The Missing Link in the Economic Development of the East Asian Exception

Can a Genuine Agrarian Reform Allow the Philippines’ Late Industrialization?

John Simone C. Yrastorza

Edited by Simone Yrastorza

The Puzzle of The Philippines’ De-Industrialization

The “industrialization consensus” has been a common theme among developing countries, particularly by transforming from an agriculture-heavy to an industry-heavy economy. The Philippines have also joined the bandwagon, yet it has not achieved the desired success despite being relatively advanced in the early 1900s. On the other hand, land and agrarian reforms have been attempted by the Philippines but were not able to mimic the success of the East Asian tigers.

In this article, a brief history of the Philippine economy will be tackled. Once contextualized, the orthodox and heterodox hypotheses as to what caused such de-industrialization will be discussed. It will be argued that the missing links that led to the Philippines’ de-industrialization may be a genuine agrarian reform as a backward linkage of industry, and a balanced approach between liberalization and state intervention.

The Puzzle of the Philippine Economy

The Philippine situation at present is not a reflection of its past. As Booth (2005, p. 14) mentioned, “If a composite index of human development were to be constructed for 1938 […], the Philippines would have come out on top.” In the 1950s, it was just next to Japan, Malaysia, Hong Kong, and Singapore on the basis of per capita income, while the other Newly Industrializing Countries (NICs) — South Korea and Taiwan, were below its level (Balisacan & Hill, 2003).

The major theme of the study of development is to focus on economic growth and policies that would allow such. There are two major views on how an economy should be managed as argued by the extreme ends of the spectrum — market-led or state-led. The bigger question, however, should be how to balance these approaches to create optimal growth.

The Opposing Viewpoints

In Nelson’s (2007) article, some of the contending views among scholars pertaining to the Philippine economy’s performance have been outlined. The first one, geography and proneness to disasters, may easily be crossed out considering that Japan and South Korea have presented tremendous amounts of growth despite their geographic location. Nelson (2007) also debunked these claims by plotting the Philippines’ per capita incomes alongside Malaysia, Indonesia, and Thailand.

Corruption might be another plausible explanation for this economic myriad considering the widespread corruption in the Philippines, as well as the authoritarian regime of Marcos. However, how then are we going to explain South Korea’s plausible growth almost during the same period that they had an authoritarian regime and their chaebols or the counterpart of Philippine cronies? In fact, another study by Li & Wu (2010) revealed that there are several other countries, including China, that have sustained high growth levels — even reaching double digits — despite corruption.

Export-Oriented Industrialization (EOI) and Structural Adjustment Policies (SAPs)

The Philippines shifted to EOI in the 1970s. This was primarily made possible by attracting foreign investors alongside Free Trade Agreements (FTAs). These may be well summarized by the neoliberal policies and SAPs that a whole lot of developing countries implemented a few decades ago. However, the Philippines, despite having joined the World Trade Organization (WTO) in 1995, alongside nine other FTAs, hasn’t done much to improve the industry sector and has even stagnated the economic sectors more (Africa, 2023). Additionally, the IBON Foundation (2017) pointed out that even the largest economies have engaged and are still engaging in protectionist policies to protect their industries.

The EOI strategy and SAPs have been largely identified with the success of East Asian Tigers that emerged. The East Asian Miracle Report of the World Bank (1993), despite recognizing the diverse strategies of the East Asian economies, heavily emphasized the adoption of policies that would foster much freer and open markets. Why, then, did the Philippines, despite following these strategies and policies, not experience the same kind of growth trajectory, and was even coined as the “East Asian exception?” In fact, it has been a common joke that the Philippines should relocate to Latin America while Chile should do so in Asia, considering their respective economic situations (Nelson, 2007).

Import Substitution Industrialization (ISI) and Protectionist Policies

The opposing group that pushes ISI, aims to develop domestic markets by promoting interventionist and protectionist policies to reduce dependence on big nations, as well as to lessen fiscal and foreign currency reserves deficits. In the 1950s, it pushed for an inward-looking strategy of ISI, alongside subsequent nationalist economic policies such as the Filipino First Policy (Abinales & Amoroso, 2005). Immediately after the creation of controls, manufacturing, agriculture, and mining had record-breaking growths of 40.8%, 17.2%, and 34.5%, respectively (Abinales & Amoroso, 2005).

