RESTRICTED EAP7 Vol. 1 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF THE PHILIPPINES (in two volumes) VOLUME I (THE MAIN REPORT) July 24, 1.969 East Asia and Pacific Department CURRENCY EQUIVALENTS US$ 1.00 Pesos 3.90 Pesos 1, 000 US$ 256.40 Pesos 1, 000, 000 US$ 256, 400 FISCAL YEAR In the Philippines the Fiscal Year covers the period July 1 to June 30. This report was prepared by a mission which visited the Philippines from April 7 to May 7, 1969. The mission consisted of Bilsel Alisbah, Chief; Per Eklund, Fiscal and Financial Matters; Owen T. W. Price, Agriculture; Dieter Elz (part-time), Commodities; William Hughes (part-time), Transportation; Miss Hayley J. Goris, Social Sectors. Mr. Rogelio G. David assisted in the pre- paration of the statistical tables. VOLUME I THE MAIN REPORT TABLE OF CONTENTS Page BASIC DATA SUMMARY AND CONCLUSIONS Chapter I - INTRODUCTION 1 Chapter II - ECONOMIC DEVELOPMENT AND THE PUBLIC SECTOR 4 Statement of Problems 4 Recent Progress 6 Consideration for the Future 9 Chapter III - ECONOMIC DEVELOPMENT AND THE PRIVATE SECTOR 12 Background 12 Recent Developments 13 Domestic Agriculture 14 Export Agriculture 16 Industrial Investment Policy 18 Balance of Payments and Monetary Policy 22 STATISTICAL APPENDIX Table 1 - 36 Chart BASIC DATA Total Cultivated as % of Total Area: (in square miles) 115,0 37.7 (1967) Total ,Density Population: (1968) 3T577iillion;/ 312 per sq. mile Rate of growth (1948-1960): 3.2% p.a 2/ (1967-196d): 3.5% p.a.- Political Status: Member of the UN, SEATO, ASEAN. Gross National Product (1968 estimate): 28,109 million pesos. Real rate of growth (1962-66): 5.6% per annum. (196d): 6.3% Per capita GNP (1968): $201 Net Domestic Product at Factor Cost (1967)3/: 21,508 million pesos of which, in percent: Agriculture 33 Manufacturing 20 Construction 4 Transport and Communication 4 Public Administration, Defense 9 Mining 2 Other economic sectors 28 Percent of GNP at Market Prices- : Annual Average 1962- 66 1967 Gross domestic capital formation 21.4 21.7 Total savings 23.3 20.4 Balance of payments current accoun1tdeficit (surplus ---1.9 1.5 Investment income payment 0.8 1.4 Government current revenue 9.1 9.2 ilesources Gap as % of Investment i: 6.8 Money and Credit: Conversion: 1 Peso = $0.256 1 Dollar = P3.90 Average Decemb"- Annual Change (In million pesos) 196o 1962-1967 Total Money Supply 3,982 8.6 Time and Savings Deposits 4,532 17.7 Bank Credit to Public Sector (net) 3,111 23.0 Bank Credit to Private Sector (net) 2,722 10.4 itate of Change in Prices- /(%) 2.9 5.1 1/ Estimates. 7/ Based on two most recent censuses, the only years for which reliable population statistics are available. 311 Based on revised official estimates. I/ Derived from Balance of Payments data. 3/ Ratio of balance of payments current account surplus to gross domC3tic capital fonmation. 6/ General Wholesale Price Index. 2- (In million pesos) Average Annual Central Government Operations: 1962/63 1967/68 Change Revenue 1,778 2,553 7.5 Expenditures 1,493 2,389 9.8 Surplus 285 164 Capital Expenditurel/ 390 689 12.1 External Public Debt (In million dollars): December 31, 1968 1963 Total external public debt, 493.2 275.9 of which: undisbursed 76.1 146.2 Total debt service, 72.7 28.5 of which: principal 53. 23I8 interest 19.1 4.7 Debt Service Ratio (%) 6.8 3.2 Average Annual Change Balance of Payments (In million dollars): 1968 Merchandise Exports (including non- monetary gold) 866 8.0 Merchandise Imports 1,150 12.6 Trade Balance -284 - Invisibles (net) -22 -21.3 Net Current Account Balance -306 Annual Averagze 1968 1962/67 Commodity Concer.tration of Exports (abaca, coconut products, sugar, wood products) 78% 82% International Exchange Reserves2/ as of Dec. 31 (in million dollars) 195 138 Net Exchange Reserves3/ as of Dec. 31 (in million dollars) 20 46 IMF Position as of December 31 1965 (In million dollars): Quota 110 Drawings Outstanding 82 1/ Includes foreign loans. 2 Gross foreign assets of the Central Bank (excluding gold tranche) plus net foreign assets of commercial banks. 2/ Net foreign assets of the Central Bank and of the commercial banks. SUMMARY AND CONCLUSIONS i. During most of the 1960's the two most pressing problems in the Philippines have been the inadequacy of the public sector's financial re- sources for investment and a rather precarious balance of payments situation because of weak export growth and low (recently negligible) foreign exchange reserves. As noted in the next paragraph there has been considerable im- provement in dealing with the first problem but the other remains unresolved. Attempts are now being made to convert into longer term debt part of the $187 million Central Bank short- and medium-term debt falling due in calendar year 1969. The negotiations with U.S. banks on this subject are not yet completed but a similar program which permitted the conversion into medium term debt of $80 million of short term debts was successfully accomplished last year. The longer-term solution of course lies in increasing exports and an improved combination of fiscal and monetary policies, particularly the former, to contain import expansion. Thus solutions to the two problems of public sav- ings and balance of payments management both require improved fiscal perfor- mance. ii. Historically, inadequate public sector resources have continuously hindered Government efforts to attend to the economy's infrastructural needs and to provide basic social services for a rapidly growing population. For almost a decade until last year politically powerful interests blocked new tax legislation. Tax administration had been generally inefficient. Lack of peso funds and limited project implementing capacity kept foreign capital inflow at a minimum. The resource position of the Government reached its most difficult stage during 1963/64-1965/66 when National Government reve- nues in relation to GNP declined for three consecutive years. Starting in 1966/67 the trend has been reversed, and National Government revenues as a percentage of GNP have risen from 9.4% in 1965/66 to 11.3% in 1968/69. This, in large part, is attributable to increased efficiency in tax adminis- tration and to the enactment of new tax measures in 1968. The Government has also taken steps to strengthen project preparation and implementation in the public sector and this is expected to lead to an acceleration of foreign assistance. The improved resource position of the Government has permitted a sizable increase in infrastructure investments. Despite these improvements, Government resources are still inadequate. The Government is aware of this and continues to press Congress for additional tax legis- lation. However, an election year is obviously not the most favorable time for substantial progress. iii. A modest acceleration of economic growth occurred during 1967 and 1968. This is primarily attributable to a production breakthrough in the heretofore stagnant domestic agriculture sector. The greatest success was in rice production. Capitalizing on progress made in research in new varieties and supplementing it with a major organizational effort, increased credit availability, proper price incentives and improved irrigation and transport facilities, an 11.4% increase in rice production was achieved in 1968 as compared with an annual average of 1.7% during the previous six - ii - years. A similar though less dramatic increase has also occurred in corn production. The success in rice production appears to have placed the prospect of sustained self-sufficiency within the grasp of the Philippines. However, before this can be assumed a number of problems must be dealt with. Particularly important is the alleviation of the strain placed by increased production on drying, milling and storage facilities. Also there remains the possibility that the price support scheme might collapse due to lack of funds. Irrigation, the importance of which has been magnified by the new varieties, is in danger of becoming a bottleneck to production. There is urgent need to formulate a coordinated water policy which combines the development of surface and ground water resources. This in turn requires a ground water survey and probably further administrative changes. A final threat to sustained self-sufficiency in rice is that the pace of the land reform program will outstrip the Government's ability to provide the neces- sary resources (e.g. credit, technical assistance) to farmers who are now cut off from the landlords. iv. The performance of export agriculture continues to be disappointing. In both sugar and coconuts there is a need to intensify and make more effec- tive research on improved varieties, and increase the use of fertilizer and irrigation, etc. The emphasis placed by the Government on the construction of new sugar mills appears questionable in the absence of convincing evidence that milling capacity, rather than sugar cane availability, has been the bottleneck. A more promising possibility for the export sector and for agri- culture in general may be a combined agri-business land settlement approach where settlers work under contract to a firm which provides capital and know- how and takes care of the marketing of the produce. v. In manufacturing the most promising development is the manner in which the Board of Investments (BOI), which has been established to imple- ment the Investment Incentives Act of 1967, is going about its business. Within a relatively short time, BOI has assembled an able staff and has gained the respect and confidence of the business community. BOI is exer- cising welcome restraint in granting the tax incentives provided by the 1967 Act. Equally encouraging is an evident determination to avoid the indiscriminate setting up of industries which will require heavy protection. This is reflected in the projects approved to date. BOI is aware of the need to promote exports and this is also reflected in the projects it has approved. In view of the progressive loss of preferences in the U.S. mar- ket, and the need to diversify exports, it may be necessary for the Govern- ment to consider providing additional encouragement to industrial exports. If the BOI continues to function effectively, an acceleration of industrial growth on a sounder basis than in the past can be expected in the 1970's. vi. As inferred above, at present the Philippines is experiencing a serious balance of payments problem brought about by a significant rise in imports in 1967 and 1968 and compounded by the poor performance of the export sector. Attempts to combat the balance of payments deficit with monetary measures have not succeeded and appear to have encouraged specu- lation against the peso. The present Administration has ruled out major - iii - changes in exchange rate policy and the Government is attempting to obtain larger than normal amounts of short- and medium-term foreign bank financing through the Central Bank and through the guarantee operations of the Development Bank of the Philippines (DBP) and the Philippine