,747 4.1% Less Invisible Payments a/ 126 167 587 686 Available for Merchandise Imports 666 874 4.7, 3,143 4,061 4.4% a/ Since reinvested earnings are included both in capital inflow and in invisible payments. they cancel out. Caital inflow exclusive of reinvested earnings is estiniated as follows: 1960, $40 million; 1966, $138 million; 1956-60. L21L million and 1962-66. 9603 million. 101, The period in-between may well turn out to be more difficult. Prudent montary managment and an early tny Pffnrt will be necessary in order to avoid excessive pressures on the balance of payments. - 52 - I. Income and Exenditure 162. As mentioned earlier, the execution of the program is expected to anable the economy to attain a growth rate in real output in excess of 6% per year. This would mean an advance faster than in the past, despite the fact that circumstances are more difficult. Real income will, in all likelihood, rise somewhat slower than real output because of the expected deterioration in the terms of trade. The adverse movement in net factor payments abroad will have the A-amp ffect After allowance for these elements.1/ real national income is projected to increase from P13.2 billion in 1960 to P18.4 billion in 19AA- Tn torm< nf fivo yar et the grn-wth is from 61_0 billion to P82.1 billion. Summary of Income and Expenditure 1956-6 1962-6 GNP at market prices 59.7 81.5 Terms of trade effect 1. Real income 61.0 82.1 Fixed investment 7.6 13.3 Inventories 0.8 1.0 Total investment 8.4 14.32 Public consumption 4.8 6.9 Private consumption 49.3 63.6 Current deficit -1.6 -2.8 National savings 6.8 11.3 163. Despite the heavy increase in investment outlay, the growth in real income is expected to be sufficiently fast to enable per capita private con- sumption to rise during the period. Between 1960 and 1966, the expected yearly growth rate is 4.8% or about 1.5% per capita. This is better than in the past five years, although it is not too much. However, the Mission does not see any other alternative. Austerity in the next several years is an absolute con- dition for the solution of the structural problems of the economy and thus for a much faster increase in output and consumption in the future. 1/ And for depreciation and indirect taxes. - 53 - CAPTER IV Financing the Investment Program 164. Financing the suggested program woul, undoubtedly require a major effort. However, the ihilippines has made co-iparable efforts in the past, e.g., in 1950-51 after the massive forei-n aid of the 1946-49 period came to an end; and again in 1959-60 when national savings were raised from less than 9 of GIP previously to about 124 at present. The program out- lined here would require a further upward push in the national savings rate to 15% by 1966. In terms of two five year period-, the change would be from an average of 115) in 1956-60 to one of 14' in 1962-66. A. foreian Reources 165. Given a domestic effort along these lines, it is natural that the Philippines will wish to seek a considerable increase in foreign capital inflow during the period. At the same time, however, it will be necessary for the country to build up its foreign exchange reserves. At present, gross reserves stand at around :120 million but net reserves are down to about 270 million which is about one nionthts imports of goods and services at current rates. If the fovernn-nt is to achieve its obiective of main- taining a much freer foreign exchange system in the future, it is essential that reserves be built uo substa.-tially from this level. Interim help from the IMF or other sources is, of course, desirable. But we assume loans from such sources would be repaid by 1966. Therefore, we proiect that out of foreign resources received during the 1962-66 period, $150-200 million would be set aside for reserves, to bring the nasoit. lnel nof net rserves n to around ';250 million by 1966, which might be regarded as a reasonable 'normal" level av upn thp. i.p -ni hnf phlinin r trade. This level would correspond to three months? inports of goods and services at the rate nroipnted for lAA T-i . - r- q P - +.n nnccr.A.I czniA n ^f4 nn- +n . A -'. +.4'eJ period, we have made the following assumptions on items other than conven- a total of $l12 million as compared to a total of around long-term credits together might total around 2160 million such assistance in the past five years. (c) Payment of war damage claims from the United States is from the United States was received in the past period. (d) Private long-term capital inflow, would aggregate around 3uu-3u millon over the perLod, includ=ng reinvested earnings of foreign companies projected at 190 million. Tne remainuer we assume vo ue net ; nw IL SJ and the repatriation of s3me of the Filipino capita which has flowed out of the country in recent years on speculative grounds. In the past five years, net private capital inlow is estimated at only about $135 million. The official esti- mate for retained earnings is around $210 million and other recorded capital flows net out to zero. The "errors and omissions" item in the balance of payrents amounted to around $75 million which is presumed to be in part a reflection of private capital flight in that period. Capital flight on an equal or even larger scale has also occurred through under reporting of exports, which is not reflected at all in the official balance of payments statistics. 