The World Bank’s “Dream Debt” Line Is a Comforting Fudging Of the Truth
By Karl Garcia
The World Bank recently said that “most countries would dream of having the kind of debt-to-GDP ratios” the Philippines has. On the surface, that sounds like praise — a global institution patting the country on the back for not being reckless.
But for many Filipinos, the statement was not reassuring. It was insulting.
Not because the Philippines is in a debt crisis. Not because the World Bank is wrong about ratios. But because the comment shows a profound disconnect between technical macro-economics and ordinary Filipino realities.
Debt Is Not a Number — It’s a Story
Debt-to-GDP ratio is a useful tool for economists. It tells you whether a country’s economy is big enough to carry its liabilities.
But the ratio is only a part of the story.
A country can have a “healthy” debt ratio and still be economically fragile — especially if debt is:
spent on non-productive projects,
used to fund wasteful programs,
accumulated without clear returns,
or relied on to support a government that can’t deliver basic services.
The World Bank’s comment ignores what Filipinos feel daily:
rising prices, underfunded schools, over-crowded hospitals, poor roads, and an economy where many people still work hard but don’t move forward.
If debt was truly “dream-worthy,” then why do many Filipinos feel like they are living in a country that borrowed too much for too little?
A Debt Ratio Doesn’t Pay for Tuition
Here’s the blunt truth:
Most Filipinos don’t experience debt as a ratio. They experience it as:
the interest payments that reduce budgets for education and healthcare,
the higher taxes and fees,
the slow or delayed government services,
the projects that look impressive in ribbon-cutting photos but do not improve lives.
The World Bank can talk about sustainability. But a debt is only sustainable if it is useful.
And in the Philippines, too much borrowing has been used to sustain political optics, not economic progress.
The “Dream” is Not the Debt — It’s the Growth
The Philippines’ debt may be manageable now because the economy is still growing. But growth alone is not a victory.
What matters is whether growth is inclusive, whether it reaches the poor, and whether it creates real opportunity.
If the country continues to borrow to fund consumption, subsidies, and politically-motivated projects, the debt will grow faster than the economy can handle.
And then the ratio — that same ratio the World Bank says other countries would “dream of” — will become the reason Filipinos lose their future.
The World Bank Doesn’t Live Here
This is the biggest disconnect.
The World Bank speaks in numbers and global benchmarks. Filipinos live in a reality of delays and inefficiencies — where the state’s promise is always “soon,” and the citizen’s experience is always “not enough.”
If the World Bank wants to praise the Philippines, it should not praise the debt.
It should praise:
the efficiency of spending,
the quality of public services,
the transparency of budgets,
the speed of project completion,
the measurable impact on poverty and inequality.
Until those are present, “dream-worthy” debt is a phrase that sounds like a luxury foreign perspective, not a Filipino truth.
Debt Is a Tool, Not a Trophy
Debt is not inherently bad. Many countries borrow to build infrastructure and stimulate growth.
But the Philippines must stop treating debt like a trophy.
A “manageable” debt is not a badge of honor. It is a warning that we are still depending on borrowing to stay afloat.
The question is not whether the debt is sustainable.
The question is whether the Filipino people are benefiting from it.
Because if they aren’t, then the “dream” the World Bank is talking about is not the Philippines’ debt.
It’s the dream of a country that finally uses borrowed money for real progress — not for debt itself.
The Society of Honor by Joe America 
https://mb.com.ph/2026/01/19/philippine-foreign-debt-payments-drop-23-at-end-october-2025-on-lower-maturities-rate-cuts
My take.
What is there to celebrate?
We paid less, but our debt is still huge.
We more installments.
Correct me if I am wrong.
A manageable ratio does not mean we are not in trouble.
That does not mean eveything is under control.
Philippine Debt-to-GDP: Why It Was Lowest Pre-Pandemic
Strong Economic Growth (the biggest factor)From 2016 to 2019, the Philippines experienced robust GDP growth, averaging above 6% annually.Even though debt still increased, the economy grew faster, so:Debt-to-GDP fell because GDP expanded faster than debt.This is the core reason the ratio hit its lowest point in 2019.
