Bing Baltazar C. Brillo
Associate
Professor
Institute for
Governance and Rural Development
College of
Public Affairs and Development
University of
the Philippines Los Ban͂os
This is an Author's Original Manuscript of an article published in “UP Los Banos Journal” on 2014 (vol.8, no.1, pp 47-54).
Abstract
The debt-driven development strategy was fundamentally about the massive
infusion of external capital via foreign loans to boost the economy. This strategy
started in the 1960s when the Macapagal administration decided to take in and
utilize external borrowings, specifically the Stabilization Fund offered by the
International Monetary Fund (IMF). This decision created a “path” and made
foreign debts a key component of the government’s economic agenda. The subsequent
Marcos administration, influenced by the established financial ties between the
government and international financial institutions, did not only continue the
economic strategy but extensively accelerated the external borrowings. This
move transformed foreign loans as the engine of the economy. In time, the debt-driven
development strategy became an established pattern and was institutionalized
since it generated increasing returns and positive feedback that are
self-reinforcing. This economic strategy has mutated into a “debt-trap” and has
been underpinned by subsequent government laws (specifically, Presidential
Decree 1177, Proclamation 50 and Executive Order 292). Consequently, the debt-driven
development strategy became path dependent, which is persistent, difficult to
reverse and “locks-in” on succeeding governments.
Key Terms: path
dependence, critical juncture framework, debt-driven development strategy, Philippine
foreign debt, Macapagal administration, Marcos administration
Introduction
A decision made in the past defines and delineates future decisions. Once
made, a decision— whether a policy, program or strategy— may develop self-reinforcing
incentives. This means that a past decision substantively influences and/or constraints
future options which, in effect, makes the chosen policy, program or strategy persistent
and difficult to change; and thus, developing into a path dependence. As an
analytical concept, path dependence was developed in economics to explain
technological evolution, but was later adopted in political science to examine
the continuity of institutions and policies. In policy studies, the critical
juncture framework became the main strain of path dependence in analyzing the sustainability
of policies. The critical juncture framework contends that once a policy is selected,
its application/implementation would generate increasing returns and positive
feedbacks in time which would operate for the maintenance/continuance of the
chosen policy and work against policy reversal (i.e. making policy change very difficult).
For the longest time, the debt-driven development strategy is the
standard policy of Philippine governments in promoting economic growth and
industrialization. Since its adoption by the administration of President
Diosdado Macapagal in the 1960s and eventual institutionalization by the
administration of President Ferdinand Marcos in the 1970s, this economic
strategy has become an enduring policy sustained by the subsequent government
of President Corazon Aquino in the mid-1980s. The persistent pattern has
resulted in more and more foreign borrowings by each administration over time.
Consequently, the country’s foreign debt has reached alarming proportions that
debt servicing has become an economic burden, eating up a substantial portion
of the national budget year after year. Despite this, the debt-driven
development strategy is expected to continue with no sign of abating. Under
this context, this article utilizes the concept of path dependence, specifically
the critical juncture framework, to trace the evolution and explain the
persistence of the debt-driven development strategy adopted by the Philippine
governments.
The Concept of Path Dependence
Path dependence, as an analytical tool, gained prominence when it was
used to explain the dominance of the “QWERTY” keyboard, from the vintage
typewriter to the sophisticated computers (David 1985 and 1999). The central
contention was that the QWERTY keyboard gained ascendancy due to a specific
decision made in history— the pioneer makers of typewriters adopted the QWERTY
keyboard design.[1]
This initial decision would have critical consequences, as it gave the QWERTY
keyboard an early lead over other typewriter keyboard designs. As more users
preferred a widely used keyboard design, the QWERTY keyboard became the
universal standard, making it costly to switch to other keyboard designs and
compounding its leadership position. This situation would ultimately redound to
path dependence; “locking-in” the QWERTY keyboard as the mainstream keyboard
design and making it difficult for other designs to penetrate the market even
if they maybe easier to use (see Arthur 1989 and 1994, Puffert 1999).
The concept of path dependence was principally utilized in political
science to examine the development and persistence of institutions and
policies. The most common approach under this lineage is the so-called critical
juncture framework. The critical juncture framework has three essential
components: (1) the antecedent condition which refers to the prevailing situation
before a decision is made; (2) the critical juncture which refers to the point
of decision among the contingent choices; and (3) the specific trajectory which
refers to the established pattern as the consequence of the decision (Collier
and Collier 1991). In this arrangement, once a decision is made (i.e. a policy
is selected among the alternative choices), it creates an established pattern
that limits future choices and endures over time. Increasing returns and
positive feedback makes the established pattern persist (Mahoney 2001, Page
2006). Consequently, these self-reinforcing incentives make changing or
modifying the status quo policy very costly.
