Assignment 3 of 4

1. The external borrowing of developing and underdeveloped countries come from

multilateral and bilateral sources. Some analysts allege that lending institutions abuse
their creditors. In other words, the schemes are more favorable to lenders. Identify
the evidences or observations that support the allegations by the analysts? (10)

China’s debt-trap diplomacy is one example that would support the alleged abuse of the
lending institutions to their creditors. China's overseas development policy has been called debt-
trap diplomacy because once indebted economies fail to service their loans, they are said to be
pressured to support China's geostrategic interests (Garnaut, Song, & Fang, 2018). In April 2019,
the Chinese Ministry of Finance released a new Debt Sustainability Framework, which has been
described as being "virtually identical" to that of the World Bank and IMF (Morris & Plant, 2019).

Studies by economic experts in the practices of China found the patterns of China's bank
lending purposefully trap governments to gain strategic opportunities for China (Kuo & Kommenda,
2020). Some commentators maintain China is supporting repressive regimes in a neocolonialist
manner through high-interest loans, intending to coerce these countries, once they default, to align
with China on key strategic and military issues. China has been accused of requiring secret
negotiations and non-competitive pricing on projects in which bidding must be closed and
contracts must go to Chinese state-owned or state-linked companies that charge significantly
higher prices than would be charged on the open market (Beech, 2018).

Western, Indian, and African media have criticized China's secretive loan terms and high
interest rates. For example, a 2006 loan to Tonga sought to rebuild infrastructure. From 2013 to
2014, Tonga suffered a debt crisis when the Exim Bank of China, to which the loans are owed, did
not forgive them. The loans claimed 44 percent of Tonga's GDP (Fox, 2018). Western analysts have
said China's practices hide hegemonic intentions and challenges to states' sovereignty (Mendis &
Wang, 2019). China has also been accused of imposing unfair trade and financial deals when cash-
poor countries are unable to resist Beijing's money (France-Presse, 2019).

In August 2018, a bipartisan group of 16 US senators cited “the dangers of China’s debt-trap
diplomacy”, saying: “It is imperative that the US counters China’s attempts to hold other countries
financially hostage and force ransoms that further its geostrategic goals” (Chuck Grassley, 2019). US
Secretary of State Mike Pompeo said that China's debt-trap diplomacy is oiled with bribes, adding
"China shows up with bribes to senior leaders in countries, in exchange for infrastructure projects"
in an October 2018 speech (Energy Daily, 2018). S. K. Chatterji at Asia Times commented that
China's BRI-led debt-trap diplomacy is the economic aspect of China's salami slice strategy
(Chatterji, 2020).
 2. The author stated that if the Philippines does not pay its foreign and domestic debts, the
budget for the health, education, and other departments will be more sufficient. Our country
can provide the needs of its citizens for concrete roads, new hospitals, etc. As a management
student, what should our government officials do to stop or minimize the country’s
public borrowing? (15)

As a citizen of the Philippine republic, I proposed several brief solutions that can aid the
government officials to stop or minimize public borrowing in the Philippines:

a. Awareness of the people on the external debt of the country

The development strategy for external debt reduction should involve the following
principles— the national interest, which means the Filipino people must harness their vast natural
and human resources for their present needs and maintain them for future use, for which they must
protect their right to set economic priorities; poverty alleviation, which means stressing 'the
majority's right to life fit for human dignity, and working for 'the reform or transformation of unjust
economic and social structures that pamper the rich minority and burden the poor majority; and
democracy, which means real participation of the people in the political process.

All these principles are violated by external debt and adjustment policies and programs
which are made and implemented without the knowledge, participation, and consent of the
affected, especially when these entail much hardship and sacrifice on the part of the people who are
made to suffer for crises they are not responsible for.

b. Upholding the green perspective

Previous economic development models focused on economic growth, employment, equity,

and the basic needs of the people but the modern concept of development would suggest that
without considering the needs of people and the environment, the country’s development would
fail.

The poor who are most affected by environmental degradation should comprise the natural
constituency of the green movement. Among them are the tribal people affected by the logging
policy, people squatting in the uplands, and fishermen marginalized from coastal fishing grounds.
They are in the best position to manage and protect the resources from which they derive their
sustenance and livelihood.