Moderate Borrowing and Fiscal DisciplineUnder Duterte, borrowing was controlled:The government borrowed for development and infrastructure, not emergency spending.Debt growth was steady but not explosive.So debt increased but not fast enough to outpace GDP growth.
Improved Revenues and Tax ReformsThe Duterte administration introduced reforms that:increased tax collection (TRAIN law)strengthened revenue performancefunded infrastructure projectsThese reforms boosted the government’s ability to finance growth without excessive borrowing.📌 Why the Debt-to-GDP Ratio Spiked During the PandemicWhen COVID-19 hit in 2020:
Massive emergency spendingThe government had to fund:health responsecash aideconomic stimulusThis sharply increased borrowing.
GDP growth slowed or contractedEconomic output dropped due to lockdowns.So the ratio increased because:Debt rose fast + GDP fell or grew slowly✅ Bottom LineThe debt-to-GDP ratio was lowest pre-pandemic because:Strong GDP growth + moderate borrowing + improved revenuesThese three factors combined to reduce the ratio.But COVID-19 reversed the trend, as emergency spending increased debt while economic growth slowed.
Philippine Debt-to-GDP: Why It Was Lowest Pre-Pandemic
From 2016 to 2019, the Philippines experienced robust GDP growth, averaging above 6% annually.
Even though debt still increased, the economy grew faster, so:
Debt-to-GDP fell because GDP expanded faster than debt.
This is the core reason the ratio hit its lowest point in 2019.
Under Duterte, borrowing was controlled:
The government borrowed for development and infrastructure, not emergency spending.
Debt growth was steady but not explosive.
So debt increased but not fast enough to outpace GDP growth.
The Duterte administration introduced reforms that:
increased tax collection (TRAIN law)
strengthened revenue performance
funded infrastructure projects
These reforms boosted the government’s ability to finance growth without excessive borrowing.
📌 Why the Debt-to-GDP Ratio Spiked During the Pandemic
When COVID-19 hit in 2020:
The government had to fund:
health response
cash aid
economic stimulus
This sharply increased borrowing.
Economic output dropped due to lockdowns.
So the ratio increased because:
Debt rose fast + GDP fell or grew slowly
✅ Bottom Line
The debt-to-GDP ratio was lowest pre-pandemic because:
Strong GDP growth + moderate borrowing + improved revenues
These three factors combined to reduce the ratio.
But COVID-19 reversed the trend, as emergency spending increased debt while economic growth slowed.
Historical Debt-to-GDP Ratio (Key Milestones 1990–2024)
(Percent of GDP — government debt relative to economic size)
Data compiled from historical estimates based on Bureau of the Treasury figures: �
Trendonify +1
Year
Debt-to-GDP (%)
Notes
1990
54.4%
Post-1980s debt burden era
1993 (peak)
74.9%
Highest on record historically �
Trendonify
2000–2005
~62–63%
Moderately high levels �
Trendonify
2006–2011⅘
~55–52%
Gradual decline �
Trendonify
2012–2015
~51–44%
Continued downward trend �
Trendonify
2016–2019
~42–39.6%
Record low in 2019 (39.6%) before pandemic �
Trendonify
2020
54.6%
COVID-19 emergency spending begins �
Trendonify
2021
60.4%
Sharp increase due to pandemic response �
Trendonify
2022
60.9%
Slightly above government’s targets �
Trendonify
2023
~60.1–60.2%
Mild improvement from GDP growth �
Trendonify +1
2024
~60.7%
Latest full-year data �
Trendonify
💡 Trend Summary:
The ratio was highest in the early 1990s (75%) and gradually fell through the 2000s and 2010s as the economy grew faster than debt accumulated. �
Trendonify
It reached historical lows around 2018–2019 (~39–40%) before sharply rising during and after the pandemic due to emergency spending and slower GDP growth relative to debt increases. �
Trendonify
📈 Why the Debt-to-GDP Ratio Matters
The debt-to-GDP ratio isn’t about how much debt in absolute terms the government has — it’s about how large that debt is relative to the size of the economy:
Rising debt isn’t necessarily bad if the economy grows faster — the ratio can fall even though the debt stock rises.
A lower ratio suggests a government may find it easier to service and repay debt without squeezing public finances.
A higher ratio can signal potential risk, especially if economic growth slows or borrowing costs rise.
