Foreign Relations of the United States, 1950, East Asia and the Pacific, Volume VI

896.10/8–150

Memorandum by the Chief of Mission, United States Economic Survey Mission to the Philippines (Bell) to the Secretary of State and the Secretary of the Treasury (Snyder)¹

secret

[Manila, August 1, 1950.]

Although the Mission is still gathering data and is not yet ready to make definite recommendations, the State and Treasury Departments should be currently informed of our tentative views on a number of urgent financial problems.

We are giving very careful attention to the difficulties of tax collection, including inefficiency and corruption and the need for a better tax program under a tax coordinator. We are studying the flow and control of public funds, in the Treasury in Manila and in the provinces. We are looking into the activities of the numerous Government corporations: their borrowing, lending and investment. We are examining the lending policies of the Philippine National Bank and the Central Bank. We are going over the recent experience with exchange, import and price controls. On all these questions, our report will have much to say and much to suggest. We have in mind particularly the manner in which American advisers can assure a better managed financial system.

Our technicians in agriculture, mining and engineering have been working on the technical side of the development problem. At the same time, the economists on the staff are working on the scope and direction of a well-balanced development program. We hope to be able to report on means to undertake a useful development program without bringing about inflation or a serious balance of payments deficit. We are giving special thought to the manner in which American aid might be made available for such a program and its proper use safeguarded.

These matters will be covered in our report, parts of which will be sent to you as they are prepared. In the meantime, we want to make sure that there is a clear view of the immediate financial difficulties confronting the Philippines. In stating the measures that could be taken to meet these difficulties, we have in mind to make any financial aid contingent on proper policies. These suggestions on meeting the immediate financial difficulties should, of course, be regarded as preliminary.

1. Treasury Cash Position

The cash position of the Philippine Treasury is now critical. The cash balances have been run down to dangerously low levels, utterly inadequate for properly conducting public business. Special and trust funds have been diverted from their legal destination to meet the every-day expenditures of the Government. Accounts payable are rapidly accumulating and warrants drawn on the Treasury are not cleared at the banks. The school teachers and perhaps other public servants are not being paid. There is obviously a limit to such practices and that limit will be reached when the Army payroll is not met.

The Treasury’s cash position is deteriorating so rapidly that action may be necessary within six weeks to provide funds to cope with this emergency. About ₱75 million may be needed to finance the every-day payments of the Treasury to December 31, 1950. The precise amount it still under study. These funds could come from a number of sources:

(a) If this can be done under Philippine law, the peso deposits of the International Monetary Fund and the International Bank in the Central Bank of the Philippines could be replaced with non-interest-bearing notes of the Government to the extent of about ₱22 million. This is in line with what nearly all members of the Fund and Bank, including the United States, have done. This transaction may have to be undertaken almost at once.

(b) About ₱12 million, more or less, of tax anticipation notes can probably be sold as soon as appropriate new tax measures are voted. There is some indication that an issue of 2% nine-month tax anticipation notes can be sold in this amount if the banks and business firms believe that the budget situation will improve. Another ₱5 million may be raised by selling Treasury bills.

(c) This would still leave the peso equivalent of $20 million to $30 million to be raised to carry the Treasury through to the end of the year. There are no peso funds that can be used for this purpose without destroying the remnant of confidence in the monetary and banking system. A way will have to be found to use dollar funds which would indirectly provide financial aid to the Treasury.

• (i) A three to five-year loan of $5 million to $10 million by the Commodity Credit Corporation to finance imports of wheat and flour could be made to yield considerable peso funds before the end of this year.
• (ii) Payments of $15 million to the Philippine Government under the pending war damage bill (H.R. 7600)² could be made without waiting for completion of the projects.
• (iii) If the peso deposits of the International Fund and Bank cannot be used, another $10 million would be necessary which could come, perhaps, as a grant from ECA funds for the Far East.

2. Budget Position in 1951

The budget deficit for fiscal 1951 will be more than ₱200 million, which would be nearly half of the total expenditures unless new revenues are secured promptly. This is nothing less than a collapse of the public finances of the Philippines in a period of exceptionally high income. No lasting improvement in the financial position of the Philippine Government is possible until tax collections have been materially increased. The tax structure of the Philippines involves the collection of too little revenue from Philippine citizens who have high incomes and large property holdings. The tax structure must be revised to yield more revenue with a more equitable distribution of the tax burden and with this must come a notable improvement in the honesty and efficiency of tax collection.

