1

*WK 6 MARKET STRUCTURE

Perfect Competition - refers to the ideal market structure where we can find a
lot of buyers and sellers of a specific product

v Each individual player in the market is relatively small and

cannot influence the market as a whole.
v Firms in such markets are “price takers” --- they cannot affect
the price in the market but simply takes the price as given.
v The product is seen by consumers as “homogenous,” that is,
there is no difference in quality of a particular product if we buy it
from firm A or firm B.
v There are also no barriers in entry. Firms can enter and leave
the industry without cost.
v There is no non-price competition such as advertising.
v In a perfectly competitive market, we assume that each firm is
attempting to maximize their production levels (produce as much as they
can), and thus maximize their level of profit. All firms are using the same
technology and all are using “least cost, greatest profit” methods of
production.

Imperfect Competition - certain conditions necessary for perfect

competition are not satisfied.

v Monopolistic Competition - this refers to a market structure in

which there are many sellers who are supplying goods that are close,
but not perfect substitutes. Each firm can exercise some effect on its
product’s price.
The product of one supplier can be differentiated from that
of another producer.

Within each product group, products and firms are different

but close enough to compete with each other.
For example, there are several grocery stores that are
carrying the same goods but at different locations. The same goes
with gas stations in which all sell the same product, but they
compete on the basis of location and brand name.

v Oligopolistic Competition - it is where the market is dominated

by a small/few number of firms (usually under ten). These firms gain the
majority of total sales revenue.

This kind of market structure sells similar goods and

services which are close substitutes, and thus, price sensitive;
meaning, a price change in a substitute good
would directly affect the supply or demand for the other
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good.

For instance, products X and Y are substitute goods and both are
sold by companies A and B respectively. If company A decides to
lower the selling price for product X, consumers of product Y would
tend to buy product X instead because of its lower price. Company B
would also decide how to react in the given situation.

# High barriers to entry. There may be strict government

regulations or quota limitations that could hinder new and small firms
in competing with the existing firms. This also requires large
investment (in billion of pesos/dollars).

# It
is also characterized by intense competition where both price and
non-price methods of competition are used such as commercials or
bandwagon.
#·They compete by offering warranties and friendly. The usually
organize helpful customer service.
# Firms in oligopolies are said to be mutually interdependent. If one firm
changes its prices, this will have an effect on the sales of all other firms
in the market.
§ Example: Petroleum Company

v Monopoly - a kind of market structure wherein there is only one

supplier of a product or service.

# Exceptionally high barriers to entry. Some barriers to entry are created

by government legislation.

# Products and services have no close substitutes. ·

# Firms are price makers.

Example: Microsoft has a near monopoly on PC operating systems.

This is because Microsoft has invested heavily into technological
development and has gained patents over its intellectual property
(software). If you have a patent on a process or a product, you have
exclusive rights over its use for a certain number of years. No one else
can use your process or property without your permission.
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The following table summarizes the types of market structures:

N0. 0f Part 0f
Pr0ducers and Ec0n0my Firms Degree Meth0ds 0f
Structure Degree 0f Where 0f C0ntr0l 0ver Marketing
Pr0ducts Prevalent Price
Differentiati0n
Many Financial
Perfect pr0ducers; markets and Market
C0mpetiti0n identical s0me N0ne exchange 0r
pr0ducts agricultural aucti0n
pr0ducts
Imperfect
C0mpetiti0n
Many Retail trade
pr0ducers; such as Advertising &
M0n0p0listic many gas0line and quality rivalry;
real/perceived PC industry S0me administered
differences in prices
pr0duct
Few pr0ducers;
little 0r n0
difference in Advertising &
0lig0p0ly p0duct, few Steel, chemical, S0me quality rivalry;
pr0ducers; aut0s, airlines administered
s0me prices
differentiati0n
0f pr0ducts
Single L0cal
pr0ducer; teleph0ne, C0nsiderable, Advertising and
M0n0p0ly pr0duct with0ut electricity & but usually service
cl0se substitute s0me patented regulated. pr0m0ti0n
pr0ducts

BUSINESS ORGANIZATION AND MANAGEMENT

Forms of Organizations

 Proprietorship - a form of business organization in which there is

only one owner. For instance, opening an internet café in your place
falls in this form of organization. The proprietor must know the retail
and trade laws and regulations of the government. He/she must also
raise a sufficient amount of capital to support the survival of his/her
business.

Advantages:

Easy to start. Anyone with a good idea and the willingness to accept
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risks can start a business as a proprietorship.

Little government regulation. Accurate tax records must be kept and

certain employment guidelines must be followed. In most cases,
proprietorship has the least regulations.

Profits stay with owner. Owner does not have to share money from
the business with anyone else

Pride of ownership. The owner can see the progress of the business
and feel proud to run it.

Complete control. Owner has complete authority over business

decisions. The owner decides alone on what product to produce, how
many hours will the firm be open for service and who will be the
manager of the firm.

Lower taxes. The tax is the same as the personal income of the
proprietor.

Disadvantages:

Unlimited liability. The owner’s personal assets can be used to pay

bill of the business or it can also be used to pay debts of the business.

Limited life of the business. If the owner dies, the business ceases
to exist.

Difficult to raise money. It is difficult and expensive to raise money

to financial limitations of the owner.

 Partnership - it is an agreement in which two or more persons

combine their resources in a business with a view to make a profit.
In order to establish the terms of the business and to protect
partners/shareholders in the event of disagreement or dissolution of
the business, a partnership/shareholders agreement should be
drawn up, usually with the assistance of a lawyer. Partners share in
the profits according to the terms of the agreement.

 Partnership Agreement. A legally binding document that specifies

how the responsibilities and profits/losses from a partnership will be
divided between the partners.

 General Partnership All members share the management of

the business and each is personally liable for all the debts and
obligations of the business. This means that each partner is
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responsible for and must assume the consequences of the actions

of the other partner(s).

 Limited Partnership. Some members are general partners who

control and manage the business and may be entitled to a greater
share of the profits, while other partners are limited and contribute
only capital, take no part in control or management and are liable
for debts to a specified extent only. A legal document, setting out
specific requirements, must be drawn up for a limited partnership.

 Advantages:

Easy to start. Partners need only to agree on how they will share
both responsibilities and rewards.

Little government regulation. They only need to keep good records

for tax purposes and meet guidelines related to employment
practices.

Not difficult to raise funds. All partners’ financial assets are

considered by a bank or other lender. This makes it possible for the
partners to borrow more than anyone of them. Each partner may
have some money available to put into the business directly.

Combination of skills. Using the distinct skills of each partner may

increase the efficiency of the firm. One partner may be good at
selling and the other better at record keeping.

Disadvantages

Unlimited liability. The owner’s personal assets can be used

to pay debts of the firm. Even a partner who has not put any
money into the business is subject to unlimited liability. Profits are
shared. Profits must be shared according to their partnership
agreement. Even if you work hard or not, the share will depend on
the agreement.

Limited life of the business. Business stops when any one of the
partners dies or is unable to participate. Thus, a successful
business may have to be ended even though other partners may
want to continue it. A new partnership can be formed to continue
the business. Part of the firm’s assets may have to be sold to pay
off the deceased partner’s share.

Disagreements. They may have the same plan but they may
differ in carrying out these plans. Disagreements could lead to
inefficient operations and even to the end of partnership.
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Corporation. A legal entity that is separate from its owners, the shareholders. No
shareholder of a corporation is personally liable for the debts, obligations or acts
of the corporation. Directors, officers and insiders can bear some liability for their
involvement with the corporation. A corporation is identified by the terms
"Limited", (Ltd.), "Incorporated", (Inc.) and "Corporation" (Corp.). Whatever the
term is, it must appear with the corporate name on all documents, stationery, and
so on, as it appears in the incorporation document.

Articles of incorporation. Refers to the written application to the

government
requesting permission to form a corporation.

Charter. Pertains to the legal authorization to organize a business as a

corporation.

Stock. Refers to the share of ownership in a corporation. Normally,

stockholders must elect a Board of Directors. The members of the board
supervise the operation of the business but usually do not take an active part
of running it and select the people who will run the company.
 Private Corporation. It can be formed by one or more people. Furthermore, it
cannot sell shares or securities to the general public unless it applies for an
IPO (initial public offering) which would then make the corporation a public
one.

