Martial law: costly lessons in economic development

Two major economic crises flanked the martial law era that was presided over by the late president Ferdinand Marcos. Both of those crises were caused by a combination of misguided policies and profligate spending related to elections on which Marcos had staked his grip on the nation. The first crisis spawned violent spasms from a restive citizenry, giving Marcos an excuse to impose martial law and silence opposition to his rule. After his reelection in 1969 that was characterized by record-high government spending, the Marcos government was confronted by a sharp devaluation of the peso in 1970 that required tight monetary and fiscal policies to stabilize but at the cost of popular disenchantment.

Rattled by the series of student-led demonstrations and the prospect of the political opposition taking away power from him at the end of his second and last term in 1973, Marcos put the entire nation under martial law in September 1972. As fate would have it, another major economic crisis, in the early 1980s, virtually drove the Philippine economy into a standstill, crippling businesses and sending millions of Filipinos out of their jobs and into the streets. That crisis—unique at a time when the rest of Southeast Asia was roaring ahead economically—was the result of a crippling impact of the economy’s dependence on foreign debt which it could no longer afford to repay and the political instability caused by the popular outrage from the assassination of Benigno Aquino Jr. in August 1983. Private investors either moved out or froze operations. Marcos was left with no option but to call a “snap" election to validate his mandate. The strongman regime’s move to steal the ballot in the February 1986 election that many believe was won by the slain leader’s widow, Corazon Aquino, triggered a “people power" revolt that drove Marcos out of power and into exile and thrust Mrs. Aquino into the presidency. (Although Marcos “lifted" martial law in 1981 ahead of a visit by Pope John Paul II, he retained extraordinary powers as a dictator until his ouster.) Why Marcos did it Marcos had called his martial law regime a “democratic revolution." He said in a 1977 book that “martial law became a moral and political necessity under the peculiar circumstances my country found itself in," adding that the “New Society" that he had sought to establish then was “a reform government under martial law." Among the objectives he set out for was a restructuring of the national economy through the “active government participation and management" in economic planning and implementation. He initiated what he called “a free flow" policy in which foreign investments may be “repatriated at any time, profits remitted, and ‘frozen’ dollars allowed to be withdrawn." A four-year development plan his government adopted for 1974-77 called for “the establishment of a balanced agro-industrial economy" where agricultural products would be processed into semi-processed goods through the establishment of more factories and industries. He also set aside land for export processing zones where investors could set up operations with exemptions from payment of duties and income taxes. In trying to make the local business environment attractive to investments, Marcos clamped down on labor dissent that had percolated in the latter part of the1960s and early 1970s owing to a steady decline in the purchasing power of workers’ earnings despite overall economic growth. In fact, it was these low wage rates that also partly lured foreign investors into setting up shop in the Philippines during the early martial law years. The first few years of martial law were also “blessed" with dramatic increases in prices of commodities on the world markets. Being a big producer of such commodities as coconut, sugar, minerals and forest products, the Philippines was able to earn higher revenues that helped it cope with the increased cost of imported crude oil. The country’s net terms of trade, a measure of an economy’s exports relative to the cost of its imports, grew steadily by double-digit rates on the strength of a tripling of sugar and coconut prices and a doubling of log and copper prices until the mid-1970s. That helped domestic output, as measured by gross national product (GNP, the overall value of all goods and services produced in an economy), leap to a growth of 9.3 percent in 1973, nearly double the annual average rate it posted in the previous eight years. Although the GNP growth rate eased to 5.6 percent in 1974, it steadily gained pace again for the rest of the decade, registering an average “cruising speed" of over 6.4 percent from 1975 to 1979. Moving forward Emboldened by all these, the Marcos administration initiated massive spending sprees on infrastructure projects (roads, bridges, irrigation, dams, and communications) and on the development of indigenous energy resources as an alternative to costlier crude oil that had been absorbing huge portions of export revenues since the oil shocks of the early 1970s. Financing for these programs, as well as for the regime’s 11 so-called major industrial projects (MIPs) designed to push the economy towards industrialization, was secured from the international capital markets, which were then overflowing with petrodollars, surplus revenues of oil-producing countries that were looking for investment havens. On the industrial front, the regime moved toward export orientation through the establishment of enclaves, export-processing zones and bonded warehouses which later created minimal linkages and benefits for the rest of the economy. While this strategy did lead to a surge in non-traditional exports, such as garments and electronics, local value-added in these products remained low because of their high import content. The MIPs, however, never took off owing to lackluster interest from investors and to their astronomically high costs. Under the cover of martial law, the government also took an increasingly interventionist stance on the economy. Marcos, through decrees that he issued in the absence of a legislative institution that he had abolished after imposing martial law rule, was dispensing monopoly privileges and power to individuals closely associated with him, including business friends and golfing cronies. Business empires were built by these associates, mainly with the aid of exemptions from tariffs and other taxes, liberal credit from state financial institutions or exclusive grants to certain operations. Thus arose the term “crony capitalism," referring to associates of Marcos who gained monopolistic control of such key industries as sugar and coconuts and acquired substantial interests in a wide range of others, such as public works contracting, banking, casinos, low-cost television production, nuclear power plant construction, and car manufacturing. This new era spawned a new set of aberrations whose adverse impact on the economy would continue to be felt for a long time. Because they subsisted on easy foreign financing and domestic credit, particularly on guarantees extended by the government, the “crony" industries not only grew into large but inefficient operations, they also contributed to a drain on the current account. From only $2.1 billion in 1970, the Philippines’ foreign debt rose to $3.8 billion in 1975 and to $12.7 billion by 1980. Costly rescue When the availability of foreign funding started to dry up towards the end of the 1970s, many of these crony companies required massive rescue operations by the government. In the end, the pouring of surplus petrodollars into the Philippine economy yielded mainly negative effects. In late 1983, when the country encountered a serious foreign exchange crisis that forced it to declare a moratorium on payments, the official total of foreign borrowings was nearly $25 billion. The agricultural monopolies of the Marcos era also failed to correct the terms of trade in the rural sector, blocking moves into more serious, outward-looking modernization of the economy. Food production managed to grow during part of his incumbency but price controls kept investors away from the farms. At the start of the 1980s, the economy crumpled under the debilitating effects of a worsening external environment manifested by a new oil crisis that sent import costs soaring, by sharp increases in interest rates, and by protectionism in the major markets. In the end, martial law gained notoriety for having been reduced to a scheme for Marcos to cling to political power with the help of political associates, relatives and other allies who were regularly granted economic largesse that most likely came from foreign debt. The cost of failed development projects of Marcos’s martial law era, from financing granted by foreign governments and commercial banks in response to “admirable" GNP reports, continues to be a burden on the Philippines to this day. It’s a pity that despite the clarity of the lessons from that era, some of the country’s leaders at present continue to consider that disastrous path. Ping Galang, a veteran business and economics journalist, was with Business Day when martial law was declared in 1972. He later joined the Far Eastern Economic Review in Hong Kong and covered the final years of the Marcos regime. He is an occasional contributor for gmanews.tv.