FREE TRADE ZONES
Debacle in the Philippines EXPORT-oriented industrialization (EOI) in Asia was introduced in two main succeeding periods or waves: countries like South Korea, Taiwan, Hong Kong and Singapore were the first countries that adopted the strategy in the mid 60s; while the Philippines, Malaysia and Sri Lanka started only exports to the US. While it served as a market for American manufactured goods, the Philippines became a source of raw materials. This encouraged an agricultural economy to develop and as a result agricultural lands for export crops trebled in area during the first half of the 20th century.
In 1934 the Tydings-McDuffie Law, among other things, defined the steps towards Philippine independence which was eventually granted in 1946. It was clear that it did not mean full independence: the law provided for parity rights for Americans; a 10-year adjustment periabout a decade later. SONIA RUPON
OMPARATIVE studies of how the strategy has contributed to the economic development of these so-called developing countries reported more successful results from the first wave experience. Those countries which adopted the strategy much later had greater difficulties in achieving success.
The Philippine experience has been a very disappointing one. The strategy has failed to provide the country with a better economic and long-term solution and today the situation continues to deteriorate.
The free trade zones (FTZs) or export processing zones (EPZs) were central in the EOI strategy in the Philippines. EPZs are enclosed territories administered by a separate government body. All customs duties on imports and exports are free from payment, with no nationality restrictions on ownership of enterprises. In addition subsidised infrastructure and services are provided.
The Bataan EPZ (BEPZ) started operations in 1972. Two other zones were established afterwards and plans to build 12 to 15 more were made but never executed. Instead, zone incentives were simply extended to investors outside the existing zones.
Initial positive effects on economy
Ten years after the BEPZ started to function, while there were initial positive effects on the economy, assessments done by the Philippine government itself and private institutions accepted that the policy was not taking the economy anywhere.
According to then Labor Minister Blas Ople, "EPZs have been successful only in countries where conditions already existed for economic growth, such as Singapore, Taiwan and South Korea. But, in countries whose economies are not yet so dynamic, EPZs play a minimal role, their contribution being psychological, if anything else".
The World Bank's hand in the worsening economic crisis in the Philippines cannot be left unmentioned. "Its primary intention in pushing EOI in the Philippines and the Third World was not to promote industrial growth. It was to satisfy the multinational firms' need for cheap labor and the advanced metropolitan economies' craving for cheap light manufactured goods by pitting one Third World country's working class against the others in a race toward the bottomline of survival" 2.
In the early 80s, it had become clear that the FTZ policy had not met its objectives in the Philippines. Nevertheless, the WB continued to encourage other Asian countries like Indonesia and the People's Republic of China to adopt the EOI strategy. It is thus important to return to an evaluation of the FTZ experience in the Philippines and its failure, which had largely been done as long ago as 1983.
Colonialism and the Philippine Economy
The effects of colonialism and the economic legacy inherited from the US were important factors in the struggle of the Philippine State to develop a more selfsustaining economy in the years after the Second World War.
Although more than 300 years under Spanish rule from the 16th to 19th centuries brought about important and lasting consequences for the land structure, it was colonization by the United States which had profounder effects on the contemporary economy. American interests have continued to control the economy and trade, even after formal independence.
As early as 1909 with the PayneAldrich Act, US exports were allowed into the Philippines duty-free without quota limitations, although quotas were imposed on Philippine sugar and tobacco od for local US investors; unrestrained entry of American imports into the Philippines and restrictions on Philippine exports of sugar, coconut oil and abaca to the US.
The tying of Philippine trade to the American market continued. "Despite the granting of Philippine independence, the US secured the right to maintain over 20 bases and military installations. US citizens likewise acquired — through the Parity Amendment to the Philippine Constitution and the Bell Trade Act -equal rights with Filipinos to exploit the country's natural resources. The QuirinoFoster Agreement (1950) gave the US a key role in Philippine policy-making through its aid programmes and the Laurel-Langley Trade Agreement (1954) perpetuated the "free trade' relationship which tied Philippine exports to the American market"3.
Philippine Industrialization
To get away from colonial dependence, Philippine officials saw industrialization as the means towards an economic breakthrough. More specifically, protected industrialization for the domestic market was taken to be a first step in this process.
The basic elements of an import substitution industrialising strategy (ISI) were then put in place in the 50s. "Import substitution flourished in such product lines as beverages, textiles, paper and rubber products, products of coal and petroleum, basic metal and metallic products, machinery and transportation equipment* Supplemented by a tarriff system in 1957, the controls spurred a rate of industrial growth that averaged 12% annually between 1950 and 1957. By 1960 almost 20% of the country's net national product 1. Business Day, February 3, 1983, Manila. Quoted by Ibon Data Bank, Phils. "What crisis? Highlights of the Philippine Economy 1983", Manila, 1984, p.96. 2. Walden Bello, David Kinley and Elaine Elinson, "Development Debacle: The World Bank in the Philippines", Califomia, 1982, p. 162. 3. Dennis Shoesmith (ed): "Export processing Zones in Five Countries: The economic and Human Consequences", APHD, 1986, p.15. 4. Vicente Valepenas, Jr and Gemelino Bautista, "The Emergence of the Philippine Economy," Manila, 1977, PP 173-174. see or dark, Then Vain 1i Confidential grad S. World Bank,
21 Washington DC, 1976, Statistical appendix, Table B3. Cited by Bello, op. cit. p. 128.
FREE TRADE ZONES
ENJOY YOUR STAY. FREE TAX, CHEAP FAC TORY RENT AND BEAUTIFUL.
