How economic policy evolved

A new book, “Cesar Virata: Life and Times Through Four Decades of Philippine Economic History” (UP Press, 2014) by Gerardo P. Sicat, provides a broad sweep of postwar economic history. Yet it details important aspects of how economic policy evolved.

I first met Cesar Enrique Aguinaldo Virata in 1991 when I represented the Asian Development Bank in a United Nations economic mission, of which he was a member, to Cote d’Ivoire in West Africa. Aware of his previous lofty positions in government, I approached him gingerly, expecting him to be aloof. Much to my surprise, I found him to be an unassuming and gentle human being.

Cesar took after his parents in being simple, self-effacing, and willing to serve his country. His intellectual acumen and administrative skills he inherited from his father, Enrique, and his sense of discipline and order from his mother, Leonor Aguinaldo. These values and traits must have driven him to work tirelessly for what’s good for the country against all odds, particularly during the widely unpopular martial law years.

After a long struggle for independence, the Philippines’ early postwar atmosphere was suffused with a strong sense of nationalism manifested by political leaders, which extended into economic nationalism. This was the circumstance in which the young Philippine economy was to evolve. An economy of Filipinos, by Filipinos, and for Filipinos—as advocated by Claro M. Recto.

The seeds of economic protectionism were sown circa 1949 when President Elpidio Quirino’s advisers—seeing the country’s dollar reserves rapidly dwindling due to excessive import and consumption spending—urged him to impose import and foreign exchange controls. Import-substitution industrialization that began as the dominant strategy in the 1950s persisted through the 1960s-80s, with the controls replaced by protective tariffs, and has since lingered.

Most economists regard an inward-looking strategy as misguided and counterproductive—a root cause of our country’s prolonged economic weakness. Protectionist policies inherently militate against exports, limit the size of the market, and render the economy uncompetitive and lacking in dynamism. Unlike in our Asian neighbors, protectionism has been embedded in our Constitution. Our neighbors have been able to more easily shift policy from import substitution to export promotion, making their economies more dynamic.

Ironically, to this day, many businessmen, politicians and political activists want to fortify protectionist policies. For instance, they’d like to see the power and oil industries nationalized or deregulated.

Economic nationalism via the preferential treatment of domestic industries shaped the milieu in which domestic and foreign investments were to be promoted. In 1967 Virata was tapped by President Ferdinand Marcos to chair the Board of Investments. The BOI was designed to oversee the implementation of the Investment Incentives Law (IIL) authored by Sen. Jose W. Diokno. Under this law, incentives were to be accorded Filipino citizens to set up businesses in preferred and pioneer industries. These actually bolstered the constitutional restrictions on foreign direct investments, e.g., the 60-percent-Filipino to 40-percent-foreign ownership rule on businesses.

Virata initially thought that “nationalistic,” if restrictive, policies made sense. He basically agreed with the mainstream view that national progress should be pursued by Filipinos and primarily for the benefit of Filipinos.

He tried to work within the restrictive IIL framework by looking for imaginative ways to bring in foreign investments and technologies. For instance, through a presidential decree, service contracts with production sharing upon the discovery of oil and gas sites became the basis for energy exploration during the 1970s. Though earlier efforts proved largely fruitless, a later breakthrough was the substantial natural gas finds in Malampaya, which have been a major source of energy for the country since 2000. Similar arrangements were extended to geothermal energy, hydroelectric power, and coal.

More formidable challenges awaited Virata when he was made finance secretary in 1970-1981, and subsequently also prime minister until 1986. An economic crisis was brewing, necessitating the floating of the peso to alleviate the balance of payments strained by the heavy demand for dollars with Marcos’ emphasis on public investments in roads, irrigation and school buildings, apart from private spending.

There was an urgent need to put the fiscal house in order while seeking as well international assistance for the country’s development effort. Virata saw in the International Consultative Group a vehicle for breaking the policy gridlock and moving reforms forward to streamline the bureaucracy and reduce rampant corruption.

Realizing the pitfalls of the IIL, Virata wanted to accelerate the liberalization of industry and trade. He was also responsible for the reform of commercial banking, which was no less challenging than the industrial and trade policy reforms. The martial law setting would help accelerate reforms in the domestic banking sector, leading to the merger of banks, increased capitalization, foreign participation, and stronger competition in the sector.

All told, the book helps one better appreciate the real Cesar Virata and the reforms he initiated, which laid the groundwork for later reforms that have largely benefited the economy; likewise, why he stuck it out in public service during the much-disdained martial law regime. He seemed like a hard-wired optimist, doggedly hoping that his contribution to economic policy under those difficult circumstances would make a long-term difference for the country.

Ernesto M. Pernia, PhD (ernestompernia@gmail. com), is professor emeritus of economics of the University of the Philippines and former lead economist of the Asian Development Bank.