National Bank (PNB). vii. The longer-term growth prospects of the Philippines are good. The long-term debt position is comfortable, with the debt service ratio unlikely to exceed 10% in the foreseeable future. This provides room for restructur- ing the accumulated short-term debts and for incurring additional long-term funds to supplement domestic savings. For such restructuring to be effective, however, the Government should take steps to improve foreign debt management. A first step in this direction would be to place a ceiling on PNB and DBP guarantee operations or at least to require loans guaranteed by official institutions to satisfy certain minimum requirements with respect to interest rate and amortization period. vii. Disparities in income distribution and the related problem of rural and urban unrest make it important for the Government to ensure that the bene- fits of economic growth are enjoyed by a larger portion of the population. This is made difficult by the scarcity of public sector resources and the high population growth rate. Free universal elementary education provides low in- come groups with the opportunity of bettering their position. In view of the financial requirements of this effort, it is important for the Government to concentrate its efforts on achieving the required quality of education at least cost. There appears to be considerable scope for increased efficiency in the education sector, public and private. Slowing down of the population growth rate could make an important contribution to improving the standard of living of low income groups. There are signs that the Government is be- coming increasingly aware of this and there are considerable private efforts to encourage family planning. It is unlikely, however, that these will have an observable impact on population growth if they are not supplemented by an official family planning program which can reach the rural areas through the education and health facilities of the Government. CHAPTER I INTRODUCTION 1. The Philippine economy has considerable potential for growth. This conclusion is based on the country's literate and technically capable popula- tion, its dynamic private sector and relatively comfortable resource endowment, and the special relationships that it enjoys with the United States. These include large receipts from var damage and veterans payments and U.S. military expenditures, trade preferences on a declining scale until 197&, participation in the U.S. sugar quota and well-established relations with U.S. commercial banks for short and medium term financing. The main economic functions of the Government are threefold. These are (i) to attend to those infrastructure and research requirements of the economy that will not be undertaken by the private sector; (ii) to establish an institutional and policy framework which facilitates the channeling of private sector resources into areas and activities which are most conducive to economic growth and social stability; and (iii) in view of the disparity of incomes in the Philippines, to ensure that the benefits of grovth are enjoyed by as large a segment of the population as possible. 2. This report describes briefly how the Government has been discharg- ing the above-described functions, and evaluates major recent economic develop- ments. The sectoral annexes attached as Volume II go into greater depth on some important sectors and aspects of the economy. 3. The Administration of President Marcos which assumed office at the beginning of 1966 and which faces an election in November 1969 has made im- pressive progress in some important areas. It has succeeded in raising public savings through more efficient tax administration and to a lesser extent by the enactment of new tax measures. This has made possible a considerable in- crease in expenditures on previously neglected infrastructure. There has also been increased efficiency in the use of resources channeled to infra- structure development, thanks to the centralized control of the Infrastructure Operations Centre which forms part of the Executive branch. 4. Significant progress has also been made in strengthening the insti- tutional and policy framework affecting the private sector. In agriculture, capitalizing on progress made in research on new varieties and supplementing it with a major organizational effort, increased credit availability, proper price incentives, and improved irrigation and transport facilities, the Govern- ment has induced a major increase in rice production thereby providing a rea- sonable expectation that the Philippines will be self-sufficient in this im- portant staple on a sustained basis for the first time in the post-war period. In industry a comprehensive law has been enacted providing tax incentives for priority investments. The Board of Investments (BOI) which has been established to implement this Act is already functioning quite effectively. 5. Planning units are being set up in two important departments (agri- culture and education) and a major transport survey has been undertaken by the Department of Public Works. The survey is to result in a ten-year invest- ment program for the whole transport sector. 6. Some progress has also been made towards improving the lot of the poor. The success in rice production is perhaps most significant in that rice producers tend to be the poorest among the rural population whose incomes in turn are extremely low as compared with urban incomes. The Government also continues to push the land reform program, but its success, though difficult to evaluate, appears to be limited. Increased expenditures on infrastructure, particularly roads, watervorks, housing, etc., also serve to improve the lot of the poor through better services. A few of the recently approved tax measures are designed to some extent to tax the well-to-do. This, however, is partly offset by less progressive features added to the income tax (Volume II, Annex I, paragraphs. 21 and 22). 7. Departing from the traditional attitude of publicly ignoring the very high growth rate of the population, the Government has recently taken several modest but potentially significant steps towards formulating a popu- lation policy, as described in detail in Volume II, Annex IV. One example is the establishment of a broadly representative Commission on Population by the President in the beginning of 1969, directed to study the impact of the growth rate on the economy and formulate recommendations. If followed through, these measures can help considerably to improve welfare in the Philippines where the average completed family has about seven children. 8. Improved economic management has brought about a modest acceleration in economic growth. GNP in real terms rose by 6 percent in 1967 and 6.3 per- cent in 1968, as compared with an average of 5.5 percent during the previous five years. Of course most of the developments described above have much greater significance for the longer term prospects of the Philippines than they do for the present. 9. Despite the achievements in raising Government revenues, both total revenues and the public investment program are still inadequate in relation to the needs of the economy and in comparison to the situation in other countries in similar stages of development. In some areas success has served to high- light new problems as in the case of the rice program where a large number of marketing problems have come to the surface as a consequence of increased availability of domestic rice. Self-sufficiency in rice has also raised the question of what the next step should be in agriculture and efforts to answer this have highlighted the inadequacy of basic data about soils and groundwater supplies. In addition, some areas have been largely neglected for many years. The devaluation of the peso, completed in 1965, was long overdue and its gains largely dissipated before it was completed. Little has been done to diversify exports or otherwise prepare the export sector for the loss of U.S. preferences. It is also disturbing that the Government has responded to the strains placed on the balance of payments by heightened economic activity by moving backward in the direction of controls and restrictions and by resorting to short-term foreign borrowing on onerous terms. - 3 - 10. Therefore, even though recent performance augurs well, it by no means ensures continued success. That will depend on the ability of future Govern- ments to maintain and improve upon present directions in policy, and to tackle problems which have been heretofore ignored, such as regional planning. Long- term foreign capital (public and private) in larger quantities than in the recent past will be required to supplement the Government's still inadequate public savings effort and to refinance the short-term debts that have accumu- lated during the last two years. - 4 - CHAPTER II ECONOMIC DEVELOPMENT AND THE PUBLIC SECTOR Statement of Problems 11. Historically the availability of savings, which throughout the 1960's have averaged more than 20% of gross national product, has not been an impedi- ment to economic grovth in the Philippines. The problem has been use rather than amount, and the small share of the public sector in total savings. The latter has led to neglect of the economy' s basic infrastructure requirements, thereby reducing the attractiveness of productive private sector investments. Too large a portion of private savings has been invested abroad or been used for the construction of luxury housing and commercial structures. 12. The scarcity of public savings is a manifestation of a more general problem -- the inadequacy of resources available to the Government. The revenues of the national Government represent a much smaller share of the gross national product than in most other developing countries of comparable per capita incomes, having averaged 10% during the three year period 1963/64 - 1965/66. Even more alarming, there was a continuous decline of revenues in relation to GNP during these three years (Appendix Table 24). During the same period net foreign borrowing by the Government amounted to an annual aver- age of about $15 million (3 percent of total revenues) and thus did not make a significant contribution to augmenting Government resources. (Appendix Table 23). 13. The main obstacle to increasing Government revenues has been the political strength of vested interests who have been extremely successful in blocking the passage of new tax legislation while securing exemptions from existing taxation. A number of important tax measures were adopted in the early 1950's but since then little has been done. The inadequacy of revenues was further aggravated by the related problems of low morale and low pay among public sector employees, leading to lack of efficiency in tax collections. 