A simple analogy of the critical juncture framework could be seen
through “the driver’s dilemma”— where
the driver of a car is at a junction and needs to decide which road to take to get
to his destination. Once a road is picked among the alternatives and the longer
the driver moves through this road, the greater the probability that he will
stay on that road because it would be costly for him to return to the junction
to change roads. Since changing roads means a waste of efforts (e.g. time
invested in the journey and the time that will be expended in returning to the
junction) and resources (e.g. wear and tear on the vehicle and the additional
fuel that would be consumed), and risky (i.e. there is no guarantee that the
new road is the more efficient route). Thus, these self-reinforcing incentives
would strongly induce the driver to stay on the same road, and thus,
establishing an “irreversible” path.
There are also other self-reinforcing incentives that work for the
continuity of an existing policy (i.e. making it difficult to change). The two
most common are: one, the short time horizon of politicians’ time in office;
and two, the status quo bias of policies (North 1990, Pierson 2000). The first
underscores the disconnect between the actions of politicians which are
typically confined to the electoral timetable, and the time necessary to reform
or change a policy (including the benefits that will accrue from the change)
which usually requires more time (i.e. beyond electoral cycles). This time disconnect
creates a tendency for politicians to not change the policy since the
implementation and impact of the change are beyond their term of office. The
second emphasizes the inherent characteristics of policies which oppose change. By nature, a policy is designed to resist change and last long for
stability and predictability. Overall, these factors generate impetuses for the
maintenance of the policy as well as impediments for policy change.[2]
Building on the discussions, this study uses the path-dependent approach
in examining and explaining the persistence of the debt-driven development
strategy in the Philippines. In particular, the critical juncture framework is
utilized to elucidate the initiation, intensification and eventual
institutionalization of the economic strategy from the Macapagal administration
to the Marcos administration.
Establishing the Debt-Driven
Development Strategy
The Antecedent
Condition. The rise of the nationalist movement characterized post-World War II Philippines,
which led to the government’s adoption of protectionist economic policies. Among
the main ones were: (1) the import-foreign exchange controls, (2) the
import-substituting industrialization (ISI) strategy and (3) the Filipino first
policy. The import-foreign exchange controls were adopted by the administration
of President Elpidio Quirino (1948-53) to deal with the Balance-of-Payment
(BOP) crisis in 1949. This control mechanism was designed to conserve the
scarce foreign currency reserve of the country by restricting the access of the
private sector to foreign credits and curtailing the importation of consumption
goods (Boyce 1990). Although designed as a temporary remedy, the subsequent
administrations of President Ramon Magsaysay (1953-57) and President Carlos
Garcia (1957-61) adopted and maintained it (Malaya and Malaya 2004). The first
policy, import-foreign exchange controls paved the way for the second policy,
the import-substituting industrialization (ISI) strategy (Golay 1961, Baldwin
1975). This economic strategy was designed to reduce foreign dependency by
promoting economic independence via manufacturing replacements for imported
goods. The ISI strategy operated through nationalizing/subsidizing key
industries and imposing protectionist trade regulations (Street and James
1982). The Filipino first policy was adopted by the Garcia administration via
the National Economic Council’s Resolution no. 204 in 1958. This policy gave Filipinos
preferential treatment in all matters connected to the economic development of the
country like applying for foreign exchange allocation (Constantino and
Constantino 1978, Agoncillo 1990).
Apparently, these protectionist policies defined the economic orientation of
the Philippine governments in the 1950s.
The Critical
Juncture. After winning the 1961 presidential elections, the newly-installed Macapagal
administration was confronted by a crucial decision on whether to continue the
protectionist policies of the previous administrations or adopt a liberalized
economic orientation. The Macapagal administration opted for the latter— a
market-oriented development strategy. This decision was influenced by: one, President
Macapagal’s personal commitment to the United States’ government which openly
supported his run for the presidency (Constantino and Constantino 1978); and two,
the economic stagnation and the looming BOP crisis facing the country (Ofreneo,
1991). In reorienting the economy towards the liberalized setup, the government’s
first major step was to abolish the import-foreign exchange controls and
allowed the Peso to float in the international currency market (Malaya and
Malaya 2004). This move was anchored on the understanding that the Macapagal
administration would be getting $300 million of financial assistance from the
United States government and international financial institutions, mainly
through the International Monetary Fund’s (IMF) Stabilization Fund. In this
scheme, the Macapagal administration was bestowed an open credit arrangement
through external sources which it can use to promote economic growth and
address the financial crises.
The decision of the Macapagal
administration to seek external financial assistance made foreign debt a
significant component of the government’s economic development strategy. This
decision was reinforced by the government’s move to hand over its economic
agenda to a group of technocrats that staunchly adhered to the IMF fiscal
prescriptions (Constantino and Constantino 1978). As a consequence, the flow of
external loans steadily increased and reached $600 million in 1965; a surge
from the $150 million foreign debt before Macapagal assumed office (Brillantes
and Amarles-Ilago 1994). Thus, the government’s decision to seek external loans
firmly placed foreign debt into the country’s financial ledger and made the
debt-driven development strategy the principal economic policy.
Persistence of the Debt-Driven
Development strategy
The Established
Pattern. Although in its nascent phase during the Macapagal administration, the
debt-driven development strategy was institutionalized by the Marcos
administration which ascended into power after the 1965 elections. The Marcos
administration did not only continue the debt-driven development strategy but
substantively enhanced the economic policy. The decision to accelerate the
external borrowings was considerably facilitated by the government’s established
financial ties with international financial institutions and the US government.
