Filipino human capital through decades of development

(Part III)

The Philippines woke up from the ashes of the World War with an advantage in human capital that was superior to that inherited by other countries in our region – in East Asia.

Episode of lost growth opportunity. In Philippine economic history, there have been periods of lost opportunities that would have taken us easily to the trajectory of virtuous and more efficient long-term economic growth.

Such missed opportunities also meant missed prospects for rapid human capital improvement. As the saying goes, a rising tide (read: economic growth) lifts all boats. Increasing economy-wide productivity would foster rising living standards for the people.

One such period was during the first decade of independence. All propitious elements of rapid growth were then present.

Early Phl-US bilateral relations. Political independence took place as scheduled for the new Philippine republic on July 4, 1946, as agreed under the Philippine Independence Law passed by the United States.

The first main tensions of new nationhood were related to the relationship with the United States. Our leaders supported the amendment of the independence constitution of 1935 that gave US citizens the same rights as Filipinos under Philippine law after a national referendum on the matter.

This amendment to the constitution was a condition to enable the new Philippine republic to get the US government to implement two important laws that it passed to assist Philippine independence.

The first law became the basis of long-term Philippine-US trade and economic relations, which included a preferential trade agreement and special access to the US market of Philippine traditional exports. The second was the appropriation of war damage compensation to enable immediate economic rehabilitation from the war.

These two measures were big boosters for Philippines nation-building. But the conditions also represented the colonial master’s big bully tactics to blunt the nationalistic contents of the Philippine constitution.

The constitutional economic restrictions. In recent years, there is economic consensus that these provisions have burdened Philippine economic progress over the decades. But politically, no Philippine political administration was strong enough to amend them. They still stand in the constitutional book even today!

In 1935, those restrictions were crafted in a time of over-dose of nationalistic fervor by leaders to provide safeguards against control of the economy by foreigners. Most Philippine leaders were mainly lawyers who were well-versed in the ‘Regalian” doctrine of national patrimony, that all natural resources (and land and, hence by logical extension, public utilities) belonged to the nation.

Tactically, they were a big mistake. For they could have enacted nationalistic laws to control foreign domination of the economy once the country was independent. To put the provisions in the political constitution just invited retaliation. And they got them.

The exchange rate issue. The destruction of the economy after the war, the high inflation rate at the close of the war might have called for a much devalued peso as an initial measure to stabilize.

Actually, elsewhere around the world, the aftermath of the war brought major devaluations across the currencies of victorious and, especially, defeated nations.

The victorious powers (mainly the US and allies) required devaluations of the currencies of the defeated nations, Germany and Japan, as part of their economic rebuilding process to reflect economic realities.

Among victorious powers, the UK and France, on their own actions as independent nations, undertook serious devaluations of their currencies when they faced scarcity of foreign exchange immediately after the war.

But the two pesos-for-one US dollar rate was restored by the American authorities before the grant of independence. Filipino leaders welcomed this exchange rate treatment even after independence. In fact, the new trade agreement protected this exchange rate from adjustment or devaluation, because the approval of the US president was required.

Even so, the Philippines was flush with dollars immediately after independence. This was the result of (1) US war damage payments; (2) the early recovery of the country’s export in the American market; (3) rapid rehabilitation efforts; (4) the presence of tax money owed to the Philippines and held at the US Treasury; (5) US military spending in the country; and (6) US development assistance beyond 1950. All these propped up the balance of payments.

A peso devaluation immediately after independence would have prevented the rapid consumption of such dollar resources. A devaluation would have encouraged exports, made imports more expensive, and improved incentives to invest in internationally competitive industries.

Magsaysay’s presidency and his early tragic death. Ramon Magsaysay became president in 1954, the eighth year of independence. By then, the country had already dissipated the large foreign exchange bounties of the postwar years, and import and foreign exchange controls had been put in place to ration dollars.

Resurgent nationalism had expanded toward regulation on foreign investments through import and exchange controls. As a consequence, much American investments compensated from war damage payments had repatriated back to America.

Magsaysay, however, was able to secure improvements in the terms of US-Philippine trade and economic relations through the Laurel-Langley Agreement in 1955, which included Philippine control on the value of the peso. He also initiated the Japanese reparations agreement, a prelude to the signing of the treaty of peace with Japan, the former war enemy.

Would Magsaysay have been like the presidents of Taiwan and of South Korea, during this period, who would lead the Taiwanese and the South Koreans to the road to economic prosperity through trade with the US?

There were no major signs that he would. Under Magsaysay, the Retail Trade Nationalization law took place, which was directed at Chinese tradesmen, but adversely affected the laws on retailing for all foreigners.

However, there was a healthy debate on the issue of peso devaluation and decontrol at the time. But in March 1957, the Magsaysay presidency ended abruptly in a plane crash.

He was succeeded by Carlos P. Garcia, his vice president, who implemented tighter import and exchange controls to advance a protectionist Filipino First slogan. In such a climate of policy, export earnings would help to finance many of the nascent new industries that served to sell only to the domestic market, thereby further hampering trade expansion.

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