14. The low level of foreign borrowings reflected the poor state of sectoral planning which failed to produce viable public sector projects for foreign financing and inefficiency in implementation of existing public sec- tor projects. The latter was attributable to weaknesses of implementing a- gencies, and the inadequacy of local money resources. The private sector is able to offer higher salaries and thus continuously drains the public sector of its qualified people, leaving behind an elderly group of tired bureaucrats, political appointees and a handful of determined public servants. There are pressures in any country for the Government to take on more projects and pro- grams than can be effectively tackled with the resources at hand. In the Philippines these pressures are possibly greater than in a society where government is less responsive to political forces. This has resulted in some schemes being started prematurely before the local currency financing had been arranged. - 5 - 15. As illustrated in Table 1, the inadequacy of financial resources has severely restricted the role of the Government in the economy as compared with the situation in other countries broadly comparable to the Philippines. The table illustrates the much more limited role of the Government in the Philip- pines in the disposal of the national product and highlights the relatively much greater impact of this on capital as compared with current expenditures. As shown in Appendix Table 25, during the period 1962/63 - 1965/66 capital ex- penditures declined in absolute terms and certain current expenditures which are particularly relevant to economic development (e.g. agriculture) were either stagnant or also declined. Table 1 Central and Local Government Expenditures as a Percentage of GNP, Philippines and Selected Countries Total Current Capital Expendi- Expendi- Expendi- tures ture ture 1962-64 1962-64 1962-64 Philippines 13.4 10.4 1.3 Korea 18.8 12.5 6T Thailand 16.4 11.3 5.1 China 19.2 n.a n.a Ceylon 26.8 20.8 6.0 MalaYsia 24.7 16.8 7.9 Average of five countries excluding Philippines 21.2 15.4 6.4 Source: Various issues of IBRD economic reports. 16. The neglect of development expenditures also reflects the fact that the Philippines, with an estimated annual population growth rate of 3.5%, (one of the world's fastest growing populations) has had to use its limited public funds for the continued expansion of such basic services as health, education, housing etc. rather than public sector fixed capital formation. Education expenditures alone absorb about one-third of the total budget (Volume II, Annex V). 17. Thus, infrastructure investments have suffered. Despite the poten- tial benefits to be achieved by irrigation, the area irrigated has expanded extremely slowly. The transportation system is inadequate to meet the needs of the economy, and lack of funds has led to deterioration of the existing system. Lack of balance on a regional basis as between sectors is another problem. A case in point is the development of power in Iligan in the Island of Mindanao. Industry has not expanded sufficiently to keep pace with the - 6 - power capacity created, at least partly because of the difficulties posed by the lack of water supply, inadequate transportation system and poor communica- tions with the main island of Luzon. Recent Progress: 18. Given the situation described above it is clear that a Government interested in long-term growth has to act on a number of fronts simultaneously. It must strive to increase resource availability through increased efficiency in tax administration, the enactment of new tax legislation, and the develop- ment of a project pipeline for foreign financing. It must also make more ef- fective use of resources available to it by carrying out existing programs and projects more efficiently and, where possible, by cutting or reducing unneces- sary expenditures. It must increase the resources that are used for infra- structure development. The Administration which came into office at the beginning of 1966, has made some progress on all these fronts. The results achieved in increasing revenues and capital expenditures are shown in Table 2. Table 2 National Government Finances 1963/4 1964/5 1965/6 1966/7 1967/8 1968/9 (estimates) I Percentage rate of growth of: 1. Total expenditures-/ 11.6 0.5 7.2 13.7 16.3 13.0 2. Current expenditures 14.7 3.9 7.9 9.8 13.3 4.2 3. Capital expenditures -1.4 -15.8 3.0 37.5 31.5 51.2 4. Revenuel/ 9.3 - 1.2 - o.6 26.1 9.9 15.8 II Capital expenditure as percen- tage of total expenditures 2/ (in millions of pesos) 17.1 14.3 13.8 16.7 18.9 25.2 III Revenue as percentage of GNP 1/ 11.3 10.3 9.4 10.8 10.8 11.3 1/ Includes National Government revenue which is transferred to local governments. 2/ Excludes foreign financed expenditures. Source: Statistical Appendix Tables 23 and 24. - 7 - 19. The first emphasis of the new administration was on improving the efficiency of tax administration. This approach, in addition to offering con- siderable scope for increased revenues, was politically necessary since Con- gressional opponents of new taxation used lack of efficiency in tax collections as an argument against new taxes. In pursuit of increased efficiency a per- manent training program was instituted in the Bureau of Internal Revenue (BIR). At the same time both at the Customs Bureau and BIR an effort was made to improve employee morale by basing promotions on merit. Large scale discipli- nary action was taken against officials vho abused their position. 20. The result of these efforts was quite dramatic. National Government revenues (including transfers to local government) which had declined by 1.2% in 1964/65 and by a further o.6% in 1965/66 rose by over 26% in 1966/67 fol- lowed by an additional 10% increase in 1967/68. Of course, not all of the increase in collections can be attributed to improved efficiency. The higher level of economic activity, rising incomes, and a particularly large increase of imports no doubt had a great deal of influence on the level of 1966/67 revenues. Hovever, increased efficiency may have accounted for about a quarter of the P718 million increase in National Government revenues in the two-year period 1966/67-1967/68. 21. In 1968 the Administration turned its attention to new tax legisla- tion. The initial package of taxes proposed to Congress was designed to yield additional revenues of about P1,000 million. The measures actually enacted in 1968 will yield, in a full year of collections, about P280 million (an increase of about 11 percent over 1967/68 revenues). While, as compared with the origi- nal proposals and the needs of the situation, the achievement is disappointing, it was unrealistic to expect that Congress would enact tax legislation increas- ing revenues by 40 percent in one year. The trend in Government finances has been reversed and revenues expressed as a percentage of GNP are expected to rise to 11.7 percent in 1969/70 as compared with 9.4 percent in 1965/66 (Ap- pendix Table 24). 22. The use of a growing proportion of resources for economic development - particularly for infrastructure investments - is encouraging. The acceleration of infrastructure investments is illustrated in Table 3 which compares average annual expenditures during the four-year period 1962/63 through 1965/66 with those from July 1, 1966 to March 31, 1969. Average annual expenditures during the latter period, which corresponds roughly to the first three years of the Four-Year Infrastructure Program introduced by the Marcos Administration, exceed previous expenditures by almost 70 percent. - 8 - Table 3 Average Annual Expenditures on Infrastructure By Major Sectors (In millions of pesos) 1962/63-1965/66 1966/67-1968/69-/ Percentage Change Highways 92.0 179.8 95 Airports 9.4 14.8 57 Port works 42.6 32.1 -25 Telecommunications 6.o 10.0 67 Power 49.4 48.1 - 3 Irrigation 6.2 26.3 424 Water supply 14.9 51.4 345 Flood control 8.6 3-7 -57 Building construction 18.3 44.5 243 TOTAL 247.5 415.4 68 1/ Understates average annual expenditures during this period because (a) annual average is based on less than three full years - i.e., July 1, 1966 to March 31, 1969 - and (b) expenditures financed by foreign loans are not available for the period from July 1, 1967 to March 31, 1969 whereas figures for previous years include such expenditures. Source: Statistical Appendix Table 26. 23. The impact of increased infrastructure investments is also evident in physical accomplishments during the two periods (Appendix Table 27). Whereas during the four years ending June 30, 1966 a total of 321 kilometers of road had been concreted, from July 1, 1966 to March 31, 1969 (slightly less than three years) a total of 1,338 kilometers were concreted. Similar- ly, the total area irrigated which had expanded by about 90,000 hectares du- ring the earlier period has expanded by about 225,000 hectares during the latter. It is also commendable that of the increase during the latter period about 150,000 hectares is due to rehabilitation of existing irrigation systems. 24. The Four-Year Infrastructure Program is at times criticized on the grounds that the allocation of funds both within and between sectors is not based on a detailed analysis of the economic returns of projects and/or on -9- the relative importance of different sectors. These criticisms though not without merit fail to take fully into account the situation that confronted the Government at the beginning of 1966. At the time the economy urgently needed infrastructure investments in every sector. Also there vere a large number of widely scattered uncompleted projects on which considerable ex- penditures had already been made. To postpone investments and to concentrate on the preparation of detailed project feasibility studies and elaborate sec- toral plans would have been costly in terms of short run results. Instead the Government chose to push ahead with the most obvious investments and to concentrate its efforts on improving efficiency in implementation. The Pre- sident set up the Infrastructure Operations Center (IOC) to keep tabs on the progress of the program and to identify and deal with bottlenecks as they emerged. As part of the emphasis on implementation during the last three years the Philippine Army has also participated in the infrastructure program. Also, the Presidential Economic Staff (PES) scrutinized the proposals of operating units to ensure that poorly planned new schemes did not take prece- dence over the completion of ongoing projects. Where major new investments were proposed, PES, with the help of the operating unit involved, attempted an economic evaluation. A number of important steps have also been taken to place future investment decisions on a more rational basis, and this should help considerably in developing a project pipeline for foreign financing. In transport the Government secured in 1968 United Nations Development Pro- grAmme (UNDP) financing for a general survey to produce a detailed ten-year investment program for this sector, and to prepare feasibility studies for projects that appear most urgent. The IBRD is the executing agency for this project. The Government is