The impact of macroeconomic adjustments on living
standard’ in the Philippines
Manuel F. Montes
The most recent balance-of-payments crisis in the
Philippines, which began in August 1983, has plunged
the country into a prolonged period of falling incomes
and spending cutbacks. In 1984 the country experienced
its first decline in gross national product (GNP) of 5.5 per
cent. This was followed by another 3.8 per cent decline in
1985. Because population is growing annually by at least
2.4 per cent, this has meant the per capita income has
fallen by at least 15 per cent since 1983. The best that the
economy can manage in 1986 is a growth rate of 1.5 per
cent, although a year of zero growth is more likely.
Unless it succeeds in lowering the first priority that
has been assigned to the servicing of its foreign debt,
the country can grow at best by 4 per cent per year for
the rest of the decade. This would imply that for the
decade of the 1980s the country would have suffered a
per capita decline of at least 10 per cent. Such a decline
can only have disastrous consequences for the country’s
low-income groups, who must eke out a living within
an economy whose income inequality, as measured by
the Gini coefficient (an index which ranges from 0 to
1 as inequality increases), has been estimated to range
between 0.5 and 0.6.
The assignment of first priority to debt servicing has
meant that the adjustment strategy has been directed
toward rapid improvement in the current account. For
the Marcos government, overthrown in February 1986,
such an adjustment strategy implied implementing and
adhering closely to a monetarist adjustment programme
inspired by the International Monetary Fund (IMP).
In the case of the Philippines, such a programme was
effective in the sense that it permitted the country
eventually to achieve a current account surplus in 1985,
which has meant that the country has serviced its foreign
debt. It has also imposed hardships on those who could
least afford to bear them. Such hardships can only be
interpreted to have played a large part in the formation
of broad resistance to the Marcos regime.
Manuel F. Montes
School of Economics, University of the Philippines, Quezon
City, Philippines
Food and Nutrition Bulletin, vol. 9, no. 1 © 1987, The United Nations University.
The new Aquino government inherited an economy
in shambles. It is even more important at this time to
understand the nature of the crisis and the nature of the
adjustment policies that were previously inflicted on
the economy. This paper attempts to clarify these issues.
On the basis of the limited data available, I also discuss
the effects of the crisis and the adjustment programmes
on the population. At this point, these effects on low-
income groups are known mostly in a qualitative sense,
and I make the plea that future research effort should be
directed at identifying the channels of these effects and
quantifying their size. This should provide the means by
which adjustment programmes can be better designed
to reduce their harmful impact on employment, food
consumption, and nutritional status.
NATURE AND MAGNITUDE OF THE CRISIS
In the past decade the Philippines had to weather a
number of adverse exogenous developments: the oil
price increases of 1973-1974 and 1979-1980, sharp
deterioration in the terms of trade (see table 1), the
international recession in 1974-1975 and 1980-1982,
and the associated drop in the demand for Philippine
exports. These developments led to persistent current-
account deficits, which were financed through foreign
borrowings.
The response to external shocks through foreign
borrowings brought unpleasant consequences as the
country’s external debt grew at an annual rate of 25 per
cent over the period 1970-1981. The Philippines’ own
cumulative current-account deficit for the period 1970-
1982 was US$12.9 billion, and by 1983 the total external
debt reached US$24.6 billion. The foreign financing of
the deficit was encouraged by low interest-rate charges
during the period 1974-1978. When the international
credit market tightened in 1979, however, the country
continued to borrow at higher real rates and increasingly
shorter terms. In addition, amortization of previous debt
became increasingly burdensome as interest rates rose
1
2 The impact of macroeconomic adjustments