This is why policymakers emphasize the ratio rather than just the nominal debt amount.
📌 Why the Ratio Can Fall Even If Debt Increases
This relates to GDP growth and the composition of debt:
🔹 Economic growth increasing faster than debt
If debt rises by, say, 5% but GDP rises by 7%, the debt-to-GDP ratio falls.
🔹 Managing debt composition and interest costs
Shifting to domestic borrowing and smoothing maturities can help reduce pressure on the ratio even as total debt climbs. �
Department of Finance
📉 Recent Situation (2022–2024)
2022: ~60.9% — near globally accepted comfort zone (~60% for developing economies). �
Department of Finance
2023: ~60.1–60.2% — modest improvement due to GDP expansion. �
Philippine News Agency
2024: ~60.7% — slight rise due to slower than expected growth and additional borrowing. �
Trendonify
🌍 Putting It All in Context
Historically, the Philippines had very high debt burdens in the early 1990s and moderate levels in the 2000s. �
Trendonify
Pre-pandemic (2019) was a lows point of ~39.6% — one of the lowest in decades. �
Trendonify
The pandemic and its fiscal response pushed the ratio above 60% — now stabilizing around that level as growth resumes. �
Trendonify
📌 Key Takeaway
👉 The Philippines’ total debt is rising — but the debt-to-GDP ratio (which matters more for sustainability) has:
Fallen sharply from past decades
Hit its lowest in 2019 (~40%)
Spiked due to pandemic spending (~60%+)
Remains around ~60–61% in recent years as GDP catches up. �
Duterte Inheried the growth from Aquino unfortunately for Duterte pandemic happened
https://www.bworldonline.com/top-stories/2026/01/19/724872/bsps-nonchalance-amid-peso-slump-still-reasonable/
Debt-to-GDP, Lags, and the Illusion of Fiscal Success (2016–2019)
A country’s debt-to-GDP ratio is one of the simplest yet most misunderstood economic indicators. It measures how much a government owes compared to how much the economy produces in a year. The ratio matters because a large debt can be manageable if the economy is growing fast, but it becomes dangerous if growth slows. The ratio depends on two factors: the debt (numerator) and GDP (denominator). This leads to four scenarios: small debt and big GDP (healthy), big debt and small GDP (dangerous), small debt and small GDP (still risky because the economy is weak), and big debt and big GDP (manageable only if growth continues).
From the 1980s to the present, Philippine presidents have inherited and reshaped the country’s fiscal landscape. Corazon Aquino inherited high debt and a weak economy after Marcos, and the debt ratio remained high because growth was unstable. Fidel Ramos benefited from strong growth and improved the ratio. The Asian Financial Crisis affected Joseph Estrada’s years, pushing the ratio up again. Under Gloria Macapagal-Arroyo, stable growth and fiscal discipline helped improve the ratio. In the 2010s, Benigno “Noynoy” Aquino III oversaw strong GDP growth and restrained borrowing, resulting in one of the lowest debt-to-GDP ratios in recent history.
From 2016 to 2019, the Philippines appeared to have a low debt-to-GDP ratio. Many observers interpreted this as fiscal prudence or a sign of Duterte’s successful management. But this perception ignores a crucial truth about economics: lagged effects. Government spending and borrowing do not impact the ratio immediately. Infrastructure projects take years from planning to construction to payment, and the economic benefits from those projects also appear with delay. Therefore, the early years of the Duterte administration benefited from the momentum of the previous administration’s growth, which expanded GDP and temporarily kept the ratio low.
Duterte inherited a strong economy, but he did not inherit low debt as a permanent advantage. While GDP was still growing fast, the full costs of Duterte’s infrastructure spending had not yet materialized. Debt was rising, but the denominator was still large and expanding, creating the illusion of fiscal health. The real consequences only became visible later, especially during the COVID-19 pandemic when GDP contracted and borrowing surged to fund emergency spending. This combination of high debt and lower GDP caused the debt-to-GDP ratio to rise sharply, revealing that the earlier “success” was temporary and largely a result of timing rather than deliberate fiscal restraint.
In short, the low debt-to-GDP ratio from 2016 to 2019 was not evidence that Duterte inherited fiscal success. It was a result of lagged effects and the strong economic base he inherited. The true test of fiscal policy is not short-term appearances but how a country manages debt when growth slows and shocks arrive. The Philippines’ experience shows that the ratio can look healthy for years and then worsen rapidly once delayed costs and economic shocks catch up.