planning to set up a National Transport Board (NTB) under the present Department of Public Works and Communication which will then be called the Department of Public Works and Transportation. The proposed NTB will be responsible for coordinating and regulating all surface transport, the responsibility for which is at present scattered between dif- ferent agencies. Considerations for the Future 25. Even though progress has been made in augmenting public sector re- sources and using these for economic development, much more needs to be done. Despite the new tax measures and improved efficiency in tax collections, Government revenues remain much lower in relation to G1IP than in other coun- tries. While Government spending on infrastructure during 1966/67-1968/69 increased considerably over previous levels, it nonetheless fell far short of the targets set by the Marcos administration as shown in Table 4. The strain placed on Government resources by increased infrastructure outlays is also illustrated by the fact that the overall deficit of the Government in 1967/68 (the last year for which complete data are available) was almost twice as large as the average annual deficit during the previous five years (Appendix Table 23). - 10 - Table 4 Infrastructure Program Financial Targets and Achievements (In millions of Pesos) Four-Year Targets Expenditures as of March 31, (July 1, 1966- 1969 as percentage of four- June 30, 1970) year targets Highways 960.4 56% Airports 134.5 33% Port works 123.4 78% Telecommunications 123.2 25% Power 285.1 51% Irrigation 293.6 27% Water Supply 327.6 47% Flood control 60.0 19% Building construction 283.3 47% Total 2,745.1-/ 45% Percent of Plan period elapsed: 69% 1/ Includes miscellaneous projects and other preliminary engineering expenditures. Source: Statistical Appendix Table 26. 26. To some extent shortfalls in the infrastructure program reflect the fact that the capacity of implementing agencies turned out to be more limited than initially anticipated by them. The major obstacle, however, was lack of funds which affected not only infrastructure investments but also Government programs in other fields, e.g. operation of the price support program for rice. The staffs of the Infrastructure Operations Center and the Presidential Econo- mic Staff deserve considerable credit for reducing the impact of resource limitation on the investment program. Their familiarity with individual pro- jects enabled them to identify critical expenditures and to ensure that funds were made available for these. There is, however, no doubt that the lack of funds interfered with the effective implementation of projects. The expe- rience of some IBRD borrowers (particularly NWSA and NPC) during the past three years attest to this. 27. Not only is the shortage of funds interfering with the effective implementation of infrastructure projects but it is also hindering the col- lection of basic data required by policy-makers. The last full census in the Philippines was taken in 1960. There is no reliable way of determining what has happened to the size, composition and geographic distribution of the population since then. Despite this, the census scheduled for 1970 is likely to be postponed for lack of public funds (Volume II, Annex IV). - 11 - 28. The Government is very much aware of the inadequacy of its resources. It has placed additional tax measures before Congress. In an election year Congressional reaction to these is uncertain. There is, however, little doubt that any administration interested in the country's development must keep Con- gress under constant pressure to enact new tax legislation. There is also room for further improvements in tax and customs administration. Violation of tax laws continues to be relatively safe. Since 1939 only one individual (a foreigner) has been convicted for non-compliance with tax laws. The deterrent effect of a few exemplary convictions on tax payers cannot be overstated. In this connection an expansion of the capacity of the Court of Tax Appeals is urgently required, as the Court has a two-year backlog of protested tax measures. Simplification of the customs code with a view to reducing and ra- tionalizing exceptions and exemptions is also badly needed. 29. Rough estimates made by the mission suggest that even after the re- cent tax measures and continued improvements in tax administration are taken into account, the Government will require additional resources of P472, P670 and P921 million in 1970/71, 1971/72 and 1972/73, respectively, in order to maintain minimum standards in social and economic services and to sustain the acceleration of the infrastructure investment program (Volume II, Annex 1). With improved economic management and strengthened sectoral planning and pro- ject preparation, a third to half of these resources may be provided through foreign assistance. The balance, however, must and should form the revenue goals of a Government genuinely interested in economic development. - 12 - CHAPTER III ECONOMIC DEVELOPMENT AND THE PRIVATE SECTOR Background 30. The serious limitation of public sector resources and the resultant neglect of public investments in the Philippines makes it all the more essen- tial that maximum use be made of the private sector in the development pro- cess. On the whole, the Philippines has not fared badly in this respect. Despite the neglect of infrastructure investments, the real growth rate of GNP during the last ten years (1958-1968) has averaged 5.5% a year. As elab- orated in the previous chapter, the contribution of public savings to this achievement has been limited. Nor have there been adequate foreign resources. In the ten years preceding 1967, net annual inflows of goods and services have been of the order of $65 million. In addition, the Government's monetary policies have not always been favorable to the private sector. Credit restric- tions have been applied periodically to the private sector to counteract the effects on domestic stability and the balance of payments of the Government's deficit financing. This is illustrated by the folloving table vhich compares the annual growth of net credit to the public and private sectors during the last five years. Table 5 Annual Rates of Growth of Credit (percentage) 1964 1965 1966 1967 1968 Net Credit to Public Sector 20.1 20.3 18.6 39.0 10.0 Net Credit to Private Sector 14.9 0.9 o.8 6.o 1.0 Source: Statistical Appendix Table 31. This could be considered a price that the private sector pays for failing to provide the Government with adequate revenues. The on-again-off-again nature of credit restrictions, however, is disruptive to private sector activity. 31. There is evidence that since the mid-fifties factor productivity growth has declined.l/ In addition the growth achieved has been unbalanced and not always consistent with the country's long-term interests. During the 1/ Jeffrey G. Williamson "Dimensions of Postwar Philippine Economic Progress" Quarterly Journal of Economics, Vol. LXXXIII, No. 1, Feb. 1969. - 13 - 1950's and the early 1960's the momentum for growth was provided by the in- discriminate establishment of import substituting consumer goods industries. These flourished under the protection provided by exchange and import con- trols and the incentive provided by generous tax exemptions and the avail- ability of imported inputs at an unrealistic exchange rate. This led to the evolution of a manufacturing sector which was heavily specialized in consumer goods, excessively dependent on imported inputs and ill-equipped to face competition. In 1962/63 vhen the peso was devalued and exchange and import controls were eliminated, the Philippine manufacturing sector entered a difficult phase. Value added in manufacturing which during 1950-1962 had increased in real terms at an average annual rate of 9% declined to 4.5% during the next four years. 32. Real value added in agriculture, forestry and fishery has remained relatively stable at an average annual growth rate of 5% during 1950-1966. These aggregate figures, however, include the impressive grovth of the forest industry since 1961 and, therefore, disguise the stagnation of the agricultur- al sector in domestic food crops and traditional export crops (Appendix Table 7). At least on paper the export crops fare somewhat better than domestic food crops. This however is partly illusory. The sizable increase recorded in coconut exports in 1963 was not so much due to increased production as to the fact that as a consequence of devaluation export proceeds returned to official channels. 33. The considerably inferior performance of domestic agriculture as compared with manufacturing is largely attributable to the Government's ne- glect of the former. As already noted, in the 1950's the accent was on industrialization. Industrial investments enjoyed special tax incentives, investment funds were readily available through Government-controlled finan- cial institutions at subsidized rates; and industry had relatively easy access to scarce foreign exchange. These favorable circumstances encouraged the surplus generated by the export sector to flow into manufacturing. In addition, the neglect of infrastructure investments was much more detrimental to agriculture with its dependence on rural roads, irrigation, etc., than on manufacturing which was heavily concentrated in the greater Manila area and more dependent on imports than on raw materials from the countryside. Recent Developments 34. Recent developments are, on the whole, favorable. The Government has made a major effort to make up for the past neglect of domestic agricul- ture, and has been rewarded with a breakthrough in rice production - the country's major food crop. In manufacturing steps have been taken to diver- sify the country's industrial base by encouraging investments in heretofore ignored areas (with primary emphasis on industries based on domestic raw materials and/or industries with export potential). An attempt has also been made to define the role of private foreign investment in the Philippines. The role is not particularly favorable, but at least the rules of the game are spelled out. The continued stagnation of export crops and of the export sector in general continues as the major production problem confronting the - 14 - Government. The Government has failed to tackle the problems of this sector in an organized way and the limited attempts to do so suggest that possibly these problems are not fully understood. 35. Domestic Agriculture 1/ - The 11.4% increase in rice production in 1968 as compared with an average annual increase of 1.7% during the previous six years undoubtedly represents a real breakthrough. Rice production takes up almost 40% of total cropped area. A similar, though relatively less im- pressive expansion, has also taken place in 1967 and in 1968 in the produc- tion of corn - the second most important food crop. Largely as a consequence of these achievements real value added in agriculture (including export crops, fishery and forestry) is estimated to have increased by 7.6% and 8.9% in 1967 and in 1968 respectively as compared with an annual average of about 4% during the previous ten years. 