Public Corporation. It is a kind of corporation that offers its securities to the

public.

GOCCs - Government Owned and Controlled Corporations

Advantages:

Easy to raise funds. More alternatives or methods of acquiring funds.

 Limited liability. It is the concept that owners of a business are only

responsible for its debts up to the amount they invest in the business.
Stockholders (owners) only risk the money they paid for the stock. If the
corporation goes bankrupt or is sued, the owner’s other assets cannot be
used to pay the debts of the business.

 Unlimited life. Even if all the owners of stock died, the corporation will
continue.

Specialized management. They can hire specialized managers in all

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parts of the business.

 Risks are shared. Each stockholder takes some risk. However, it is not
necessary for the stockholders to accept all the risk.

 Disadvantages:

 Difficult to start. This requires government approval which could result

into
bureaucracy. Bureaucracy refers to a business/government system that is
characterized by “red tape” and other complicated processes.

 Less direct control. Professional managers run the business and are in
charge of the firm’s operations. owners are usually far from the day-to-day
operation of the business.

Double taxation. The corporation’s profits are taxed by corporate income

taxes. The corporation also pays dividends which are out of the firm’s after-
tax income. Dividends are parts of the corporation’s income that is paid to
its stockholders. Then, stockholders pay personal income taxes on the
dividends. Thus, each peso of the corporation earnings may get taxed twice .

Limited activities. Corporations are limited to activities that are stated in

their
articles of corporation. This states the purpose of the business.

Mergers – this happens when a company buys a c0mpany/gr0up 0f

c0mpanies.

Horizontal mergers. Merger of two companies in the same industry.

These
two companies operate at the same level or stage in the production
process. If horizontal mergers reduced competition in an industry that may
not be in the public interest, the government would probably block the
merger.

Vertical mergers. Merger of two companies that are in different

businesses.

Conglomerate. Firm that is made up of many divisions and/or

subsidiaries
that may not have much in common in their lines of business. For instance,
Jollibee Corporation owns Chowking, Greenwich and Delifrance. Pepsi
Company, on the other hand, owns Frito Lay, Kentucky Fried Chicken,
Pizza Hut and Taco Bell.
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Cooperatives
These are registered associations or corporations of at least fifteen (15)
persons who voluntarily pool their resources which consist of money, labor or
talent to build capital and work together to raise incomes.

All members have an equal say (one vote per member, regardless of the
number of shares held).

Open and voluntary membership.

Limited interest on share capital.

Surplus is returned to members according to the amount of patronage.

First objective is to maximize the benefits or profits that its members can
earn from their transactions with the cooperative.

Regulated (governed) by particular rules of equity and values.

Functions

Marketing. Extended control of members’ products through processing,
distribution and sale.

MEMBER PR0DUCTS FUNCTI0NS FuFUNCTI0NSMEMBER BENEFITSons

Agricultural Transp0rt Extend c0ntr0l 0f their

Forestry Pr0cess Grade pr0ducts and realize
Aquaculture Add Value additi0nal margins
Horticulture Research
Crafts Distribute
Bargain
Sell

Purchasing. Provides affordable supplies and goods.

MEMBERS FUNCTI0NS FuFUNCTI0NMEMBER BENEFITSons

Hardware St0res Refineries Reduced C0sts

Independent gr0cery st0res Plants V0lume Disc0unts
Fast F00d Franchises Feed Mills Quality C0ntr0l
Wareh0use Increased Access
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Manufacture
Buy In Bulk
Deliver

Service. Provides needed services.

MEMBERS FUNCTI0NS FUNCTI0NMEMBER BENEFITS

Pr0ducers Farm Applicati0ns Access t0 services

Rural Residents Credit Aff0rdable services
Urban Residents Electricity Quality
Public C0mmunicati0ns Increased Access
Insurance
Health Care
Sch00ling
H0using

 Unique Principle

The U.S. Department of Agriculture identified three unique principles that

differentiate cooperative from general corporations

User-owner. The members own and use the cooperative; thus, they are
responsible for the growth and development of the cooperative through
adequate financing and patronage.

User-control. The members exert absolute control over the operations of

the
cooperative. They have decision-making privileges and the members
themselves are elected as Board of Directors.

User-benefit. The members earn benefits from their actual use of the
cooperative.

 Practices

The USDA also enumerated certain practices that make cooperatives

unique from other forms of business organizations

Patronage Refunds. The net earnings of the cooperative are returned

and distributed to the members according to their use of the cooperative
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Limited Return on Equity Capital. While members receive earnings

based 0n their use, cooperatives usually limit the returns they give to
members who gave direct capital investment so as to promote
patronage rather than monetary investments.

Cooperative Cooperation. Different cooperatives usually collaborate

to
maximize the resources and services they offer to their members.

Cooperative Education. Cooperatives sponsor advocacy programs

geared to educate both members and non-members of the importance
of cooperatives to the community and to individuals.

Geographical Structure

Geographical characterization defines a cooperative’s size and scope

of operations in reference to serving members.

Local. Small region covered, a barangay

Super local. Two or more provinces (branches).
Regional. Numerous provinces or more.
National (nationwide)
International (worldwide)

Cooperative Governance System

The USDA Report also presented the different membership structures

of cooperatives.

Centralized Structure. In this structure, individuals are direct

members.
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Federal Structure. In this structure, cooperatives and

individuals
are directed members.


Sources of Funds

The Food and Agricultural Organization of the United Nations used the
illustration below to present the different sources of cooperative funds.
 12

Directly from Member. Members provide funds to the cooperative by

payment
of fees and contributions, capital investment and deposits, and deferred
payment for the products they bring in to the cooperative.

 From cooperative business surpluses. Not all cooperative earnings are

returned to members, part of it is retained by the cooperative as capital and
used to create and provide more business for the cooperative. In principle,
cooperative business surpluses are still owned by members; collectively, that
is. If and when the cooperative shuts down, these are then returned to the
members.

From cooperative business surpluses. Not all cooperative earnings are

returned to members, part of it is retained by the cooperative as capital and
used to create and provide more business for the cooperative. In principle,
cooperative business surpluses are still owned by members; collectively, that
is. If and when the cooperative shuts down, these are then returned to the
members.

From outsiders. Another important source of cooperative funds are the

financial aids or grants, loans, and trade credits from banks, suppliers and
government or donor agencies.
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WK 7 LABOR AND WAGES

Basic Concepts Involved

Terminologies and Formulas

Potential Labor Force (PLF) - individuals whose age are fifteen years old
and
above.

Labor Force (LF) - part of PLF who wants to work, whether employed or
not.

Labor Force Participation Rate (LFPR) - this can be computed by dividing

the total labor force by potential labor force

LF
LFPR 
PLF

Employment Rate (ER) - can be computed by dividing the number of

employed by the total labor force and then multiplied by 100.

number of employed
----------------------------
ER x 100 LF

Unemployment Rate - this can be attained by dividing the number of

unemployed by the total labor force multiplied by 100.

number of unemployed
--------------------------------
UR = x 100 LF
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Employed - those who have work

Wage and salary workers - individuals who receive salary and may be
employed at private or public firms. Contractual and casual workers are
also included in this classification.

Own-account workers - individuals who are self-employed and

manage
their own businesses. They are usually small entrepreneurs who
engage in wholesale and retail trade.

Unpaid family workers - these are workers who help their parents or
relatives in their livelihood. Those who belong in this classification do
not receive regular compensation for their services. Working is seen as
a fulfillment of family obligations. Helping in the store or field of a
relative is an example.

Underemployed - individuals who are currently employed but still seek for
additional jobs. Underemployment has two types, to wit:

Visible- those who work for less than 40 hours a week. Service crew in
restaurants, factory workers under rotation and others are included in
this type.
Invisible - people who work for more than 40 hours a week but still look
for additional jobs. Also included in this type are highly- skilled workers
who are forced to accept jobs that require low levels of skill and with
lower wages because of job scarcity. Examples are messenger,
security guards, promo girls in groceries, department stores, etc
 15

Labor and Wages

The following are reasons for differences in wage rates among countries :

Demand for labor - in industrial countries, the level of demand for goods is
high, because of the high levels of per capita incomes—how much each
individual receives, in monetary terms, of the yearly income that is generated
in their country through productive activities. Therefore, if there is high
demand for goods there would also be a high demand for labor that will make
the goods. The high level of investment per labor accounts for a high
productivity of the labor employed compared to poor countries when
investment per labor is much lower.