and loans fell due. By 1982, net interest expense came had borrowed from government financial institutions.
close to US$2 billion and was responsible for 46 per cent Non-financial public corporations themselves were
of the current-account deficit. recipients of equity contributions because of the large
While it appears that external factors were responsible deficits in their operations.
for the economic crisis, a closer examination shows that TABLE 1. Terms of trade (1972 = 100)
domestic policy variables and the longstanding structural
problems of the economy were the main causes of the   Price index Net terms of
country’s inability to service its foreign obligations and Imports Exports trade
the accompanying disruption in trade transactions [2]. 1972 100.0 100.0 100.0
Apparently, the strategy was to cushion the impact 1973 128.8 145.9 113.3
of external developments through foreign borrowings
1974 211.6 242.3 114.5
{instead of immediately carrying out an adjustment)
without having to sacrifice income growth targets. 1975 219.6 192.8 87.8
During the past decade, the government engaged in a 1976 217.2 168.8 77.7
programme of infrastructure projects and investments 1977 241.1 171.3 71.0
that had long payback periods. A significant amount
1978 245.8 192.1 78.2
of government capital expenditures contributed
insignificantly to the supply of goods and services. 1979 289.4 236.1 81.6
While they created demand, especially as they involved 1980 358.7 246.1 68.6
construction, they produced little output. This led to 1981 308.6 240.6 60.4
inflationary pressures quite apart from those contributed 1982 340.5 199.9 58.7
by external shocks. Source: ref.1.
To sustain this aggressive pattern of spending, the
The proliferation of new government corporations
government adopted generally expansionist fiscal
and various bureaucracies as well as state banks reflected
and monetary policies. The heavy spending increased
the increasing role of the government in the market for
government deficits that could not be covered by
products and financial assets. The extent of government
domestic savings. The gap between investment and
activity in financial markets can be readily discerned as
savings widened from P1.9 billion annually in 1971-1975
one notes that four government financial institutions
(2.4 per cent of GNP) to P9.1 billion annually in 1976-
(the Philippine National Bank, the Development Bank of
1980 (4.8 per cent of GNP). The gap had to be made up
the Philippines, the Land Bank of the Philippines, and
by foreign borrowings, which rose from US$2.6 billion to
the Philippine Veterans Bank) account for close to half
US$10.5 billion between 1975 and 1980. The allocation
of the total assets of the commercial banking system.
of government resources to low productivity uses led to a
The government’s increased economic role has not been
dismal performance of the economy as compared to that
accompanied by any social levelling, nor has it improved
of its Asian neighbours. The process of growth through
the lot of the poorest in society.
government deficits can be sustained without huge
increases in foreign indebtedness only if the expenditures As was mentioned earlier, the Philippines suffered
are validated by increasing productivity per worker. from major exogenous shocks emanating from a volatile
Higher savings made possible by higher productivity international economic environment. While external
could then offset the effects of the budget deficit on the difficulties were a necessary condition for the crisis,
balance of payments. The inefficiency of the investment the continuous weakening of the economy through the
strategy took a turn for the worse when, in 1981-1983, years can be attributed to the unproductive investment
government equity investments became the single strategy described above. Although other developing
most important capital outlay, exceeding the share of countries faced the same external shocks, they did
infrastructure. This occurred when the government was not encounter the difficulties that the Philippines is
constrained to bail out near-bankrupt private firms that experiencing at present.
Manuel F. Montes 3

TABLE 2. GNP and GNP per capita, 1980-1984 (at constant prices; in millions US$; pop. in millions)

  GNP Population GNP per capita Growth rate over preceding year(%)
GNP Population GNP per capita
1980 92,597 48.30 1,917 - - -
1981 95,722 49.50 1,934 3.37 2.48 0.89
1982 97,539 50.80 1,920 1.90 2.63 -0.73
1983 98,767 52.10 1,896 1.26 2.56 1.25
1984 93,345 53.35 1,750 -5.49 2.40 -7.7
   Source National Economic and Development Authority 131.

The crisis was long in the making. It was apparent that
there was a downward drift in the country’s economic
performance. In 1981, real GNP grew by 3.7 per cent. In
the next two years, GNP growth averaged less than 2 per
cent (table 2) [3].
At this point, any major exogenous disturbance was
bound to provoke a crisis. The assassination of Senator
Aquino in August 1983 did just that. Immediately after
the assassination, foreign financing halted abruptly.
Without replenishment from short-term borrowings,
international reserves fell from US$2.4 billion to US$0.7
billion in two months. The situation was exacerbated
by the flight of capital, as residents as well as foreigners
speculated on future political conditions.
In October 1983 the peso was devalued from P11 to
P14 to the dollar. The devaluation triggered inflationary
expectations that further raised prices and encouraged
hoarding and further speculation. In October 1984 the
inflation rate reached a peak of 64 per cent. Reserve
requirements were raised to reduce money-supply
growth. Budget cuts for the succeeding years were
also announced. Foreign-exchange cut off the flow of
imported material inputs to many industries. This, in
turn, caused numerous firms to cut back, lay off workers,
or simply close shop.
data available, only intuitive assessments of the situation
can be made regarding the relationship between trends
of social indicators and the macroeconomic events. It
must also be pointed out that the Philippines managed
to postpone adjustment in the 1970s. Nevertheless, even
the long-term trends did not exhibit a favourable pattern
before the 1983 crisis.
Several unfavourable trends affecting living conditions
in the Philippines can be observed over the past few years.
Real wages for skilled and unskilled labourers as well as
in the agricultural sector were on a generally declining
trend during the period 1970-1982 (tables 3 and 4). A
legislated minimum wage (which was in fact higher than
the reported wage) in conjunction with inflation partly
explains this trend. Real wages increased only for a short
while during 1975-1978 because of relatively low inflation
and high investment growth rates. Deterioration of the
economic environment, slack labour demand, and the
surge in inflation in the succeeding years led to erosion
of real wages.
TABLE 3. Index of average daily basic wage rates of labourers
in industrial establishments in Metro Manila. 1970-1980
(1972 = 100)
  Nominal wages Real wages