36. The all out effort of the Marcos Administration in rice and corn production is undoubtedly the major element behind the production achievements of the last two years. These efforts have, of course, benefited from the general responsiveness of farmers to incentives and from developments under- taken in earlier years, such as the work of the International Rice Research Institute (IRRI) in developing new high yielding varieties. Even in this case, it is to the credit of the Government that a decision was made in 1966 to push ahead with the new varieties despite the feeling of some experts that these had not yet been adequately tested. Other elements in the Government's food production drive are an increased supply of institutional credit for pro- duction and development, the expansion and rehabilitation of irrigation facil- ities, and, in the case of rice, establishment of a relatively high support price for part of the crop. Last, but not least, the Rice and Corn Production Coordinating Council (RCPCC), set up in the Office of the President under the able guidance of the Executive Secretary, has been extremely effective in coordinating the efforts of institutions involved in food production. The high return achieved by successful coordination is not surprising in view of the multitude of agencies participating in closely related aspects of food production (Appendix Chart 1). 37. The success in food production has not been without its problems, particularly in the case of rice. The greater availability of domestically produced rice has given rise to a wide variety of problems of "marketing" in the broadest sense of the term. Firstly, it has highlighted the inadequacy of grain drying facilities, as those farmers growing high yielding varieties, have found it increasingly difficult to use the traditional method of drying in the sun, especially during the wet season. The lack of milling and stor- age facilities has emerged as another bottleneck. Finally, the perennial shortage of public funds has reared its head in connection with the opera- tion of the support price. The Rice and Corn Administration (RCA) which administers the price support program has been hampered both by the lack of 1/ See Volume II, Annex III, for a detailed discussion. - 15 - funds and the lack of storage. To some extent this problem has been of the Government's own making. In late 1967 and in early 1968 it appeared certain that a record harvest would be produced and that the Philippines during 1968 would be able to export rice instead of having to import it. The decision to export was unfortunately postponed until late 1968 by which time the funds and storage facilities of RCA were already overstrained and there were few inter- national buyers. Despite this at the end of 1968 about 36,000 metric tons of rice were exported to India and Indonesia. 38. The 1968/69 rice crop has been affected by drought. The Government is trying to offset the effect of this through a crash program designed to further expand the area under high yielding varieties. The drought, while unfortunate in one sense, has provided the Government with a breathing space for tackling the marketing problems. Consultants were hired to study the storage problem and on the basis of their study the Government has approached the IBRD for financing. This project might also include some provision for drying and milling of rice. At the same time the efficiency of existing rice mills can be considerably increased through relatively small investments and more careful management. 39. The new rice varieties have magnified the importance of irrigation. This arises from the photo-period insensitivity of these varieties which per- mits under ideal conditions two-and-a-half crops a year. In certain parts of the Philippines it is possible for the new varieties to achieve, with irriga- tion, higher yields in the dry season as compared with the wet. Farmers are increasingly aware of the enhanced opportunity afforded by irrigation. One indication of this is that of the schemes included in the Four-Year Infra- structure Program, the installation of pumps by the Irrigation Service Unit (ISU) and the establishment of small communal irrigation schemes by the Pre- sidential Arm for Community Development (PACD) are among the few which are running ahead of schedule (Appendix Table 27). In addition, a large number of tubewells are being drilled by farmers without the help of ISU. There is no reliable information about the numbers of such wells but their growing im- portance is readily apparent in the countryside. Unfortunately, because they are not based on any real knowledge of groundwater resources, the number of wells running dry is also increasing. 40. Whilst the growing demand for irrigation water is encouraging, the haphazard and uncoordinated development of the country' s water resources is disturbing. To avoid uneconomic investments in irrigation there is an ur- gent need to coordinate the development of surface and groundwater resources. This is made difficult not only by the number of different government insti- tutions involved but also because adequate information about aquifer condi- tions is lacking. At present the United Nations Development Program is con- sidering assisting the Government in a project which will coordinate the development of ground and surface waters in two pilot areas in Central Luzon. It would be extremely advantageous if the scope of this project could be ex- panded to include a groundwater survey covering at least the whole of Central Luzon. On the organizational side, a bill has recently been introduced in Congress to set up a Water Development Authority. Under this proposal, dif- ferent implementing agencies would maintain their separate indentities but would be united under one policy-making and planning unit. If enacted this legislation would be an important first step towards formulation of a coordi- nated water development policy. - 16 - 41. The continued success of the food production drive may be influenced by the possible impact of the land reform program (see Volume II, Annex III, pages 10-12). For social, political and production reasons the Marcos Adminis- tration, as well as previous Governments, have embraced the cause of land re- form. Primarily directed at tenant rice farmers, its objective is to make him the owner of the land which he now cultivates thereby giving him greater incen- tive for increased production. Lacking the funds for outright purchase of land, the Government has devised a two-stage process. During the first stage selected areas are proclaimed "land reform areas" and the tenant farmers assume the status of permanent leaseholders which entails the payment of a fixed rent to the landlord (calculated on the basis of past production) instead of sharing the crop. In the second and final stage the land is purchased from the land- owner and the permanent leaseholder acquires title to it. To date, lack of public funds has restricted actual land purchases to only about 700 hectares. The first stage, however, is far advanced in Central Luzon where share cropping and rice production are most dominant than in any other part of the country. At the time the mission was in the Philippines, over a third of the agricultu- ral land in Central Luzon had been proclaimed land reform areas, and it is understood that since then with additional proclamations, the area covered has reached about 70% of agricultural land. 42. The danger to production arises from the fact that land reform is removing the landlord as a source of capital without providing an alternative. The Government is aware of this and a serious attempt has been made to in- crease the availability of agricultural credit in land reform areas. The in- crease, however, has not been commensurate with the farmers' requirements. In addition to a shortage of production credit, the leaseholders are hampered by limited access to medium and long term credit for mechanization, drilling of tubewells, etc., since the major institutional sources require collateral pre- ferably in the form of land. It cannot be emphasized enough that in view of the political commitment to continue expanding the land reform area, the Government must assign the highest possible priority to attending to the credit needs of leaseholders in order to avoid depressing production levels and giving rise to bitter frustrations in a situation where rural unrest is already a problem. 43. The 1967/68 crop year represents a breakthrough in production. It is premature, however, to assume that self-sufficiency in rice has been at- tained and that therefore, the Government can safely turn to other problems. The bottlenecks and underlying problems described above and the annual addi- tion to the population of more than a million new mouths to feed argue against such relaxation. Nevertheless, the success achieved in domestic agriculture should enable policymakers to place greater emphasis on export agriculture - a sector which is badly in need of such attention. 44. Export Agriculturel/ - The stagnation of export agriculture is best illustrated by the behavior of export earnings. As shown in Table 6, export earnings from agricultural products (excluding forest products) in 1967/68 were about $52 million less than in 1963/64. The table also shows that the drop cnnnot be attributed to export prices since prices of major products were considerably higher during 1967/68. 1/ See also Volume II, Annex III. - 17 - Export Earnings Unit Values (million dollars) (dollars per metric ton) 1963/64 1967/68 1963/64 1967/68 average aversge average average Cocunut Products 245 226 - - Copra 162 126 154 179 Coconut Oil 52 68 226 277 Disiccated Coconut 19 21 271 288 Copra Meal 11 11 66 59 Sugar 165 151 134 147 Abaca (unmanufactured) 31 13 285 207 Pineapple 10 10 - - Canned 7 9 222 174 Juice 3 1 log/ 100/ Tobacco (raw) 14 13 464 405 Total Agricultural Products 465 413 - - Forest Products 178 255 Total Exports 734 834 1/ Per thousand liters. Source: Statistical Appendix Tables 17 and 18. 