In turn, this defined the Marcos administration’s economic agenda which was
built on the notion that the extensive infusion of external capital will bring
about economic growth and industrialization. As a consequence, the country took
in massive loans, not only from the international financial institutions but also
from foreign governments and private commercial banks. This made external funds
the critical source of the domestic economy’s capital needs, and hence, the
main engine of the economy (De Dios and Hutchcroft 2003).
The debt-driven development strategy was enhanced by several key
factors: the relative ease with which to obtain foreign loans; the deluge of
petro dollars in the 1970s (which prompted international commercial banks to
aggressively seek clients to unload the funds [Balisacan and Hill 2003]); the
foreign debtors pegging the interest at a lower rate than the one prevailing in
the international financial market; the declaration of Martial Law in 1972 (which
centralized political power that made it easy for the Marcos administration to
impose its economic agenda); and the recruitment of technocrats in government (which
justified the utilization of external borrowings as a legitimate economic
strategy [Fabella1989]). These factors made external loans the standard mode
for financing public investments (Bautista 2002); thus, from the 1970s onwards,
most of the government’s big economic development projects were funded through
foreign borrowings (Boyce 1993, Hutchcroft 1998). Furthermore, the debt-driven
development strategy was reinforced in the 1980s when the Marcos administration
was confronted by the imminent BOP crisis, the failure of the Export-Oriented Industrialization
(EOI) program, the global oil price shock, and the aftermath of the
assassination of Senator B. Aquino in 1983. The resilience of the debt-driven
development strategy was manifested when the Marcos administration, as remedy,
negotiated with its international creditors to restructure its debt payments
and launch an economic recovery program premised on acquiring more external
borrowings. As a consequence, the country’s aggregate debt progressed
significantly from $599 million in 1965 to a staggering $27 billion in 1986
(Freedom from Debt Coalition 1989).
The decision of the Marcos administration to adopt the debt-driven
development strategy did not only conform to but substantially reinforce the
established pattern. The institutionalization of the debt-driven development
strategy became evident when it evolved into a “debt trap,” a condition where
the government has no choice but to continue borrowing to sustain a functioning
economy[3]
(Montes 1992, Brillantes and Amarles-Ilago 1994). In turn, the situation has
ramified into a vicious cycle where more foreign loans were acquired to finance
the government and to pay for the maturing foreign debts. Moreover, the Marcos
administration’s decision to issue Presidential Decree 1177 in 1977 further
galvanized the debt-driven development strategy. This law authorized the
automatic appropriation for debt service in the annual national budget, effectively
making debt service the priority in the budgetary allocation of the government.
The debt-driven development strategy has “lock-in” on the government, as
its institutionalization as an economic policy was passed on to the succeeding
Corazon Aquino administration.[4]
Early on in its reign, the Aquino administration adopted the model debtor
strategy to promote the country’s creditworthiness with international financial
institutions and foreign investors (Bello 2004). This decision was legally
concretized by Proclamation 50 which declares that the Philippine government recognizes
all its debts and affirms its commitment to paying them, and Executive Order
292 which upholds Presidential Decree 1177, reiterating anew the automatic
appropriation for debt service in the national budget. Thus, these actions
firmly reinforced the debt-driven development strategy as an established pattern
in the government.
Conclusion
The debt-driven development strategy commenced when the Macapagal
administration decided to abandon the protectionist economic policies of the
previous administrations and adopt a liberalized economic orientation. By
seeking external financial assistance, the Macapagal administration’s decision created
a “path” that made foreign debt a key element of the government’s economic
policy. The established financial ties between the government and international
financial institutions influenced the succeeding Marcos administration, as the
government did not only continue the debt-driven development strategy but
extensively accelerated it. There was massive infusion of external capital in
the economy as the foreign borrowings became the main fuel for economic growth.
In time, the path was transformed into an established pattern through a variety
of increasing returns and positive feedback, such as the availability of
foreign funds, the relative ease with which to get foreign loans, the government
becoming populated by technocrats who adhere to the economic strategy, and the
transformation of the debt-driven development strategy into a “debt trap”
(where foreign borrowings sustain as well as burden the economy). The
established pattern was further reinforced and institutionalized by subsequent
laws, particularly Presidential Decree 1177, Proclamation 50 and Executive
Order 292. Thus, under this context, the debt-driven development strategy is path
dependent, making it persistent and difficult to reverse.
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[1] The QWERTY keyboard was adopted primarily to
deal with mechanical malfunction and not with efficiency.
[2] Proponents
of path-dependent approach have suggested that an exogenous shock or a powerful
external impetus (e.g. political scandal, mass protest, serious calamity and
financial crisis) is necessary to neutralize the self-reinforcing incentives
and disrupt the established pattern, and thus, providing the opening in the
move for policy change.
[3] This situation was exacerbated since many borrowed funds were invested poorly
which did not translate to sustainable revenues.
[4] The government of President Marcos was
toppled in 1986 via the so-called EDSA People Power Revolution.
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