### WOMEN:
00. originated in manufacturing"'.
However, industrial growth was linked to the agricultural economy. The country continued to depend on agricultural exports as a source of capital accumulation. But because of the 'free' trade agreements with the US, the Philippines found itself in a situation where its agricultural exports could not cope with the high cost of machinery and capital goods. This led to a trade deficit which rapidly widened through the years.
Neither did the domestic market expand. Land reform had not been carried out, and neither the rural poor nor the new urban poor had the purchasing power to sustain an expanding manufacturing sector. Local manufacturers were therefore unable to move into the production of technologically complex goods beyond the more basic consumer products. Where they were able to make the move, import bills steeply rose as capital goods, fuel and materials flowed into the country to sustain industrial production. After a decade, the economy was suffering from stagnation and rising debt.
"In the 1960s, the Philippines moved into a deepening economic crisis. In 1962, in response to acute balance of payments problems and under pressure from the IMF, the new Macapagal administration abolished import and exchange controls and devalued the peso by almost 100%. Import costs doubled as did peso repayments on foreign loans. An estimated 1500 Filipino entrepreneurs were driven into bankruptcy. Other firms were forced to accept foreign control in joint ventures. Average annual growth in the industrial sector dropped to an all-time low of 4.5%. Real wages dropped by 10 percent.
### Export-oriented
Industrialization
The response of the Marcos administration from 1965 was to borrow massively for a huge public infrastructure program. In 1967, the government passed the Investment Incentives Act which allowed 22 - 100% foreign equity in pioneer industries. International Viewpoint #196 • December 10,
Foreign investors were given strong guarantees of unrestricted WELCOME TO RP profit remitSTRIKES tance. An
Export IncenBANNED tives act was adopted two years later. Plans for the Bataan Export Processing Zone were announced. The Philippine elite felt threatened by export-led industrialization and the removal of protection. The opening of the economy was also met by big mass actions, particularly by the student movement in the late 60s, denouncing US control of the economy.
The deteriorating economic climate as well as this national opposition and political unrest worried the World Bank and the IMF. Through American-trained technocrats in high government positions, they were able to force the government towards an open EOI strategy by using the loan credits as leverage. On Septerber 21, 1972, martial law was imposed and this provided the political framework for the implementation of the EOI strategy.
A three-year development plan was laid out for 1974-77 catering to the World Bank's policies. The diversification and expansion of exports was the central goal, and to ensure the creation of a favorable climate for foreign investors there were full guarantees on capital repatriation, profit remittances, fiscal and financial incentives. To assure that industrial operations would run smoothly, strikes were banned.
During this time Filipino entrepreneurs were still able to make the government maintain a certain degree of protection, much against IMF-WB wishes. But the Bank insisted on a fundamental restructuring of the economy by removing the "dualism between labour-intensive export-oriented industries operated under free trade arrangements, and the remainder of the sector which is oriented to the protected domestic market"7
Under threat of losing IMF and WB loans, the Marcos government capitulated: "We are in agreement with the findings of the Bank that Philippine industry has suffered because of an overprotected system. We are determined to take the difficult and often painful decisions to dismantle some of the protective devices and Inus to promote a free and compelive nus to promote a tree and competitive
. Continuous succumbing to the IMF-WB led to fierce political infighting in 1983 between powerful business cro1990 nies of Marcos and government free trade technocrats, with the former blaming the IMF and World Bank for the economic crisis.
Disappointing results from
EPZS
The establishment of EPZs was considered essential in the new economic policy adopted by the government under IMFWB pressure. Promoters of the policy argued that the zones would stimulate the national economy by bringing in more foreign investments, accelerating the transfer of modern technology, and by creating new employment. All these sounded very promising; but assessments made have revealed results far from these hopes.
The experience of the Bataan Export Processing Zone has been summed up thus:
Because of its poor location, the BEPZ incurred a total cost of $120 million for its construction, more than twice that allowed for. The choice of location was due to political circumstances more than anything else, and the zone was extravagantly equipped to attract investors. The establishment of the zone had a high social cost, forcibly relocating huge numbers of families who had been residing in the area for more than 15 to 20 years.
Despite the aim of stimulating foreign investment, in fact the bulk of investments came from local sources. In the BEPL, 91% of the total capital invested in the BEPL came from within the Philippines. And of these locally raised funds, 95% came from the local capital market?
Occupancy as estimated by the government was very much less. "From an estimated total of 113 firms to be located in the BEZ by 1979-1980, only 56 companies were established in the zone by 1980. Of the 41 companies remaining in 1983, seventeen were engaged in light manufacture (footwear, plastic and rubber products, packing materials, toys, food, etc.), thirteen in garments, five in electronics, four in heavy metal fabrication and two in shipbuilding.1°"
Most of the work is done on the assembly-line, and even if a number of workers were sent to other countries for training, the transfer of technonology has proved minimal.
