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Impact of Foreign Aid on Philippines

Title: Influence and Role of Foreign Aid and Trade in Philippine Development

Thesis Statement: The analysis of the implications of foreign aid and trade in the development of the Philippine nation and state can contribute to the improvement of the policy-making processes.


Underdeveloped nations or Third World countries like the Philippines have depended on foreign aid and trade for such a long time that up to now it is still an issue discussed globally. Foreign aid is discussed and argued over continually as it clearly gives the distinction among rich and poor nations and how their relations with another affect the costs and benefits of their interactions. This is a significant issue internationally as it also contributes to the development and lessening of poverty around the world.

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This research tends to study how trade and aid relations affect the policies for the development of Third World countries, specifically the Philippines. It will discuss the motives or interests of industrialized nations and show that the so-called Official Development Assistance (ODA) has certain flaws in it which becomes the underlying reason as to why underdeveloped nations are in such a snail-paced socioeconomic growth. Lastly, this research will also discuss how foreign aid and trade can affect the policy-making processes of the Philippines.

The Philippine economy at present is still in its poor state even with the new administration put into power by the people. There have been a lot of quantum changes for the last decade, up from the time when the country was colonized by various countries which are currently in power right now. There have been some improvements in the past enabling the Philippines to even be one of the richest countries following Japan and after this rapid economic growth during the postwar period, almost immediately during the reign of Marcos such growth began to stagger that the Philippines was dubbed as “the sick man of Asia”. There are some articles written by economists, political analysts and social scientists mentioning that a part of the reason why the Philippines right now is in such a poor state is due to the wasted aid or assistance of the developed or industrialized countries. Political instability during the Corazon Aquino administration had also worsened the economic activity of the country. Wasted foreign assistance which goes hand in hand with massive corruption, cronyism, poorly developed institutions and bureaucratic failure and inefficiency have, still and would be considered as the culprits behind the illnesses the Philippines is experiencing.

Most researchers have focused on studying corruption and how the bureaucracy has failed in giving due public service. Other studies made include international actors and their implications on the governance and institutional processes here in the country. Such studies do involve at most the study of foreign aid and trade as well. This paper intends to address the effects foreign aid and trade has left on the policy-making processes and economic development of the Philippines. It will inevitably include the other impacts as well on the health, education and military sectors.

  • Section 1 provides the different approaches to development and its essence in terms of economic and societal factors. It will also define foreign aid and trade in order to highlight the different perceptions about foreign aid. This section will also include the different forms of aid to clearly distinguish the forms of aid and be able to set the proper context in which aid is used.
  • Section 2 will address the aid and trade interests of not only the industrialized countries but as well as those of the developing countries. This includes the costs and benefits garnered by the participant countries to explain the rationale behind the assistance provided and received.
  • Section 3 aims to explain the role of foreign aid and trade in the country’s development and its pros and cons.
  • Section 4 concludes the paper and will state some overall implications of foreign aid and trade on policy and governance, lastly it will also include alternatives which can provide a better solution than only relying on foreign aid to meet the developmental needs.

Development according to Habibullah, is defined based on two approaches namely economically and socially. The definition of development was viewed by most with a limited ‘economic’ bias by simply defining it as “a process of growth of material production through the accumulation of capital” (Habibullah K., 1986, p. 1). While ‘development’, defined in a ‘social’ context is simply considered as viewing it from a psychological, sociological and institutional perspective (Habibullah K., 1986). Studying development from each of these approaches separately as Habibullah had mentioned, is very limiting considering the fact that economic factors are closely knitted with social factors. Therefore, the solution was to integrate the two approaches thereby forming the ‘socioeconomic approach’ as Habibullah had suggested. Studying the development of a country from this perspective can allow a larger number of economic as well as social indicators to be studied for the concept of ‘socioeconomic development’.