Supply of labor - among developed countries, the supply of labor is relatively

scarce compared to the amount of job opportunities. Among poor countries,
relatively more people offer themselves for jobs because the supply of labor
is very large in relation to the available job opportunities. As a result, the level
of the wage rate in poor countries continues to be depressed.

International trade - if goods can move freely across countries, that is, if there
is complete free trade, including the absence of transport costs then, the
disparities in factor prices will vanish and therefore factor prices across
countries will equalize. The exchange of goods among countries will
substitute for the movements of the factors of production. Of course, this
does not happen, simply because there are barriers to trade. But countries
that take advantage of the benefits of international trade are likely to improve
their wage rates much more quickly than those that deny themselves the
advantage of free international trade.

Wage Differences Among Groups:

Compensating Wage Differentials - serve to compensate for the

relative
attractiveness, or non-monetary differences among jobs .

 For instance, window washers must be paid more than janitors

because of the risks in climbing skyscrapers. The same also goes
when you are working in “swing shift,” that is, from four o’clock in
the afternoon until twelve o’clock p.m., and more when you work in
“grave yard shift” (from 12 midnight to 8 a.m.). In addition, overtime
pay and double-pay when you work during a non-working holiday.

Labor-quality/price of skill - the term “human capital” refers to the stock of

useful and valuable knowledge accumulated by people in the process of
their education and training. The reason why doctors, lawyers, and
 16

engineers demand higher wage/professional fee is because they invest

many years in their formal education and on-the-job training. Part of the
high salaries of these professionals should be viewed as a return on
their investment in human capital.

Wages of unique/talented individuals - fame has lifted incomes to

astronomical levels like the entertainers, basketball stars, advisers of the
President, and others. They have particular skills that are highly valued
in today’s economy.

Absence of perfect competition - labor is very different but closely

related to factors of production. Doctors and mathematicians, for
example, are non-competing groups because it is difficult and costly for
a member of one profession to enter into the other.

Labor Supply

It refers to the number of hours that the population desires to work in gainful
activities in factories, farms, businesses, government, or non-profit organizations/
establishments. The three key elements are:

 Hours worked. Some people have jobs with flexible hours; some do not have
any control on their working hours. A worker who has just been offered a
higher rate and is free to choose the number of hours to work will be tugged
in two different directions. He/she will be affected by the substitution effect,
which attempts him to work longer hours because each hour of work is now
better paid. Each hour of leisure has become more expensive, and he has an
incentive to substitute extra work for leisure. But acting against the
substitution effect is the income effect. With the higher wage, his income is
higher. With a higher income, he will want to buy more goods and services
and in addition he will also want more leisure time. Which will be more
attractive, the substitution or income effect? There is no single correct
answer; it depends upon the individual. In the case shown below, for all wage
rates up to point C (the critical point) labor supplied increases with a higher
wage: the substitution effect outweighs the income effect. But from point C
upward, the income effect outweighs the substitution effect, and labor
supplied declines as wage rates climb higher.

Figure 2. Backward-Bending Labor Supply Curve

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Labor-force participation. One of the most dramatic developments in

recent
decades has been the sharp influx of women in the work force. In the April
2005 issue of Women’s Situation at a Glance, the magazine discussed the
situation of women and the need to empower and protect them from gender-
based discrimination and violence shows that more Filipino women are
participating in the labor market. From 48.2% in 1994, women’s labor force
participation rate increased to 51.4% in 2004. However, they find it more
difficult to find jobs than men. The 2004 unemployment rate for women was
11.8 % compared to 11.4% for men. The proportion of unpaid family workers
is also higher for women than men.

Table 1. Data on Gender Differences (2004)

Indicator Women (%) Men (%)

By Highest Educational
Attainment
No Grade Completed 92.7 92.5
Pre-School 3.1 2.8
Elementary 0.1 0.1
Secondary 39.2 42.3
Post Secondary 34.3 33.5
College Graduate and 16.7 16.5
Higher 6.5 4.7
Labor Force Participation Rate

Unemployment Rate 51.4 83.9

Proportion of Unpaid Family 11.8 11.4
Worker 8.2 15.9
 18

Overseas Filipino Workers 52.5 47.5

Immigration. In 2002, close to 48 percent of Overseas Filipino Workers who

worked abroad are women. Most of them went to Hong Kong (22.7%), while
most men went to Saudi Arabia (37.0%). These are based on the 2002
Survey on Overseas Filipinos. The movement of Filipinos outside the country
creates a brain drain and low quality work because all the professionals are
going out of the country. And the so-called feminization of migration has a
significant social cost as it is the women who are generally able to provide
better direction for the family, particularly when it comes to the nutrition, health
and education of the children.

WK 8 LAB0R F0RCE IN THE PHILIPPINES

Labor Union

It is an organization of laborers in a factory, in a special trade or craft, or in an

industry. It is in-charge of speaking for labor in case of disputes with employers
and in representing their views in issues pertaining to the members’ welfare. It is
the counterpart of an employer’s association. The objectives of a labor union are
as follows:

Increase collective bargaining. Collective bargaining is a process by

which a
labor union deals with management to negotiate outstanding labor-
management issues. These issues can cover a wide range of topics, but the
most typical would be one covering wage rates for a specific period of time.
The union, if it is only one recognized to negotiate a labor contract, then
becomes a countervailing force to the single buyer of labor services, which is

the employer.

Reduce monopsonistic power over labor services. The situation of

having a
single buyer of good is known as monopsony in contrast to a monopoly,
which is a single seller of goods. If a union could consolidate all labor
services under its wing, then it would itself be able to exercise monopoly
power, and a situation of monopoly-monopsony negotiation would rise. In
single community, a buyer of abor services may exert strong monopsonisitc
power. With an organized labor union, an improvement in the bargaining
position of labor may reduce the monopsonistic power.
 19

Support moves to raise standards of work, including minimum wages. Public

policy discussions of labor legislation are venues for labor union activity, as a
legitimate lobbyist in its own interest and in the interest of labor in general.
Governments respond to labor union lobby in relation to other political
economic factor such as it helped raise minimum wage, 13 TH month pay, and
mandatory allowances. Lobbying by labor unions is more effective in
influencing government to raise the standard wage than perhaps negotiated
settlements with employers through collective bargaining.

Reduce the supply labor. In a country with a large supply, such as the
Philippines, reducing the supply of labor is a difficult proposition to achieve
through union action. By organizing labor unions, its membership expands. It
is in the interest of the labor union to maintain a closed-shop arrangement
with a company. This means that only union members can be employed by
the company. By doing this, the union restricts non-union member for
employment. So we can see that sometimes its interest can come in conflict
with those of the non-unionized labor force as opposed to protecting its
members, which may be in need of good jobs. When labor unions control
membership, they can force requirements that may then be unduly designed
to exclude persons willing to find work.

Labor and Employment Issues in the Philippines

Job Scarcity. From 2006 to 2007 the unemployment rate decreased by .3

percent from 8.1 to 7.8 respectively. Every year, thousands of graduates add
to the unemployment rate. However, because of the situation of our country
only a small portion of the labor force lands a job while those who are
employed constantly fear losing their job because of the slow growth of our
economy.

Flexible labor policy. This is a policy that allows contractualization and

casualization in labor through labor-only contracting (LOC), subcontracting,
agency hiring, and others. Through LOC, an agency supplies workers to a
company. Workers are not directly hired by business owners. Ernesto
Herrera in his column in Manila Times, entitled Contractualization dated
May 23, 2006 wrote that “70% of companies in the Philippines is practicing
LOC.” This is illegal because it violates the provision of job security in the
Labor Code but there is still no change and workers are still seeking for a
revision in the Labor Code. LOC has various forms:

Contractualization. Workers are hired for a particular job lasting for five to
six
months. The contract ends after such period when the workers are
supposed to be due for regularization. Business owners resort to this
practice to cut cost on workers’ wages and avoid giving benefits that regular
workers enjoy. These workers cannot even form or join unions because only
 20

regular employees enjoy such right.