Shutdowns occurred when less raw materials came in, and firms had to stop operations. Other firms transferred to other countries where labor was even cheaper. This led to a significant drop in employment. Taking again the BEPZ 6. Bello, op. cit. pp. 131-132. Cited by Shoesmith, op. cit. p.16. 7. World Bank, "Meeting of the Consultative Group for the Philippines, December 13 and 14, 1979", Annex VI, p. 5. Quoted by Bello, op. cit. p.149. 8. Roberto Ongpin, "Statement" in World Bank, ibid, quoted in Bello, op. cit. p. 149. 9. Shoesmith, op. cit. p. 44. 10. Ibid.
case, 2,178 workers lost their jobs in 1983, representing 14% of the 16,507 workers employed in the same year!!
Zone Workers and their struggle
Workers in the EPZs are generally young, 21 years old on the average, with a majority of single women with secondary education. The greatest concentrations of women workers are in electronics and the garment industries, the reasons being that young, single women are more precise in this type of assembly work, more docile, and are likely to accept lower wages.
At the BEPZ, 72% of the workers were born to poor peasant families. Almost all (97%) of the workers were migrants coming mostly from nearby provinces where employment opportunities are bleak!?.
The government's cheap labor policy has kept workers in poor living conditions. In 1982, most regular workers earned a daily wage of P31 ($1=P9 in 1982), which was raised to P42 in 1983 where the dollar exchange had become $1=P14. In the zone area prices of goods were 30 percent higher than in Metro-Manila13 • A significant number of workers were not even regularly employed; as casuals, they could be fired anytime and had no access to benefits. Workers have also been made to work overtime and exposed to very unhealthy and unprotected working conditions. Fringe benefits are few: many have not enjoyed social security, housing, transportation and medical benefits. Cases of sexual harassment of women workers are numerous.
Despite the ban on strikes, mass actions have been carried out either as strikes or other protest actions. Up to 1983, 41 unions had been organized in the zone covering 87% of all firms and around 30 strikes and 20 other forms of mass actions occurred. 14 Most dramatic was a sympathy strike of 20,000 workers who walked out of their jobs in 21 firms, to protest police brutality in what could have been a peaceful strike of electronic workers in one company. This event paralyzed the whole zone.
Regional Industrial Centers
1983 was a crucial year, as workers' militancy developed and the political and economic condition of the country sank into deeper crisis. In 1986 Marcos had to leave the presidency, also under US pressure. The initial years of the presidency of Cory Aquino, due to a better political climate, encouraged foreign investment and trade balances showed positive results. EPZs also showed a positive performance unlike in the previous years.
Part of the plan for economic recovery was to set up regional industrial centers
FREE TRADE ZONES and make an economic turnaround outside Manila. These centers were to take three major forms: an industrial estate, an export processing zone, or the so-called mini-estates. Cebu province led this move and in 1988 government officials were proud of the economic boom that Cebu brought about. The Mactan export processing zone, after years of stagnation, began to attract more foreign tenants. As of 1986, only 6 companies operated there, 4 more operated in 1987, and another 6 arrived in 198815.
Despite the positive mood however, many problems still continued to exist which were seen to influence the success of MEPZ operations. Only two subsidiaries account for 80% of the approximately 5,000 workers employed in the zone. There has been chronic lack of water, electric power, transportation and communication services, which are likely to affect future expansion. There has also been much criticism over red tape and very high shipping rates, while seanavigation infrastructure has deteriorated. The housing problem is an added shortcoming, squatter communities having developed with the poor and landless moving into the urban center to search for work16
The establishment of EPZs in the Philippines has obviously been beneficial to transnational companies from traditional imperialist powers but also from regional economic centers. Investments came from the US and Japan initially, but the more recent flow has come from the newly industrialised Asian countries like South Korea, Taiwan, Hong Kong and Singapore. The commitments from these four "NICs" in Southeast Asian countries in 1988 "rocketed 334% compared with a 125% increase for Japan"'?. . But the country's national economy has not reaped durable advantages from the free trade zones; increases in employment, foreign investment, and technology transfer have not been stabilized.
The reason is clear. From the point of view of the transnational corporations, the FTZs must contribute to lowering their costs, facilitate the relocation of their investments and multiply options and deepen the competition between Third World countries, and so increase the flexibility of their own international strategies. Instead of becoming a factor of steady development, the FTZ policy has thus added an element of structural instability to the national Philippine economy, and has never been designed to confront the roots of poverty. 11. EPZA Corporate Plan, 1983-1987, p. 72. Cited by Ibon Data Bank, op. cit. p. 94. 12. Shoesmith, op. cit. p. 212. 13. Ibon Data Bank P. 99. 14. Shoesmith, op. cit. p. 217. 15. James Clad, "Cebu sets the pace," Far Eastern Economic Review, November 10, 1988, p. 82. 17. Nigel Holloway, "The Numbers Game", FEER. 23 16. Ibid., p. 83. November 16, 1989, P. 71.