Hence, I suggest the recognition of tribal land rights and the inclusion of tribal people in the
management of protected areas and an immediate ban on logging of all virgin forests, and the
transfer of the rights to forest resources to upland communities'. Kalaw (1990) stated that poverty
is the biggest despoiler - but to break that, we must use the resource wisely so that the poor benefit,
so that they don't become poorer and destroy the resources.
 c. People over debt

Debt reduction is essential to alleviate poverty and suffering. A useful starting point would
be for all the creditors, whether banks, governments, or multilateral institutions, to accept that
expenditure on the essential needs of the poor should come before debt-service payments. They
might consider that prompt and full loan repayment at the expense of sustainable development, and
in particular of social and infrastructural items, is counterproductive, in that it stifles productivity
and growth, and thus the existence of a prosperous and rewarding partner for the future. It would
help if they agreed to measures that would reduce the outflow of funds from the Philippines to a
level compatible with social and environmental needs the government should ensure economic and
political stability to enjoy the benefits of external debt and make the debt burden minimal.

Additionally, the government should acquire external debt largely for economic and social
reasons rather than political reasons. This would increase the productivity of the country. Another
way of reducing debt is by converting it into funds for activities furthering the development and
meeting social needs, such as the UNICEF 'Debt Relief for Child Survival' scheme and the World
Wide Fund for Nature 'Debt for Nature Swap’ (Gonzales, 1989).

d. Strengthen country’s exports

Countries opened up their markets to Philippine exports through the help of globalization,
this would result in increased foreign exchange earnings, and so a capacity to increase debt
repayments. Now, the government’s responsibility is to diversify and strengthen the nation’s export
base to increase export earnings and as well as promote industrialization to reduce import
dependency. One example of this is to hone the agriculture sector of the country by establishing
agrarian reforms that would mostly benefit the farmers or workers than the elite hacienderos or
hacienderas.

e. Debt relief

Lastly, the government should press for permanent debt relief to avert the debt overhang
problem. It would help if debt relief were not made conditional on the government pursuing
economic policies which are likely to erode even further the living standards of the poor. It would
be necessary for official debt relief to come from additional funds, not from existing budgets.
Multilateral bodies could offer more assistance, both financial and technical, with easier interest
and repayment terms.
 As a management student, I would suggest the government the following:

f. Issuing debt with bonds

Governments often issue bonds to borrow money. This enables them to avoid raising taxes
and provides money to pay expenditures, while also stimulating the economy through public
spending, theoretically generating additional tax income from prosperous businesses and
taxpayers.

g. Interest Rate Manipulation

Maintaining interest rates at low levels is another way that governments seek to stimulate
the economy, generate tax revenue, and, ultimately, reduce the national debt. Lower interest rates
make it easier for individuals and businesses to borrow money. In turn, those borrowers spend that
money on goods and services, which creates jobs and tax revenues.

h. Instituting spending cuts

Canada faced a nearly double-digit budget deficit in the 1990s. By instituting deep budget
cuts, the nation reduced its budget deficit to zero within three years and cut its public debt by one-
third within five years. Canada accomplished all this without raising taxes (Smith, 2021). I think
that the Philippines can emulate this example if the cuts on expenditures would be justifiable and if
corruption wouldn’t be involved in the process.

3. What were the factors that prevented the Philippines from achieving development or
progress in spite of its massive domestic and foreign loans since the 1970s to 1990s?
(10)

The reasons why the Philippines remains a poor country despite the country’s abundant
natural and human resources stems from the damaged culture and present toxic mentalities that
Filipinos embraced from the era of colonization. The Philippines was subject to a distinctly
extensive and chaotic experience with the imperialism of the Spanish, American, and Japanese
colonizers, these experiences led the country to experience a long history of subjugation.
Consequently, influenced several profoundly deep-rooted issues in the Philippine government,
institutions, economy, and society, namely the following:

a. Inequality (Socioeconomic factor)

The hierarchical nature of Filipino society attributes to the stark inequality. Filipino society
under Spain is divided into different socioeconomic classes, because the remnants of these social
institutions persist today, the Philippines ' aggregate wealth accumulation doesn't lift many of the
poor out of poverty. Instead, the Philippines’ economic growth overwhelmingly favors the same
elite families who have been in power since the Spanish rule. Income inequality remains a
significant barrier to the holistic development of Filipino society and quality of life, keeping the
Philippines poor (Santa Maria, 2017).

b. Corruption and incompetence (Political factor)

Because of corruption and inadequate legislation, the government does relatively little to
meaningfully reduce poverty, deal with rapid population growth and raise standards of living.
Poorly planned and implemented public goods, infrastructure, and property rights inhibit economic
growth in all sectors (Santa Maria, 2017).

c. Environmental degradation (Environmental factor)

Many rural Filipinos depend on the country’s extensive natural resources, particularly for
the fishing and agricultural industries. However, environmental degradation brought about by
climate change and human irresponsibility negatively affects the lives of rural Filipinos. Also,
frequent natural disasters disproportionately affect poor Filipinos and worsen their already
impoverished situation (Santa Maria, 2017).