167. Conventional borrowing is projected on the assumption that the Philippines could service external debt by the end of the period in an amount corresnonding arnn 11% or 1 9C of nnrted current foreign exchange receipts. Total debt outstanding at the end of 1961 is estimated at around $390 million. Of this abhout $170 millionn was debt of anverrnent. ann gnvermment corporations. and the remainder private debt with exchange guarantees. Of the total, around $4100 million is mediunterm debt, sot+h.tsernic1 will he hib over the Xt five years, reaching a peak of $67 million in 1964 (91 of projected earnings). 168. Around $120 million of present debt remains undisbursed. We are pro- new borrowing during the period. Allowing for time lags in disbursement this Mcn-, 41,,4 - -,,- d!dnl .ai - .- ,,1an.ti1A a-I +n nn n+ mr1n in *'.__-b SS4. L'.j ,& LtLt t 4... i.L.L Z..J& L A LC L4LJ4L~ new.A. lo n Vo J h-av Lto 'be 1962-66. Negotiations are now underway for loans amounting to around $150 14"_L110L11 .LO .L i a11>L"=ii llun w4k; Pcugra -u 01. the~ LMew ul"e' 4VJiLU UJ long-tem character. On this assumption, service on new debt would rise to aroun $411 milio by 196 Jrnging tota det er-e1roece for that year to around $95 million, as compared with projected foreign exchange earn- igs of somewhere between 825 and $850 mizliOn or a ratiO uo -J-.l.54. Deducting amortization, use of conventional loans at this rate would produce a net inflow in addition to the other sources mentioned above of $280 million in the period and debt outstanding would rise to around $650 million by 1966. Service payments on this would decline to around pu6 m ilon by 1769. Thus additional debt could be contracted in the period 1966-68, permitting main- tenance of substantial inflow of capital without exceeding total debt Service bf around $100 million. It should be stressed that the rate of capital inflkw from conventional borrowing which will be possible under reasonable debt service limits depends very much on whether new borrowings are on a long- term basis or not. If a substantial share is medium-term debt, then capital inflow from this source would have to be kept to a lower level than assumed here. The Eission wants to emphasize most strongly the dangerous implications of such borrowing policies. They will reduce the creditworthiness already within the next five-year period and thus make impossible the execution of the proposed investment program. 169. Under this set of assumptions, total inflow during the period would aggregate around $950 million. Of this $150 million uould be used to build up exchange reserves, leaving $800 million available for financing domestic investment. Thus, of the projected investment bill of P14.3 billion, net foreign capital inflow would provide for P2.8 billion, leaving P11.5 billion to be financed from domestic sources. This compares with foreign financing of $430 million (11,590 million in real terms) in 1956-60 and a domestic bill in that period of P6.9 billion. - 55 - B. Financing Public Sector Expenditures Background 170. With the rise in r-overnment expenditures on economic and social dPvelPent+ i nit+iated ' CLI in( t - A uner 'Presi;dent 4- C zgsN Ay v the role o4 public finances in the overall monetary situation shifted from a pasoive nea ton nn active _xa_ioar one I th four fi 1a years -1 through-- 1959,1/ net bank credit to the public sector rose by an amount corresponding t I of the mQ1-19__ money supply. ULt net bank creui ou the private sector increasing half that amount, the result was generation of inflationary pres3ures wh;h lue e a arop in foreign excuainge reserves 0± u±m-u and a risc in prices of 12%. Pressures on the foreign exchange control SYstem. mounted rapidly. 11 Again.t Tris background, the Government obtained legislation in the middle of 1959 calling for a humber of domestic tax increases and authoriz- ing a margin fee on foreign exchange which was set initially at 215. As a result, total revenue, including that from the margin fee, rose by 29% in that year and another bfo in the fiscal year 1960-61. Thus, in spite of a further rise in expenditures, the net impact of the public sector was de- flationary in those two years. In 1960-61 toual current revenue including lecal government nay have attained P1,600 million or about 11.6% of GNP as compared with an averag.