Job sharing. Where 2 to 3 workers share the same job. They do not go to
work regularly and receive meager compensation.

Time rating and piece rating. Workers are paid according to the number
of
hours they worked or according to the number of goods they produced.

Task system. Workers are given a particular quantity of products to be produced

that shall be sold at a price also determined by the business owner.

Low wages. Aside from the problems already mentioned, workers are also
receiving meager compensation. Unlike before when it is being determined
in national level, the minimum wage is now ascertained on a regional basis
by the Regional Tripartite Wages and Productivity Board. Daily
minimum wage is based on the provision that it is for the family of 6
members but if we are to compare a worker’s daily wage to the actual
amount of a family of six needs to live decently, we will find that the salary is
almost a half short. How can an ordinary Metro Manila workers’ wage of
P350 (refer to the table below) meet the daily cost of living? And some of our
Filipino workers are working below the minimum wage especially the
construction workers, market sellers, and other of the same kind.

C0ntinue 0n page 6
 21

Wk 11 BUSINESS CYCLE

Business Fluctuations
Basic Concept

 Often called as business cycles, business fluctuations are the

irregular fluctuations in the general level of economic activity around
its long-run growth path. Further, these are the periodic but irregular up-
and-down movement in the economic activity that is measured by
fluctuations in real GDP and other macroeconomic variables.

o Phases of Business Cycles

 22

o Contraction. A slowdown in the pace of economic activity

o Trough. The lower turning point of a business cycle, where a

contraction turns into an expansion. It also marks the end
of a contraction as well as the beginning of possible
recovery.
o Expansion. A speed-up in the pace of economic activity.

o Peak. This refers to the upper turning of a business cycle. It also

marks the end of an expansion and the beginning of recession
The following inputs present an in-depth explanation of the concepts related
to business cycle.
 A recession is a downturn in economic activity and is associated
with falling levels of GDP, consumption and investment expenditure.
Inflation and interest rates are declining and the level of unemployment
is rising. A recession will have a trough at the lowest point. A
trough has GDP, consumption and investment expenditures at the
lowest levels. Unemployment is high and inflation is low.

 A recovery in economic activity is usually associated with rising

levels of GDP, consumption and expenditure, investment
expenditure and decreasing levels of unemployment. This may lead to
the peak with high levels of GDP with businesses operating at
close full capacity, inflation rising due to increasing costs and interest
 23

rates at higher levels.

Difference Between Recession and Depression

 Before the Great Depression of the 1930s, any downturn in

economic activity was referred to as a depression. The term
recession was developed in this period to differentiate periods like the
1930s from smaller economic declines that occurred in 1910 and 1913.
This leads to the simple definition of depression as a recession that
lasts longer and has a larger decline in business activity.

 A good rule of thumb for determining the difference between a

recession and a depression is to look at the changes in GNP. A
depression is any economic downturn where real GDP declines
by more than 10 percent. A recession is an economic downturn
that is less severe.
 In the middle of the 1980s, the Philippine economy can be
considered in the state of depression because of the economic and
political crisis that occurred during the dictatorial regime.

Factors Affecting Business Cycles

o International Factors
The extent of dependence on international trade determines the
importance of this factor. Export industries are dependent on foreign
markets. When foreign demand is rising, domestic production
rises. Secondary industries and activities arising out of exports also
improve their output. These are the raw material industries based
on local sources. Therefore, employment also rises. Further, the rise of
exports signals the rise of imports.

The transmission of business cycles through trading partners could

have an affect on domestic economic conditions. This event is called
contagion. The Philippines’ major trade partners are the U.S.,
Japan, Europe and neighboring Asian countries. For instance, when
Thailand suffered an economic shock in 1997 with the sudden fall of
Thai currency (baht), the Philippine economy was affected through
changes in expectations about economic conditions, the reduction of
trade, and possibly contraction of future plans for expansion.
 24

o Climactic Factors

Climatic events can also trigger economic changes. Favorable weather

conditions could cause bumper crops and therefore could result into
prosperity in sectors dependent on the weather such as agriculture. In
turn, this could influence better expectations about the economy.
Droughts, on the other hand, can cause crop failures and endanger
doomsday scenarios or expectations that are pessimistic. The best
example is the El Niño phenomenon.

Internal Factors

Political and economic factors could trigger a country’s economic

conditions.

The death of Benigno Aquino Jr. sparked the 1986 People Power
Revolution.

The “I Accuse You Statement” of former Senator Teofisto Guingona

which led to the impeachment of President Joseph Estrada.

Another factor can be institutional. The cycle of presidential and local

elections creates a high level of demand for spending during election
years and tends to cause an economic expansion in a temporary nature
because of the political spending of the candidates. After the elections,
a period of tightening of expenditure happens which induces a slow-
down in the economy.

Based on the acceleration principle, the stock of capital depends

on the level of income or production. Additions to this stock, or net
investment, take place when income grows. Net investment can be
accelerated by an increase in demand or sales for a commodity. But if
sales were to slow down, investments would fall more quickly. Changes
in sales get reflected more rapidly through changes in inventory.
Therefore, investment accelerates—either going up or going down—
faster than the rate of change of demand for consumption.

UNEMPLOYMENT

Basic Concepts

Unemployment - refers to the condition and extent of joblessness within an

economy, and is measured in terms of the unemployment rate, which can
 25

be derived from the number of unemployed workers divided by the total

civilian labor force (U/LF).

Citing the opinions of Samuelson and Nordhaus with regard unemployment:

A person is unemployed if he or she is not working and (1) has made
specific efforts to find a job during the last four weeks, (2) is laid off from a
job and is waiting to be recalled or, (3) is waiting to report to a job in the
succeeding months. To be counted as unemployed, for example,
contemplate the possibility of making a movie or being a rock star. A person
must report specific efforts (like visiting local firms or answering ads) to find
a job.”

Okun’s Law states that for every two percent that GDP falls relative to
potential GDP, the unemployment rate rises at one percentage point. For
instance, if GDP begins at one hundred percent of its potential and falls to
ninety eight percent of potential, the unemployment rate rises by one
percent point; let us say from six to seven percent.

The Keynesian View of Unemployment. This view argues that

unemployment is an excess supply of labor resulting from a failure of
coordination in the market economy.

T he Classical View of Unemployment. This view, on the other hand, claims
that unemployment is a job search. People who are engaged in the
productive work of looking for a better match between the worker and then
employer.

Kinds of Unemployment

o Frictional Unemployment. Also known as “voluntary unemployed,” this

particular kind of unemployment arises because of the incessant
movement of people between regions and jobs or through different stages
of the life cycle. It is also a result of temporary transitions made by
workers and employers or from workers and employers having
inconsistent or incomplete information about the job they applied and hired
to.

Examples

A fresh graduate who is looking for a job may lack the resources or
efficiency in finding the company that offers a position that is available
and suitable for him/her. As a result, the fresh grad does not take other
work, temporarily holding out for the better-paying job.

When a company is not hiring new recruits because of its belief that
 26

there is insufficient number of individuals who are qualified for the

position when actually there are lots of competitive graduates.

Structural Unemployment. According to Samuelson and Nordhaus,

structural unemployment signifies a mismatch between the supply of and
the demand for workers. Mismatches can occur because the demand for
one kind of labor is rising while the demand for another kind is decreasing,
thus, supplies do not quickly adjust.

Example

The increase in the demand for caregivers abroad that causes other
professionals to leave their work and study care giving.

Cyclical Unemployment. This exists when the overall demand for labor
is low.
As total spending and output fall, unemployment rises virtually everywhere. It
also occurs when there is a recession in the economy, when unemployment
rate rises as a result of imbalance between the aggregate supply and
aggregate demand.

Impact of Unemployment

Unemployment has various impacts. These include:

Economic Impact. When the unemployment rate goes up, the economy is in
effect throwing away all the goods and services that the unemployed workers
could have produced. During recessions, it is as if vast quantities of automobiles,
housing, clothing, and other commodities were simply dumped into the ocean.
The losses during periods of high unemployment are the greatest documented
wastes in a modern economy. They are many times larger than the estimated
inefficiencies from microeconomic waste due to monopoly or than the waste
induced by tariffs and quotas.