Simultaneously with these events, the Philippines Skilled Unskilled Skilled Unskilled
began negotiations with the IMF and its private creditor 1970 90.6 88.4 114.4 111.6
banks. In the course of the negotiations the country 1971 95.3 94.4 105.1 104.1
religiously fulfilled its prior action commitments to 1972 100.0 100.0 100.0 100.0
the IMF, which included a reduction of reserve money
1973 105.3 102.6 92.4 90.0
in the first quarter of 1984. By the time an agreement
was concluded in December 1984, the IMF could 1974 115.1 110.8 75.6 72.8
state that the country had made substantial progress 1975 119.7 120.1 72.7 72.9
toward adjustment as that agency conceives the 1976 124.4 126.2 71.2 72.3
meaning of “adjustment.’’
1977 137.5 132.9 72.9 70.4
1978 154.4 138.4 76.1 68.3
CONSEQUENCES OF THE CRISIS ON
1979 170.1 145.8 70.8 60.7
LOW-INCOME GROUPS
1980 180.9 151.5 63.7 53.4
The effect of the crisis on the social and material welfare Source: ref 1.
of the people is difficult to document. From the limited
4 The impact of macroeconomic adjustments

TABLE 4. Daily wage rates of labourers in agricultural operations, 1970-1982

Daily wage rates (pesos per day)  

  Rice Corn Sugar cane Coconut Consumer price
Nominal Real Nominal Real Nominal Real Nominal Real index outside
Manila (1972 =
100)
1970 3.44 4.35 3.05 3.36 3.18 4.03 3.38 4.28 79.0
1971 3.85 4.24 3.44 3.78 3.32 3.65 4.21 4.63 90.9
1972 4.36 4.35 3.76 3.76 3.67 3.67 4.41 4.41 100.0
1973 4.46 3.91 4.15 3.64 5.12 4.49 4.73 4.15 114.0
1974 5.56 3.65 5.56 3.65 5.88 3.86 6.36 4.18 152.2
1975 6.59 4.00 6.41 3.89 7.78 4.72 7.33 4.45 164.6
1976 8.97 5.13 8.77 5.02 7.28 4.16 8.73 4.99 174.8
1977 9.86 5.23 9.55 5.06 10.96 5.81 9.22 4.89 188.6
1978 10.42 5.14 9.76 4.81 9.99 4.92 10.18 5.02 202.9
1979 10.71 4.44 10.38 4.31 11.00 4.56 10.62 4.40 241.1
1980 10.60 3.72 10.66 3.74 10.97 3.85 10.71 3.76 284.9
1981 11.91 3.69 10.80 3.35 11.88 3.68 13.45 4.17 322.5
1982 13.07 3.68 11.11 3.13 12.76 3.59 15.32 4.32 355.0
Source: Bureau of Agricultural Economics.

For the period 1971-1982, the labour force grew at an
average annual rate of 3.6 per cent. This was due largely
to the rapid growth of the working-age population and
increased participation of females in the labour force.
These trends placed downward pressure on real wages
(on top of the inflation rate) and contributed to the
growing levels of underemployment.
As in other developing countries, the unemployment
rate is a poor indicator of the population’s well-being.
In fact, during the quarter immediately after the then
emerging crisis {fourth quarter of 1983), the lowest
unemployment rate of 4.1 per cent was recorded. This
perhaps indicates the need for relatively more people to
work and to help families to cope with the crisis. As can
be seen from table 5, no visible trend could be discerned
from the movements of the unemployment rate. The lack
of employment opportunities is better manifested by
the lack of full-time work, when, in fact, persons would
like to do more work or when those with full-time work
want more work to augment their income. In the same
table, the highest underemployment rate of 30.5 per
cent was experienced during the fourth quarter of 1983,
the quarter immediately after the Aquino assassination.
The data also show the increase in the percentage of the
visibly and invisibly underemployed through the years.
The trend in income inequality is also disconcerting.
Data on quintile shares for 1971 and 1980-1983 (table
6) show that the income share of the top 20 per cent
increased from 53 per cent in 1971 to 59 per cent in the
third quarter of 1983. On the other hand, the shares of
the bottom four quintiles declined. Positive economic
growth rates in between the periods did not in any way
help to reduce this degree of income inequality. In 1984,
when the economy experienced a high inflation rate and
a negative growth rate, it can probably be said that, at
best, the situation did not change.
Various studies by international organizations,
individual researchers, and government agencies using
different nutritional norms have come up with different
poverty lines. All studies are in agreement, however, as
to the high frequency of poverty in the Philippines. The
prevalence of poverty and problems of malnutrition are
inextricably intertwined. The latter can be attributed to
food demand and supply conditions. Despite various
government programmes (e.g., Masagana 99) and
extensive research on high-yielding crop varieties, the
Philippines has yet to achieve self-sufficiency in food
supply. Modest growth in agricultural production in the
past decade failed to keep up with the rapid population
growth. Intermittent fluctuations in supply due to weather
disturbances led to unwanted movements in food prices
and encouraged hoarding. Stabilization of food prices
through imports and stockpiling were the measures used
to protect low-income consumers at the expense of food
Manuel F. Montes 5

producers who receive lower incomes. The objective of incentives for agricultural production, which, in turns,
keeping food prices down is achieved with the help of an reduces demand for unskilled labour.
overvalued exchange rate; however, overvaluation lowers
TABLE 5. Population, labour force, employment, unemployment, and underemployment, 1971-1983