-e of 10% of GL\P (at current prices) in the four fiscal years 1956-59, The Problem for the Future 172. -s discused in the nr3vious cha,,'rr. bh isio tu<72ots that .1irect ,.:li3 _x-ondi.tur'es on current and ca-ital nccunt b increa,.rl in rrl l tcr-s fro-. a total of P6.8 billion iurine th fiscl voar:, 10$(-60 to arounJ :11.0 billiqn in the fiscal years 1963-67 (in this presentation, ';e have equated calendar years 1962-66 with the fiscal years 1963-67). At current prices the aggregate for the 1956-1960 period was only around P6.3 billion. The general Pattern of sectorial nriorities nronosed in the )ublic sector has already been discussed. An additional point of importance to the whole public sector needs to be made here with resnect to covernment salaries, 173. The successTiL execution of a proparnm alons the lines suggested here will require recruitment to public service of the best talent the Philipnines has to offer. Tn order to achieve thin it i qucyestpa thqt salaries in the top lt.vels of government be increase-d substantially. At present. the salary level for mmhers of the Cinet. of p12-onn nPr var acts as the upper limit. This is far below the salaries of senior officials in private business - whi -h reprt.y1 range f-rm pq)nnn +.0 o no-nn0, Further study is needed of the particular posts for which increases are mos-t u1rgePntlyV requ1ired_ ndr ofP th prpraemgn uti em likely that around 2,000-3,000 jobs altogether might be involved at a total F , L- ' - - - J 'j~ . ) UJo r.4%j L4..L 4. L-J.v,.L cyL period, assuming the increase went into effect during the fiscal year 1964. 1/ Fiscal years ending June 30. - 56 - Allowance for this amount is included in the proposed program of current expenditures. 174, In addition to the direct outlays on current and capital expendi- tures, the following changes are envisaged in current transfers: (a) Losses on inventories - mainly on tobacco - which amounted to an estimated P86 million in 1956-60 are assumed to be eliminated in 1963-67, as well as any further net increase in such inventories.1/ (b The fertili2er subsidv nrogram is nroiected as nhasine out - with an allowance of P30 million in 1963-66, as against ex- nonditures of PSL millinn in 196-0 (n) A r ubn±w m"-iis suggste biar+a hy the- 1.init% hlpr ease t1he impact of further exchange rate changes on the imported families. The most important of these are canned sardines, proposed to be spent for this purpose over the next two or treyears. Oneofth objclu UXV "L.L A.5~ SU YwoJu-L.A- to reduce the pressures for wage increases which will emerge phasize the temporary character of this measure. The Government should carefully consider what is the most appro- priate method of granting the subsidy, so that it does not set a precedent for the future or for other sectors of the economy. Subsidies inevitably lead to the weakening of the public finances and to dangerous distortions of the cost- price structure. (d) Public pensions, back pay payments, and public funds for uncovered GSi5 liabilities are projected as rising from P139 million in the last five years to around P260 million in 96-67. Tne exact extent or Tne Government-s liability to GSIS on account of back coverage authorized in legisla- tion but uncovered by individual contributions needs to be clarified, but on the basis of court decisions requiring GSIS to make payments on this back coverage, it seems likely that some government transfer will have to be made on this account. (e) Interest payments on the debt of central and local govern- ments are projected on the basis of the increase foreseen in debt outstanding. In total, these rise from P96 million in the past to P175 million in 1962-66. / This would allow still for some further gross purchases to the extent that they could be financed by sales from existing stocks. Alternatively if the purchase program were to be dropped altogether, any sales would pro- duce additional revenue for the Government.. Land Purchases .7* Land purciiases by the public sector amounted to Ph4 million in the 1956-60 period of which Pio million was for land reform and P22 million purchases by the Peoples Homesite and Housing Corporation mostly for land not needed for conotruction purposes. For the future we oroject P35 million to be spent on land reform and P15 million lor public housing. Sales of some of the PHHC's present land holdings would provide additional funds which could be used for purchases of more suitable sites for low cost housing. Ca,ital Transfers Since the last war, a number of public or semi-public institutions have been developed in the Philippines which channel credit to the private sector. The 1oans of these Instituticns have -ro,T as follo,,: over tho past five years: Net Loans Outstanding ( nillion pesos) Hid-Year 1955 1960 Development Bank of the Philippines 458 498 ACCFA 30 80 Rural Banksl/ (Gov't equity & C.B. rediscounts) 3 27 Government Services Insurance System 140 400 Social Security System - 20 Government pawn shops 7 17 Industrial Loan & Guarantee Fund -46 638 1,088 approximately as follows: In millions of pesos Agric. Industry Real Estate Consumption Other Total Fiscal 56-60 122 84 115 46 83 450 Calendar 56-60 118 107 1_ 65 98 500 1 / (Inro-onnnc n. nnfn.in1lv rc ni nr'i tr nwn-qhi n n~f lMT i n LhA Piirn 3Anlrn 17'. For the future, we suggest that allowance oe made for an increase in w. m .J - -, . +-. 4 - r -e o.