The concept of development in the economic base is normative and that there is no single piece of information under development in this case. Under the term ‘developing countries’, it always refers the reader to look at nationalism, transfer of power, stagnation, technical assistance, economic growth, modernization and industrialization (Habibullah, K., 1986). In order for economists to give it an operational significance, they have decided to give development a purely economic concept. Therefore, ‘economic development’ was given a general definition by Okun, B. and R.W. Richardson as “a sustained, secular improvement – in the material well-being, which we may consider to be reflected in an increasing flow of goods and services” (Habibullah, K., 1986). It is important to take note that economic development is different from economic growth albeit the two terms are used interchangeably. Economic growth simply means more output whereas economic development means something more. Due to the technical and institutional alterations, there is a greater ability to produce and this is what is meant by economic development. But, this difference between the two should almost be negligible as development is hard to examine without growth. According to Habibullah, some economic development theories are those of Marx, Schumpeter and the classical models. The Marxist theory is somewhat more universal compared to the classical models since Marx includes in his theory the political and socio-cultural factors into his analysis but his main concept of the developmental process still relied heavily on a materialistic interpretation and capital accumulation. The Schumpeterian model is identical to Marx’s theory but instead of focusing on the growth of capital, his model rather focused on the growth of the numbers of entrepreneurs.

Sociologists, psychologists and some economists had self-assurance that defining development in the social context will work well seeing that a purely economic approach to development was inadequate during the 1950s and 1960s as a great number of developing countries had reached the growth target set by the United Nations, but the low quality of life or the poor standard of living of the people had more or less remained the same. With regards to this, some economists who considered that various institutional and socio-cultural factors are also important in the course of development, many of them still contend that the deterministic power of economic factors and economic growth on its own will end up automatically in social progress (Habibullah, K., 1986) . Thus, this led to an increase in the ‘social psychological models as sociologists and psychologists (even some economists) claimed the dominance of the various psychological and social or societal factors as key determinants to economic development. Some of the important social psychological models Habibullah mentioned were Professor David McClelland’s “n-achievement” model, E.E. Hagen’s “theory of social change and Dr. Boeke’s theory of “sociological dualism”.

Basically, Professor McClelland’s n-achievement model (Need for Achievement) is all about having the motivation for achievement in order to have a successful economic development where a growth in n-achievement would automatically lead to the growth in entrepreneurship and thus ending in an overall progress in the economy. E.E. Hagen claims that cultural personality is the important factor in economic development. He suggests that the revolutionary actions of the subordinated group or those who are in the lower classes against the elites are responsible for the transition of society from traditional to modern. While Dr. Broeke’s theory of sociological dualism explains that the reason why less developed countries exist now was brought about by the colonialization of such countries in the past. Colonialism brought with it its own social system (Western Capitalism in majority) which clashed with the colonized country’s indigenous social system. Such was the case for the Philippines which was colonized by the Spaniards, Japanese and the Americans finally. Each country had brought with them their political system and style, culture and traditions which greatly influenced the Filipinos. Their influences can be reflected from the household up to how the government manages the whole country.

Socioeconomic development was born out of the fact that underdeveloped countries continue to fail in improving the standard of living of the majority of its population and that the interrelations between economic and social factors became more evident in the long run. “The essence of this approach is that development is a single process involving the transformation of a whole social system, of which economic activities and relations are a part, for the achievement of specified goals” (Habibullah, K., 1986, p.8). This new concept in studying development has provided the economic and social approaches a more wholesome explanation. Socioeconomic approach is encompassing as it looks at the development of society not only with the economic bias but it includes as well the social conditions, political and administrative foundations that account for the stagnation or growth of a country.

With this approach, foreign aid and trade can be discussed not only economically but other socio-political elements can be included as well to provide a better understanding. Foreign aid and trade can be defined politically so as to explain its interrelation with the policies and governance of a country. It is important to look at the macroeconomic level in order to see how it affects the economy most certainly for the underdeveloped nations such as the Philippines.

It is important first to clarify the concept of an underdeveloped area, its characteristics to be considered as a country belonging to this category. Although it doesn’t sound good and fortunate to be branded with the label “underdeveloped”, “developing” or “less developed country” it is better clear up this definition in order to see how industrialized countries consider in helping and sending out foreign aid for such countries.