  Popu Labour Employed Unem Underemployed (‘000) Labour Unemploy Underemployment as

lation force (‘000) ployed force/ ment % of labour force
15 yrs. (‘000) (‘000) population as % of
old Visiblea Invisibleb Total ratio (%) labour Visiblea Invisibleb Total
and force
over
(‘000)
1971c 25,811 12,911 12,246 666 807 1,055 1,862 50.0 5.2 6.3 8.2 14.4
1976 c
31,376 16,244 15,427 818 829 805 1,634 51.8 5.0 5.1 5.0 10.1
1976 (3rd 24,837 15,018 14,238 780 2,178 1,450 3,628 60.5 5.2 14.5 9.7 24.2
quarter)
1977 25,695 15,328 14,547 781 1,588 1,309 2,897 59.7 5.1 10.4 8.5 18.9
(average)
1978 26,688 16,502 15,652 850 1,236 1,088 2,324 61.8 5.2 7.5 6.6 14.1
(average)
1979 27,918 17,536 16,802 734 NA NA NA 62.8 4.2 NA NA NA
(average)
1980 (4th 28,929 18,543 17,746 797 1,928 1,947 3,875 64.1 4.3 10.4 10.5 20.9
quarter)
1981 (4th 30,023 19,005 18,017 988 2,827 2,353 5,180 63.3 5.2 14.9 12.4 27.3
quarter)
1982 (4th 30,978 19,698 18,614 1,084 2,813 2,632 5,445 63.6 5.5 14.3 13.4 27.7
quarter)
1983 (4th 31,907 20,521 19,671 850 3,405 2,854 6,259 64.3 4.1 16.6 13.9 30.5
quarter)
Source of basic data National Census and Statistics Office [4].
a.  Working less than 40 hours per week (60 days per quarter) and wanting additional work.
b.  Working 40 hours per week (60 days per quarters or more and wanting additional work.
c.  Data for 1971 and 1976 are for population 10 years old and over.

TABLE 6. Distribution of income among families by On the demand side, there is no doubt that income
quintiles, 1971-1983 (percentages of total income) disparities lead to differing food expenditure patterns.
World Bank 1983 data on household expenditures in
  Family income ranking  
Metro Manila, with the households classified according
Bottom Bottom Bottom Bottom Top to their per capita expenditure (table 7), reveal high
20% 40% 60% 80% 20% percentages spent on food in the lower per capita
1971 3.7 12.0 25.6 47.1 52.9 expenditure classes. In addition, the average household
size decreases, the higher the expenditure class. It is clear
1980, 3rd 2.9 9.9 22.0 42.0 58.0
quarter that the poor, with larger household size, spend a greater
proportion of their money for food than the non-poor.
1981, 3rd 2.8 9.9 21.2 40.8 59.2
quarter Malnutrition can be attributed to the unequal
distribution of nutrients across groups in society as well
1982, 3rd 3.0 9.4 20.9 40.8 59.2
quarter as within the household unit [5].
1983, 3rd 3.4 9.8 21.3 41.2 58.8 Table 8 shows the percentage adequacy of energy and
quarter protein intake for the Philippines as a whole as 88.6 and
Source: ref 4. 102.9 per cent respectively. These figures taken alone are
misleading, however. The same table reveals the variation
Computed by straightforward interpolation of in nutrient intakes according to income groups, rural or
cumulative family income distributions. urban residence, and section of the country. Intake levels
6 The impact of macroeconomic adjustments

and therefore the adequacy percentages for all nutrients Florencio and Aligaen [6] show that household heads
are high for higher-income groups. Furthermore, the had the highest diet rating in both rural and urban
nutritional status in urban areas is slightly better than in areas. Fathers and male off spring had more nutritionally
the rural areas. adequate diets than female household members.
Intrafamilial nutrient distribution data from a study Preschoolers had the best nutrient intake among
of 100 households in the Metro Manila area in 1980 by offspring, while adolescents had the poorest.
TABLE 7. Total expenditures and expenditures for food by households classified by expenditure per capita, Metro Manila

Monthly Number of Average Average total Average Food as

expenditure householdsa household household household percentage
per capita size expenditure expenditure of total
(pesos) for food expenditure