Debt-to-GDP = how much the country owes ÷ how much the country produces
The ratio is a snapshot of “how big the debt is compared to the country’s economy.”
That’s why you always hear:
The Four Scenarios (Numerator vs Denominator) ✅ 1. Small numerator, big denominator
Small debt, big economy = very healthy ratio
Example:
What it means:
The country can pay the debt easily because the economy is big. ✅ 2. Big numerator, small denominator
Big debt, small economy = very unhealthy ratio
Example:
What it means:
The economy is too small to handle that much debt. ✅ 3. Small numerator, small denominator
Small debt, small economy = can still be risky
Example:
What it means:
Debt is manageable, but the economy is weak. Growth is the priority. ✅ 4. Big numerator, big denominator
Big debt, big economy = depends on growth
Example:
What it means:
This can be okay if the economy keeps growing fast.
Debt is “big” but the economy is also big.Why the Ratio Changes (the real reason)
Even if debt stays the same, the ratio changes if GDP changes.
So the debt-to-GDP ratio can improve because:A) GDP grows fast
Even if debt increases, GDP can grow faster → ratio improves.B) Debt grows slower than GDP
Debt increases, but GDP increases more → ratio improves.Philippine Presidents & Debt-to-GDP (1980s–Present)
Here’s the pattern, not just numbers.1980s – Corazon Aquino (1986–1992)
➡️ Debt-to-GDP stayed high because the economy was weak
1990s – Fidel Ramos (1992–1998)
➡️ Debt ratio improved because GDP grew
1998–2001 – Joseph Estrada
➡️ Debt ratio rose again
2001–2010 – Gloria Macapagal-Arroyo
➡️ Debt-to-GDP improved
Heavy on 2010s to Present (Your Priority)2010–2016 – Benigno “Noynoy” Aquino III
➡️ This is the “best case” scenario:
small numerator + big denominator
In simple terms:
Debt wasn’t increasing much, but the economy was growing fast.
So the ratio improved.2016–2022 – Rodrigo Duterte
➡️ Debt-to-GDP rose
This is like:
Big numerator + big denominator, but numerator grows faster than denominator.2020–2022 – COVID Years (Duterte + start of Marcos Jr.)
➡️ Debt-to-GDP skyrocketed
This is the worst combo:
Big numerator + small denominator2022–Present – Ferdinand “Bongbong” Marcos Jr.
➡️ Debt ratio improving but still high
This is big numerator + growing denominator.
If GDP growth stays strong, the ratio will improve even if debt stays high.The Key Takeaway (No fluff)Debt is not “bad” by itself.
The question is:
➡️ Can the economy grow faster than the debt?
If yes → Debt-to-GDP improves
If no → Debt becomes a burdenOne Last Important Point
Debt is okay if:
Debt is bad if:
“The World Bank recently said that “most countries would dream of having the kind of debt-to-GDP ratios” the Philippines has (about 61%). On the surface, that sounds like praise — a global institution patting the country on the back for not being reckless.” – Karl
Not after your report on how it is misleading, Karl. But note, apparently the debt to GDP ratio of the US is about 120%, Japan’s is about 250%, Canada and UK about 100%
Economics is not my field but I do know that GDP is not a very relevant figure for the Philippines because any “growth” is concentrated on the big players (i.e. the Oligarchs) and not the “masa.”
The World Bank is not wrong about saying “most countries would dream of having…” It is us to us not to be snookered into complacency thinking our leaders are doing a good job. Grocery bills etc. would tell the “masa” the real story.
But here is what I struggle in. Francis has been convincing us that general wealth of the masa is the way to fight corruption. But the oligarchs in the Philippines are wealthy? Are they fighting corruption? I think not.
The solution is for the “poor bums” to first decide on becoming rich, and then build the institutions that will reduce corruption, i.e. allow the debt to GDP ratio. So the “poor bums” try to get into UP….then they graduate and find out they cannot get jobs locally, or what they can get locally do not get them rich. So what is Plan B?