Social Impact. The social cost of unemployment is certainly larger than the
economic cost. No amount of money/ materials can show the effect of long
periods of involuntary unemployment socially and psychologically. An
unemployed person experiences psychological deterioration due to anxiety
and worry of not being able to find work and provide financial support for his/her
family and for himself/herself. Sometimes it even causes separation of family
members. Unemployment could also result to employing their offspring at an
early age as maid/house helpers to rich families for they have insufficient means
to pay their debts due to unemployment. Another is that they could not find a
good-paying job because positions entail higher requirements such as being a
college graduate. Moreover, Samuelson and Nordhaus stated that according to
psychological studies, being fired from a job is generally as traumatic as the
 27

death of a close friend or failing in school.

PRICE STABILITY

Inflation
It refers to the increase in the average price level in the economy.
Inflation rate is the percentage of annual increase in the general price
level measured by price indexes such as the Consumer Price Index, and
GDP Deflator.

Consumer Price Index. This measures the average price of goods

consumed by urban wage-earners. That is, the CPI is a weighted
average in which the weights reflect the spending of urban wage-
earners. CPI is used in computing inflation if we want to compute the
purchasing power of the worker’s peso.

GDP Deflator. It measures the average price of all the GNP. That is,
the weights for the GDP deflator reflect the share of each good in the
GDP. We can use this if we need to compute the purchasing power of
the peso for all sorts of goods and services, including investment
goods.

Types of Inflation

Inflation has four types. These include:

Hyperinflation. Inflation at extremely high rates (e.g. 1000, 1 million,

or even 1 billion percent a year)

Galloping Inflation. Inflation at a rate of 50 or 100 or 200 percent

annually.

Moderate Inflation. Inflation at a price level increases. It does not distort

relative prices or incomes severely.

Deflation. A fall in the general level of prices.

Causes of Inflation

The following are some of the causes of inflation. Among these are:

Oil Shocks. The increase in the price of oil in the international market
increases the price of commodities in a specific country like the Philippines.
As a country that is dependent on imports for its energy needs, the
Philippines suffers major shocks in the internal structure of prices such as
 28

food, transport, utilities, and industry.

Political Crisis. The martial law up to EDSA Revolution I and also the
EDSA 2 and 3 caused an increase in prices in our country because a lot of
investors went out of the country. Political tension would also lessen the
confidence of both local and foreign investors to put up their businesses in
the Philippines (because of loss of confidence in the government).

Demand Pull Inflation. As previously discussed, when the demand for a

certain good increases, the price of that good would also increase. In short,
the high demand for the good “pulls” the price upward and causes inflation.

Cost Push Inflation. When the cost of producing a certain good increases,
the supply of that good will in turn decrease (other things held constant).
The increase in production cost “pushes” the price of the good to increase
as well.

Impact of Inflation

Scrambled Income Distribution. Debtors gain, lenders lose because

the money borrowed in the past would have a decreased value in the future;
workers with a fixed income lose and firms gain because the workers could
only buy less products due to the price increase while the producers will
receive more revenue by selling goods at a higher price.

Inefficiencies. Distortion of resource allocation. Inflation creates

uncertainty, in that people do not know what the money they earn today will
be able to buy tomorrow. Uncertainty, in turn, discourages productive
activity, saving and investing.

Reduced Competitiveness of the Country in International Trade. If this

is not offset by a devaluation of the national currency against other
currencies, it makes the country’s exports less attractive, and makes
imports into the country more attractive which in turn tends to create
unbalance in trade.

Inflation is a Hidden Tax on “Nominal Balances.” That is, people who

hold
bonds and bank accounts in peso lose the value of those accounts when
the price level rises, just as if their money had been taxed away.

As the purchasing power of the monetary unit becomes less predictable,
people resort to other means to carry out their business, means
which use
up resources and are inefficient.
 29

WK 12 MONEY

According to Samuelson and Nordhaus (2004), money refers to anything

that serves as a commonly accepted medium of exchange or means of
payment. It is also the stock of assets that can be easily used to make
transactions.

Functions of Money

As a Medium of Exchange. According to Mankiw, money is what

we use
to buy goods and services. The sentence “Ang salaping ito ay
bayarin
ng Bangko Sentral at pananagutan ng Republika ng Pilipinas”
is printed
on the Philippine peso bills. This sentence also serves as a guarantee
made by the Bangko Sentral ng Pilipinas that such bill/money is
authentic and ready to be used. The convenience and ease of
converting money to other things (i.e. goods and services) is called
liquidity.

 An effective medium of exchange should have the following

characteristics:
 It should be recognizable as something of value. Person A
should recognize the value of the item so that Person B can
give it to A in exchange for goods or services.

 It should be easily transportable. Precious metals have a

high
value to weight ratio. This is why oil, coal, vermiculite, or water
is not suitable as money even though they are valuable. Paper
notes have proved highly convenient in this regard. It should
be durable. Money is often left in pockets.

 Some countries (such as Australia, New Zealand, Mexico and

Singapore) are making their bank notes out of plastic for
increased durability. Gold coins are often mixed with copper
to improve durability.
 30

Unit of Account. The unit by which we measure the value of things.

Just as we measure height in meters, we measure value in money.
Money provides the terms in which prices are quoted and debts are
recorded and it also serves as a “yardstick” with which we measure
economic transactions (Mankiw, 2000).

 An effective unit of account should be:

Divisible into small units without destroying its value –

precious metals can be coined from bars, or melted down into
bars again.

Fungible - that is, one unit or piece must be exactly

equivalent
to another. This is why diamonds, works of art and real state
cannot be considered as money.

A
specific weight, or measure, or size to be
verifiably countable
- For instance, coins are often made with ridges around the
edges, so that any removal of material from the coin (lowering
its commodity value) will be easy to detect.

Store of Value. According to Mankiw (2000), it is a way to

transfer
purchasing power from the present to the future . In addition, it
allows value to be held over time. For instance, if you work today
and expecting to earn P600, you can keep the money or spend it
whenever you like.

 An effective store of value should have the following characteristics:

It should be long-lasting and durable. It must not be

perishable
or subject to decay. This is why food items, expensive spices
and even fine silks are not generally suitable to use as money.
 It should have a stable value.
 It should be difficult to counterfeit and the genuine must be
recognizable.

Types of Money

Fiat Money. “It is a type of money that a government has declared to

be
a legal tender, despite the fact that it has no intrinsic value.” –
Investopedia.com
 31

The pieces of paper money that we have in our pockets and wallets are all
fiat. They are just called money because the government declared it by a
decree or fiat.

Commodity Money. It is a type of money which has some intrinsic

value, and that value comes from a commodity out of which it is made.

concrete example of this kind of money is gold. When people use

A
gold as money, the economy is said to be on a gold standard.
Gold is a form of commodity money because it can be used for
various purposes—jewelry, etc. But because we cannot carry
around bags of gold anytime and anywhere to purchase
something we can find in the mall, we now use a fiat money.

How the quantity of money is controlled?

Money Supply. It refers to the quantity of money available. In an

economy
that uses commodity money, the money supply is the quantity of that
commodity. In an economy that uses fiat money, such as most
economies today like the Philippines, the government controls the supply
of money, specifically the Bangko Sentral ng Pilipinas. Legal restrictions
give the government a monopoly on the printing of money.

MonetaryPolicy. It pertains to the control over the money supply. A

monetary policy also serves as a measure/action taken by the Central
Bank to influence the supply of money in the economy. Monetary policy
actions of the BSP are aimed at influencing the timing, cost and
availability of money and credit, as well as other financial factors, for the
purpose of stabilizing the price level.

Expansionary Monetary Policy. A type of monetary policy
 32

setting that
intends to increase the level of liquidity/money supply in the economy.
Examples of such policy include lowering of policy interest rates and
the reduction in reserve requirements. Further, expansionary
monetary policy tends to encourage economic activity as more funds
are made available for lending by banks.

 Contractionary Monetary Policy. A type of monetary policy

setting that
intends to decrease the level of liquidity/money supply in the economy.
Examples of this policy include increases in policy rates and reserve
requirements. Moreover, contractionary monetary policy tends to limit
economic activity as fewer funds are made available for lending banks.