Under 50 - - - - -
50-99 53 8.8 705.40 477.58 67.7
100-149 189 8.0 992.74 642.15 64.7
150-199 242 7.2 1,231.19 773.41 62.8
200-249 229 6.6 1,449.85 857.25 59.1
250-299 193 6.0 1,602.45 895.45 55.9
300-349 159 5.9 1,895.08 1,031.43 54 4
350-399 97 6.0 2,230.97 1,145.36 51.3
400-499 125 5.8 2,495.25 1,233.28 49.4
500-599 95 5.4 2,910.16 1,345.14 46.2
600-699 66 5.6 3,568.00 1,579.17 44.2
700-799 45 5.6 4,179.73 1,659.18 39.7
800-899 37 6.0 5,050.89 1,919.46 38.0
900 - 999 10 5.1 4,791.70 1,515.00 31.6
1,000-1,999 51 5.4 7,189.45 2,322.94 32.3
2,000-2,999 5 4.8 11,712.80 2,834.00 24.2
3,000 and over 6 3.8 19,677.50 2,916.67 14.8
  Source: World Bank, 1983. a. Table is based on 1,602 households for which the data were available, out of a total sample of 1,688
households.

TABLE 8. Mean nutrient intake per capita per day in the Philippines, by income group, urban or rural residence, and island
group of residence, 1978

  Nutrient
Energya Proteina Iron Vitamin A
Intake AR b
% ade Intake RDAC % ade Intake RDA c
% Intake RCAc %
(kcal) (kcal) quacy (g) (g) quacy (mg) (mg) adequacy (IU) (IU) ade-
quacy
National 1,804 2,036 88.6 53.0 51.5 102.9 11.0 12.0 91.7 2,481 3,618 68.6
average
Annual per capita income (pesos)
less then 1,590 2,036 78.0 43.3 51.5 84.0 9.2 12.0 77.0 1,846 3,618 51.0
250
250-499 1,700 2,036 83.0 49.1 51.5 95.0 10.8 12.0 90.0 2,060 3,618 57.0
500-999 1,787 2,036 88.0 52.0 51.5 101.0 10.8 12.0 90.0 2,295 3,618 63.0
Manuel F. Montes 7

1,000- 1,943 2,036 95.0 57.2 51.5 111.0 11.8 12.0 98.0 2,861 3,618 79.0
1,499
1,500- 1,996 2,036 98.0 62.1 51.5 121.0 12.0 12.0 100.0 3,572 3,618 99.0
1,999
2,000 and 2,218 2,036 109.0 72.7 51.5 141.0 13.7 12.0 114.0 3,995 3,618 110.0
over
Residence
Urban 1,872 2,052 91.2 58.2 52.3 111.3 11.4 12.4 91.9 2,922 3,663 79.8
Rural 1,769 2,029 87.2 50.3 51.0 98.6 10.8 11.8 91.5 2,253 3,595 62.7
Island group
Luzon 1,861 2,041 91.2 54.2 51.6 105.0 11.6 12.1 95.9 2,597 3,628 71.6
Visayas 1,712 2,024 84.6 51.4 51.1 100.6 10.2 11.9 85.7 2,507 3,597 69.7
Mindanao 1,733 2,040 85.0 50.7 51.5 98.4 10.3 11.9 86.6 1,905 3,616 52.7
Source: FNRI First Nationwide Nutrition Survey, Philippines, 1978.
a.  Cutoff points currently in use: for energy, 80 per cent adequacy: for protein 70 per cent adequacy.
b.  Average requirement.
c.  Recommended daily allowance.