Although the Philippines’ unique cultural and historical background has made it difficult for
the country to counter poverty, good governance and meaningful support may allow the Philippines
to turn these liabilities into assets.

4. The author found that the private counterparts of the GOCCs were more efficient. It
means that a privately-owned courier company is more profitable than a government-
owned and controlled courier entity. What do you think are the factors behind it? (15)

Government-owned or -controlled corporations (GOCCs), also considered as SOE (state-

owned enterprise), are typically sizeable firms in a dominant sector in an economy. State
ownership is geared towards strategic sectors — either sector that is crucial for economic
development or that controls the natural resources of a country (Shleifer, 1998). There are several
key differences between state and private ownership in terms of objectives, financing, liquidation,
management, and compensation. The main objective of private ownership is to maximize profits for
the capitalists who own the corporation. Meanwhile, the ultimate goal for SOEs is to balance the
interests of the stakeholders, including protecting jobs and preventing social unrest. Lastly, the
government can act as a backup that provides subsidies to the SOEs when their sources of revenue
fall short of covering costs (Grout & Stevens, 2003). Compared to private corporations, SOEs have
several advantages including state subsidies, exclusive government contracts, low-interest loans,
tax breaks, and low-priced raw materials (Li, Lin, & Selover, 2014). However, there are also several
disadvantages associated with state ownership. The following disadvantages are some of the
factors why SOEs are less efficient and less profitable compared to the private sectors:
 a. Soft-Budget Constraint

According to the soft-budget constraint hypothesis, the state extends various forms of
support to SOEs. As a result, this situation distorts the incentive structure because an SOE does not
have to desperately rely upon generating profit to guarantee its long-term existence or have to
worry about competition. Because a competitive environment incentivizes management to
constantly improve their performance and to innovate, an SOE is expected to deliver inferior
performance compared to a private corporation (Goldeng, Grunfeld, & Benito, 2008).

If managers of private corporations do not allocate their resources efficiently, the market
will conduct a course of actions including replacing the managers, retracting the capital, taking over
the company, or shutting down the company. However, the decision on what to do with SOEs in a
similar situation does not fall on the market, but it is decided by the government (Stiglitz, 1988).
That is why the soft-budget constraint situation also causes the difference in skill-sets between the
managers of SOEs and private corporations. While the latter needs to be highly capable of
generating profit for the company, the former needs to be able to deal with the government or
politicians (Barberis, Boycko, Shleifer, & Tsukanova, 1996). Eventually, the soft budget constraint
results in several moral hazard problems. In many cases, it impacts both the psychology and
behavior of the SOE employees to be less aggressive in controlling for costs, to be less innovative,
and to be less efficient as they don’t have to try as hard as the employees of private corporations to
ensure the survival of the firm (Lin & Li, 2008).

b. Lack of Autonomy due to Policy Burdens

Another reason for less-than-optimal performance by the SOEs is because they are entitled
to less autonomy as they have to help the government achieve its specific goals. According to
Groves, Hong, McMillan, and Naughton (1994), when a firm had more autonomy in labor decisions,
profit attainment, and output decisions, it would experience higher efficiency compared to firms
that had less autonomy in making these crucial decisions. As SOEs are owned by the government,
they might have to compromise their profit-maximizing goal to prioritize other government goals.
This is because, through SOEs, government plays a conflicting role as a regulator and shareholder.
As a regulator, the government has a social contract with the public, hence has to serve their best
interests in terms of maintaining the social order. As a shareholder, however, the government has
to increase the value of its investment (Chen, 2016). Hence, they are faced with multiple and
conflicting objectives. Moreover, given that these other non-financial objectives make it difficult to
measure the performance of an SOE, the incentives of SOE management are not as closely knit to
the performance of the company as to those of private corporations (Putnins, 2015).
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