"The Political and Economic Situation in the Philippines"

Luncheon address by

His Excellency Fidel V. Ramos,
former President of the Republic of the Philippines
As prepared for presentation at the Asia Society Washington Center

Washington, DC, April 30, 2001

Why "People Power II" Was Necessary

My mission here is to brief you on the political and economic situation in my country. This is a somber-but also hopeful-time in the Philippines. In any case, it is also an exciting time. The euphoria of "People Power Part II" has faded; and we Filipinos must face up to the enormity of the Estrada legacy of corruption and cronyism. The Estrada administration has left us a deep budget deficit, a debauched stock market, a devalued currency, and a devastated economy. And, unfortunately, our efforts to restore investor confidence coincide with a downturn in the global economy. Our biggest export markets and sources of foreign direct investment -- Japan and the U.S. -- are both in difficulty. These last two and a half years-as valuable time that has been dissipated in extravagant, high living and unfocused leadership-are all the more painful because of what might have been. The Philippines had emerged from the East Asian crisis relatively unscathed-and (for a change) we might have led our neighbors in returning to the path of growth.

The Devastation of the Estrada Years

Now it may take us years to recover fully from the devastation Mr. Estrada wrought on our country. Elected president in May 1998-with almost 40% of the vote in a field of 11 candidates-the former action-movie star rode on a tidal wave of popular favor which ebbed almost as quickly. Long before it became apparent that President Estrada had put together a network of cronies and relatives who earned him the equivalent of millions of dollars in bribes, commissions and kickbacks-in a country where one-fifth of all the people still live on the equivalent of five dollars a day-a creeping pessimism over his capability to lead our country had spread among Filipinos. Early on, business-people noted the "return of cronyism and influence-peddling"; and the "lack of direction and leadership." For the poorest income classes (masa) who make up Estrada's hardcore constituency, discontent was set off by a rise in fuel and commodity prices, low wages, and joblessness. Almost as soon as he ascended to the presidency, he allegedly began to collect bribes from gambling syndicates operating illegal numbers games on Luzon Island. He also ordered public pension funds (SSS and GSIS) to "invest" in corporate takeovers organized by his friends and in the initial public offerings of dubious corporations floated by his cronies. In 1999, insider-trading and manipulation of stock prices by Chinese-Filipino contributors to his campaign fund destroyed the credibility of the Philippines Stock Exchange. Then his biggest crony emerged as majority owner of the Philippine National Bank. Before long, the government's misdeeds had given even the moribund communist insurgency a new lease on life. And what is even worse was a resurgence of separatist rebellion among our Muslim minority in Mindanao and Sulu. But it is on the economy that the protracted political crisis under the Estrada administration of these last two and one-half years have been most punishing. Until then, our economy had been responding to structural reforms that had begun to dismantle the cartels and monopolies left over from the protectionist period-opening the country to world markets-and shift its development strategy to export-led growth. In 1996, in fact, our gross national product expanded by 7.2 %. And thanks to these structural reforms, embodied in 229 landmark laws, the Philippines escaped the worst of the financial crisis-and in June 1998, was rated as the economy most likely to recover faster than the others. But the Estrada administration failed to take advantage of the lead-time its predecessor-governments had gained for it. Structural reform actually slowed down -- even slipped back -- over the period 1998-2000. In a futile effort to compel reform under Estrada's leadership, the International Monetary Fund and the World Bank deferred $510 million in loans. Meanwhile, Standard & Poor's downgraded the country's credit-rating from "stable" to "negative." The "seal of poor housekeeping" restricted the Estrada administration's ability to tap foreign bond markets and forced it to default on deficit targets. The Philippine government ended the year 2000 with a 136 billion pesos deficit-more than twice its initial target of 62 billion pesos.

"People Power II" Brings Down President Estrada

Last November, President Estrada was finally impeached for gross violation of his oath of office. But, on the 16th of January 2001, President Estrada's allies in the Senate frustrated efforts to expose bank documents -- previously submitted as evidence -- that would have proved conclusively his ownership of illicit and hidden accounts worth billions of pesos. The prosecutors from the House of Representatives walked out in protest-forcing the suspension of the trial which was perceived by many as the precursor to the forthcoming acquittal of Estrada. That same night, Filipinos began to gather by the thousands -- spontaneously -- before the "Lady of Edsa" religious shrine built to commemorate the "People Power" revolution that-15 years ago-had expelled Ferdinand Marcos's dictatorship and inspired similar movements in other developing states. As in February 1986, most of Filipino civil society in mid-January 2001 was once again gathered in an exuberant and peaceful citizens' protest movement. Within three days, "People Power Part II" had ousted and replaced President Estrada with his constitutional successor, Vice-President Gloria Macapagal-Arroyo -- without a shot being fired and not a life being lost. But for us Filipinos, "People Power" is an assertion of the sovereign people's ultimate right to intervene -- when political institutions fail -- to undertake a last effort to make democracy work the way it should. For us Filipinos, "People Power" is about restoring the "invisible institution of morality" which is the true foundation of the rule of law and all the other visible institutions of civilized society.

