796.5 MSP/9–852

No. 312
The Ambassador in the Philippines (Spruance) to the Secretary of State1


Dear Mr. Secretary: There have been exchanges recently between Manila and Washington of various views as to what the MSA program for the Philippines for the Fiscal Year 1954 should be. Since I consider this program to have a very important bearing on what we shall be able to accomplish in the Philippines, I am submitting to you my ideas on the situation here, as briefly as possible but still at some length.

To begin with, I think our chief reason for the Bell Mission and for our present economic and military aid program here is to prevent the country from falling into the hands of the Communists [Page 498] through the success of the Huk movement, and to get the country in such a condition of social order and justice that there will be no breeding ground left for a further Communist movement.

In fighting the spread of Communism in the Far East, we also have as a most important objective the prevention of Japan from going Communist, and her retention among the free nations of the world as a potential ally.

To be kept out of the Communist camp, Japan must be able to trade with the free nations and obtain the materials and the markets needed to support her ever increasing population. Agriculturally, except possibly for Hokkaido, Japan has expanded to the limit of her capabilities. She can produce no more food, but must depend on imports of food and raw materials. She is an industrial nation and must manufacture the raw materials she imports, export and sell them abroad. If all of the free countries of the Far East industrialized to the limit of their capacities and failed to increase their capacity for the production of food and raw materials, the result might be the forcing of Japan into the arms of the Communists.

To return to the Philippine situation, I am convinced, after a seven months’ period of study and observation of the country, that the basic cause of the current low standard of living, underemployment and unemployment among the mass of the people stems primarily from poor land use. This involves a number of things, among which may be mentioned: (1) lack of cadastral surveys and the inability of the small holder to obtain a legal title to his land; (2) large scale absentee landlordism; (3) lack of public roads to open up new areas of public lands and to obtain good access to markets from areas already opened up but underdeveloped; (4) adequate public health measures to combat malaria and schistosomiasis in new areas of public lands and in underdeveloped areas, such as Mindanao and Mindoro; (5) irrigation, particularly in rice raising areas; and (6) the present incidence of taxation, which falls primarily on business and consumption and so raises the cost of living to the mass of the people, and which does not fall on land values and so does nothing to prevent land purchase and land holding from being the favorite investment of the small but wealthy class of Filipinos who control the country economically and politically.

If the foregoing estimate is correct—and I feel sure that it is—, it follows that our major effort should go to clearing up the basic land problems and not to pushing the industrialization of the Philippines.

The current political situation in the Philippines is that neither Quirino or Lopez in the Liberal Party, nor Laurel or Recto in the Nacionalista Party, have shown the slightest indication of taking any interest in land reform. The Liberals control the House of Representatives [Page 499] and the Nacionalistas, the Senate. Quirino’s control of his own party in the House is not too firm. The result is that the chances of getting the necessary laws through the Congress to effect land reform are very poor, unless we have something to give which the Filipino politicians want badly and which we can and will withhold if we do not get our land reform legislation. Even if we do get the laws we want on the statute books, an honest and effective execution of these laws still remains to be accomplished. Quirino is quite obviously campaigning for re-election, and he will do nothing that he feels will jeopardize his chances in this respect. The millions of dollars which the United States gives to be spent by MSA (including JUSMAG) in the Philippines is about all we have to offer in exchange for the laws we require for land reform and for an honest execution of these laws.

I shall now discuss the question of industrialization. This may be considered on the bases of (1) what industries are practicable in the present state of the Philippine economy and (2) whether the United States should extend a large amount of MSA aid to help industrialization at the present time.

The establishment of industries which will process Philippine raw materials that are now available or can be economically produced here is undoubtedly sound. Examples of such industries are tobacco, cement, sugar refining, rice milling, copra processing, lumber milling and the processing of mineral products. A factory to manufacture bags for sugar and rice is about to start production, at first using imported jute but eventually to operate with Philippine-grown kenaf. This is a new Soriano company, as is the glass plant which now supplies most of the Philippine requirements for bottles. Colonel Soriano is also investigating the possibilities of producing paper from Philippine forests.

The successful establishment of industries such as the above requires careful investigation of sources of raw material, cost of plant and of production, and market availability. Since the difference between success and failure in such an enterprise is often narrow, the ability to undertake it and to carry it through to successful operation involves not only a thorough knowledge of the product, but also the selection of competent management to run the industry after it is in operation. As the amount of managerial talent so far developed among Filipinos is not large, it follows that most of the managers of industries in the Philippines will still be found to be foreigners. The national corporations of the country, which are quite naturally, managed and staffed by Filipinos, have not been notably successful. Much of this is due to politics, however.

