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

Report to the President by the United States Economic Survey Mission to the Philippines¹

[Extracts]

Washington, October 9, 1950.

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I. Summary and Recommendations

At the request of the President of the Philippine Republic, President Truman appointed a United States Economic Survey Mission to consider the economic and financial problems of that country and to recommend measures that will enable the Philippines to become and to remain self-supporting. The Mission was instructed to survey all aspects of the Philippine economy, including agriculture, industry, internal and external finances, domestic and foreign trade, and public administration. The Mission was asked to give special consideration to immediate measures to help raise production and living standards, in the Philippines. The Mission has had the full cooperation of the Philippine Government and of many individuals and organizations outside the Government. Their help has been invaluable in providing the Mission with the data necessary for its work.

Economic conditions in the Philippines are unsatisfactory. The economic situation has been deteriorating in the past two years and the factors that have brought this about cannot be expected to remedy themselves. Unless positive measures are taken to deal with the fundamental causes of these difficulties, it must be expected that the economic situation will deteriorate further and political disorder will inevitably result. Whatever is to be done to improve economic conditions in the Philippines must be done promptly, for if the situation is allowed to drift there is no certainty that moderate remedies will suffice.

The findings and recommendations of the Mission are summarized below and are presented more fully in the body of the Report. Technical memoranda for the guidance of the Philippine Government in determining policy on agriculture, industrial development, taxation, and public administration have also been prepared by the staff of the Mission.

Urgent economic problems

The basic economic problem in the Philippines is inefficient production and very low incomes. While a substantial recovery was made in production after the liberation, agricultural and industrial output is still below the prewar level. In the past ten years, however, the population has increased by 25 percent. Although home production has been supplemented by large imports, the standard of living of most people is lower than before the war. In Manila, real wages of industrial workers are about the same or slightly higher than in 1941; but in the provinces, real wages in agriculture are lower than before the war. For many agricultural workers, wages are wholly inadequate, in some instances less than one peso (50 cents) a day.

The finances of the Government have become steadily worse and are now critical. The Treasury has a large and mounting deficit, with taxes covering little more than 60 percent of the expenditures. Obligations have been allowed to accumulate, warrants have been issued for which funds are not available, and school teachers have not been paid in some provincial areas. The new taxes voted by the special session of Congress cannot meet the budget needs and the cash position of the Treasury is becoming steadily worse. If the Central Bank is used to cover the large deficit of the Government it may lead to a new outburst of inflation, the burden of which will fall on those struggling for a living in a land of very high prices and very low incomes.

The international payments position of the country is seriously distorted and a balance has been maintained in recent months only by imposing strict import and exchange controls. The country has had an excessive volume of imports, which hitherto could be paid for out of very large dollar receipts from United States Government disbursements and accumulated dollar balances. These balances have been drawn down and receipts from the United. States Government have been declining sharply. Greater difficulty will probably be experienced in the future in paying for imports. In the meantime, the volume of exports is less than before the war and can be expected to grow only gradually. Unless foreign exchange receipts are increased or excessive dependence on imports decreased, import and exchange controls will have to become even more restrictive.

Causes of the difficulties

While production in general has been restored to almost the prewar level, little of fundamental importance was done to increase productive efficiency and to diversify the economy. In agriculture, the area under cultivation was brought to the prewar level, and the livestock population partially restored. But almost nothing was done to open new lands for the increased population, to improve the methods of cultivation, or to better the position of farm workers and tenants. In industry, production was restored very much in the prewar pattern. While some new enterprises have been started, particularly in the past year, there has been little real progress in opening new work opportunities and in strengthening the economy. The country still relies too heavily on the export of a few basic agricultural crops—coconut, sugar and hemp—which provide a meager livelihood to most of the people engaged in their production.

The failure to expand production and to increase productive efficiency is particularly disappointing because investment was exceptionally high and foreign exchange receipts were exceptionally large during most of the post-liberation period. Too much of the investment went into commerce and real estate instead of the development of agriculture and industry; investment undertaken by Government corporations has unfortunately been ineffective. A considerable part of the large foreign exchange receipts were dissipated in imports of luxury and non-essential goods, in the remittance of high profits, and in the transfer of Philippine capital abroad. The opportunity to increase productive efficiency and to raise the standard of living in the Philippines in the postwar period has thus been wasted because of misdirected investment and excessive imports for consumption.