The primary way in which the BSP controls the supply of money is
through open -market operations, that is, the purchase and sale of
government bonds. When the BSP wants to increase the money
supply, it uses some of its monetary resources to buy government
bonds from the public. Because these resources leave the BSP and
enter into the hands of the public, the purchase increases the quantity
of money in circulation. On the other hand, when BSP wants to
decrease the money supply, it sells some government bonds from its
own portfolio. This open-market sale of bonds takes some peso out
of the hands of the public and decreases the quantity of money in
circulation.

FINANCIAL SYSTEM

Basic Concepts

Financial System

“It refers to the network of institutions authorized by law to engage in the

generation, circulation and control of money and credit.” (IBON Databank)

Financial Institutions

According to Samuelson and Nordhaus, financials institutions usually

“transfer funds from lenders to borrowers. Also, these institutions create
financial instruments (such as checking and savings account).” There are
two types of financial institutions. These are:

 Banks. These institutions are authorized (by the BSP) to accept

deposits from the general public (for instance, 20 or more persons
 33

and/or entities). Gerardo Sicat classifies banks in the following

manner:

Commercial Banks

Oneof the types of financial institutions that accept deposits.

They can also issue accounts to depositors that allow the
depositors to issue demand checks.

They are allowed to undertake trust functions, that is, manage

funds for the benefit of persons who place their assets.

 Engage in short-term lending - they give credit to business,

normally for periods within a given year which enable them to
earn interest on these loans.
Unibanks/Expanded Commercial Banks

These are commercial banks with enlarged powers related

towards owning other financial institutions.

They are allowed to own investments in other companies or
other financial institutions. Examples of these banks are
Bank of the Philippine Islands and Metrobank.

Thrift Banks - composed of two types, savings banks,

rural banks, private development banks and stock savings
and loan associations .

Savings Banks. They are allowed to accept deposits of

the depositor’s savings. Furthermore, they are
allowed to engage in lending to clients for an
allowed range of investments, such as real state
investments, personal finance, and home-building and
home development activities.

Rural Banks. They are designed primarily to mobilize

rural savings by accepting savings and time deposits and
to provide a channel for funds from urban areas and the
government sector for agricultural and individual activities
in the countryside. They can also provide credit to small-
scale farmers as well as receive government assistance.

Private Development Banks. These are modeled to

serve the community or a specific provincial unit.
Moreover, it was designed in order to be conduit for
 34

private development loans. Private development banks

are allowed to accept time and savings deposits and to
provide medium and long term credit to small and
medium scale enterprise.

Stock Savings and Loan Associations. These

financial
institutions are usually company-based which are created
to provide service to their members. These operate as
credit unions in which they provide salary loans and
deposits from their members. Examples of this type are the
Armed Forces Savings and Loan Association.

 Government Banks

Philippine National Bank. This bank is considered to be
the dominant commercial bank in the country.
Furthermore, PNB facilitates the financial needs of
industry and commerce as well as a recipient of
government deposits.

Development Bank of the Philippines (DBP). This

bank
engages in a long-term development lending, for as
long as eight years. The lending is usually granted to
industrial and agricultural projects.

Land Bank of the Philippines. This bank helps serve in

the financing of the land reform program.

 Non-Banks. These financial institutions serve as further

intermediaries of units with excess funds, thus, facilitating their
investments. Apart from the bank, non-banks cannot offer
lending service to the general public. Furthermore, non-banks
cannot accept deposits. Examples of non -banks include:

 Investment houses
 Insurance companies
 Pawnshops, money brokers, stock brokers and other non-bank
financial intermediaries.
 Government financial institutions such as GSIS, SSS, Pag-IBIG
Fund, PhilHealth and NMHFC

Financial Intermediaries
 35

According to Samuelson and Nordhaus, these are institutions like

commercial banks that take deposits or funds from one group and
lend these funds to other groups.

Savings

Pertain to the stock of monetary assets like bank deposits, cash not spent,
investment in securities, etc.

Types

 Household Savings - involves voluntary saving, contractual saving

and social security schemes.

 Voluntary Saving. It refers to the amount of saving that

result
from the normal preferences of households in the way they
divide their incomes between consumption and saving.

Contractual Saving. It is when people buy personal life

insurance
and other forms of insurance as a preparation for future
uncertainties.

Social Security Schemes. Refers to a devised and
mandated
saving plan of the government for the workers to save from
their current incomes that they receive. Its main purpose is to
provide social insurance for the workers and also for their
retirement time.

Government Savings - consists of the excess of revenues over

expenditure. However, if the government incurs a deficit, the
process is called “dissaving.”

Foreign Savings - Refers to the excess of imports over export

revenues.

Dividend

These are incomes declared to stockholders. These could be in the form of

cash paid to stockholders, or, in some situations, additional stocks that is
declared for business.

FAQs About the Philippine Financial System

 36

How do banks make profits?

Banks make profits through fractional-reserved charging interest

on
loans and charging fees

Fractional-Reserved Banking. Reserves are assets that banks

hold
in the form of cold cash or of funds deposited by the bank with the
central bank. Banks do not keep all of the depositors’ money on
hand. They use depositors’ money to make money.

 Charging Interest on Loans. The money that the banks lend to
the
borrowers comes from the savings and time deposits from the
depositors. They pay interest to depositors but charge a higher
rate on money they lend out. For example, a bank may pay 3% on
a savings account but charge 9.5% in interest on a loan. In the
case of money borrowed from the Central Bank, banks pay a
percentage rate on money they borrow, called the discount rate.
Banks then loan that money and charge a higher rate on the loan
than the rate that they paid.

 Charging Fees. In the past, checking and saving accounts were

free
of charge. Opening bank accounts have fees for minimum
deposit, check fees and ATM fees. Automated Teller Machines
were first introduced to replace bank branches as well as to
save banks’ operating expense and that savings would be
passed on to consumers. Nowadays, ATMs serve as a revenue
stream for banks.

WK 13 DOMESTIC TRADE/SERVICES SECTOR

Services

According to Tullao, these are products that are produced and consumed
simultaneously.

Intangibility. Services cannot be seen, handled and smelled. There is

also
no need for storage. Because services are difficult to conceptualize,
marketing them requires creative visualization to effectively evoke a
concrete image in the customer’s mind. From the customer’s point of view,
 37

this attribute makes it difficult to evaluate or compare services prior to

experiencing the service.

Perishability. Unsold service time is "lost", that is, it cannot be regained.

It is
a lost economic opportunity. For example, a doctor who is booked for only
two hours a day cannot later work those hours, thus, she has lost her
economic opportunity. Other service examples include airplane seats (once
the plane departs, those empty seats cannot be sold), and theatre seats
(sales end at a certain point).

Lack of Transportability. Services tend to be consumed at the point
of
"production" (although this doesn't apply to outsourced business services).

Lack of Homogeneity. Services are typically modified for each client or

each
new situation (customized). Mass production of services is very difficult.
This can be seen as a problem of inconsistent quality. Both inputs and
outputs to the processes involved providing services are highly variable.

Lab0r Intensity. Services usually involve considerable human activity

rather
than a precisely determined process. Human resource management is
important. The human factor is often the key success factor in service
industries. It is difficult to achieve economies of scale or gain dominant
market share.
Demand Fluctuations. It can be difficult to forecast demand (which is also
true of many goods). Demand can vary by season, time of day, business
cycle, etc.

Buyer Involvement. Most service provision requires a high degree of

interaction between client and service provider.


Client-Based Relationships. Based on creating long-term business

relationships. Accountants, lawyers and financial advisers maintain long-
term relationships with their clients for decades. These repeat consumers
refer friends and family, helping to create a client-based relationship.

Commodities and Transactions

Wholesale and Retail Trade. These are instruments and
mechanisms for
commodity distribution such as selling.

 38

Wholesaling. It consists of the sale of goods/merchandise to retailers,

industrial, commercial, institutional or other professional business users
or to other wholesalers and related subordinated services.
Examples: The Warehouse and Makro Club (both offer bulk
purchases).