How about proposing doable solutions based on your own experiences and observations of how things are done better in your adopted country of the US, rather than constantly needling others who put more thought into the subject?
“How about proposing doable solutions based on your own experiences and observations of how things are done better in your adopted country of the US, rather than constantly needling others who put more thought into the subject?” – Joey
Because I see plenty of that going on here at TSOH. You think we need more?
When someone posts a “doable solution,” do you think they appreciate a response in the form of another doable solution? Or do they prefer feedback on what they spent so much time on, which assumes that the read it?
So in less words, you have nothing to add aside from eristics.
“So in less words, you have nothing to add aside from eristics.” – Joey
Actually I have plenty to add…but I do try to keep things brief to discourage people who engage with me from going off in a tangent. I do invite you to mention what you consider “eristic” and substantiate why.
Or you can resort to saying “pilosopo” (not sure if you are addressing the messenger or the message when you do as you seem to deny the former despite clear evidence to the contrary) and leave it at that. To be honest, I thought you could do much better than that.
Prrrt gentlemen…
I am trying to address Francis’ concerns in the present and next articles. Well as Joey told me address does not equal to resolve.
Addressing might not resolve, but it gets one closer to resolution after iteration and adjusting. To put it positively. Thanks for your efforts Karl, I really appreciate it. You have more patience than I do 🙂
My pleasure.
I think one factor you didn’t mention, Karl, is where our borrowed funds come from/who are we borrowing from.
One big thing, I think, our policymakers learned (were traumatized) from the Marcos Sr. administration is the importance of not being reliant on foreign debt.
So far, our borrowing is mostly domestic. Not like the Marcos Sr. administration.
As Japan shows—even an enormous (100+% of GDP) level of debt can be somewhat managed (“puweding i-diskarte”) so long as that debt is…domestic. Of course, this doesn’t mean that our government should be reckless spenders, eager to waste billions on frivolous things. But it does mean we have far more room for spending, if we choose to spend.
Yes, it is easier to handle domestic debt because it somehow “stays in the family” AND it is not subject to exchange rate fluctuations. “In the family” could also mean stuff similar to ABS-CBN selling a large part of its Mother Ignacia headquarters to Ayala to help pay off its debts back in 2024. Re corruption, there are unconfirmed stories that Suharto’s (huge) corruption didn’t hurt Indonesia as much as the money was MOSTLY reinvested locally, not in NYC or Switzerland.
I also have an example of private debts in foreign currency as something dangerous. There were Germans who incurred debt to buy housing in Swiss Francs in the noughties when the interest rates there were lower and the Swiss Franc also had a low exchange rate towards the Euro. When suddenly the Swiss Franc went up in value because the Euro fell, they were in trouble as their debt payments suddenly went up 15% or so from their Euro perspective.
Here’s a **clear overview of the Philippines’ debt mix — meaning how the government’s total liabilities are composed by source and type: 🇵🇭 Philippines National Government Debt Mix (Recent Data) 📊 1. Domestic vs. External Debt
As of 2025, the Philippine national government’s outstanding debt is primarily funded through domestic borrowings, with a smaller portion coming from external creditors:
This mix reflects a strategy to limit foreign exchange risk and leverage a relatively liquid local investor base while still accessing foreign financing. 💵 2. Why This Mix Matters
Domestic debt being the majority has benefits such as:
External debt still plays an important role to finance development and public investment but carries more exchange rate and global interest rate risks. 📈 3. Other Notable Features of the Government’s Debt Profile
📌 Summary (Typical Mix) Component Share of Total Debt Notes Domestic debt ~68–70% Issued in pesos, lower external risk External debt ~30–32% Borrowed internationally, FX exposure
If you want, I can also break this down further — for example by creditor type (multilateral vs bilateral vs bond markets) or by currency composition of the external debt.
Somewhat related to the issue of debt—is the prevalence of “austerity” in Filipino political and economic discourse. By “austerity,” an unwillingness by our policymakers to “spend,” even for development-related purposes. It is clear how an overly “austere” attitude to public spending hinders development. One is reminded of the famous German “Black Zero” or Schwarze Null.
FDR’s New Deal and LBJ’s Great Society was characterized by substantial degrees of public spending. China has spent a fair bit on subsidies and supporting technological research to catch up to (and surpass) the cutting-edge of the West. To improve welfare, you have to spend money. To make money, you have to spend money. Spending is key to national development.