According to Jr. Wolf, C. foreign aid and trade is commonly associated with these other labels: “backward, underprivileged culturally deprived, undeveloped, less developed, rich and poor, low income, Point Four and developing nation” (1960, p.22). These labels on third-world countries caused some commotion as early as the 1940s since the definitions of these labels seemed inappropriate to describe Third World countries. For example, the label “backward” was popularized because of President Truman’s Point Four speech and it caused an immediate denunciation among Third-World countries as the label “backward” implied “savagery” or “barbarism”. The use of the labels “culturally deprived” and “underprivileged” also elicited a negative meaning as it connoted not only charity and poverty but also a depressed level of civilization, culture and material development which is not true at some parts since cultures of Third World countries is usually highly-developed because it has already evolved over how many centuries.

Foreign Aid or simply the word aid has been defined by many economists, political scientists and other researchers in the field of Social Sciences. Each of them has their own interpretations and perceptions about the word based on their culture, the country they are from, the kind of political and social context they are in. Many other societal factors are involved in the influence of how foreign aid or aid is defined and this goes the same for foreign trade or trade.

Aid is generally defined as “the transfers of resources from governments or public institutions of the richer countries to governments in the Third World; a post-Second World War phenomenon” (Hayter, T., 1985, p.6). Whereas foreign trade or trade by itself is defined as services or goods intended for trade with another country other than the country from where they came from. Trade is essentially the imports and exports between nations or to some location outside of a country’s borders.

Aid has many forms, purposes and roles to play. It has many uses not only for industrialized countries, but also for Third World countries like the Philippines. Aid as well as trade has many sides to it that majority of a poor populace would not know. It is not satisfactory to categorize foreign aid as homogenous which can be put into a single category, since its manifold objectives are simply too diverse to be dealt with all at the same time. Thus, there exist different forms of aid, each having its own purpose, objective, rationale and role. In this sense, it is much easier to identify how foreign aid is allocated and used. At the same time, the implications of such aid and its connection with trade can clarify the implications it has made on the Philippines policies, governance and processes.

There are actually a number of interrelated forms of Aid coming from the industrialized countries (majority coming from the West) which have been used by many poor countries such as the Philippines. It has been mentioned that aid is also a post-Second World War phenomenon and this is true for Imperialist governments; “Imperialist governments did not actually call their expenditures on colonial administration and conquest, on railway systems to transport minerals and raw materials to the ports for transshipment to Europe as aid” (Hayter, T., 1985, p.6). At post- Second World War, these expenditures came to be known as aid or foreign assistance. Like in the case of the Philippines, U.S. development assistance began after the Second World War during the 1940s. An example is the Tydings Act (Rehabilitation Act) of 1946 which granted “compensation to Filipinos in the form of financial and technical assistance for the reconstruction and rehabilitation of roads, bridges and public buildings” (Pante, F. and Reyes, R., p.2). It was mentioned that when these colonies are left on their own to be independent, their colonial rulers and other governments began to provide loans and grants to help in the financing of agriculture, social and economic infrastructure. This can be demonstrated in the Japanese Development Assistance (Official Development Assistance) which happened during 1956 in the form of war reparations payments or “baisho”. It is somehow a form of de-colonization from these colonial powers through giving or lending money. In the Philippine context, most of its aid or assistance had come from the United States and Japan and the reasons why they had provided aid are clearly seen in its history with colonization. Foreign aid for the U.S. has many roles in American diplomacy. It is either used for creating a symbolic national “presence” abroad; it can be utilized for international favors; and it can be used for introducing and influencing changes in other countries” (Montgomery, J., 1967).