Retailing. Consists of the sale of goods or merchandise, from a fixed

location such as a department store or kiosk, in small or individual lots
for direct consumption by the purchaser. Retailing may include
subordinated services, such as delivery. Purchasers may be individuals
or businesses. In commerce, a retailer buys goods or products in large
quantities from manufacturers or importers, either directly or through a
wholesaler, and then sells smaller quantities to the end-user. Retail
establishments are often called shops or stores. Retailers are at the
end of the supply chain. Manufacturing marketers see the process of
retailing as a necessary part of their overall distribution strategy.

Examples: SM Department Store, 7-11 and other small sari-sari stores.

 Transportation and Communication Storage

Transportation. The service of providing a means of transferring one

product or service from one place to another.
Examples: Philippine Airlines, Cebu Pacific, Victory Liner, Negros
Navigation, WG&A, etc.

Communication. The service of providing means communication or

informing parties about transactions.

Examples: Globe, Smart, PLDT and Digitel

Storage. Includes services of warehouses and safekeeping goods. It

aims to ensure that goods which are not yet bought or are not yet
released in the consumer markets are kept well with utmost
consideration to their quality and proper care.

Trade. Refers to the transaction of buying and selling and exchange. It is

closely related to the services of transportation, communication and storage
but those services exist to support and ensure an effective trade.
Financial Insurance, Real Estate and Business

Finance. It refers to activities that involve the production of money (both

income and profits) through banks, stock market, money market, T-bills,
certificates and bonds.
 39

Insurance. Refers to the buying and selling of pre-need plans such as

educational plan, life insurance, retirement plan and others.

Real Estate. This sector consists of owned dwellings and land.

Residential Property. These are properties are intended for

dwelling and domestic functions.

Non-residential Properties. Properties held for speculation,

inherited properties, properties held for sale and profit seeking,

and other business activities.

Private Services. These are services that answer our private needs and
wants such as haircuts, tourist and recreational activities, private education,
private lawsuits, private medical consultations, and hotel and restaurant
services.

Government Services. Pertain to social services and general public

services.

Social Services. These cover expenditures for education, health, social

security, labour and employment, housing and community
development, and other social activities.

General Public Services. These cover expenditures for services which

are indispensable to the existence of an organized state and cannot be
allocated to certain sectors or sub sectors. These include executive
and legal services, financial and fiscal, civil services, planning, foreign
affairs, public order and safety, and centralized services.

Trade, which is the biggest contributor to services, accelerated its

pace
to 9.1 percent from 5.3 percent last year. The growth was propelled
by the double-digit expansion of the retail industry by 12.1 percent
from only 5.6 percent the previous year with the opening of new
malls and department stores. Wholesale sub sector, on the other
hand, remained sluggish increasing by a measly 0.2 percent.

Underground Economy (Informal Sector)

This comprises all types of business that are not officially registered in the
government and thus, not covered by taxes. They are also non- structured sector
that has emerged in the urban centres as a result of the incapacity of the modern
sector to absorb new entrants.
 40

Who are included?

 Individual entrepreneurs or groups of individuals who perform

economic activities not listed in the government.

It is characterized by:

the use of family and unpaid labour (apprentices) and reliance on

manual labour rather than on sophisticated machinery and equipment;

flexibility,
allowing people to enter and exit economic activities in
 response to market demand;
simple and sometimes precarious facilities;

the ability to improvise products from scrap materials ;

a willingness to operate businesses at times and locations

convenient to customers; and

a tendency to locate smaller markets, out of the reach of the larger
firms

vehicle repair
radio repair
watch repair
refrigerator repair
manufacture of bricks and aggregates for building construction
money changing
 blacksmithing
leather crafts
water pump manufacture
herbal medicines

Its problems include:

Mini and micro enterprises only provide a means of subsistence

through the production of goods n and services on a small scale
with lower quality and prices.

Small and medium enterprises are associated with higher levels

of education of the entrepreneurs, higher levels of income and a
longer time in business.

Black market includes illegal trades and businesses such as

prostitution, money laundering, gambling, drug and human
trafficking, piracy, illegal firearms and other illegal activities.
 41

Strategy Proposed by the International Labor Conference (I.L.O., 1991)

The strategy proposed by the Conference for the development of a 'more and
better protected' informal sector consists of:

improving the productive potential, and, therefore, of the employment and

income generating capacity, of the informal sector;

 improving the welfare of the poorest groups;

establishing an appropriate regulatory framework, including appropriate
forms of social protection and regulation; and organizing informal sector
producers and workers.

organizing informal sector producers and workers.



These strategies have been broken down by C. Leonardos (1999) into four
piecemeal strategies as follows

market expansion through the enhancement of the demand for informal

sector products; which, in turn, can only be achieved through the qualitative
improvement of goods and services;

facilitating producers within the informal sector to obtain credit on the same
terms as modern enterprises;

access to training for improvement of skills and upgrading of

technologies used in the informal sector, and, finally,

improvement in the basic facilities and amenities of informal sector

premises.

These sub-strategies relate to marketing of the products or creating the demand,

quality, proper incentives, facilities and improvement in the quality of the human
resources

WK 15 - FINAL UNDERGR0UND EC0N0MY

Definiti0n 0f Terms

 International Trade - This refers to the exchange of goods and services

across international boundaries or territories. In most countries, it represents
 42

a significant share of GDP.

Globalization - this refers to the increasing interconnectedness of people and

places as result of advances in transport, communication and information
technologies that cause political, economic, and cultural convergence.

Free Trade – it refers to a policy whereby the government does not intervene
in trading between nations by tariffs, quotas or other means.

Aims and Purposes of International Trade

Enables a c0untry t0 consume m0re than it w0uld be able t0 pr0duce if it

depended 0nly 0n its 0wn res0urces.

Enlarges the p0tential market f0r the g00ds 0f a particular ec0n0my.

T0 build ec0n0mic relati0ns am0ng nati0ns.

Emergence 0f M0dern Trade

Alth0ugh f0reign trade was an imp0rtant part 0f ancient and medieval

ec0n0mies, it acquired new significance after ab0ut 1500. As empires and
c0l0nies were established by Eur0pean c0untries, trade became an arm 0f
g0vernmental p0licy.

The wealth 0f a c0untry was measured in terms 0f the g00ds it p0ssessed,

particularly g0ld and preci0us metals. The 0bjective 0f an empire was t0
acquire as much wealth as p0ssible in return f0r as little expense as
p0ssible. This f0rm 0f internati0nal trade, called mercantilism, was
c0mm0nplace in the 16th and 17th centuries.

Internati0nal trade began t0 assume its present form with the establishment
0f nati0n-states in the 17th and 18th centuries.

Heads of state discovered that by promoting foreign trade they could

mutually increase the wealth, and thus the power of their nations. During
this period new theories of economics, in particular 0f internati0nal trade,
als0 emerged.

Internati0nal Trade The0ry

Ricardian M0del

 The Ricardian m0del f0cuses 0n c0mparative advantage.

 43

 The c0ncept is defined by Samuels0n and N0rdhaus in this way: a

nati0n should specialize in producing and exporting those
commodities which it can produce.

 In a Ricardian model, countries specialize in producing what they

produce best. Unlike other models, the Ricardian framework
predicts that countries with fully specialize instead of producing a
broad array of goods.

 Als0, the Ricardian m0del d0es n0t directly c0nsider fact0r

end0wments, such as the relative am0unts 0f lab0r and capital within a
c0untry.

Hecksher-0hlin M0del

 The Hecksher-0hlin m0del was pr0duced as an alternative t0 the

Ricardian m0del 0f basic c0mparative advantage. Despite its greater
c0mplexity, it did n0t pr0ve much m0re accurate in its inc0rp0rating the
ne0classical price mechanism int0. H0wever, fr0m a the0ritical p0int 0f
view, it did n0t pr0vide and elegant s0luti0n int0 internati0nal trade
the0ry.

 The the0ry argues that the pattern 0f internati0nal trade is determined

by differences in fact0r endowments. It predicts that countries will
export those goods that make intensive use of locally abundant
factors and will import goods that make intensive use of factors
that are locally scarce.

 Empirical pr0blems with the H-0 m0del, kn0wn as the Leontief

paradox were exposed in empirical tests by Wassily Leontief who
found that the US tended to export labor intensive goods despite
having capital abundance.

