796.5 MAP/1–1251

Memorandum by the Officer in Charge of Economic Affairs in the Office of Philippine and Southeast Asian Affairs (Shohan) to the Director of That Office (Lacy)


Subject: Mr. Melby’s New Approach to Philippine Problems

Mr. Melby has recommended that financial assistance in support of the Philippine Government be solely, or substantially, directed through a military aid program. Since I believe Mr. Melby’s memorandum1 understates both the merits as well as the difficulties of his proposal, I will discuss it in my own terms with little reference to Mr. Melby’s attractive statement.

The Philippines present a three-fold problem: (1) a security problem, (2) a fiscal crisis, and (3) it is “underdeveloped” in far reaching institutional and social senses. Each of these problems of course impinges on the others. The two short-run, crisis problems of (1) security, and (2) the budget result largely from lack of sufficient but realizable development of her economic potential, of her political and social institutions, and fundamentally of the intellectual and moral characteristics of her people. The security problem is in part a budgetary problem—ability of the government to pay for necessary military preparedness. And the budgetary problem arises in part because of the heavy costs of defense expenditures.

The urgency of the two short-run, crisis problems precludes our tackling only the more fundamental institutional problems of development, which are less amenable to rapid change. We and the Filipinos must, with varying emphasis of interest as between us, directly tackle the first two problems.

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At the same time, we cannot completely neglect to attack the longer-run development problems. It is our chosen policy on a global basis, and a good policy. Deviation from it should not be acceptable in our own eyes, would have an ugly appearance in the eyes of other Asian countries, and would be particularly jarring to the Filipinos.

Therefore, I hold that our programs in the Philippines cannot rely exclusively on attacking any one or two of the problems described, but must embrace them all. Our programs must be organized within the limits of our resources, within the limits of understanding of our own government and people, with a view to maximum Philippine cooperation, and with a controlled approach to the security and budgetary problems. Our programs do not appear at present to be so organized and directed.

At present our general emphasis is upon longer run “development” factors, albeit with our tongue in our cheek. For example, Mr. Allen Griffin2 recently told a considerable audience that we must not expect significant results in productivity or institutional change from the economic aid program, that the latter is rather in the nature of “a bribe” to enable our more effective participation in Philippine affairs.

I hold then, with Mr. Melby, that the center of gravity of our efforts should shift toward a military program, integrated primarily with the solution of the budgetary difficulties of the Philippine Government. It is in any event necessary to bend every effort to the institution of expanded and more efficient Philippine defense forces, well integrated with our own strategic plans. I believe this objective lies within our resources, will be apprehended by both the American and Philippine peoples, can be reasonably well supervised by the United States and can become the basis for securing significant supervision over other aspects of the Philippine economy.

Such a program might have been a substitute for the costly ECA “bribe” referred to by Mr. Griffin, which would contribute relatively less in directly meeting the two crisis problems. For reasons given earlier, such a program would, of course, have had to have been supplemented by a fairly extensive technical assistance program costing $2 or $3 million annually.

However, the situation cannot be approached without reference to the actions and negotiations of the last few months. I believe that if the Philippine Congress gives substantial although not complete performance on the Foster Agreement,3 we are morally bound to give equally substantial performance on a large-scale economic aid program, although together with proposed additional military expenditures the fiscal management problems will be great, especially if we [Page 1496] continue our present notion of demanding full peso counterpart deposits. I recommend that if, however, the Philippine Congress falls substantially short of full performance, we cut back immediately on the scale of our economic aid and look to military assistance programs as our major tool for dealing with the Philippine economic situation. In the circumstances envisaged I believe it will be necessary that we expand the scale of military assistance in order to encompass a significant portion of present Philippine military expenditures, both in order to bait Philippine cooperation and also in order partially to assist the Philippines in the budgetary problem that will arise in case of non-performance by the Philippine Congress on the Bell recommendations.

The recommendations of the Military Survey Mission4 are in large part not comprehended in the present Philippine budget and would therefore not assist in meeting the present budget crisis. And that is the primary immediate as well as intermediate term problem—simply the problem of insuring some sort of reasonable if not perfect balance between government receipts and expenditures, avoiding a highly inflationary deficit position and avoiding a breakdown of Philippine Government fiscal institutions.

