Silviase/jgov_v1.4_full_ann huggingface dataset:
(1) Macroeconomic developments of the Philippine economy $ ^{18} $

The overall economic performance of the Philippines is one of the rare cases in East Asia which can be considered a failure; it is notable that World Bank's East Asian Miracles Studies did not include the experience of the Philippines (The World Bank 1993).

Throughout 1970's and 1980's, the Philippine economy repeatedly exhibited rapid growth, debt crisis and adjustment. In the early 1970's, the Philippines rescheduled the external debt which had resulted from its expansion of investments during the Marcos administration. As a result of the adjustment program, which consisted of tight monetary policy, devaluation of foreign exchange rate, and stringent fiscal policy, the current accounts balance turned into a surplus while the rate of inflation declined.

However, the adjustment program did not solve any of the structural or fundamental problems of the Philippine economy. In spite of this experience with debt crisis, the Philippine government again adopted an expansive policy from 1972. The total investment share of GDP grew from 21.6% in 1972 to 31.0% in 1979, while governmental fixed investment grew from 2.1% to 7.3% (Dohner and Intal 1989). Confronting the first oil shock in 1973, the Philippine government continued and accelerated its expansive policy to avoid recession, possibly because of increases of export revenue from primary products, prices of which rose significantly, and because of heavy external lending. As a result, economic growth in the same period averaged 6.5% but the current account deficit persisted, at 5% of GNP. If the expansion policy had succeeded, the Philippines economic growth would have been a typical case of growth-cum-debt. Due to the cautious debt management and favorable international environment which allowed further external lending, the Philippines avoided facing the debt crisis for the remainder of the 1970's.

Adverse external effects in the 1970's were another cause of the deterioration of the Philippine economy, which in terms of trade registered a loss of 6.9% of GNP from 1979 to 1982. Furthermore, increase of the real interest rate caused an additional 3.5% loss of GNP (Dohner and Intal 1989). The external balance was negatively affected, notably by external environment, but by the inadequate trade and foreign exchange rate policy as well.

Nevertheless, the real GNP growth rate in the 1970's reached 6.2%. On the other hand, the inflation rate was 14% and current account deficits were consistently over 5% of GNP during the same period, contributing heavily to the accumulation of a huge amount of external debt. The Philippines failed to shift its resources to tradable sectors due to the
misalignment of the exchange rate and adoption of protectionist policy. With these structural problems, financial crisis in 1981 and the assassination of opposition leader Benigno Aquino, which caused an outflow of short-term capital, triggered the debt crisis.

After the crisis, the Philippine government initiated an adjustment which seriously hampered economic output. The real GDP growth rate declined severely in 1982 and 1983 and turned negative in 1984 and 1985. Fixed investment declined from over 30% of GNP in early 1980's to 14% in 1986, but current account recovered and turned to surplus in 1986.

It should be noted that this macroeconomic mismanagement seems to be the result of the “Crony Capitalism” practiced by the Marcos government. The economy of the Philippines had traditionally been ruled by a small number of wealthy families and resulted in an concentration of the wealth and political power. The Marcos government, which rose outside of the traditional power structure, tried to create countervailing power to support the government and President Marcos himself. The “Marcos cronies” were rewarded by using public investment projects on the one hand, and finance from governmental banks on the other, thereby creating a new ruling economic and political force.

The late 1980's was a period of economic recovery, the growth rate started to recover and the inflation rate came down from the peak level of 1984 and 1985, but the current account balance turned to deficit. This economic growth, which was based on the export growth depending on imported goods, and domestic consumption seems not to have been sustainable. Krugman et. al. (1992) called this “unsustainable growth of import-led recovery” and even at the beginning of the 1990's, the Philippines had to request rescheduling of its external debt from international creditors.

(2) Characteristic of the financial system $ ^{19} $

The financial system of the Philippines was strongly influenced by the US system, but at the same time, strong government intervention is apparent. Coexistence of rather a developed stock market and various financial instruments, with the existence of large governmental banks was the character of the Philippines.

The financial sector of the Philippines is composed of commercial banks, rural banks, savings banks, development banks, finance companies, investment companies and many other officials and unofficial financial institutions. The Philippine stock market, established in 1934, is one of the oldest in Asia. It played an important role in the early
period of economic development; but in recent years, its role has been became marginal. Throughout the 1970's and 1980's, banking dominated the financial sector with a consistent share of over 70% of total assets. Particularly, share of the governmental banks' was over 30% until 1985, reflecting their important and crucial role in economic development. However, the management of these governmental financial institutions, such as the Development Bank of the Philippines (DBP) and Philippine National Bank (PNB), is considered to be one of the underlying causes of the debt crisis. Also, preferential low credits were widely provided by the banking sector. The share of governmental banks peaked in 1982 at 17% of total assets of the banking sector, but during the process of the liquidation of non-performing loans of the state enterprises and government-related enterprises (Marcos Cronies), the share declined to 2.8% of the total banking system.