As the rapid bounce-back of the US in the 2010s and the 2020s versus the slow recovery of Europe in the same period shows, austerity can be a drag.
_
Leloy Claudio’s recent book on this (“The Profligate Colonial” — It’s on Amazon, a short but somewhat costly eBook, though I can’t wait for the cheaper Ateneo Press version to come out) presents an argument which I think is very heterodox and novel, in the Philippine context. He argues that the economic development of the Philippines has suffered from the dominance of “austerity” in our political and economic discourse. “Austerity” is so dominant in our public discourse that Claudio goes so far as to argue that both the Right and the Left subscribe to the necessity of “austerity.”
A flawed summary of the bits that I can remember. I take responsibility for any errors—I do recommend, if one has the time, to actually read the book. Very heterodox and novel:
He traces the origin of the dominance of “austerity” in our national discourse to the Americans. Before the Americans came, we were—though still technically under the “Spanish” flag—an effective British economic colony. It was as part of the “Anglo-Chinese” trading network that the Philippines experienced prosperity as through that trading network, the Philippines became connected to the global economy, which allowed for our country to export agricultural crops. Said agricultural export boom was what helped fund the families of the illustrados who would eventually desire autonomy, then independence. A crucial detail to note here was that in this system, our currency was cheap (our currency being silver-based, much cheaper for various factors than gold) which allowed us to be competitive exporters, and as part of the Anglo-Chinese trading network, we had a relatively diversified set of trading partners and were integrated with our neighbors.
When the Americans came, they switched us to their gold standard. Our silver money was not “sound” money, it was barbaric unlike their “gold” currency. Moreover, the gold standard cut us off from integrated our neighbors, and tied us primarily to America. That the overvalued gold currency would make our agricultural exports (the foundation of the PH economy at this time) uncompetitive was somewhat ameliorated by the access to the US market (which has made even more dependent on America). That keeping the Philippine colony on the gold standard made importing things from America (such as weapons for colonial troops to put down rebellion…or fancy consumer goods) cheaper was nice for America.
(Claudio finally clearly shows us where the idiotic superstitious correlation Filipinos keep making with “strong currency” and “strong economy” comes from. Bear this history in mind whenever someone laments about the Peso no longer being the strong. It was cheap silver that helped formed the conditions for the Revolution. If I keep reiterating the foolishness of obsessing over “strong” currencies, it’s because it’s that obsession that actively hinders any sound export policy and which restricts our room to spend.)
Keeping us on the overvalued gold standard meant that the Philippine colony had to be run on balanced budgets. There was limited legroom for deficit spending. This had obvious implications for national development. How can the Philippine colony spend on roads, hospitals or classrooms? But for America, it wasn’t so bad—meant you could run a colony on the cheap. Bargain.
Now the Filipino elites chafed under this. The exact specifics are a bit complicated to summarize (especially I am just a layman) but to back the gold standard “Peso” of the Philippine colony, there was put in place a “Gold Standard Fund.” Here, there was a loophole. A portion of this “Gold Standard Fund” could be used for the development-purposes (such as funding bridges, classrooms…or sugar mills). The Philippine National Bank (PNB) played a role in regulating this, and effectively used a portion of our currency reserves to fund national development—such as financing improvements to raise the productivity of our sugar mill, improvements which also allowed for our sugar industry (one of our biggest industries then) to sell higher-quality sugar for export and to even get into sugar and coconut oil processing.
Of course, this wasn’t all rainbows and sunshine. Filipino elites liked this spending because they could get their fingers in the pie. Those with connections get the easy loans. Eventually, the PNB collapsed. They touched this matter a bit in the film Quezon—which takes the side of the Americans.
The Americans (particularly, Governor-Generals Wood and Forbes) blamed Filipino corruption for the collapse of PNB and saw it as proof that Filipinos were unready to govern themselves. But Claudio points out that corruption alone could not have explained the collapse of the PNB, and that such a narrative ignored the global context. The PNB gave their loans to finance national development at a time when World War 1 was raging. World War 1 drove up demand for all sorts of goods—including the agricultural commodities we were exporting. It was boom times, in short. But World War 1 ended. Demand for goods (including our own agri-exports) collapsed as war-time demand went away. The “Great Deflation of 1920” was global. The US Fed engaging in deflationary policy didn’t help. As Claudio remarks: “Within the context of the colonial relationship between the US and the Philippines, this had been the worst deflationary crisis the Philippines had encountered. And it would severely impact the fates of Filipino exporters who made less as prices in the US fell.”