Urgent Tasks of the Arroyo Government

Now we Filipinos are determined not to allow our political processes-and our political institutions-to fail ever again. Our country needs a prolonged period of political stability-so that our workers and business-people can create social wealth. Our central task as a people is to build strong political institutions-to build an effective and efficient state. Significantly, President Arroyo has identified among her basic goals that of improving moral standards in government. And this is fitting and proper, since democracy needs strong moral foundations. Democracy is more than just a set of procedures for holding elections and passing laws: it is a whole system of values. The urgent tasks of the Arroyo government can be summarized in what I call the four "C's." Namely:

Consolidation - Cabinet, legislature, AFP/PNP, bureaucracy, civil society

Confidence/Trust - Restoration and strengthening, especially in regard to investments inflow, leadership capability, and the rule of law

Continuity of Reforms - Level playing field, transparency, predictability, and accountability

Competitiveness - Production efficiency and quality, ICT potential, Asia-Pacific gateway, human assets and natural resources

These next few months we Filipinos must pick up the pieces from the civil disaster the Estrada presidency proved to be for our country. Political stability must be restored urgently -- and that is why the Arroyo administration has begun talking peace with the M.I.L.F. (Muslim separatists) and the Communist Party of the Philippines and its military arm, the N.P.A. The election of a new Congress on May 14 should give Mrs. Arroyo a friendly and cooperative legislature. The criminal prosecution for economic plunder of Mr. Estrada and his cronies has already begun. In the economy, these next two years must be spent managing the massive budgetary deficit, restoring business confidence, and completing structural reform. Government's most pressing need is to raise its revenues so that it can increase public spending on infrastructure and on developing our human capital. Not only must public expenditures be contained, but tax administration also must be overhauled, tax programs simplified and fiscal incentives rationalized. Periodic surveys suggest that investor confidence is returning cautiously. In late February, business-people judged President Arroyo, who possesses a Ph. D. in economics, to be "competent and trustworthy."

Global Uncertainties Inhibiting Economic Recovery

But the lingering Estrada effect on the economy is being compounded by a downturn in the global economy. Philippine producers had been well-placed to take advantage of the investment boom in American information technology. But now the "dotcom" boom is turning to bust. As for Japan, its ruling party has tried hard, but not quite succeeded in raising the political will to deal decisively with the country's stagnant economy. Meanwhile, China's entry into the World Trade Organization (WTO) -- now merely a matter of time -- should sharpen even more the competition it offers East Asia's emerging economies. Already China is sucking in nearly half of all the foreign direct investment that goes into East Asia. In 2000, it took in $41 billion-second only to the United States. China's economic (and military) power is rising inexorably. This year its economy is projected to grow by 7%. By contrast, the Philippine GDP will grow little more than half of that -- by about 3.8%. And Philippine exports -- the bulk of which being electronic components-are expected to grow no more than 4% or less than half of last year's 8.7%. Fortunately, interest rates, now at around 10%, have been declining too. In February, inflation was kept at a single digit-between 6.5% and 6.7%.

A Vision of High Growth

The Arroyo government thinks recovery could begin before the year 2001 is over. Much will depend on President Arroyo's leadership. She must reenergize our people-by raising before them the vision of a country that can do better than lag behind its neighbors. President Arroyo must also keep alive -and turn toward a positive purpose-the resurgence of the national spirit set off by "People Power II" and similar to the upbeat mood that prevailed during the period of our centennial of Philippine independence from Spain. For all these reasons, she needs to spell out challenging national goals-not only for the political leadership and the administration bureaucracy but also for national business, labor, and the whole of civil society.