Montgomery classified aid in three forms according to their major purpose: Diplomatic, Compensatory and Strategic. Diplomatic foreign aid is for the purpose of establishing in abroad a presence of national ideals like “generosity, humanitarianism, efficiency, technological excellence, and sheer power” (Montgomery, J., 1967, p.7). Diplomatic foreign aid is established through the economic and military assistance and this was emphasized after the World War II. This form of aid, presence is utilized by industrial countries to display official friendships with the other countries and of course to “influence the state of politics” (Montgomery, J., 1967, p.8). This Diplomatic Foreign aid is concretized by the U.S. and other developed nations mainly through their diplomats or ambassadors which are considered as their “official” presence in other countries. But, there is also this “unofficial” presence which takes form through the missionaries and voluntary service agencies (private volunteers, a close example is the Peace Corps which established not only in the Philippines but world-wide) the developed nations have. These two concrete forms of diplomatic foreign aid have major differences when it comes to institutionalism however, since official diplomatic foreign aid is dependent upon government-to-government relationship while unofficial diplomatic foreign aid is dependent upon private individuals. Another difference is that missionaries aim to change only individuals and not necessarily the whole society. Therefore, it comes down to the fact that Diplomatic foreign aid can either be given in a most personal form by private interests or in an impersonal form by the government.

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Compensatory Foreign Aid which is the second form, serves the purpose of fulfilling international transactions or international exchanges of favor to be exact. This kind of foreign aid is considered as more controversial than the Diplomatic Foreign Aid as Compensatory Foreign Aid in other words can imply bribery. “The commonest forms of these international exchanges involve the use of a military base, air rights, and adherence to alliances, all of which have been ‘purchased’ with substantial economic or military assistance instead of cash payments” (Montgomery, J., 1967, p.16). Such is the case for the U.S. and the Philippines seen in the Visiting Forces Agreement and also in the Operation Enduring Freedom (OEF) case. This form of aid is commonly criticized because of the bad impression it gives as a medium for exchange of favors but nonetheless this can never be abandoned when it comes to agreements or negotiations between countries.

The third use of foreign aid according to its major purpose is definitely the most innovative compared to the first two mentioned earlier. This third use of foreign aid is more than just a payment for international favors and as an extension of Western diplomacy (specifically American diplomacy) to Third World Countries. The Strategic Foreign Aid is “a reflection of a world outlook” (Montgomery, J., 1967, p.18).

According to Montgomery, Strategic foreign aid is considered as risky and dramatic for the fact that its purpose is to improve the world order not simply of dependence and dominance but also of a delicate network of constructive interrelationships. By giving assistance to other nations, it is believed that foreign aid can serve the interests of the industrialized nations since Strategic foreign aid involves trepidation for internal conditions which can affect world politics. Strategic foreign aid cannot be used at all times if the conditions such as: merging of noncommunist countries which seek to expand their sovereign independence and giving its people a higher standard of living are not present. The absence of these conditions causes foreign aid to lose its strategic drive. A concrete example for Strategic foreign aid is once again the United States military assistance which serves their interest of having security against the threats of communism most emergent in poor countries. “The range of instruments available to the United States in advancing such a world order includes military action to create strategic bastions against the military expansion of the communist world, as in South Korea” (Montgomery, J., 1967, p.18).

Military aid to the Philippines by the U.S. began immediately during the postwar period. One of the first military aid programs by the U.S. was the Philippine Military Assistance Act approved on June 26, 1946. This military assistance act actually allowed the U.S. on final agreement, the use of fifteen military bases for a lease period of ninety years in the “interest of mutual protection and the maintenance of peace in the Pacific” (Jr. Wolf, C., 1960). It is clearly seen in the actions of the U.S. that they are very cautious of the threat of communism in other countries.