Given the limited data, the nutritionally at-risk groups
could hardly be identified. What is clear, though is that
the nutritional status of low-income groups should be
examined and intra-household nutrient distribution be
given due attention.
MACROECONOMIC ADJUSTMENT POLICIES
The Philippines has had 18 stand-by credit arrangements
with the IMF since 1962. The eighth arrangement, in 1970,
was spawned by the third balance-of-payments (BOP)
crisis, which erupted that year. The poor performance
of the foreign trade sector and the monetary and fiscal
policies prior to 1970 led to growing current-account
deficits. The 1969 presidential elections accelerated
government spending and delivered the final blow as
the money supply increased by 20 per cent. In line with
the conditions of the eighth arrangement, the peso was
devalued by 39 per cent, from P3.90 to P6.40 per US
dollar, in February 1970 and the reserve requirement was
raised 2 per cent by May 1970. The stringent conditions
that accompanied the arrangement resulted in the
reduction of the current-account deficit by 75 per cent, a
BOP surplus, and a 4 per cent increase in GNP [7].
The modest success of the eighth arrangement led
to the ninth, tenth, and eleventh programmes, for the
period 19711973, when total external debt grew at an
average annual rate of 7 per cent. Credit grew modestly
in 1971 and 1972, at 11.2 per cent and 11.6 per cent
respectively. In 1973 the money supply target was missed
by a wide margin as the government failed to stop the
rapid expansion of liquidity due to the commodity price
boom.
Surprisingly, the twelfth stand-by programme, in
1974, called for a 42.5 per cent increase in money supply,
one-third higher than the previous year’s growth. In
this programme, BOP imbalances due to the oil shock
were to be met by increases in the level of medium- and
long-term borrowings and not through devaluation of
the overvalued peso. The programme targets were for
the most part not met. The inflation rate reached 33 per
cent and the trade deficit widened. It was in this period
that short-term capital inflows began to circumvent the
debt ceiling that existed only for medium- and long-
term debt. The weak performance of the Philippine
economy and the pattern of light conditionality that
began in the ninth arrangement continued under the
thirteenth arrangement in 1975. By 1976 the BOP was in
a precarious situation.
The chronic balance-of-payments difficulties forced
the government to request an extended fund facility
(EFF) from the IMF. The EFF was a medium-term
arrangement (1976-1978) under which the IMF not
only set fiscal and monetary targets but also outlined
performance criteria for structural adjustment as part of
the conditions for a loan. The EFF structural adjustment
programme had three important subprogrammes: tax
reform to promote increased domestic savings so as
to lessen dependence on capital inflows, a large public
investment programme to improve infrastructure and
to reduce energy dependence, and major tariff reform to
improve resource allocation.
The ambitious targets in all the three sub-programmes
of reform and investment were missed by a wide margin.
The failure of the structural adjustment programme
was partly due to the difficulties experienced by the
8
government in implementing the agreed-upon changes
in the incentive structure, that is, tariff reform. In the
public investment programme, the projects undertaken
had long gestation periods and required large amounts of
resources. The failure of tax reform had the government
turning to short-term loans (which up to this period were
unmonitored) to finance public investments. By 1978 the
Philippines exceeded the debt limit by 33 per cent.
The sixteenth arrangement, in 1980-1981, which
was engendered by the second oil shock and the
international recession, called for monetary restraint,
limited domestic credits to the public sector, set a ceiling
on the international reserve level of the banking system,
and imposed a limit on foreign borrowings with 1 to 12
years’ maturity. Up to this time, the IMF had not realized
the flaw in the debt limit. As in previous agreements, all
performance criteria in this programme were not met.
In this period, the responsibility of managing structural
adjustment programmes was shifted to the World Bank,
while the IMF concentrated on short-term stabilization.
The first structural adjustment loan from the World
Bank, in 1981, contained measures to bring about trade
liberalization and industrial reform.
Several difficulties were encountered, however,
when tariff reforms were delayed when the government
attempted to increase revenues through additional
import duties.
The country did not have an arrangement with the
IMF in 1982. In that year, the budget deficit increased
rapidly because of the government’s attempt to bail out
failing corporations. For the same reason, a substantial
portion of the budget went to government corporations
as equity contributions. Given a weak revenue system
and the enormous increase in government expenditures,
the government had to resort to foreign borrowings to
finance the deficit, half of which were short-term loans.
By 1983 it became apparent that the Philippine
economy was near the edge of a cliff. It was clear that
the country was borrowing at unsustainable levels.
The seventeenth stand-by programme, which became
effective in February 1983, aimed at reducing the BOP
deficit by one-half from that of the previous year. This
was to be achieved by limiting the growth of net domestic
assets of the monetary sector, slowing down government
loans to public corporations, and setting a ceiling on
foreign borrowings, including a subceiling on short-
term non-monetary debt. By the middle of the year,
the BOP deficit and money supply had surpassed their
targeted limits. Reluctantly, the government allowed the
The impact of macroeconomic adjustments
peso to adjust a little bit to relax the BOP pressure and
curtail money growth. The IMF deemed this action too
late and too little, and for the first time it terminated a
programme with the Philippines. Two months after the
beginning of the fourth crisis, in August 1983, the peso
was devalued by 21.4 per cent.
Negotiations for the eighteenth stand-by arrangement
started upon the onset of the fourth crisis during the last
quarter of 1983. An arrangement between the Philippines
and the IMF was not reached until December 1984. In the