(It is worth noting that among the critics who lambasted Filipino elites for reckless spending was…Governor-General Forbes. What is most amusing is that man—for whom Forbes Park was named—was quite the hypocrite; he himself used reserve money to fund his pet projects, including spending excessively on Baguio, which he saw as necessary to revitalize white colonial personnel. He spent three-quarters of the money the US spent on the Treaty of Paris, buying the Philippines, on a road in Benguet.)
It is clear that here, an aversion to spending (rightfully or wrongfully) for development purposes arose.
What didn’t help was during the Japanese occupation in WW2. The spread of “Mickey Mouse” money contributed to a deep aversion to “cheap” currency among Filipinos and a love (even when irrational and extremely counterproductive) for “strong” currency.
How could Filipinos question the Bell Trade Act pegging our peso to the US dollar? For the Americans, the peg was to ensure their capital wouldn’t depreciate when they’d have to move to all back stateside. For Filipinos, it made us “feel” we were rich, even when it actually hurt us. Claudio notes: “But regardless of how dire the postwar crisis was, Filipino representatives had faith in the quick return of hard money…This strange situation—a country with low tax collection and poor use of limited funds but a strong currency—led former UN economist Shirley Jenkins to call the Philippines the ‘poor little rich country’ of Asia.'”
Pegging our peso to the strong US dollar meant that we need substantial currency reserves. Which meant balanced budgets, which meant less spending (if at all) on national development. Pegging our peso to the strong US dollar also meant imports from the US were very cheap. Which led almost immediately to crisis, especially after the destruction of World War 2. Demand for reconstruction meant demand for US imports, which needed dollars to pay for. Hence, a balance-of-payments crisis.
It was here that the first thing we had to direct industry, to maybe(?) foster development, emerged in the Central Bank—a system of exchange controls where the Central Bank would control the access to dollars. In theory, the Central Bank could direct dollars to those “worthy” such as key manufacturers. Here, the Philippine state could have its “strong Peso” while not having its reserves emptied out, and it could (as a bonus) somewhat direct industrial development. Now, much more straightforward route would be to just depreciate the Peso—lessen demand for imports, reduce drawing from the dollar reserves, improve competitiveness of exports. But the Bell Trade Act prohibited that. Claudio explains the convoluted, self-contradictory of Central Bank policy at this time:
“Because of these arcane policy moves, the new decade [1950s] would begin with a commitment to two forms of ‘control.’ The first control was the dollar peg, which kept the peso expensive. The second was the limiting of dollar allocations. Cuaderno [our first Central Bank Governor] often spoke of these ‘controls’ in the same breadth, viewing them as a package. However, we should note that both controls encouraged different outcomes. The first form of control, by keeping the peso expensive, encouraged importation from the US. The second form of control, by ensuring that only a few importers had access to dollars, limited importation. Rather than a package, it is better to think of the second form of control as a bandage for the bleeding caused by the first form of control.”
(As an aside, Claudio makes an interesting point that the obsession of Filipino policymakers like Cuaderno…could also be traced culturally…to a “macho” sensibility…it was MANLY to have a strong currency…)
Now, again, to maintain all this required balanced budgets. Limited spending, even on national development. Less money for roads, bridges, classrooms, etc.
You can see it, especially under President Garcia. Yes, President Garcia is famous for the Filipino-First policy. But it is worth noting that, influenced by the essentially hegemonic consensus in Filipino discourse in favor of austerity, Filipino economic nationalism was less about spending on infrastructure or subsidies to support Filipino citizens and businesses and more about setting up quotas to reserve industries for only “pure” Filipinos (and not for, say, the Chinese immigrants or those of Chinese ethnic descent).
Eventually, this had to end. Import-Substitution-Industrialization, facilitated by the Central Bank’s system of currency controls, had reached its limits. The Bell Trade Act was replaced by the Laurel-Langley Act.