+ +i_ +, nhn+. U1 J,00 million. Around P850 millicn would be ,or manufacturinr cn the basis of the considerations aLready discussed in thoe Indutry Section of tne pcvaouus chiple agriculture, in addition to the P200 million of credit through ACCFA and the Rural Banks, another P"O to P1Ou million might be added for credit from other government institutions, leaving P3C0-P350 million for other sectors (including "consumption" loans), as compared with P275 million in the past. As noted in the section on indvstry not all of the P850 illion for that sector would necessarily be channelled through these institutions. A good part of it could take the form of lending back corporate profits tax, a device which would be probably ad-inistered by the Department of Finance. Another part could take the form of government loans or equity in development institutions, Summary of Proposed Government Expenditures 178. In the summary, total projected public sector outlays for 1962-66 are as follows: (billions of neson at current. prices) 1956-60 1963-67 T1 4 4- n ., 4 1 ...*- -- -- Current 4,490 6,940 xe Capal 1,7UU 3,90 Inventories 110 40 Total direct 6,330 10,920 Current Transfers: .3 Subsidies 155 90 Pensions, back pay, etc., 139 260 Interest 96 175 Land Purchases:J7 C_ Land reform A8 PiC 22 15 Sub-total 40 50 Capital Transfers 450 1,400 Grand Total 7,220 12,895 Sources of Funds for the Public Sector 179. Taxes at Existing Rates. Under existina tax. lerislation and current rates of collection, government revenues would probably decline in 1966/67 to about 10. of the national nroduct an comarnd with thp level of arond 11 apparently reached in 1960/6l The main reason for this is the scheduled ex- piration of thp margin fee (now nt. l) rich brgh+. in arndl ;2Pn millinn in 1960/61 or over 12' of total revenue. Taken together, other revenue would move arnnximats1v -in linp -A+.1i +31ga ntn+Ann"d1 e nl+hnahirl +hia. +hInn+ wool+ - 5') - of some taxes going up at a faster rate (esocially wherc rate increases go iuto effect under existing legislation) whil others decline relative to GMV, Assuming that the nargin fee will remain in effect through fiscal 1963, total revenue in 1962-66 would amount to P9.2 billion, as comnared Trith P5.d5 bil- lion in the fiscal years 1956-60. 'ithout the margin fee, this total iould be around -150 million less. In the year 1966, the total Tould be around R1.9 billion, compared with an o9timated P1.6 billion in 1960/61. Savings of Government Corporations 170. In the period 1956-60, the operating corporations of the Government earned profits before depreciation aggregating about P100 pillion even after deducting losses of 30 million incurred by four of them.20 For the futu:e, we project a rise in such profits to P22n million. The main increase is expected from the National Power Corporation. following from the lar.ge exK- pansion foreseen in sales, and the increase in power rates which went inro effect during 1959-60. (Further rate increases may be nmesary in the future to offset higher costs associated with the devaluation). N.PC's roos Drofits after interpst arn nrnote t P100 millir;n npainst 232 million in 1956-60. For the rest, we assume an increase from P70 million in the past to D20 million in tho Puture- on ancount of increases foreseen in such corporations as PAL, ?MBR, and NAWASA, as well as a decline in (or elimination of) Inos MAbTO AC+FA 0+ ~ Then Goenenqfnncia co-.orati en acc,Vmlo'a ted -11.toali0 aearly 9500 million in the period 1956-60. Of this, about P100 million con- 'his profit arose from interest payments on the government bonds held by the '1e Central Bank projected at a minor amount (see paragraphl79 below), these Prfitu will not rise much. However, there wi." be some icrease in J_ erve frir foreign exchange reserves if these are built up to the proposed level. LY ont: Lot 01 Wn -enur1 aU_ on oreign excu1agU unansuaumons (amocriting to 940 million in 1956-60) are assumed to be eliminated by 1962-66, so th' on balance we project net profits to rise to MLL0 mlion in Uau period, The Development Bank of the Philippines had net profits after -Lnters -~ arun -2 milo in -960 -it th inre- foese in --- loans outst;nding (and possibly some increase in interest rates) this is pro- jected at 'L: million in the future. '3 Vf Wvich greater importance are the funds accumulated by the Uovern- mient Services Laurance System and the Social Security System. The assets of the former rots by P290 million in 15 -OU. We project a sligntly lower absolute amount for 1962-66 (P260 million) on the ground that extension of coverage will now grow at a ,lower rate. For t'e Focial " curity yct -i:., 1/ Including the Post 'id Telecommunications operations, there are 16 such corporations; the most important are: The National Power Corporation (NPC), the Manila Railroad (PPR). the Philippine Air Lines (PAL), the People's Homesite and Housing Corporation (PHHC), the Manila Gas Corporation, the National Steel and Shiiward Corporation (NASSCO), the National Water and Sewerage Authority (TJAWASX), the National Marketing Corporation (*\AM1ARCO) and the National Hice and Corn CorDoration (NARIC). NARIC had net losses of P14 million in the period. The Post and Telecommnications Department had losses of P9 million. - 60 - however, coverage is now expanding rapidly. Actuarial