45. For two years running the coconut crop has suffered typhoon damage. This, however, is only part of the story. Both in coconuts and in sugar there is inadequate research in varietal improvements and in response to ir- rigation and fertilizers. It is disappointing that the respective industries have not taken on this task, though the failure to do so is more understand- able in coconuts where there are many smallholders. The Government's attempts to make up for the deficiency in research have been inadequate and fragmented. There are, for example, three different official and semi-official agencies in- volved in coconut research. - 18 - 46. Of late, spurred by growing balance of payments difficulties, the Government has become increasingly concerned about export crops. Instead of a general evaluation of the problems of this sector, it has focussed on the repeated failure of the sugar industry to take full advantage of the United States sugar quota. To alleviate this problem, the Government has encouraged a crash program of sugar mill construction. Ten mills have been authorized and of these four have been completed and the balance are in various stages of construction. The mission was unable to confirm that the lack of sugar milling capacity has been the major bottleneck. The advisability of expanding milling capacity appears questionable for a commodity which is in excess supply in the world, particularly when Philippine participation in the U.S. sugar quota at a favorable price is based on a U.S. law which may be changed when the current version expires in 1971. Existing mills operate during only four months of the year. Under these circumstances, it could have been more ad- vantageous to encourage investments in irrigation so as to have year-round supply of cane in order to utilize existing mills more effectively. This would have been a less risky approach given the uncertain prospects for sugar. Irrigated land has many potential uses whereas sugar mills have only one. 47. A more promising development for the export sector and for agri- culture in general may be the example of the banana operations in Mindanao. In these cases farmers are cultivating bananas on their own lands under contracts with major firms (both domestic and foreign). The latter bring to the project capital, managerial and technical know-how and take care of marketing the product. It could be quite advantageous to combine this type of approach with land development schemes. The Philippines has considerable unutilized agricultural land, particularly in the South, whereas there is overcrowding in Central Luzon. If land reform is to be effective, the farms in Central Luzon must be of an economic size. This requires the reduction of population in Central Luzon at a faster rate than can be absorbed by in- dustry. Land settlement schemes have been tried before in the Philippines and they have failed primarily for lack of organization. The agri-business type of land development scheme need not necessarily be restricted to export crops. Feed grain cultivation for central organizations producing pigs, poultry or cattle, is another possibility as are rice and sugar cultivation. Land Development schemes require considerable capital. Therefore, it will be difficult for the Government, with its limited resources, to undertake such schemes. There are indications that private capital is interested in this type of undertaking. However, it would be difficult to proceed with land development schemes on a large scale without first determining the potential of different agricultural areas. The need for a groundwater survey has al- ready been mentioned. Equally important is an agricultural land classifica- tion survey. Industrial Investment Policy 48. In industry the most promising development is the manner in which the recently established Board of Investments (BOI) is going about its busi- ness. BOI is the institution set up under the Investment Incentives Act of 1967 for the purpose of implementing that Act. The Act is designed "to accele- rate the sound development of the national economy in consonance with the - 19 - principles and objectives of economic nationalism". The Act distinguishes between preferred enterprises which "will process further and thereby in- crease the value of exports and those that will result in the production of goods for domestic use in substitution for imported items", and pioneer enterprises vhich are "engaged in the manufacture, processing, or production of goods that are not being produced locally on a commercial scale, or a firm which uses a process, design, formula, scheme, method or system of production which is new and untried in the Philippines". 1/ Even though the Act is quite 1/ The incentives provided under the Act are: (i) For preferred enterprises: (a) Organizational and pre-operating expenses may be deducted from taxable income for a period of not more than ten years from date of operation. (b) Accelerated depreciation of fixed assets at a rate not more than twice as fast as normal rate of depreciation. (c) Net operating loss incurred in any of the first ten years of operation can be carried over as deduction from taxable income for next six years. (d) Exemption for seven years from tariff duties and compensating tax of imports of machinery, equipment, and spare parts. (e) Purchases of machinery, equipment and spare parts from a domes- tic msanufacturer are entitled to a tax credit equivalent to 100% of the value of compensating tax and customs duties that would have been paid on such importations. Another tax credit equivalent to 50% of such compensating tax and customs duties shall be given to the domestic manufacturer. (f) Under certain conditions a tax credit for taxes withheld on interest payments on foreign loans. (g) Deduction from taxable income, upon BOI approval, of undistri- buted profits which are used for procurement of additional equipment and spare parts. (h) Employment of foreign nationals. (i) Anti-dumping protection. (j) Protection from Government competition. (ii) For pioneer enterprises all of the above and: (a) Exemption from all taxes until December 31, 1972. Thereafter partial payment (on an increasing scale) of income tax only. (b) Post-operation tariff protection to an extent not exceeding 50% of dutiable value of similar imported items. - 20 - explicit in spelling out the incentives it provides, the determination of pre- ferred and pioneer industries is left up to the BOI. 49. The Act favors and encourages domestic private investment. Foreign investment can freely enter only pioneer industries; its participation in preferred enterprises can only be on a minority basis (up to 40%) or as loan capital. Discrimination in favor of domestic capital however is not a new phenomenon and goes back to the Constitution which reserves to Filipino citi- zens and corporations or associations, at least 60% of whose capital stock is owned by Filipinos, the right to exploit the country's natural resources and which limits the right of aliens to invest in the field of public utilities. Other legislation also reflects this attitude. The Retail Trade Nationaliza- tion Act (Republic Act No. 1180) prohibits aliens and associations, partner- ships or corporations whose capital stock is not wholly owned by citizens of the Philippines from engaging directly or indirectly in retail business. Republic Act No. 4239 among other things limits the award of contracts for public works to corporations or associations at least 70% of whose capital stock belongs wholly to citizens of the Philippines. Only persons who are citizens of the Philippines may engage directly in the rice and corn industry (Republic Act No. 3018). Among foreign investors, U.S. investors enjoy a favored position under the provisions of the Laurel-Langley Agreement. The value of U.S. direct investment in the Philippines at the end of 1967 is estimated to be $635 million. Now, with the Laurel-Langley Treaty set to expire in 1974, there is uncertainty regarding the future status of existing U.S. investments. 50. Within a relatively short period the BOI has gathered an able staff and has gained the respect and confidence of the business community. It has already drawn up two "Investment Priorities" plans defining preferred and pioneer industries and describing the additional capacity that needs to be created in these fields. The second of the plans, which is a slightly modified version of the first one is summarized in Appendix Table 12. One of the most encouraging aspects of BOI operations to date is the restraint exercised in granting incentives. An effort is made to avoid extending incentives to ac- tivities which are already well established (e.g. sugar production and mill- ing, power generation). This can be seen by the limited number of entries in column 1 of Appendix Table 12 which describes existing capacity. Equally en- couraging is the determination of BOI staff to avoid the indiscriminate setting up of industries which will require heavy protection. One reflection of this is that of the 55 broad fields of activity included in the Second Investment Priorities Plan none is considered to require additional tariff protection, despite the fact that tariffs in most of the fields covered by the Plan are quite low. Finally, the BOI attaches major significance to export promotion. Of the total annual production of P5.5 million which is anticipated to flow from investments under the Plan, almost 30% is intended for export. 51. The primary emphasis of the Second Investment Priorities Plan is on industries processing agricultural products. The total investment required in these industries to satisfy projected domestic demand in 1972 and/or to avail of export opportunities is estimated by the BOI to be P2.4 billion. Mining and mineral processing industries are a close second with P2.2 billion - 21 - followed by manufacturing industries with an estimated investment requirement of P1.7 billion (Appendix Table 12). Even though it is presented as a formal "plan" the BOI program should be regarded as a pragmatic list describing the type of industries which in the opinion of BOI staff are likely to catch on if the proper incentives are provided. In practice the composition of invest- ment between different categories may prove quite different and this is as it should be in a private enterprise economy. As of May 1, 1969 the BOI had approved total new investments of about P1.2 billion (Appendix Table 13). If the rate of new investments maintains this pace an acceleration of the growth of the manufacturing sector can be expected in the early 'seventies. 52. In evaluating proposed investments the BOI takes into account the level of protection likely to be required by the industry in question. In this connection tariffs on imported inputs as well as on competing products are also considered. As pointed out in previous IBRD reports the structure of Philippine tariffs is biased in favor of import substituting consumption goods and is least favorable to production of manufactured exports and capital goods (see AS-138a, May 21, 1968). It is to be hoped that as the BOI becomes increasingly familiar with the structure of tariffs it will get more deeply involved in making recommendations for general reforms. 53. The special incentives provided under the Investment Incentives Act of 1967 to exports of manufactures are welcome. 