A satisfactory reform of the tax system will take time. A plan for such reform will be recommended in the report. To improve the budget position at once, public works and other pork barrel expenditures must be cut and the operations of the government corporations should be curbed. And additional revenues must be raised quickly to avoid continued large deficits while the tax system is reformed. Emergency tax measures must be resorted to as soon as possible in order to secure additional revenues at a rate of about ₱250 million a year beginning not later than January 1, 1951. We are considering the following measures:

(a) If the peso is not devalued, an emergency special import duty of 25% would be levied on all imports except rice, flour and canned milk. This may yield ₱175 million or more annually. Alternatively, if the peso is devalued, the customs, excise and sales taxes on imports would rise by ₱30 million. An emergency devaluation profits tax could be levied equivalent to one-third of the increase in the receipts of exporters attributable to the devaluation. This may yield ₱60 million. In either case, when larger revenues are collected from taxes on income and property, as contemplated in the tax reform, this special import or export profits tax would be repealed.

(b) An excise tax of 40 centavos a pack would be levied on imported cigarettes and 20 centavos a pack on lower-priced domestic cigarettes. This may yield ₱70 million to ₱80 million a year. The revenue stamps on imported cigarettes would be supplied to manufacturers under bond and would be attached by them prior to export to the Philippines. This is the plan we had in mind when we cabled the U.S. Treasury our Belto 4, July 21, 1950.³

(c) There would be minor adjustments of excise taxes on certain luxury import goods, such as liquors and automobiles, in order to reduce the demand for such goods without the need for import controls. The revenue from these excises may amount to perhaps ₱10 million a year.

3. International Payments

The payments problem of the Philippines would be completely out of hand without the use of exchange and import controls. It is probable that under present conditions the uncovered deficit in international payment could amount to $265 million or more in 1951. At the same time it is clear that the Philippine authorities are not capable of managing an import control efficiently or honestly. Inevitably the retention of such a system will lead to arbitrary and discriminatory action unnecessarily harmful to the interests of American business men in the Philippines.

The payments problem of the Philippines cannot be met until the proper measures are taken to offset the effects of the inflation of the past now built into the Philippine economy and to end the inflation that is being currently generated by the Philippine Government. The high level of income and of domestic prices makes imports very cheap and very attractive. The cheapness of imports hampers the development of domestic production even in fields in which the Philippines are capable of producing economically for home needs. The high internal costs may in some instances be a factor limiting the recovery of exports, although this requires further study.

Before the war, the Philippines used to buy imports to an amount equivalent (c.i.f.) to 30% of the national income. This ratio was about 38% in the early post-war years and declined gradually to about 33% before the recent import controls. With high peso incomes even the pre-war ratio of imports to national income would involve enormous dollar expenditure. The only way to reduce imports (without the use of import controls) is to make the peso cost of imports considerably higher. This could be done by devaluation or by special import duty. A memorandum on devaluation of the peso is attached.⁴

Even if imports could now be reduced sufficiently through devaluation or a special import duty, the balance of payments would soon be out of hand unless the present domestic financial policies were modified to avoid inflation. Import and exchange controls can prevent these inflationary forces from creating a balance of payment deficit. In that case, the inflationary forces would be diverted inward to the home economy and result in a sharp rise in prices. The best program for balancing international payments would be to adjust the relationship of import costs to peso income, terminate the current inflation, and dispense with import controls.

4. Control of American Aid

The scope and financing of the development program are still being studied. In the meantime, a memorandum is attached⁵ indicating our preliminary views on how the use of American aid could be supervised and technical assistance provided to the Philippine Government.

Daniel W. Bell

1. A covering letter of August 2 from Chief of Mission Bell to Secretary of State Acheson, filed separately in the Department of State files, explained this memorandum as follows:

   “There is attached a memorandum addressed jointly to you and John Snyder giving our tentative views on some of the problems confronting this country. It is just possible that we may have to act quickly one of these days and we wanted the State and Treasury Departments to be thinking about the problems concurrently with us.

   “If you or your experts have any views different from those expressed in the basic memorandum or the two memoranda attached [see footnotes 4 and 5, below], I shall be very glad indeed to receive them as promptly as possible. We are working under great pressure and still hope to conclude our work by the end of this month.

   “I am sending a copy of these memoranda directly to John Snyder.” (896.00/8–250)

   This memorandum and covering letter arrived in Washington by courier on August 14. Copies were subsequently circulated as National Advisory Council Document No. 1033, dated August 15.

2. Regarding the legislation under reference here, see the letter of April 17 from Assistant Secretary of State McFall to Senator Connally, p. 1438.
3. Not printed.
4. The lengthy memorandum under reference here, entitled “Preliminary Memorandum on the Exchange Rate,” and dated July 28, 1950, is not printed.
5. The memorandum under reference here, dated July 25, is not printed.