projections made by the staff of the SSS indicate expansion of at least P250 million in the next five year period, as against P90 million in 1956-60 (the SSS started operations only in 1958). Financing the Gap 1l In the aggregate. taxes at existing rate, earnings of Covcrnment corporations and accumulation of funds by the GGIS and SGS would total P10. billion for 1962-66. comnared with the nronced exnnditure program of P12.9 billion, leaving a gap of 92.8 billion: Sources of Funds: 1956-60 1962-66 Taxes at existing rates 5,850 9,200 Surplus of Government Operating Corporations 100 220 Surplus of Central Bank Trust Funds 100 150 Profits of the DBP 20 40 Increase in Assets of GSIS 290 260 Increase in Assets of SSS 90 250 Total 6,45o 10,120 Total Outlays 7,220 12,900 Gap 770 2,780 18M. In the 1956-60 period, the Government deficit on capital account of P770 million was covered by use of foreign funds amounting to P240 million, borrowing from the lanking system of P380 million (net of the buildup in cash balances) P15 million sales of bons to the public sector and P80 million to government trust funds Y, leaving an errors and omissions item of P70 million (which probably results from an over- statement of expenditures - and the deficit) in that period. For 1962-66, we project public sector use of the foreign resources at $300 million (1,050 million) out of the net .foreign inflow total of $800 million dis- cussed earlier. This leaves a gap to be filled domestically of P1,730 million.To finance this amount three main possibilities are left: bond sales to the private sector other than the banking system, sales to the banking system, and increased taxes. ./ Excluding the GSIS, SSS and Securities Stabilization Fund, which are already accounted for in total sore o,f fundso - 61 - 18m. As indicated, bond sales outside the banking and public sectors were very small in thc past., The main reason for this is the 1o7i level o interest rates on government bonds. Supported government bonds yield rates of only 4%. A non-supported issue at 6% was attempted but did not succccu. The Mission believes that it is both desirable and nossible to crc-te a real market for government securities in the Philiopines. This could be done with short-term paper as well as with long-Lerm bonds. Determining the anpropriate interest rates necessary to achieve this would require careful study of the existing interest rate structure. However, the Mission's tentative imprCsoionl is that, with a stable domestic and external financial position, an interest rate of between 7 and 8% tax free iould probably attract significant invest- ment in long-term government bonds., On the assumption that such action will be taken during the period, we have projected a net rise in bond sales to the private non-banking sector of P150 million over the next 5 years. 187, Borrowing from the banking system is projected at only P80 million for the future. This is a residual item deriving from (a) our estimates of the requirements of the private sector for commercial bank credit, and (b) the limits imposed on total bank credit by the ned to build un foreign ex- change reserves and at the same time to avoid inflationary increases in the money -nmnv Thor, nqir1rqAonq qrp in Pp_nt.inn "I belortw. Noew Taxes 188. Thus there remains a gan to be filled by increased taxation of around Rl 5n million Philinine qnimrnment. ovinn_ nc . nrnn-rt.inn of (rALP is low compared with other less developed countries. The average ratio for the l a st fi ve ye ars is g0 In the 4hlpie copae to mor tha 1i Burma, Ceylon and Taiwan, More than one third of Philippine tax revenue is plays a relatively minor role owing to (i) the high level of exemptions and UUU01131 \.L.L/ ridesprealdt~ ev a LVJLILL.IU \.4L/L LJW 11LC11E)~.LLJCt_L in4 Lh dd l income brackets. The corporate tax is gaining weight with growth in the manu- L L±±it 0%::U L4AJ± 1ILWU U'J~ .±L U.L X!J ±U I R I VLILL fro a J1L r1J.LC,~UUL land taxes has been stagnating at a very low level. 189. The over-all structure of taxation is such that revenue receirts are not+ resn sive n 4 tiO- 4 - ---4- A-vf r.r.nA-, .,-.-+-A ,,nir-n n n oi n+a + .U11-I UCL0t o .LLI MO~AJIi~ CL_.r0J , Q LJ 11~V ") L-. L - - at existing rates may fail to keep pace with G.N.P. between fiscal 1960 and 1967. existing legislation. If no new taxes are enacted, the Philiopine Government was have uo be content inth playing a recouding role in economic cuivity. Given the needs for public expenditires and capital transfers already outlined, this outcome would lead to a most serious weaug u 01 U-3 case of the Philippinc economy. If the Philippine Government wants to follow ourposive economic policies, .tax revenues must be raiseU s+rn1".L_ t 190. Achieving the suggested target or Y1,500 million in new Taxes imr.A3es a marginal tax rate.in relation to GNP, of 22% and an average rate in 1966/b7 of ll,? compared to 11.55 in 1960/61. - Lven after te ir:plementation of tIs program, the Philippine tax effort will remaiin moduct carrpared to neighboring - 62 - Asian countries which have lower per capita incomes. Seen in this perspective, the target suggested by the Mission appears realistic. If the Philippines implc- ments this eoal with political determination it will be demonstrating a national willingness to bear sacrifices in the pursuit of socio-economic progress. 