1/ In view of the Philippines' well-developed manufacturing sector these are the exports which hold consider- able promise of rapid growth over the long-term. To break into this area how- ever the Philippines must contend with the competition of countries like Japan, Taiwan and Korea. In addition the Philippines is gradually losing the favorable treatment granted her exports in the United States under the Laurel- Langley Treaty. Since January 1, 1968 Philippine exporters are paying 60% of the U.S. MFN tariff and this will increase to 80% in January 1971 and to 100% in 1974 unless some other approach emerges from negotiations between the two countries on their future economic relations. Given the difficulties facing Philippine manufactured exports, it may be appropriate for the Government to 1/ The Act entitles approved projects to the following special export in- centives: 1. Deduction from taxable income of twice the amount of promotional expenses incurred in the sale of the products abroad. 2. Deduction from taxable income of twice the amount of shipping costs incurred in export of the products (only 150% deduction is permitted if products are shipped in foreign vessels). 3. Tax credit equivalent to 7% of the total cost of the materials and supplies purchased, or an amount equivalent to the taxes actually paid on said raw materials, whichever is higher, to the extent used in mAnufacturing the exported products. - 22 - consider some additional assistance including possibly the establishment of an export credit insurance scheme, and means of increasing the availability of long-term export credits for manufactures. Balance of Payments and Monetary Policy 54. While in recent years in domestic agriculture and industry there has been some strengthening of the institutional and policy framework, considerable balance of payments difficulties in the last two years have forced the Govern- ment to pursue monetary policies which have not been conducive to the smooth functioning of the economy. As shown in Table 7 the balance of payments problem has been touched off by an unusually large increase in imports and this has been compounded by stagnant export earnings and in 1968 by the emergence of a negative balance on the invisibles account. Not only does the table illustrate the steady climb of the trade deficit and its acceleration in 1967, but it shows that despite the considerable attempts of the Government to curb import demand, imports in 1968 have continued to grow at a more rapid pace than exports. Table 7 Philippine Trade 1963 1964 1965 1966 1967 19681/ (million dollars) Imports (goods only) 618 780 808 853 1,062 1,150 Exports ( ) 728 742 768 828 821 848 Trade balance 109 -38 -4o -65 -241 -302 Net invisibles 35 58 119 132 117 -35 1964 1965 1966 1967 1968 (rate of growth) Imports (goods only) 26.2% 3.5% 5.6% 24.5% 8.2% Exports ( " ) 2.1% 3.5% 7.8% -1.0% 3.3% 1/ Preliminary figures. Source: Appendix Table 14. 55. The sharp increase of imports in 1967 has no simple explanation. Undoubtedly part of the answer is to be found in the relaxation of credit by the Marcos Administration from the beginning of 1966 to mid-1967, in fulfil- ment of a campaign pledge. Increased Government investments in infrastructure and particularly in transport are another contributing factor and this is re- flected in the fact that imports of transport equipment were of the order of $130 and $144 million in 1967 and 1968, respectively, as compared with $110 - 23 - million in 1966 and $87 million in 1965 (Appendix Table 19). The sugar mill construction program is yet another factor as is the unusually large level of rice imports which occurred in 1967. 56. Despite considerable attempts the Government has failed to contain import demand in 1968 and (judging by preliminary indications) in 1969 1/. These attempts have consisted primarily of monetary measures introduced in waves since June 1967. The most important elements of Government strategy have been: (i) increases of the basic rediscount rate of the Central Bank; (ii) reduction of rediscount quotas; (iii) increases of legal reserve requirements on all deposits; (iv) the introduction of a system of advance time deposits for imports; and (v) the introduction of ceilings on portfolios and foreign exchange liabilities of the commercial banks. 2/ These monetary measures have been supplemented by: (a) restrictions on the amount of foreign exchange that can be taken out of the country by travellers; (b) the requirement that all invisible payments in excess of $100 must be supported by a sworn statement of purpose and that commercial banks must satisfy themselves that the purchaser's pesos have been legitimately earned; and (c) the introduction of "voluntary" import quotas by importers of motor car assembly parts. 1/ For a detailed discussion of policies introduced to curb import demand see the International Monetary Fund, 1968 Article XIV Consultation Report (SM/69/46; April 10, 1969). 2/ The ceiling on foreign exchange liabilities of commercial banks was re- moved on April 16, 1969 in order to encourage the banks "to avail of their foreign credit lines". - 24 - 57. In part, the failure of Government policy to contain import demand reflects the difficulty of tackling a sizable balance of payments deficit by monetary measures alone without any support from the fiscal side. The pack- age of tax proposals enacted by Congress was not only much less than that pro- posed by the President but its full impact will not be felt until FY 1969/70. The approaching elections, on the other hand, make it difficult for the Govern- ment to consider major changes in exchange rate policy. 58. The ineffectiveness of monetary measures, however, also reflects certain inherent weaknesses of the policies pursued. Firstly, the effective- ness of restrictive monetary policies has been considerably reduced by a large number of exemptions designed to avoid interference with priority economic activities such as rice production, the infrastructure program and exports. Because of the difficulty of administering some of these exemptions quite possibly loopholes have been created for other than the preferred activities. 1/ In addition the constant revision, modification, and intensification of earlier measures has given rise to considerable confusion and has encouraged specula- tion against the peso. Such speculation is evident in the increased stocks of imported raw materials and spares held by many industries. There have also been unexplained drops in certain types of foreign exchange receipts which suggests that some foreign exchange is being diverted to non-banking channels (e.g. a drop of $115 million in 1968 in "other invisible" receipts - Appendix Table 14). 59. The magnitude of the trade deficit in 1967 and 1968 has necessitated considerable short-term foreign borrowing by the Central Bank (Appendix Table 22). At the end of 1966 the short-term foreign liabilities of the Central Bank were of the order of $100 million as compared with assets of $166 mil- lion. At the end of 1967 the Central Bank's foreign assets ($180 million) were only marginally higher than at the end of 1966 whereas short-term liabi- lities had climbed to $235 million, in addition to which the IMF gold tranche 1/ A classic example of such qualitative credit controls is provided by a Central Bank memorandum dated April 16, 1969 which exempts the imports of machinery and equipment by "export-oriented" industry from the ceil- ings on import letters of credit and from special time deposit require- ments. Among others the definition of export-oriented includes: "Those engaged in the processing or manufacture of finished products for exportation, or with an export potential as evidenced by a record of exportation or export contracts, in which at least 70% of total raw material content consists of indigenous raw materials." "Those engaged in the processing or manufacture of finished products in which domestic value added per unit cost (local raw materials, supplies, labor, fuel, power, transportation, services) is not less than 50%, provided, however, that at least 50% of their total produc- tion is destined for export." - 25 - of $27.5 million was utilized. In the course of 1968 the Central Bank utilized an additional $55 million of IMF resources provided under two standby agree- ments. Other short-term foreign liabilities at the end of 1968 were of the order of $120 million as compared with gross assets of $161 million. The reduction of other foreign exchange liabilities at the end of 1968 as compared with end 1967 was largely due to the conversion during 1968 into medium-term debt of about $81.5 million of short-term debts owed to US commercial banks. As of April 8, 1969 short-term foreign liabilities of the Central Bank (ex- cluding IMF drawings) had again increased to $175 million. 60. In an effort to reduce the pressure on its exchange reserves the Government has encouraged the increasing use of suppliers' credits and other deferred payments arrangements. Strong incentive has been provided for such arrangements by exempting from advance time deposit requirements, machinery and equipment imports financed in this manner, and by the readiness of the Development Bank of the Philippines and the Philippine National Bank to guaran- tee suppliers' credits. Information about the magnitude and terms of private debt contracted in response to these incentives is incomplete, but indications are that it is considerable. The outstanding suppliers credits guaranteed by the PNB and DBP were about $300 million in the last quarter of 1968. Of the $179 million guaranteed by PNB, half was to mature before June 1969 and the balance before June 1970. In addition to its outstanding guarantees, as of the end of 1968 DBP had approved in principle but not yet issued guarantees for $200 million. 61. Government has obtained the services of a private consulting firm to help define the magnitude of the problem and to recommend an appropriate debt management strategy. The move to determine the magnitude of current debt is welcome particularly in view of the incomplete information regarding private debts incurred with and without the guarantee of official institutions. Pend- ing the outcome of this study the Government would be well advised to place a ceiling on the guarantee operations of PNB and DBP, or, at least require loans guaranteed by official institutions to satisfy certain minimum require- ments with respect to interest rate and amortization period. 