## (3) Financial liberalization

When we look at how the financial system was regulated and liberalized, it is useful to follow the classification in Yap et al. (1989). First period is 1956 to 1973, when the interest rate was controlled by the Central Bank and low interest rate credits were provided from the governmental banks. However, this policy obstructed financial intermediation by the formal financial sector, thereby encouraging development of the informal financial sector. The shift of the funds from the formal sector to the informal financial sector hampered real capital formation.

The Banking Act was modified in 1972, and the new system determined the character of the second period from 1974 to 1981. The aim of the change was to put larger amounts of funds under control of monetary authorities by regulating the money market which had been developing since the late 1960's. The basic stance of the policy was to regulate the informal sector but not to deregulate the formal sector.

The third period began after 1981, when full-scale deregulation of the financial system was adopted, as a result of the two crises of the early 1980's, namely the financial scandal in 1981 and the debt crisis in 1983. The objective of the deregulation was to rationalize the financial market and strengthen risk management of the banking sector to restore confidence in the system. The main components of the reform were: (i) deregulation of the interest rate, (ii) authorization of universal banking activities, (iii) increases of reserve requirements, and introduction of new taxes. The reform undertaken in this period focused on emphasizing domestic saving to mobilize long-term capital.

## (4) Developments of the financial sector and liberalization

The developments of the financial sector can be briefly explained by the ratio of
monetary aggregates to GNP. In 1970, the M1/GNP ratio was 10%, but declined to remain at 6% to 8% throughout the 1980's (Figure 1-7). On the other hand, since the 1970's, the ratio of M2 to GNP was close to 20% which is not high compared with the other countries. This ratio was eroded by the economic turmoil in the early 1980's. We can see a wide range of financial disintermediation triggered by the economic turmoil. Due to the recovery of the economy and the effects of the financial liberalization, this ratio rose by over 30% at the end of 1980's (Figure 1-8).

In the case of the Philippines, the movement of M3/GNP is an important feature to follow. M3 is the sum of M2, deposit substitutes and marginal deposits (non-interest deposits for issuing letter of credits). Deposit substitutes are certificates issued by banks based on the repurchase agreements of treasury and corporate bonds, and were actually in the form of the short-term financial instruments traded in the money market. The interest rate on deposit substitutes was not regulated by monetary authorities, and they grew rapidly through the 1970's with the development of finance companies. The economic crisis in the early 1980's caused the widespread bankruptcies among finance companies, and the issuance of large amounts of treasury bills, and abolition of tax exemptions on the transactions of deposit substitutes the shrank the market. In the late 1980's, monetary authorities gradually abolished deposit substitutes and the volume of M2 and M3 nearly equalized.

Rapid increase of M2/GNP ratio in the late 1980's can be considered to be a result of the financial liberalization started in 1983. But when we observe that the savings rate is not rising, the subsequent financial deepening can be considered to be the result of the shift of funds to the formal sector.

Starting from this reform, we can interpret that the central bank was able to use the monetary policy for macroeconomic management. We can also point out that financial liberalization was executed to interrupt the vicious cycle of high inflation, negative interest rates, financial disintermediation and to cope with the debt crisis.

We can summarize that the banking sector of the Philippines has been a source of the economic problem and debt crisis, because of government involvement in governmental financial institutions that was used as the fiscal purpose and distorted the monetary policy. Rescue finance of insolvent governmental enterprises and so-called “Marcos Cronies” that were heavily indebted in the 1980’s, and expansion of the monetary aggregates resulted from of this operation. Despite the adjustment measures, the basic features and structure of the Philippine economy has not changed and is on a difficult road to recovery. $ ^{20} $
Figure 1-7 Ratio of M1/GNP (\%) : Philippines

Figure 1-8 Ratio of M2/GNP (\%) : Philippines
Chart 1-9 Real GNP Growth Rate (%): JAPAN

Chart 1-10 Consumer Price Inflation Rate (%): JAPAN

Chart 1-11 Current Account Balance (%): JAPAN

(Note) Real GNP Growth Rate and Inflation Rate are Percentage change from the previous Period
Chart 1-12 Real GNP Growth Rate (%): KOREA

Chart 1-13 Consumer Price Inflation Rate (%): KOREA

Chart 1-14 Current Account Balance (%): KOREA