[Page 500]

I turn now to the question of whether the United States should extend a large amount of MSA aid to help industrialization at the present time.

The present economic climate in the Philippines is not favorable to the investment of foreign capital, and this includes American capital. This is not only the opinion of the best qualified officers of the Embassy staff, but also of nearly all of the representatives of American business in the Philippines who have a real knowledge of what goes on in the country. This unfavorable economic climate is evidenced by such things as the import control, the foreign exchange tax, the reduction in quantity or the total elimination, either by law or by executive order, of the importation of specific items of trade, and, in general, the heavy incidence of taxation on business enterprise previously mentioned. Probably much, if not all, of the above may be expected in a newly independent country; but, at the same time, it is not conducive to the entry of new American capital, particularly when the capital previously invested here finds itself prevented from leaving the country.

The point I am trying to make is that I do not think that the substitution of public capital from the pockets of the American taxpayer for industrial enterprises in the Philippines, in place of private American capital, will tend to promote the favorable climate for private capital which we believe should be encouraged.

A second aspect of this question is my very grave doubt as to whether the investment of the American taxpayer’s money in the Philippine industry, as proposed by MSA in the FY 1954 budget, could be adequately safeguarded. In this connection I refer particularly to the procedure described in Musto A–63 and discussed in MSA/Manila Tomus A–101 of 18 August 1952 and Tomus 335 of 26 August 1952.2

I inquired of a representative of Colonel Soriano at the opening on 1 September of the Industrial Textiles Manufacturing Company, Inc., of the Philippines (for the manufacture of sugar and rice bags from jute and kenaf) how long Colonel Soriano had investigated the possibilities of establishing this industry. I was told that he had gone into the subject for a period of eight months and that in such an investigation he employed officers from his own companies and outsiders as well, when special talent not otherwise available was needed.

Colonel Soriano has a record for the establishing of successful new industries in the Philippines, which is outstanding. On the other hand, the attempts on the part of the Philippine Government, [Page 501] both during the regime of Governor General F. B. Harrison3 and since, to establish new industrial enterprises or to operate old ones have, as a rule, been more successful politically than financially.

To summarize, I believe:

That our efforts in the Philippines exerted through MSA should be devoted primarily to helping solve the land problem, which is basic to creating sound economic conditions here and so to removing grounds for Communist penetration, and to a proper integration of the Philippine economy with that of Asia and the rest of the free world;
That reforms in land tenure and its allied problems will not be accomplished by either of the two present political parties unless we are able to bring major pressure to bear on the Philippine Government;
That to devote large sums of MSA money to the furtherance of industrial projects in the Philippines will be very popular here, as industrialization is much talked of as a panacea for the present economic ailments, but it will not contribute directly toward the bringing about of land reform;
That a program of forced industrialization of the Philippines will not contribute to the success of our Japanese policy as well as a program of increasing the production of food, semi-processed and raw materials;
That the substitution of American public capital for private capital for industrial projects will not tend to improve the present unfavorable economic climate in the Philippines; and
That the methods proposed by MSA to channel public funds into industrial projects are not such as are apt to be successful in avoiding loss of the American taxpayer’s money.

The above has been read by six of the principal officers of the Embassy staff, and it meets with their concurrence. Dr. Renne of MSA has also read it, and has asked me to add a statement about the discussion which was held between Dr. Renne and myself and members of our respective staffs regarding the FY 1954 program.

As a result of my objections to the original MSA FY 1954 program, which allocated $10,000,000 to industrial projects and had an inadequate road building program, a revised program was submitted allocating $5,000,000 to industrial projects and about $5,000,000 for agriculture, which included roads.

In agreeing to the $5,000,000 item for industrial projects, it was my understanding that such projects would be scrutinized with great care and would be primarily those which would process raw materials produced in the Philippines; and that any part of this $5,000,000, which could not profitably be used for such projects, [Page 502] could and would be diverted to agricultural and allied projects which would assist the land reform program.

Should this diversion not be permitted, my support of $5,000,000 item for industrial projects would be withdrawn for the reasons outlined in this letter.

Respectfully yours

R.A. Spruance
  1. Copies of the letter were sent to John M. Allison, Assistant Secretary of State for Far Eastern Affairs; Willard L. Thorp, Assistant Secretary of State for Economic Affairs; and Roland R. Renne, Chief of the Mutual Security Agency Mission in Manila.
  2. None printed.
  3. U.S. Governor-General of the Philippines, 1912–1921.