62. The long-term debt position of the Philippines is still quite com- fortable. Even if the Philippines during the next five years were able to secure on conventional terms long-term loans of $150-200 million annually, debt service would not exceed 10% of current receipts. This may be the rough order of magnitude that the Government should aim for in order to restructure its short-term debts and to supplement domestic savings by about $70-120 mil- lion a year. Foreign borrowings of this magnitude should enable the Philip- pines to grow at about 6% per year providing the Government continues and intensifies its efforts to improve economic performance, particularly in the fields of fiscal and balance of payments management. STATISTICAL APPENDIX Table External Debt 1 Philippines - External Public Debt Outstanding as of December 31, 1968 2 Philippines - Estimated Future Service Payments on External Public Debt 3 Private Foreign Debts National Accounts Gross National Product by Expenditure Shares and Net Domestic Product by Industrial Origin, 1962-68 (at current prices) 5 Gross National Product by Expenditure Shares and Net Domestic Product by Industrial Origin, 1962-68 (at constant 1955 prices) Production 6 Land Use in the Philippines - 1967 7 Output of Main Agricultural Products, 1961-68 8 Utilization of Agricultural Land, 1961-68 9 Mineral Production, 1962-68 10 Index of Manufacturing Production, 1962-68 U Manufacturing Sector - Net Value Added and Percentage Distribution 1962-67 12 Second Investment Priorities Plan of Board of Investments 13 Projects Approved by BOI as of May 1, 1969 Balance of Payments and Foreign Trade 1 Balance of Payments 15 Origin and Distribution of Foreign Trade 16 Indices of Quantity, Price and Terms of Trade, 1960-68 17 Value of Exports, 1961-68 18 Volume and Unit Values of Principal Exports, 1961-68 19 Value of Imports, 1961-68 2C Imports Classified by Use of Goods, 1961-68 21 Average level of Philippine Tariff, 1961-68 22 Foreign Exchange Reserves Fiscal and Monetary 23 Consolidated Fiscal Operations 24 National Government Revenue 25 National Government Expenditure 26 Annual Expenditures on Infrastructure by Sectors 27 Physical Accomplishments of Infrastructure Investments Table 28 Revenue and Expenditures of Local Authorities by Function 29 Holders of Government Securities 30 Outstanding Internal Public Debt 31 Analysis of Factors Affecting Money Supply, 1961-68 32 Loans and Investments Outstanding of Financial Institutions, 1961-68 33 Composition of Credit Outstanding to the Private Sector, 1961-67 34 Price Indices, 1962-68 35 Wage Indices, 1961-68 36 Labor Force, Employment, Underemployment and Unemployment, May 1956-1968 Chart 1 Philippines - The Rice and Corn Production Coordinating Council Table 1 Philippines - EStrn PWAIc Debt Outstanding as of Deceiber 31, 1968 V Debt flspayable in Foreign Currency (In thousands of U.S. Dollars) Debt Outstandin December 31, 1968 Disburaed Including Source only undisbursed TOTAL EXTERNAL PUBLIC DEBT 417 109 493,246 Privately held debt 202,684 213,419 Publicly issued bonds 12 618 12 618 Suppliers 3,624 Australia 1306 Belgium 1,308 1,308 France 1,784 1,784 Germany 1,706 1,706 Japan 141,643 20,718 United States 3,142 5,802 Financial Institutions 166 177 168 177 France 706 701 United States 165,469 167,469 Loans from international organisations - IBRD 93,v712 131,079 Loans from governments 120 713 1848 Canada 9,s515 9515 Germany 9,S59 10,000 United States 101,639 129,233 1/ Debt with an original or extended maturity of one year or more. Statistical Services Division Economics Department May 21, 1969 Table 2 Philippines - Estimated Future Service Payments on External Public Debt outstanding including undisbursed as of December 31, 1968 Debt Repayable in Foreign Currency (In thousands of U.S. Dollars) Debt Outstanding (Begin. of Period) Payments during Period Year including undisbursed Amortization Interest Total GRAND TOTAL 1969 444,840 53,636 19,044 72,680 1970 391,204 59,612 21,577 81,189 1971 331,592 54,617 18,945 73,562 1972 276,975 52,153 15,235 67,388 1973 224,822 24,467 12,146 36,613 1974 200,355 23,630 10,782 34,412 1975 176,725 22,o65 9,459 31,524 1976 154,660 20,730 8,259 28,989 1977 133,930 19,070 7,053 26,123 1978 114,860 16,857 5,997 22,855 1979 98,003 14,139 5,091 19,230 1980 83,864 12,787 4,321 17,108 1981 71,077 12,159 3,624 15,783 1982 58,918 11,44o 2,947 14,387 1983 47,478 10,617 2,336 12,954 A. IBRD Loans 1969 131,079 4,759 5,174h 9,933 1970 126,320 7,179 6,561 13,74o 1971 119,141 8,441 6,860 15,301 1972 110,700 8,687 6,361 15,048 1973 102,013 8,538 5,849 14,387 1974 93,475 8,336 5,346 13,682 1975 85,139 8,257 4,852 13,109 1976 76,882 8,093 4,364 12,457 1977 68,789 7,842 3,891 11,733 1978 60,947 7,075 3,435 10,510 1979 53,872 6,354 3,033 9,387 1980 47,518 6,539 2,655 9,194 1981 40,979 6,483 2,270 8,753 1982 34,496 5,751 1,887 7,638 1983 28,745 4,914 1,572 6,486 B. Suppliers' Credits 1969 21,439 2,622 1,143 3,765 1970 18,818 3,154 1,139 4,293 1971 15,664 3,287 978 4,264 1972 12,378 3,o66 779 3,844 1973 9,312 2,822 597 3,420 1974 6,490 2,299 431 2,730 1975 4,191 1,799 287 2,o86 1976 2,391 1,299 203 1,502 1977 1,092 1,069 65 1,134 1978 23 23 1 24 Note: Includes service on all debt listed in Table 1 prepared May 21, 1969 with the exception of the following, for which repayment terms are not available: Suppliers - Japan $11,185,000 Financial institutions - United States $37,221,000 $48,406, ooo Source: Statistical Services Division, Economics Department. Table 3 Private Foreign Debts (Other than Short-term Trade Credits) As of December 31, 1968 (In million U.S. dollars) Out- Item Authorized Utilized Unutilized Cancelled Paid standing Payable in U.S. Dollars 64014*4 535.62 90.72 14.10 352.81 182.81 Medium-term Loans 309.54 259.41 44.27 5,86 230.88 28,53 ESxport-Import Bank 13.00 9.63 - 3.37 9.63 - Tnmort deduction 48.84 165.27 2.76 .81 35.19 1.0,08 Suppliers Credit 247.70 204.51 41.51 1.68 1860o6 18.-15 Long-term Loans 330.90 276.21 46.45 8.24 121.93 15h,28 Agency for Int'l Development 12.80 5.67 5.30 1.83 0.29 5.38 Export-Import Bank 102.03 76.20 19.42 6.41 19.36 56,8!B TB RD-PDCP 4o.oo 23.64 16.36 - 3.77 19.87 Oil Companies 54.'96 52.08 2.88 - 32.91 1]9.17 Suppliers credit 55.17 52.68 2.149 10.16 42.52 Other private loans & sa.le of non- residents assets 65.94 65.94 - - 55.4.4 10,50 Payable in Pesos 48.98 48.98 - - 5.90 L13.08 Long-term Loans ATD-PDCP 27.50 27.50 - - - 27.5o Cooley Loans 21.48 21.48 - - 5.90 .5.5 Source: Central Bank of the Philippines. Table 4 Gross National Product by Expenditure Sbares and Net Domestic Product by Industrial Origin, 1962-68 (At current prices) Value in Million Pesos Per Cent Distributiom Item 1962 1963 1964 1965 1966 1967 1/ 1966 2/ 1962 1963 1964 1965 1966 1967 I9 Expndiureon Gross National Product at r et ces 15,721 18,135 19,459 21,070 23,246 25,425 28,109 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Private Corsunption Experditures 12,286 13,737 15,525 16,582 18,080 19,802 n.a. 78.1 75.7 79.8 78.7 77.8 77.9 Government Consumption Expenditures 1,380 1,637 1,829 1,974 2,189 2,414 n.a. 8.8 9.0 9.4 9.4 9.4 9.5 Gross Domestic Capital Formation 3,082 3,767 4,426 4,658 5,005 5,514 n.a. 19.6 20.8 22.8 22.1 21.5 21.7 Net Exports of Goods & Services -1,133 -93 -578 -211 423 -710 n.a. -7.2 -0.5 -3.0 -1.0 1.8 -2.9 Net Factor Income from Abroad -80 -68 -92 -123 -140 -211 n.a. -0.5 -0.4 -0.5 -o.6 -o.6 -0.8 Statistical Discrepancy 186 -845 -1,651 -1,810 -2,311 -1,384 n.a. 1.2 -4.6 -8.5 -8.6 -9.9 -5.4 Per Capita GNP (in pesos) 537 600 622 651 694 734 n.a. Annual change in GNP (per cent) 10.6 15.4 7.3 8.3 10.3 9.4 10.6 Net Domestic Product at Factor Cost 13,557 15,613 16,598 17,917 19,709 21,508 23,932 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture, Fishery & Forestry 4,175 4,980 5,209 5,729 6,403 7,048 7,982 30.8 31.9 31.4 32.0 32.5 32.8 33.3 Mining & Hanufacturing 2,767 3,266 3,334 3,448 3,782 4,119 4,749 20.4 21.0 20.0 19.2 19.2 19.1 19.8 Constraction 448 584 661 759 754 805 859 3.3 3.7 4.0 4.2 3.8 3.7 3.6 Transportation, Comunication, Storage & Utilities 625 671 712 783 865 918 988 4.6 4.3 4.3 4.4 4.4 4.3 4.1 Commerce 2,111 2,316 2,533 2,711 3,018 3,324 3,539 15.6 14.8 15.3 15.1 15.3 15.5 14.8 Services 3,431 3,796 4,149 4,487 4,887 5,294 5,815 25.3 24.3 25.0 25.1 24.8 24.6 24.4 Per Capita NID (in pesos) 464 517 530 555 588 622 667 Annual change in NDP (per cent) 8.9 15.2 6.3 7.9 10.0 9.1 11.3 Note: The national account series in this table is the latest set of official figures which supersedes and replaces all other figures previously reported in the last Report AS-138a. 1/ Preliminary estimates from Overall Revision as of August 30, 1968. 2/ Advance estimates based on trends established by available figures and indicators up to the end of third quarter 1968. Source: OSCAS, National Economic Council. Table 5 Gross National Product by Expenditure Shares and Net Domestic Product by Industrial Origin, 1962-68 (At constant 1955 Prices) Value in Million Pesos Per Cent Distribution 1962 1963 1964 1965 1966 1967 l/ 196 2/ 1962 1963 1964 1965 1966 1967 1966 Expenditure on Gross National Product at Mrrket Prices 12,696 13,631 13,970 14,734 15,618 16,555 17,594 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Private Consumption Expenditures 10,221 10,591 10,987 11,389 11,825 12,353 n.a. 80.5 77.7 78.6 77.3 75.7 74.6 Government Consumption Expenditures 1,129 1,258 1,309 1,380 1,446 1,527 n.a. 8.9 9.3 9.4 9.4 9.3 9.2 Gross Domestic Capital Formation 1,902 2,192 2,439 2,577 2,662 2,854 n.a. 15.0 16.1 17.5 17.5 17.1 17.3 Net Exports of Goods & Services -783 -333 -573 -444 -96 -860 n.a. -6.2 -2.5 -4.1 -3.1 -0.7 -5.2 Net Factor Income from Abroad -51 -41 -54 -72 -81 -122 n.a. -0.4 -0.3 -0.4 -0.5 -0.5 -0.7 Stptistical Discrepancy 278 -36 -138 -96 -138 803 n.a. 2.2 -0.3 -1.0 -o.6 -0.9 4.8 Per Capita GNP (in pesos) 434 451 447 456 467 478 n.a. Annual change in GNP (per cent) 6.1 7.4 2.5 5.5 6.o 6.o 6.3 Net Domestic Product at Factor Cost 11,040 11,853 12,076 12,706 13,430 14,204 15,133 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture, Fishery & Forestry 3,436 3,703 3,600 3,837 4,094 4,406 4,796 31.1 31.2 29.8 30.2 30.5 31.0 Mining 1 Manufacturing 2,132 2,294 2,337 2,374 2,564 2,696 2,859 19.3 19.3 19.4 18.6 19.1 19.0 Construction 345 421 456 515 502 530 553 3.1 3.6 3.8 4.1 3.7 3.7 Transportation, Communication, Storage & Utilities 526 553 573 606 634 665 689 4.8 4.7 4.7 4.8 4.7 4.7 Commerce 1,682 1,757 1,832 1,914 2,023 2,159 2,267 15.2 14.8 15.2 15.1 15.1 15.2 Services 2,919 3,125 3,278 3,460 3,613 3,748 3,969 26.5 26.4 27.1 27.2 26.9 26.4 Per Capita NDP (in pesos) 378 392 386 393 401 410 421 Annual change in NDP (per cent) 5.0 7.4 1.9 5.2 5.7 5.8 6.5 Note: This series represents the latest official estimates and revises previous estimates. 1/ Preliminary estimates from Overall Revision as of August 30, 1968. 2/ Advance estimates based on trends established by available figures and indicators up to the end of third quarter 1968. Source: OSCAS, National Economic Council. Table 6 Land Use in the Philippines - 1967 Dercentage of Area (ha.) Total Land Area Commercial Forest l1,752,O56 39.17 Non-Commercial 2,851,383 9.50 Bushland and Cnoen 3,146,117 11.39 Swanrns 662, 4 7 2.21 C'ultivated and Other Lands 11,317,797 37.'73 Total 30,000,000 100.00 Source: Bureau of Forestry Table 7 Ou1put of Main Agricultural Products, 1961-68 (In thousand metric tone) Aver age196 16 168i Crop YearsL/ 1955-57 1961 1962 1963 1964 1965 1966 1967 l8 Export Crops Copra 1,187 1,3982/ 1,445_./ 1,495_/ 1,487 1,471 1,485 1,577 1,542 Desiccated coconut 45 59 63 67 63 63 77 88 88 Sugar (centrifugal and muscovado) 1,190 1,354 1,506 1,600 1,690 1,621 1,460 1,622 1,655 Abaca 118 115 116 128 134 134 135 118 103 Tobacco 4
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Philippines - Current economic position and prospects (Vol. 1 of 2) : Main report
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