interim, the Philippines had to keep a ceiling on money
growth and had to devalue successively to lighten the
pressure on the economy. The protracted negotiations
indicated that the IMF had reverted to its strict monetarist
prescriptions in its dealings with the Philippines.
CONSEQUENCES OF ADJUSTMENT POLICIES FOR
THE POOR
The overshooting of money-supply targets set by the
IMF before the 1983 crisis was due largely to the budget
deficits incurred by the government. During the period
19701980, the money supply was permitted to grow
at 17 per cent annually, compared to 4.4 per cent and
10 per cent in the 1950s and 1960s respectively. The
departure from conservative monetary and fiscal policies
of the earlier periods contributed to high inflation rates
and partly explains the declining trend in real wages.
Between 1970 and 1980 the nominal exchange rate fell
by less than 2 per cent. Thus, nominal adjustment of the
peso value does not fully compensate for the fact that
domestic inflation was higher than in the rest of the
world during the 1970s.
During the second half of the 1960s the average annual
inflation rate based on the consumer price index was 6
per cent, while in the first half of the 1970s it was 16 per
cent. With the oil shock in 1979 and 1980, the inflation
rate was 17.5 and 18.2 per cent respectively. Thereafter it
declined, reaching 10 per cent in 1983.
The 21 per cent devaluation of the peso in the last
quarter of 1983 triggered a 26.1 per cent jump in the
general price level. In 1984 the inflation rate averaged
50.3 per cent. The sustained tight money policy reduced
the average inflation rate to 25.0 per cent by November
1985. To mop up excess liquidity, the Central Bank
engaged in open market operations that drove interest
rates to excessively high levels. This and the limited flow
of imported inputs generated supply shocks that forced
firms to lay off workers. By December 1985 the inflation
rate had fallen to 5.7 per cent.
Manuel F. Montes
TABLE 9. Total number of workers terminated for
economic reasons (permanent and temporary shutdown/
retrenchment), 1983 to mid-1985
  1983 1984
1st quarter 16,196 30,372
2nd quarter 8,467 22,844
3rd quarter 9,113 22,109
4th quarter 41,652 17,119
Total 75,428 92,167 a
Source: Labour Statistics Service, Ministry of Labour and
Employment.
a.  Total does not add up because of multiple reports.
Table 9 shows the number of workers terminated
quarterly from 1983 through the first half of 1985. After
the October 1983 devaluation, the number of laid-off
workers increased rapidly, so that the fourth-quarter
total accounted for more than half of the 1983 total.
Successive devaluations and the stringent monetary
policy in 1984 also brought abnormally high levels of
layoffs. This continued up to the first quarter of 1985.
The adjustment policies that were designed to place
the economy in a reasonable growth path had not in
any way alleviated the status of the poor. While the
Philippines indeed showed positive real growth rates
in the past decade, the distribution of output on the
average changed negligibly. The agriculture sector, which
provided more than 50 per cent of all employment
throughout the 1970s, accounts for roughly one-fourth
of gross domestic product on the average. A World Bank
report on poverty trends determined that poverty rates
in rural areas are higher than in urban areas. In the
former, poverty in 1983 was 43 per cent, while it was 19
per cent in the latter.
The monopolistic structures that emerged during the
decade were encouraged by a strong industrialization
bias of previous development strategies and were simply
reinforced by the adjustment policies implemented.
Because of the emphasis on import-dependent
industrialization, traditional agriculture remained
relatively stagnant, although the non-agricultural sectors
were heavily dependent on it for foreign exchange. The
agriculture sector in recent years underwent a structural
evolution in which a dichotomy arose because of the
monopolization of the agricultural export industries
by the government. In this set-up, an export subsector
existed side by side with a lagging food sector.
The instability of the Philippine food sector led the
government to intervene in the food market through
the National Food Authority whenever it deemed it
necessary. Where there is a chronic deficiency in food
supply that leads to food-price increases, the Authority
attempts to stabilize prices through food imports.
9
In the past decade, the government’s resources were
largely devoted to investment projects. The government
priorities through the years can be discerned from the
sectoral allocation of government expenditures. The
1985
share of social services declined substantially, from 44.2
22,598 per cent in 1965 to 34.9 per cent in 1970. Thereafter, it
13,200 accounted for less than 25 per cent of the total budget.
  On the other hand, the allocation to economic services
  (infrastructure and non-infrastructure expenditures)
was increasing. In 1982 its share was 42.4 per cent.
One-third of total government expenditures in 1982
went to general public services.
Real personal consumption expenditures (PCE)
increased in the 1970s and the first half of the 1980s. On
a per capita basis, however, a declining trend could be
discerned in the 1980s (table 10). In the second half of
1983, when the crisis began, real PCE per capita declined
by 0.15 per cent from its level for the same period in the
previous year. The decline became more pronounced in
the first half of 1984, and in the following six months
real PCE per capita decreased by 1.36 per cent from the
previous year’s level.
Adjustment policies are designed to provide long-
term solutions to macroeconomic problems posed
by a BOP crisis. The distributional impact, if it is not
altogether assumed away in the process of formulating
policies, is seldom given consideration.
The short-run effects of these policies in the form of
high domestic inflation rates and decreasing per capita
real incomes make worse an income distribution that is
already skewed because of the structural defects of the
economy. Clearly, if adjustment policies are designed
to minimize the effects on the domestic economy,
the burden of “adjustment” will be more equitably
distributed. An alternative, given that adjustment
policies are formulated in a certain manner, is to design
auxiliary policies consistent with them that will meet the