The forms of aid according to their purpose each have their own requirement of involvement with the other nations’ domestic affairs. Political forces competing against each other in different nations for domestic power is in a state of internal disequilibrium due to its military capabilities being supported by the foreign aid. This use of foreign aid in maintaining stability for countries not threatened by invasion is an evidence of political involvement for industrialized or developed nations in the affairs of the developing nations. Foreign aid also has political, social and economic repercussions and implications which account for the fact that it has been unsuccessful in the other areas of its strategy for serving its interests. Aside from the three forms of aid mentioned, there also other five principal forms of official foreign aid according to the Development Assistance Committee (DAC) which are grants, loans, contributions in kind, officially guaranteed suppliers credits and reparations payments. All of these five principal forms of aid are actually the representations of the forms of aid according to purpose. These principal forms are the physical manifestations of the foreign aid programs industrialized countries offer underdeveloped nations and within these are strings attached.

These strings are attached works on the premise that industrialized nations certainly are motivated to help Third World nations not only out of humanitarian or diplomatic reasons, but as well as their interests, the benefits they get from assisting poor nations. One may wonder why rich countries should be concerned with the poor nations’ welfare. The answer may be obvious to some but according to Pincus, the answers are actually obscure and complicated. But to simplify the answers, Pincus mentions that nations for a fact want or need friends in the political arena. For foreign policy to work, political cooperation and economic aid are needed. Obviously, each country has a standpoint to advance or a position to defend or side with in international negotiations. For rich countries to gain support from poor nations when the need arises, they have to show interest or concern for the welfare of these poor nations. “Votes in the United Nations, trade concessions, use of bases or communications facilities, transit rights and the myriad large and small aspects of international political and economic dealings” (Pincus, J., 1967, p.7) are some of the situations where rich or industrialized nations can use or take advantage of the support given to them by the Third World countries whom they assist. This rationale is very plausible but shallow. Rich nations’ interests go beyond making major long-run political and financial commitments for the sake of diplomatic negotiations. Therefore, Pincus answers this through a simplified form of interests or motives of the rich nations through the following: military security, maintenance or extension of power and prestige, economic advantage, charity, and a sense of community.

All of these interests are closely interrelated with one another and explain how important underdeveloped nations are to the rich countries. For example, “the falling dominoes” argument in the U.S. does not only involve military and political interests but also the issues of ideology and power. In the dominoes argument, it is stated that the West should provide aid for each country threatened by Communism because if that nation would fall, it would be easier for Communism to take over other countries threatened as well and it would be more costly for the West to defend. This issue of military and national security with the passage of time had concentrated on more political issues. For the West, it views the underdeveloped countries ideologies’ as a stadium for the battle against Communist Absolutism and freedom for control. As for the Soviet Bloc, it views the underdeveloped nations’ ideologies as a center for struggle in the overthrow of an imperialist regime. With this, the imperialist powers are afraid of their own destruction, the outspread of such a hostile ideology because this ideology is the manifestation itself of power aiming for their destruction. Therefore, imperialist or rich nations would want to see the world organized in a fashion as their own or in ways that are at least not threatening to them; this is the basis of the industrialized nations’ political interest in underdeveloped countries and this is at the same time from the perspective of underdeveloped nation is not only a cultural lag but it has advantages for them as well.

Rich nations from the East and West are competitively enticing underdeveloped nations through economic and military aid, political support and through favorable commercial policies. The industrialized nations are still bound by the idea that the key to survival lies in territorial political control and geographical domination so it is very true then that political motives or interests are essential for their concern for underdeveloped nations.

Aid and trade may have different aims but both are important when it comes to the interests of the great powers. The U.S. for instance, in order to keep its long-range economic well being up and about is through expansion of its commercial interests. One way is through increasing its supply of imported cheap raw materials from Third World countries like the Philippines. In our case, exporting out raw materials had been around even from the time of Spanish colonialism and in most cases has given no improvement to uplift the standard of living in the country. This economic rationale underlying continued foreign aid and trade is beneficial in the points-of-view of the industrialized nations. With the reliance of industrialized nations on raw material imports from underdeveloped nations and in turn the reliance of underdeveloped nations on capital goods and other products made in developed nations, it concluded by the industrialized nations that the greatest trade is between the most industrialized nations. Thus, for the mutual benefit of all, foreign aid should be continued to sustain the economic growth of underdeveloped nations in order to increase trade.