191. The outline of a desirable tax reform is discernible, although specific measures must await a thorough inles+4+4a tinThe devalntion of the ne which is now in process involves a relative shift in incomes from the manu- addition, exporters of sugar receive a dollar price in the U.S. market wh.ich this windfall gain should be captured by the public sector, in the forn of export taxes on particular commodities. We suggest differential taxec ratier than a uniform export tax, on the grounds that the latter is detrimental to an appropriate allocation or resources. Large expansion in the exporn voiuae of sugar / and logs (and probably of abaca and copra) is likely to yield returns to the national economy much lower than equivalent increases in ex- ports of other agricultural, mineral or manufactured products. The 'ission is unable to recommend the precise form and rate of specific taxes, but our impression is that altogether export taxes can yield at least 9600 million and possibly much more over the period of the program. 192. The long-term policy objective must be to place increasing reliance on the taxation of incomes and transactions in the domestic sector of the economy rather than the foreign trade sector. The secular growth of national income is likely to be more rapid than imports and exports. Secondly, the value of foreign trade transactions can be expected to show greater fluctu- ations than home production. For both these reasons, tax reverues would show greater growth and reduced instability if they were less dependent on foreign trade. Greater reliance must therefore be placed on the corporate and persona2 income taxes, inheritance and estate duties, the real property tax and sales taxes. 193. The oresent rate of the corDorate tax - 22% of net income up to P100,000 and 30% on income above this level - is low, compared to India, Pakistan (45%) or U.S.A. (52%). The actual collection in fiscal 1960 was only 21% of declared corporate net income. This relatively low effective rate would be vindicated from the economic point of view if a large part of post-tax profits were reinvested. Available evidence indicates that this did not take place in the rast. If reinvestment continues to be low even after the devaluation, the rate of corporate profit tax should be raised. Provided the effective tar rate is raised to 30%. the vield miaht increase by as much as P400 million during the plan period. 194. The personal income tax is not yet a mass tax. More than 96%.of Filipino families are lAlV meluded from the purview of the tax. Illegal 1/ Beyond that for the U.S. market. - (-3 - t. y rcnton JQ nyrnti -_t. PYt.PnqivP1v The actual number of returns is only half what it ought to be. Income taxed in fiscal 1260 !:as about 4% of total *'nno income The affantive tn rate aid by mriddle income brackets (iP7.03 to P10,000 family gross income) was substantially beiow 1, 2he ,ision reommands anpwa rvion. of +e e +trctu _ aS ell as viyorous steps to reduce illegal evasion. Tentative calculations suggest that such arfor ---- -AIl by _ore tha- n 1 ; ml1on1 etee fiscanl 1963 and 1967. 195. Another obvious possibility for increased revenue is a higher tax on gasoline. At 8 centavos a liter, the Philippine gs tax s anon the lowest in the world. An increase to around 12 centavos would yield increased revenue of around P260 million for the period as a whole. 196. Finally there are very strong economic and social rrounds for much higher taxes on real estate - both urban and rural. In 1956-60, real property taxes yielded P265 million. We would suggest that with better enforcement, faster progress on land surveys and title registration urged in the section on Agriculture, and some increase in rates, the yield of this tax might well be increased to as much as P500 million in the period, as against the P320 nillion projected on the basis of existing tax rates and records of enforcement. 197. In the full report, the Mission will have additional suggestions regarding the tax system. - 64 - C. Money Supply and Credit 198. Between 1955 and 1961, the money supply in the Philippines rose by 57% or just about the same rate as the national product in current prices. For the period between 1961 and 1966 we project an overall growth rate in real income of 6% a year. Given the increase in financial staoi- lity also assumed, and the increased rate of economic development projected in the rural areas, we estimate that there would be some tendency for people to increase their holdings of money relative to overall output. Thus we project a growth in money supply at an average rate of 6.7% which would correspond to a rise of 8OO million in the five-year period, as against P764 million in 1955-61. 