A Philippines Without Poverty

At her inaugural, President Arroyo declared her goal to be "a Philippines without poverty in ten year's time." This is a worthy-and achievable-goal which can be the core of her government's vision for our country. And that she set herself a time-frame for achieving it is good-because it focuses her entire government's attention on what needs to be done. Realistically, the eradication of Philippine poverty will take at least a decade of sustained high growth-of GDP at a level our economy had historically achieved only rarely and for very short periods. The expert opinion is that GDP per head must grow consistently by 5% -- equivalent to gross GDP of some 7%, allowing for population growth -- to enable the average Filipino poor to cross the poverty threshold in about ten years, even assuming that income distribution remains relatively unchanged. But consistently high GDP growth is not enough. Government also must take direct action to enable the Filipino poor to benefit from economic growth if the cross-over period of ten years is to be shortened. Government will have to devote the two years between now and middle 2003 to laying the ground for the decade of high growth beginning in 2004. During the start-up period, government must also put in place the key policies the economy will need to expand at peak level. And these strategic policies should cluster around the basic reforms to promote transparency and accountability and to level the playing field of enterprise. Meanwhile, President Arroyo must also plan for her intermediate political goal -- which is to win her own six-year term in May 2004. And the best way to ensure the President's election in her own right is for her government to install the key reforms the country needs as a result of the Estrada disaster and to prosecute Mr. Estrada and his crony co-respondents successfully.

Our Unique Strengths

Indeed, we Filipinos and our new government face severe challenges over this decade. But also, we have unique strengths upon which we, as a people, can draw. Politically, we have emerged from the recent crisis of presidential removal and succession more confident in our ability to govern ourselves. Our country is being cleansed by its constitutional ordeal. To be sure, Philippine democracy still is very far from the ideal. Not the least of its weaknesses is an historical legacy of an electoral democracy superimposed on a patrimonial society. Oligarchies are still able to use their access to the levers of political power to bend public policy to their vested interests and purposes. Like other transitional democracies, we Filipinos really have two political components. One part is made up of the urban middle class who are increasingly organized into special interest groups or sectors; the other is made up of a rural electorate still dependent upon and largely organized through patronage. But, even among our poorest and most isolated communities, political awareness is strong. As growth spreads, this should mean more and more representatives of rural interests getting into Congress-where they can help heal the cleavages in national society-cleavages between rich and poor that -- until now -- can express themselves only in insurgencies and separatist movements. Fortunately, too, we have a multitude of people's organizations that today enlivens Philippine civil society. In the Philippines, civil society is exceptionally well-developed -- thanks to a system of mass -- education and a tradition of popular participation in electoral politics dating back almost a century. These NGO's and voluntary associations articulate minority interests -- such as those of women, children, cultural communities, the peasantry, the urban poor, environmentalists, and so forth. Some among us believe these associations will eventually become the building blocks of modern democratic political parties.

What Prospective Investors Can Expect from the Philippines

Now to sum up and conclude-what can prospective investors expect from the Philippines? The problems besetting the Philippines are well-known. What has been less obvious is the strength of its economic fundamentals-foremost among them being our adaptable and talented workpeople. In the aftermath of the financial crisis, we have continued to build on these fundamentals. And now that most of the uncertainty is over, these fundamentals should begin to work for the country once again. And they include the country's being ranked "number one" in the category of "knowledge jobs" according to a year 2000 survey of 47 developing and developed countries conducted by the Connecticut-based Meta Group. This is indicated by the availability in the Philippines of qualified engineers, information-technology workers, and competent senior managers. Already we run extensive back-office operations in the Philippines -- accounting, software development, and technical support -- for some of the great service-industry multinationals. America Online, Caltex, and Accenture (previously Andersen Consulting) are among the majors that have recently set up or expanded their operations in the Philippines. America Online, in fact, is in the process of transferring its support services currently located in the United Kingdom, Australia, and Hong Kong to its Clark Special Economic Zone facility in central Luzon. The consultancy firm McKinsey & Company recently identified 11 white-collar services -- with an estimated demand worth $180 billion by 2010-that the mature economies can profitably outsource and which the Philippines is well-positioned to supply. Already Toshiba has announced that it is shifting a large portion of the engineering and manufacturing of its portable computers from the United States to the Philippines. Meanwhile, Oracle is investing 270 million pesos to expand its ongoing program to train world-class Filipino IT workers. Some 20,000 Filipino graduating students in 15 colleges and universities nationwide are enrolled in this program. Oracle supplies the software and the IT curriculum, trains teachers and issues certificates. In regard to the economy, President Arroyo's message, which she has asked me to bring to you as her special representative, is that of her government's "serious commitment to make the Philippines a better place for you to do business." Dear friends, I suggest the time has come for you to reexamine your Philippine prospects. The ten-year vision President Arroyo has enunciated should double the size of the economy, wipe out mass poverty and place the economy firmly on the path of high growth. Get in on the ground floor of a restoration of economic growth in a strategic country -- the Philippines -- at the gateway of Asia-Pacific and certain to be in the center of global economic action in this new century!

Thank you and Mabuhay (Best Wishes)!!!