The inequalities in income in the Philippines, always large, have become even greater during the past few years. While the standard of living of the mass of people has not reached the prewar level, the profits of businessmen and the incomes of large landowners have risen very considerably. Wages and farm income remain lower than the economy can afford because of the unequal bargaining power of workers and tenants on the one hand, and employers and landowners on the other. Under such conditions any policy that keeps prices high has the effect of transferring real income from the poor to the rich. This is what has happened in the Philippines, where prices on the average are three and a half times as high as prewar. The inflationary conditions which have made this possible were caused by large budgetary deficits and an excessive creation of credit, much of it for the Government and Government corporations.

As a consequence of the inflationary conditions, along with insufficient production, the demand for foreign exchange to pay for imports, and to remit profits and transfer funds abroad has exceeded the current foreign exchange receipts from exports and United States Government disbursements. The foreign exchange reserves of the country, although still considerable, have been greatly reduced, confidence in the currency has been shaken, and a breakdown in international payments has been averted only by stringent import and exchange controls. The generally unfavorable economic and political environment and the fear of discrimination in the administration of import and exchange controls have the effect of discouraging foreign investment in the Philippines.

The high hopes of the Philippine people that with peace and independence, they could look forward to economic progress and a rising standard of living have not been realized. Because of the deteriorating economic situation, there is a widespread feeling of disillusion. Most agricultural and industrial workers have no faith that their economic position can or will be improved. Businessmen fear a collapse of the peso. The uncertainties created by these doubts are strengthened by the recent tendency toward unemployment resulting from the slowing up of construction and the sharp curtailment of imports. The economy shows little inherent capacity to overcome the difficulties with which it is faced.

There are officials in the Philippine Government who are aware of the dangers in this pervading economic unbalance between production and needs, between prices and wages, between Government expenditures and taxes, between foreign exchange payments and receipts. Some of them understand the reasons why these difficulties arose; but the measures that could halt the deterioration have not been put into effect. Inefficiency and even corruption in the Government service are widespread. Leaders in agriculture and in business have not been sufficiently aware of their responsibility to improve the economic position of the lower income groups. The public lacks confidence in the capacity of the Government to act firmly to protect the interests of all the people. The situation is being exploited by the Communist-led Hukbalahap movement to incite lawlessness and disorder.

The Government has thus far attempted to deal with some of these emerging problems through import and exchange controls and through price controls. Such measures are directed to the symptoms rather than the causes of economic disorder. At best, they are measures that can only delay a breakdown in the economy; they cannot remedy the fundamental ills from which the country suffers. A permanent solution to these problems will be found only through a determined effort on the part of the people and the Government of the Philippines, with the aid and encouragement of the United States, to increase production and improve productive efficiency, to raise the level of wages and farm income, and to open new opportunities for work and for acquiring land.

Recommendations

The Mission recommends that the following measures be taken:

1. That the finances of the Government be placed on a sound basis in order to avoid further inflation; that additional tax revenues be raised immediately in as equitable a manner as possible to meet the expenditures of the Government; that the tax structure be revised to increase the proportion of taxes collected from high incomes and large property holdings; that the tax collecting machinery be overhauled to secure greater efficiency in tax collection; that a credit policy be adopted which will encourage investment in productive enterprises; and that fiscal, credit and investment policy be better co-ordinated to prevent inflation.

2. That agricultural production be improved by applying known methods of increasing the yield from all basic crops; that the Department of Agriculture and Natural Resources be adequately supplied with funds and the agricultural extension service expanded; that the agricultural college at Los Banos be rehabilitated and the central experiment station located there, with other stations at appropriate places throughout the country; that rural banks be established to provide production credit for small farmers; that the opening of new lands for settlement in homesteads be expedited and the clearance of land titles promptly assured; that a program of land redistribution be undertaken through the purchase of large estates for resale to small farmers; and that measures be undertaken to provide tenants with reasonable security on their land and an equitable share of the crops they produce.

