BOP during the American period, 1898-1941

The balance of payments is an accounting of the total payments going in and out of the country with respect to the world-at-large.

The perspective of the BOP in Philippine economic history. Modern economic observers pay attention to the importance of the BOP as one of the indicators of a nation’s economic health. This was the outcome of the emphasis on macroeconomics – the basis of aggregative economic analysis.

It is understandable then that during the American colonial occupation, no estimates of the BOP for the Philippines were calculated. Rough estimates following such concepts were presented in the years when the Philippines was on the road toward possible independence, made in US government reports on the colony.

It is of great curiosity for us to know whether the Philippine BOP during colonial period was a positive, or favorable, position.

Turbulent economic times. The answer to this question is, yes. In general, if we had estimates of the Philippine BOP during the American colonial times, the country’s international transactions would have shown a sound BOP.

Over time, minus brief periods of imbalances, the BOP showed surpluses that improved the country’s international payments position.

This strong economic position was an outcome of the free trade access to the American economy, especially after 1909, which stimulated strong performance of export sectors. Access to export markets helped finance the demand for consumption and investment in the domestic economy which, thus, underwent a long period of strong growth. The country’s foreign trade (with the world and with the United States, which became the dominant partner, both for exports and imports) enabled the country to pay for its import needs.

The period in review included the economic downturn immediately after the first World War and the Great Depression after 1929, which was especially severe in early 1930s.

Externally, these busts followed the ups and downs of the US economy – since the Philippine economy was moving in sync with that of the US. In general, too, the long period referred to could also be seen as one in which unprecedented economic growth of the United States also took place.

Along this path, the Philippine BOP also followed the same pattern of growth and volatility. There was something particular about the volatility.

Philippine economic cycles followed the American pattern. But these real output indicators (when compared and plotted on paper across the depression years to the close of the outbreak of the World War II) showed a trend toward positive growth for the Philippines. Those for the US economy, in turn, showed a picture of persistent stagnation. (Philippine output indicators were heavily weighted by exports, but the Philippine was, at that point, heavily export-dependent.)

Trade, services, and capital payments. Relevant data on trade showed a positive balance of trade for much of the colonial period. Hard data were available throughout this period from balance of trade and payments information from the US Tariff Commission and the US Treasury.

The trade balance was in deficit in 1919 and 1921, and was in relative but positive balance during 1920 and 1931. But throughout the years until the close of the 1930s, it was strongly in surplus.

On the other hand, typical of an economy dependent on the trade and payments services that were an aspect of the colonial relationships with the US economy, the Philippines depended on the services of US companies in shipping, transport and banking to facilitate the growth of trade.

While American direct investments in Philippine enterprises fueled the flow of private capital to the Philippines, these also had consequences of bringing about, in later periods, an outflow of capital corresponding to these long-term inflows in the form of profit and interest payments and capital retirement. There were remittances of profits of American investments in the Philippines to their US investors. These capital movements were part and parcel of the capital account that was part of the BOP.

In short, the balance of trade surpluses enabled the country to incur (or finance) shortages in non-merchandise trades and in the imports of capital goods.

During difficult economic times, the BOP was in deficit as it was in 1919 and 1921 (immediately after the end of the First World War) and in 1930 and 1931 (during the hard times of Great Depression). This was also felt during weak years in non-merchandise trade (such as the second half of the 1920s and the early 1930s) when the BOP appeared in near balance.

Conclusion. Over time, however, when the periods of deficits in the country’s international payments were taken into account, the overall picture was a payments system that was growing and in surplus.

At the eve of the onset of World War II, the country’s BOP was in surplus. This meant that the country’s international dollar reserves were rising.

There was an additional unintended outcome of US efforts to protect against Philippine exports. When the US imposed processing taxes on coconut oil exports (a form of export taxes to reduce our advantages in trade), the proceeds of the taxes were put in escrow for the future Philippine republic as part of the adjustment program. This had the effect of adding to the rising dollar reserves for the account of the future republic.

Dedication. This essay is dedicated to the memory of Dr. Ponciano Intal Jr. who died last year at a relatively young age from cancer. Pons received an MA from the UP School of Economics in 1978 and his Ph.D. from Yale University. He was the president of the Philippine Institute for Development Studies (PIDS) during the 1990s. Pons was a productive scholar, a good research administrator, and a very likable personality.

I used as major reference for this Crossroads column and that on Feb. 12, his Essays on Philippine Colonial Economy (De La Salle University Press, 2003) which was based on his Ph.D. thesis at Yale. In this work, Pons undertook to provide estimates of the BOP and to link years when there were useful payments data.

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