The problem is not now or in the forseeable future a problem of a foreign exchange crisis. Additional United States expenditures in the Philippines, whether for military or economic purposes, will not of themselves assist in meeting the budget problem. Additional United States expenditures can only help if they increase government receipts without increasing its current obligations, for example, by directly relieving the government of obligations that it would otherwise have had to meet.

It is true that we can generally expect over a reasonable period of time that any and all additional United States Government dollar expenditures in the Philippines will “assist” that country by giving her command over goods and services from the outside world. Yet our expenditures may on their initial impact prove positively embarrassing by adding to domestic inflation and in no way directly contribute to the immediate government problem of managing its income and outgo. As has been properly if not effectively labored by many observers and analysts of the Philippine scene for a number of years, there is no necessary economic reason for additional American aid to the Philippines except as it is needed and useful as a type of bribe to produce better performance by the Philippine Congress and Executive on fiscal problems, and as it is needed to permit effective American supervision and advice to insure the same result. It is really only incidental to these objectives that additional American expenditures [Page 1497] will improve the Philippine foreign exchange position and will assist for the longer-run in developing Philippine basic resources, both natural and human.

The Philippine budget for the present fiscal year and prospectively for 1952 is radically out of balance. The deficit for the present year may be of the order of $75–$100 million, in the absence of substantial receipts from new taxes recommended. Also in the absence of new taxes, the deficit for 1952 may be of the same general magnitude. If we can obtain an improvement in the Philippine fiscal position and get American supervision by using the bait of financial assistance for the development of her military establishment, we need not have offered the additional bait of approximately $50 million annually for economic development. In fact, the addition of substantial economic outlays to the substantial new military outlays may prove sufficiently inflationary further to complicate the Philippine economic position and specifically the government’s fiscal position.

However, it would appear to me that we could not achieve our purposes only by supplying funds to finance substantially new military activities in the Philippines. This would be without any direct effect on the government’s fiscal position, and in requiring the government immediately to put up counterpart peso funds we would, in effect, be merely requiring the government to buy our military services with pesos. This would either (a) increase the government’s budgetary problem, or (b) transfer to us without any significant consideration control over these Philippine Government receipts. I believe the proposal could only be made sufficiently attractive if we were in addition to financing the items recommended by the Military Survey Mission, [to] take over other items of Philippine national defense expenditure, equivalent to the anticipated governmental budgetary deficit.

I recognize that my proposals anticipate possible defeat on the line we have continually taken, that we will not extend economic assistance to the Philippines without adequate performance on its part. But such acknowledgement would be no more than recognition of the hard fact that for whatever reasons our policy has not succeeded. It would also be recognition that one of these reasons may well be the Philippine conviction that in view of current Far Eastern developments we cannot let them down in meeting their immediate critical problems, and this I take to be axiomatic.


Financing new military expenditures in the Philippines would not significantly contribute to, and might further embarrass, the alleviation of immediate Philippine governmental economic problems. Only if we were to underwrite present military expenditures would our military program be of assistance. Such action on our part would be, [Page 1498] in simplest terms, an outright budgetary grant, but in a form which might be more palatable to our own Congress and would permit the United States to have extra control over the Philippine military establishment. A budgetary grant, however, is only a temporary palliative. A cure can come only from increasing the efficiency and sense of responsibility of the Philippine Government itself. To bring this about some “bribe” is necessary. Perhaps a budgetary grant along the lines mentioned above would have been sufficient. It remains, however, that the “bribe” has already been extended through the Foster–Quirino agreement. It is too late to switch bribes, if the Philippine Government lives up to the “quid pro quo” required of it in the Foster agreement. Should the Philippine Government fail to provide substantially full performance on its side of the bargain, we should not then fail to call off the bribe of the ECA program and satisfy our own immediate objectives in the Philippines through taking over the full amount, if necessary, of the Philippine national defense expenditures.

  1. Reference uncertain. For what is probably a later draft of the mentioned paper, see the document infra.
  2. Far Eastern Program Director, Economic Cooperation Administration.
  3. For text of the Quirino–Foster Agreement of November 14, 1950, see Foreign Relations, 1950, vol. vi, p. 1521.
  4. See Foreign Relations, 1950, vol. vi, p. 164.