3. That steps be taken to diversify the economy of the country by encouraging new industries; that adequate power and transportation facilities be provided as needed for further economic development; that a Philippine Development Corporation be established to coordinate all government corporations and enterprises and liquidate those that are ineffective; that financial assistance be made available to productive enterprises by the Corporation acting in cooperation with private banks; that the natural resources of the country be systematically explored to determine their potentialities for economic development; and that the present laws and practices with respect to the use of the public domain be re-examined.

4. That to avoid a further deterioration in the international payments position and to reduce the excessive demand for imports, a special emergency tax of 25 percent be levied for a period not to exceed two years on imports of all goods other than rice, corn, flour, canned fish, canned milk and fertilizer; that if such an emergency import levy is not possible under the Trade Agreement with the United States, either very heavy excise taxes should be imposed or a tax of 25 percent should be levied on all sales of exchange; that, as a safety measure, the present exchange and import controls be retained but their administration be simplified and liberalized and the full remittance of current earnings be permitted; that a Treaty of Friendship, Commerce and Navigation be concluded between the Philippines and the United States and the present Trade Agreement re-examined in the light of the new conditions.

5. That an adequate program of public health and improved education be undertaken, and better facilities for urban housing be provided; that the right of workers to organize free trade unions to protect their economic interests be established through appropriate legislation; that abuses in present employment practices depriving the workers of their just earnings be eliminated by legislation making mandatory direct payment of wages and retroactive monetary awards to workers; that a minimum wage for agricultural and other workers be established to provide subsistence standards of living.

6. That public administration be improved and reorganized so as to insure honesty and efficiency in Government; that the civil service be placed on a merit basis and civil service salaries raised to provide a decent standard of living; that the Philippine Government remove barriers to the employment of foreign technicians and take steps to improve training facilities for technicians in the Philippines; and that in accordance with the request of the Philippine Government, the United States send a Technical Mission to assist the Philippine Government in carrying out its agricultural and industrial development, fiscal controls, public administration, and labor and social welfare program.

7. That the United States Government provide financial assistance of $250 million through loans and grants, to help in carrying out a five-year program of economic development and technical assistance; that this aid be strictly conditioned on steps being taken by the Philippine Government to carry out the recommendations outlined above, including the immediate enactment of tax legislation and other urgent reforms; that expenditure of United States funds under this recommendation, including pesos derived from United States loans and grants, be subject to continued supervision and control of the Technical Mission: that the use of funds provided by the Philippine Government for economic and social development be co-ordinated with the expenditure of the United States funds made available for this purpose; and that an agreement be made for final settlement of outstanding financial claims between the United States and the Philippines, including funding of the Reconstruction Finance Corporation loan of $60 million.

No one must expect that even so comprehensive a program as this will quickly or automatically remove all the ills of the Philippine economy. What it can do is to provide an environment in which the people of the Philippines can work out a reasonable solution of their problems. What they ultimately achieve will be determined primarily by their own efforts and by the devotion of the Philippine Government to the interests of all the people. The nation has the physical and human resources to accomplish this task with help from the United States. In the few years since independence, the Philippines has taken a leading position in world affairs and in the United Nations. With thorough measures to deal with its economic problems, it can take its rightful place as a prosperous and stable nation.

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1. This Report, subsequently generally referred to as the Bell Mission Report or the Bell Report, was delivered to President Truman under cover of a brief transmittal letter signed by Chief of Mission Bell and the other members of the Mission—Richard J. Marshall, Edward M. Bernstein, August L. Strand, and Francis McQuillin. Chief of Mission Bell submitted his resignation to President Truman on October 18.

   The Department of State issued a press release on October 28 (Department of State Bulletin, November 6, 1950, pp. 723–726) comprising the summary and recommendations of the Report as printed here, President Truman’s letter of October 26 to President Quirino (p. 1506), and a brief explanatory statement. A few copies of the complete Report were made available to the press in Washington on October 28. Soon thereafter, the full text of the 109-page Report was distributed as Department of State Publication 4010, Far Eastern Series 38.