199. Whether such a rate proves excessive or whether it could be increased without generating inflationary pressures can, of course, be determined only by careful observation. In any event, the Central Bank will have to take action through its control over credit to vary the rate from time to time depending on actual developments in prices and import demand. It is precisely to provide the leeway needed to make such changes smoothly that foreign exchange reserves should be built up substantially. 199a. As already indicated, we suggest that exchange reserves be increased by at least $10 million (R530 million) between 1962 and 1966. Such an increase would account for most of the assumed rise in money supply, and would reouire limiting money crpation by net domestic credit expansion to less than P300 million as compared to nearly P1 billion between 1955 and 1961. (millions of pesos) Amnunt.s rAtainding (end nein) 195 1961 1966 es t7 A1 tA g100 2900 Net foreign exchange reserves 39 200 730 hTet domestic credit; frPom bakig I9R 1900 0170 '1 4 ~.. 144- -yoU1A e-'~fii nn+.re-. S~uch a Ludt, or nI~et cre~Lu.L u t-Jc~~ i V.UA-- by the Central Bank over operations of the commercial banks, and great reSt Vraint b$-y the public sector in. itS bor."1i,ge Ifto r t.he h--iino,sy qvt.P-m Given such restraint, however, it is likely that sizeable gross credit exanio to the pri1vate- sector Would -+till be ^o~1 n t.hp 'h qci- .f expected investment by the private scctor in financial assets. 200. In spite of tendencies toward capital flight, private investment in financial assets other than currVQy and de-and deposits rose at a rate of around 114% between 1955 and 1961-. Time and savings deposits rose by an aver- age of 12.5% while investment in bank equities,insurance and other ancial 1/ Average of June and December 1961 (estimated) compared with average of June and December 19559. - 65 - assets went up even faster. However, these rates of increase were based on relatively low starting points, and it is unlikely that they can be increased in the next five years, despite the increase in confidence ex- pected from greater financial stability. Factors which would dampen the growth rate scmewhat are the expected tendencies for holdings of currency and demand deposits to grow more rapidly then real income and for private individuals to hold more Povernment bonds. However, we would expect the growth rate in such investments to remain high, perhaps in the range of 12-13%. In absolute terms, we project growth in financial investments out of current income at P1.46 billion (a 12.5. rate) between 1961 and 1966. In addition, we would expect that some of the projected foreign capital inflow - particularly repatriation of Filipino capital and war-damage claim payments - would find its way into investment in domestic financial assets. An additional P200 million is projected on this account, bringing the total to a1.66 billion. Added to the allowance for domestic money creation of D270 million!/ this amount of financial investment would permit banks and other private financial institutions to expand credit to the domestic sector by around P1.93 billion in 1962-66. 201. There remains the Question of how much of this total could be ex- tended to the nuhli ertor Tn the past .i3r ver orpdit to the private sector from domestic financial institutions expanded at an average rat6 rf around 1 ner year. Crodit to the tiblic entor grew tnrly a% fqt. in that period. Even after allowing for the expected drop in the pro- likely that the achievement of the large increase projected in private cap,itall expe=ndJiune wouldA require additional crnedit f"rm nrY,vc nA e%hPr private financial institutions at a rate of 10-12% annually. An 11% rate on the eatima+ed --+ o nO,r7 411Jo o ts fan in -from +hese -su.-ce at the end of 1961 would require an increase of P1.85 billion in credit to the private Sector by thEe end of 1966'X. Ths of4 the total credi -a able under our assumptions, only a negligible amount would be left for in the following table. 1/ The difference between the P800 million "allowable" increase in UoUa money supply al 1e -ayv mUaion lnucrease proeueu i1 foreign exchange reserves. 2/ Other than the government institutions described on Page 57. - 66 - Sources and Uses of Fund by Financial Institutions Amounts outstanding end period in millions of pesos 1955 1961 (Est.) 1966 Sources of Funds - Total 2171 3890 6350 Currency and Demand Deposits (privatp) 133 2100 2900 Other Financial Investments from current income 335 1790 3250 Ti-mp and ravines rianosits (prae)1 1040 00 Xnvestment in equity of commercial banks 147 370 550 Tnvestment in othefinnil irn.=A tutions - 60 250 Tnv+crrnt in Tn niiane + 14A r1 4I0l Investmet of fnd from Abroad in linancal 0 institutions - - 200 Uses of Funds - Total 2171 3890 6350 Foreign Exchange Reserves 398 200 730 Credit to Private Sector 1251 2740 4590 Commercial Banks 1101 2350 3590.2/ Other Financial Institutions - 60 350Oj Insurance Comoanies 1q0 33O 6q0 Bank credit to niiblijrit + t-+N e q8 80 930 Oti. ii.p. nf Ti.q I. in0 10010 1J Other than Government Institutions Xisted on page 57c ~)Tr.1 n pinn Tn-i411i^nr, n"icin- P-^ ^-P ~ ,. W UV. WL grD invetMitU 'VZ.L V.L r.L14o) UL.LUU P.L"VJtVU LUL- 1962-66, the private sector component amounts to about r10.3 billion, as compared to around . 