There is, unfortunately, only one President who truly broke away from the consensus on austerity at this point. Fucking Ferdie Senior. Claudio’s take on this, from what I can tell, is that it was that…in addition to the rampant corruption that took place under the reign of the first Marcos…it was too little, too late. From Claudio:
“In the Marcos administration’s final years, Sicat acknowledged that export-driven growth in the 1970s was inadequate. He would, however, without naming him, blame Miguel Cuaderno for this failure. In 1984, as the economy was in a tailspin, he argued that the Marcos economic team tried to promote as much exportation to the US market as remaining preferential trading agreements allowed. These interventions, however, were ‘two decades too late,’ since by then, ‘our neighbors had already preempted a large ground in our potential markets” and ‘the climate of growth of international trade’ which helped those neighbors ‘became altogether different and certainly more restrictive.'”
“Such statements are easily read as excuses for the dictatorship’s failures. Except that Sicat had been making the same argument even before joining the Marcos government. As we saw earlier, he was making the same points in the late 1960s. Sicat believed that changes in the 1950s allowed East Asian ‘tigers’ like South Korea, Taiwan, Hong Kong, and Singapore to emerge—a mostly correct observation. Recent research on comparative takeoff points of economic growth between the Philippines and these economies has shown that, despite the Philippines starting at a better postwar position, these four economies had overtaken the Philippines in the 1960s, before the Marcos period.”
In short, as we preened and boasted about our “manly strong currency” and cheap consumer goods from America…our neighbors, with their cheaper currencies, had seized more of the global market.
There was also the unfortunate luck of the Philippines that we had to suffer through two oil shocks (1973 and 1979), with Volcker Shock (the US Fed raising its interest rates) coming right after the second of these oil shocks. While Marcos Senior’s corruption cannot be ignored—and Claudio does note that his corruption plays a bigger role this time than with the Filipino colonial elites with respect to the collapse of the PNB—the facts still show that the Philippine state was facing both the costs of its failure to seize earlier opportunities (having to peg to the USD right after WW2) and an unlucky set of unforeseeable global circumstances. Corruption, in this narrative, is a key factor—but not the only factor. Again, this does not exculpate Marcos Senior—he is still a colossal failure, a thief of the highest order—but we must not moralism cloud our objectivity and prevent us from putting even such an awful leader in the broader context.
(The Central Bank under Cuaderno was said to be an “island of state strength,” relatively clean and competent. Yet, even a clean technocrat implementing a misguided policy will yield ineffective results…that will have repurcussions for decades to come. Policy is as important a question as corruption.)
Claudio, at the end, observes that it was in the struggle against Marcos (and contradictory arguments by key intellectuals on the left such Lichuaco) that led even the Left, even the hardline Leftists, to adopt the language and rhetoric of austerity.
Apologies for the length of this comment, but…my brain is tired from trying to sum up everything I can barely remember. Again, I do encourage actually reading the book—it’s a very provocative argument against…well…a very good portion of what passes for political debate in this country, on the Right, the Center, the Left…
– Francis
Thanks Francis. Exactly.
thanks for that excellent summary. Didn’t know about the 1920s stuff, but I do know that the peso-dollar peg after 1946 did prevent the Philippines from letting its currency go cheaper, which IIRC in postwar Japan a) forced Japanese to buy local stuff (versus Filipinos who got cheap access to American goods) and b) allowed Japanese goods which at that time were still low-quality (think their cars in the 1960s) to be sold cheap abroad.
I have a higher opinion of Leloy Claudio BTW than of Heydarian. BTW Europe has de facto let go of austerity since Covid, if we hadn’t done so things would look far worse than now. I am a total hack when it comes to economics (at least history I can say I understand a bit) but there are certainly conditions where Keynesian approaches are correct, it is a bit like borrowing money for a house is usually good while borrowing money for consumer goods isn’t that good.
Re oil crisis, I am old enough to remember how suddenly the comic character Asiong Aksaya appeared on the pages of Bulletin Today, which is what Manila Bulletin was called when it was essentially a Marcos Sr. regime paper. And also how in the Marcos Sr. era there was an official exchange rate in banks and a street exchange rate that reflected the real value of the peso, somewhat like it was in Eastern Europe under Communism. Whew what weird times those were.