Trade and Aid interact with another as “the transfer may facilitate trade or inhibit it” (Pincus, J., 1967) and their purposes are not to deter one another. The object of trade growth is not to decrease aid and the object of aid is not increase trade. Aid is important to the economy many underdeveloped nations as long as they are discontented with “the present world distribution and the incidence of its growth, given the present organization of international economic policy” (Pincus, J., 1967, p.47). This goes the same for trade, it is important for both industrialized and underdeveloped nations as long as it can have good effects on growth.

All of the concepts and situations discussed can be readily seen and applied on the case of the Japanese Official Development to the Philippines. The Japanese ODA is significant for the reason that it had greatly influenced the development and economies of various nations all over the world. It is stated in the IBON in their 2005 report that the Philippines is the third largest recipient of Japan ODA after China and Indonesia. The Philippines has been getting its aid from Japan for Philippine development projects and needs since 1960.

Most of the Japan ODA accomplishments are seen in infrastructure developments since 1969. According to the Japanese Embassy in the Philippine reports, the following were the sectoral accomplishments: (1) Roads and Bridges, (2) Power and Energy, (3) Potable Water Supply, (4) Airports, (5) Ports, (6) Flood Control, (7) Agriculture, (8) Environment, (9) Health, (10) Education.

For the roads and bridges, it is mentioned in the report that 13% of all national highways were improved through Japan ODA, which includes the 2,100 km Philippines-Japan Friendship highway, 200 new bridges, the second Mandaue-Mactan Bridge and the San Juanico Bridge. 8% of the power and energy generation was assisted by Japan. Japan had supported in the generation of geothermal power and also in the development in the interconnection of power grids. Water facilities which provided clean drinking water to an estimated 13 million Filipinos were reported to be built by Japanese ODA. The construction of major airports were funded by Japan ODA with the total of 110 billion yen (PhP 47.8 billion) which includes the NAIA 2 and Cebu- Mactan international airports. These airports accommodate about 13 million passengers of domestic flights and approximately 8.3 million passengers of international flights.

About fifty-nine small-scale ports were built and rehabilitated for greater access to different areas and the facilitation of industrial development. These constructions were supported by Japan as well as the expansion and improvement of major ports like Subic, Cagayan De Oro and Batangas. Flood control projects were also assisted by Japan. An example would be during the Ormoc disaster which killed about 8,000 people in 1991, in response to this, Japan had completed the Ormoc City Flood Mitigation Project which had prevented the same disaster Ormoc had experienced when a typhoon of the same intensity hit Ormoc again. In agriculture, Japan had funded more than 50% of irrigation projects which equals about 129,000 hectares of farmland Japan. The Philippine Government was also supported by Japan in reforestation, solid waste management and Metro Manila Air Quality Improvement and other various environmental projects. For the Philippine Health sector, Japan had already given grants and technical assistance with a total of 20 billion Yen (PhP 8.8 billion). The most significant were the upgrading and expansion of the Philippine General Hospital, Benguet Medical Center, Vicente Sotto Hospital and Davao Medical Center. Research for infectious diseases was also supported by Japan. Once again, Japan has extended its loans and grants for the expansion of school buildings. As of 2005, there are about 1,557 classrooms and 156 science laboratories built at a cost of P 4.4 billion (grant-aid) and the construction of 64,000 classrooms were ongoing funded through loan schemes. Education, Mathematics’ and Science teachers’ skills were also being improved and focused on then by Japan.

With all of these important and overwhelming assistances Japan has given the Philippines, it is important to note that there are imperative problems which had resulted from the nature of Japan’s aid and supported/funded projects. A central issue is that the aid of Japan to the Philippines comes in the form of loans which worsens the debt burden of the country. Although the scale and results of Japan ODA is truly amazing, it should not be neglected that these had come in the form of loans meaning they were not free.

Looking at this in the context of judicious fiscal policy, these ODA loans certainly have contributed much to development but these are not necessary or these ODA loans are inappropriate for the problematic pos

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