The protectionist nature of ISI has been criticized for promoting rent-seeking behavior and corruption, which pushes the economy to become inefficient (Lusztig, 1998). Krueger (1985) argues that dependency on others may actually increase since importing intermediate and capital goods is key to the sustainability of such a strategy. Additionally, ISI economies have also practiced overvaluing their currency, which limits the incentives for producers to participate in international markets (Krueger, 1985).

“Those that fail to learn from history are doomed to repeat it.” — Winston Churchill

Three out of four poor Filipinos reside in rural areas (Aldaba, 2009), wherein agriculture is usually the main livelihood. In line with Sen’s (1999, p. 3) concept of development as freedom, “Development [is the] process of expanding the real freedoms that people enjoy,” and this includes having access to endowments — that is, the ownership of productive resources, which in the case of rural Philippines may include land and support services for farming. However, the Philippines has exhibited a long history of inequality in terms of the ownership of land.

Taking a leap back in history, if there is one common program that was implemented by most of the East Asian miracle economies, it was agrarian reform — that is genuine. Instead of focusing alone on industrialization, rural development was also given importance — a major factor for a successful industrialization plan, and an important backward linkage to the industry sector. Hence, it should not be a matter of which one should be pursued between the two but a question of how they will complement each other to achieve the desired economic development.

Since the early 1900s, numerous reforms on land and agriculture have been implemented. The most comprehensive of them all — the Comprehensive Agrarian Reform Law (CARL) of 1987. These reforms, despite being several in number, were of inferior quality and failed to meet their purposes — social injustices, rural poverty, and productivity. In line with this, Wurfel (1993) puts it as a “Land Reform for the Elite.”. On the other hand, Fabella (2014, p. 4) pointed out that the reform just created the social class of the “landed poor.” Ballesteros et al. (2017) also pointed out that it is inconclusive whether the reform’s objectives were really met even 30 years after its implementation.

Putzel (1992), instead of focusing alone on domestic factors, mentioned that these reforms were largely influenced by the United States (US), which had a strong influence despite the Philippines’ independence. The NICs of South Korea and Taiwan, as well as Japan, implemented their respective successful reforms immediately after the Second World War, which were all supported by the US. It is puzzling, however, that the same discouraged the recommendations of Hardie, who was one of Japan’s land reform consultants and was even red-baited by Filipino politicians (U.S. Foreign Policy and the Tenant et al., 1971).

What Went Wrong?: The Philippine Debacle and the Success of East Asian Economies

It is then argued that the missing block that the Philippines did not have was the policies that would foster domestic producers while playing at the international level, as well. This may be in line with the argument that is forwarded by Chang (2002, p. 90) while pertaining to developed countries, “Infant-industry promotion was a ‘ladder’ that most countries have needed (and actively used) in order to climb up to the top — and which was eagerly ‘kicked away’ when no longer necessary.” Hence, the Philippines, by implementing such aggressive liberalization policies without creating and supporting competitive domestic sectors has led to such failures.

Additionally, agriculture plays an important role in the industrialization of a country. This could be a source of raw materials for the local industries to produce value-added goods instead of importing such commodities. As Kay (2002, p. 1098) puts it, “Agriculture can and must make a contribution to industrial development, especially in the initial phase. Industrialization, in turn, can stimulate agriculture by providing key productivity-enhancing inputs for it, as well as a market for its output.” Finally and most importantly, ensuring a genuine agrarian reform with sufficient support services may have a huge impact not only on industrialization but also on poverty eradication.

What’s Next for the Philippines?

Over the past decades, the Philippine economy has been focused on attracting foreign investors and exporting low-value products. Yet, not much has been done to develop its local industries, and have neglected the role of agriculture as a backward linkage of the industry sector. There is no question that for a country to develop, liberalization is an important ingredient. But focusing alone on such a single aspect can only do so much. Hence, it is imperative for the Philippines to try new strategies, such as genuine agrarian reform and protectionist policies, while ensuring efficient competition, and to learn from its past mistakes and failures. While these may still leave the economic puzzle incomplete, having such might create so much progress.

John Simone C. Yrastorza is an undergraduate student majoring in Public Administration at the University of the Philippines National College of Public Administration and Governance (UP NCPAG). In 2023, he was part of the Summer School Program of the London School of Economics and Political Science (LSE), where he completed a course on International Development. His academic and research interests encompass the political economy of development, development in historical perspective, East Asian developmental states, Philippine economic history, fiscal administration, and the intersections among poverty, gender, labor, and development.

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