needs of the poor.
A survey carried out by the National Nutrition
Council provides some preliminary but nevertheless
worrisome indications of the effect of the crisis on
preschool children. The survey measured weight-for-
height status for all regions in the Philippines in 1984
and 1985. For the whole country, the percentage of
preschoolers falling below 85 per cent of the weight-
for-height standard increased from 13.3 to 14.3. An
examination of the reginal results shows that the western
Visayas, principally Negros and lloilo Province, which
grow sugar for export, exhibited an increase from 13.8
to 20.1 per cent in the proportion of preschoolers falling
below 85 per cent of the standard weight for height. Even
the most urbanized region, metropolitan Manila, had an
increase from 8.8 to 14.4 per cent.
10
TABLE 10. Real personal consumption expenditures per capita, 1980-1984 (semestral)
  1980 1981 1982 1983
First six months 572 585 586 590
Second six months 655 660 665 664
Source: NEDA, Natronal Income Accounts Staff.
The differences in the degree of deterioration and
the fact that some regions exhibited improvements
between 1984 and 1985 is evidence that these changes
can be attributed to a large degree to the difficult external
adjustments. The depressed world prices of sugar caused
visible starvation in Negros, while metropolitan Manila
has seen many of its import dependent manufacturing
operations shut down. In the kind of adjustment that
has so far been carried out, sugar and factory workers
have found themselves with greatly diminished means of
providing for their livelihood.
SUGGESTION FOR FURTHER RESEARCH
An analysis of the short-run impact of macroeconomic
adjustment policies on the poor is quite intricate, since
it may be necessary to classify the economy by sectors
and income groups for this purpose. Difficulties could
arise because distributional and price interactions
among sectors brought about by exogenous disturbances
are complex.
Intersectoral complications are by no means the
same for all developing countries. Thus, an intersectoral
model that lends itself well to empirical verification in
a particular country may not be suitable for another
country. Interactions among sectors are likely to be
the product of the history of economic policies, which,
given initial resource endowments, shape the structure
of the economy. For this reason research in this area
can appropriately begin with an examination of the
structure of the particular economy. A unique set of
structural constraints and current policies will govern
each country’s evolution.
It would be a fair statement to say that stabilization
programmes in the Philippines have been designed and
implemented with a limited regard for their effects on the
country’s human population. This limitation can be traced
to two factors. First, the existing information base about
the relationship between macroeconomic adjustments
and microeconomic adjustments is small. Some data are
available from the surveys that have been conducted by
The impact of macroeconomic adjustments
1984 Growth rate
1980- 1981 1981 -1982 1982- 1983 1983- 1984
583 2.27 0.17 0.68 -
655 0.76 0.76 -0.15 -1.36
the census office, but these have not been processed in
such form that their macroeconomic implications can
be analysed. Moreover, the processing of cross-sectional
data itself has been problematic in the decade as resources
for this purposes have been constricted. In the past
decade there was a presumption, now increasingly being
called into question, that economic growth at the macro
level automatically addresses many of the problems of
nutrition and poverty.
The second reason for this limited regard for effects
of stabilization programmes on the human population is
that the modelling efforts of both international agencies
(such as the IMP) and local researchers have not found
the connection crucial until the onset of the 1983 crisis.
The experience of previous programmes did not involve
absolute declines in total real output. The present crisis,
however, has seen absolute declines in an economy with a
heavily skewed income distribution, and the deep effects
on the poor cannot be ignored.
While adjustment programmes are not explicitly
meant to impose the greater burden on the poor, actual
experience has been that redistribution against the poor
is implicit in stabilization programmes. The mechanism
through which the effects of policies on distribution
are transmitted is, therefore, important and must be
identified for a given economic structure. This being
the case, a more articulated macroeconomic model that
explicitly takes into account income groups should be
used and the relationships of important aggregates be
spelt out.
The theoretical specification that may require
incorporating microeconomic concepts within a
macro framework can be translated in an empirical
computable model. The extensive use of data found in
social-accounting matrices (a 1978 table exists for the
Philippines) and microeconomic demand and supply
equations seem to be called for. This would be the only
way to evaluate the impact of macroeconomic policies
on groups in society, especially those already being left
behind in, or, perhaps, by, the development process.
Manuel F. Montes
REFERENCES
1. Central Bank of the Philippines, Statistical Bulletin
(Manila, 1983).
2. E. de Dios, ed., An Analysis of the Philippines Economic Crisis
(University of the Philippines Press, Quezon City, 19841.
3. National Economic and Development Authority,
Philippine Development Report: 1984 (APO Press, Pasig,
Philippines, 1985).
4. National Census and Statistics Office, Survey of Households
(National Government, Manila, 1971, 1976, 1978, 1979,
1980, 1981, 1982).
5. A. Quisumbing, “Nutrition and Welfare Issues in the
Philippines: Some Perspective for Research,” paper
presented at the Workshop on Nutrition and Welfare,
University of the Philippines at Los Baños, 1981.
11
6. L. A. Florencio and M. B. Aligaen, “Food and Nutrition
in Filipino Urban Households,” Nutrition Reports
International, vol. 21, no. 3 (1980).
7. M. Thompson and G. Slayton, “An Essay on Credit
Arrangements between IMF and the Republic of the
Philippines: 1970- 1983, “ Philippine Review of Economics
and Business (in press).
8. Central Bank of the Philippines, Quarterly Economic and
financial Report (Manila, 1985).
9. Central Bank of the Philippines, “Economic memorandum,”
Nov. 1984.