1 biLlion in red- terms during l)6O-ov* In current prices, the 1956-60 total was P5.4 billiono Thus, the financial bill for the private sector would nearly double in 1962-6. Total private savings are projected to grow by around 60%. - from an estimated P4.7 billion in - 67- 1956-60 to R7.6 billion in 1962-66. ±' The latter amounts to 10.73 of pro- jected disposal private income, as compared with 9.3% in 1916-60, implying a marginal rate of 15%. As already noted, it is believed likely that a sub- stantial portion of domestic savings will be channeled through private finan- cial institutions -- some P2.3 billion, or 30% of the total, as against an estimated 29% in 1956-60. 203. Projections of credit available for financinc nrivate inveqtnLrtt frnm these institutions and from The Government have already been given. Fundo available to thp nrivatp secinr frnm Phrr4 qrp rojneted at. aroundl D.1 billion ($590 million). This is the residual of the total capital inflow nrniontArl At.& tQ mnillinn nfhrny al1rLTM^M n" tinn20 mill-'nn in thep nlfhlif- sector and $60 million investment in domestic financial institutions 2 % iL IJ7s MI.LL.J.on, , L s estiMa1UeU U114i.L. LIU id p_7U JTLLL"Ull WUU.LU LU I ULrl vested earnings of foreign firms. The remainder consists of reparations to the private sector (less 2ocal currency repayments to the Government), that portion of the war-damape claim payments and repatriation of capital not allocated to investment i-i financial institutions, net new foreign in- vestment, and net use of conventional borrowings. 204. The over-all picture of projected financing for the private sector emerges as follows: Millions of pesos current Percentaqes prices 1956-60 -962-66 1956-60 1962-66 Capital expenditures $370 10350 10010 10D,0 Financing Funds from abroad (direct) 565 2060 10.5 19.9 Funds from government institutions 540 1450 lu.5 1.0 Funds from commercial banks 814 1240 15.1 12.0 Funds from other financial insti- tutions 210 610 3.9 5.9 Financed within sector 3240 4990 60.3 45.2 205. It may be seen that major changes are projected in the pattern of finance for the private sector. with large proDortionate declines indicated for self-financing and financing from the commercial banks. On the other hand, a substantial increase is prolected in the share of direct fareign financinz - and smaller, but sigpificant, increases projected in the relative importance nf fnnd-, from 1no_+.Prm anvP.rnman+. nA nriv.%+.P_ finnncial inqfititions. Tt should be noted that if the funds retained as the result of tax exemption for tner and noecenarn1 indue__ in the past e n a a t from the Government, then the Government's share in financing past inve3tment rse to aon 18.2% and sRlf 04ianifn dop Ato +C8% 1a n+e in +.h section on industry, however, it appears probable that not all of these par4± ;c,,L,.A4 A.IA- VVV-- L Lfa t MenrStVt L''.,";W4n M----a t-r n J- *' S~ n- 1 P ~/Derived as a residual: tL)Oal inVestmet:1# less0 Ute foreigntL deficit_ less government savings. The increase in reserves of $150 mlion is acUune IE in projectuig an increase in total domestic credit of P530 million less than the expected sources of funds to credit inotitutious. - 68 - General 206. The investment program which the Mission suggests is large. While a aiihAttntFA provuioe-n haQ hna maAck fj'. f%v-fr% 4ri fj v,,.4v,- 1in lav.aat nn'T- of the burden - four-fifths - will have to fall on the domestic economy. This outlays - direct public investment, current expenditures, capital transfers - .4 UIA LA J 1 ,C. UI J.VV W-..L Uvpju U I Urlu bUMA ±Ul.U. *. tionary financing would defeat its own purpose. It would shift the burden to th lowLr Luom groups when the very purpose of the investment program shouLd be to lay a foundation for a sustained improvement in their welfare. It would Lead to distortions in the pattern of investment which the economy can not afford. It would reduce capital inflow and thus curtail the aggregate amount of resources available for investment. It the Government and the society are not prepared to stand a considerably higher tax burden, then the investment program should be cut bacK, 207. On the other hand, if a savings and investment effort of the suggested magnitude is made, the Philippine economy could look towards a brighter future. To be sure, a further increase in the rate of savings will be necessary in the later 1960's, and this will call for a new major effort. However, the burden will be proportionately less. The economy will have made a significant step forward in raising the income level. An industrial complex oriented towards intermediate and eventually producers goods industries will be under way. Plentiful agricultural resources will begin to be used in a rational manner. There is a possibility - indeed a likelihood - that with economic improvement and urbanization the rate of population growth will eventually slow down. Above all, there will be an increase in confidence that the structural problems of the Philippine economy are susceptile. to soluticn.