Specific Fact0rs

 In this m0del, lab0r m0bility between industries is p0ssible while

capital is imm0bile between industries in the sh0rt run. The specific
fact0rs name refers t0 the given that in the sh0rt run specific fact0rs 0f
pr0ducti0n, such as physical capital, are n0t easily transferable
between industries.

 The theory suggests that if there is an increase in the price of a

good, the owners of the factor of producti0n specific to that good
will profit in real terms.

 Additionally, owners of opposing specific factors of production, (i.e.

 44

lab0r and capital) are likely to have an opposing agenda when lobbying
for controls over immigration of labor. Conversely, both owners of
capital and lab0r profit in real terms from an increase in the capital
endowment.

 This m0del is ideal f0r particular industries. Als0, this m0del is ideal f0r
understanding inc0me distributi0n but awkward f0r discussing the
pattern 0f trade.

Gravity M0del

 This m0del presents a m0re empirical analysis 0f trading patterns

rather than the m0re the0ritical m0dels discussed ab0ve. The gravity
m0del, in its basic f0rm, predicts trade based 0n the distance
between c0untries and the interacti0n 0f the c0untries’ ec0n0mic
sizes.

 The m0del mimics the Newt0nian law 0f gravity which als0 c0nsiders
distance and physical size between tw0 0bjects. The m0del has been
pr0ven t0 be empirically str0ng thr0ugh ec0n0metric analysis. 0ther
fact0rs such as inc0me level, dipl0matic relati0nships between
c0untries, and trade p0licies are als0 included in expanded versi0ns 0f
the m0del.

Barriers t0 Internati0nal Trade

Imp0rtance 0f such restricti0ns/barriers:

 T0 pr0tect the nati0nal interests 0f the c0untry.

 T0 pr0tect specific industries in the c0untry
 Serves as a resp0nse t0 trade p0licies 0f 0ther c0untries.
 T0 keep the balance 0f trade.

Kinds 0f Restricti0ns/Barriers

 Imp0rt Qu0tas. 0ne meth0d of limiting imports is simply to close the p0rts
0f entry int0 a c0untry. M0re c0mm0nly, maximum all0wable imp0rt
quantities may be set f0r specific pr0ducts. Such quantity restricti0ns are
kn0wn as qu0tas. These may als0 be used t0 limit the am0unt 0f f0reign
0r d0mestic currency that is permitted t0 cr0ss nati0nal b0rders. Quotas
are imp0sed as the quickest means t0 st0p 0r even reverse a negative
trend in a c0untry’s balance 0f payments. They are used als0 as the m0st
effective means 0f pr0tecting d0mestic industry fr0m f0reign c0mpetiti0n.

 Tariffs. An0ther c0mm0n way 0f restricting imp0rts is by imp0sing tariffs,

 45

0r taxes 0n imp0rted g00ds. A tariff, paid by the buyer 0f the imp0rted

pr0duct, makes the price higher f0r that item in the c0untry that imp0rted
it. The higher price reduces c0nsumer demand and thus effectively
restricts the imp0rt. The taxes c0llected 0n the imp0rted g00ds als0
increase revenues f0r the nati0n’s g0vt. Furtherm0re, serves as a subsidy
t0 d0mestic pr0ducers 0f the items taxed because the higher price that
results fr0m a tariff enc0urages the c0mpeting d0mestic industry t0
expand pr0ducti0n.

 N0n-Tariff Barriers. In recent years the use 0f n0n-tariff barriers t0 trade

has increased. Alth0ugh these barriers are n0t necessarily administered
by a g0vernment with the intenti0n 0f regulating trade, they nevertheless
have the result. Such n0n-tariff barriers include g0verment health and
safety regulati0ns, business c0des 0f c0nduct, and d0mestic tax p0licies.
Direct g0vernment support 0f vari0us d0mestic industries is als0 viewed
as a n0n-tariff barrier t0 trade, because such supp0rt puts the added
industries at an unfair advantage am0ng trading nati0ns.

BALANCE 0F PAYMENTS

Basic C0ncept and Parts 0f B0P

Basic C0ncept

The balance 0f payment (B0P) is the meth0d c0untries use t0 m0nit0r all
internati0nal m0netary transacti0ns at a specific peri0d 0t time. Usually, the
B0P is calculated every quarter and every calendar year. All trades
c0nducted by b0th private and public sect0rs are acc0unted f0r in the B0P
in 0rder t0 determine h0w much m0ney is g0ing in and 0ut 0f a c0untry. If a
c0untry has received m0ney, this is kn0wn as a credit, and, if a c0untry has
paid 0r given m0ney, the transacti0n is c0unted as a debit. The0ritically, the
B0P sh0uld be zer0, meaning that assets(credits) and liabilities (debits)
sh0uld balance. But in practice this is rarely the case and, thus, the B0P can
tell the 0bserver if a c0untry has a deficit 0r a surplus and fr0m which part
0f the ec0n0my the discrepancies are stemming.

 Parts 0f the Balance 0f Payments

The B0P is divided int0 three parts, namely, current acc0unt, capital
acc0unt and financial acc0unt.

 Current Acc0unt

 This is called current acc0unt because it used t0 Mark the infl0w and
 46

0utfl0w 0f g00ds and services in a c0untry.

 The extent 0f current acc0unts includes:

 Trade balance – refers t0 the difference between the m0netary

value 0f exp0rts and imp0rts in an ec0n0my 0ver a certain peri0d
0f time.

 A p0sitive balance 0f trade is kn0wn as a trade surplus and

c0nsists 0f exp0rting m0re than is imp0rted.

 A negative balance 0f trade is kn0wn as a trade deficit 0r,

inf0rmally, a trade gap.

 Receipts fr0m inc0me-assets such as st0cks in the f0rms 0f

dividends.

 Unilateral transfers 0r the 0CW remittances – these are

included in the n0n-merchandise trade and financial aids/grants
fr0m 0ther c0untries.

 Capital Acc0unt

 This includes the infl0w and 0utfl0w 0f d0llar in a particular country.

Such as f0reign debts and payment 0f debts, transfer 0f g00ds, and
financial assets by migrants leaving 0r entering a c0untry, f0reign
investments, transfer 0f funds received t0 the sale 0r acquisiti0n 0f
fixed assets, gift and inheritance taxes, death levies, and finally,
uninsured damage t0 fixed assets.

 It is where all internati0nal capital transfers are rec0rded such as

acquisiti0n 0r disp0sal 0f n0n-financial assets (ex. Land) and n0n-
pr0duced assets(ex. Mine used f0r the extracti0n 0f diam0nds).

 Financial Acc0unt/0fficial Statement Acc0unt

 In the financial acc0unt, internati0nal m0netary fl0ws related t0

investment in business, real estate, b0nds and st0cks are d0cumented.

 This als0 includes the g0vernement-0wned assets such as f0reign

reserves, g0ld, special drawing rights (SDRs-The SDR is an
internati0nal reserve asset, created by the IMF in 1969 t0 supplement
the existing 0fficial reserves 0f member c0untries. SDRs are all0cated
t0 member c0untries in pr0p0rti0n t0 their IMF qu0tas. The SDR als0
serves as the unit 0f acc0unt 0f the IMF and s0me 0ther internati0nal
0rganizati0ns. Its value is based 0n a basket 0f key internati0nal
 47

currencies.)

WK 16 SHORT HISTORY OF THE PHILIPPINE ECONOMY

Pre-Spanish Colonial Period

Agriculture - main source of livelihood

 Examples of agricultural products they produced are sugarcane, cotton,

hemp, bananas, and other types of fruits and vegetables.

 Two Methods of Land Cultivation

Kaingin
- a kind of system in which shrubs and bushes are burned to
clear the land. Afterwards, the land is ready to be planted by rice and
other crops.

Tillage
- a kind of system in which wooden plows and harrows are
drawn by carabaos. These instruments are used to cultivate the
soil. In some regions, irrigation ditches are used to increase farm
production, as manifested by the rice terraces in the Mountain
Province.

Landholding - lands that can be owned by private and public entities.

 Public Pr0perty – lands that are less arable and th0se al0ng the mountain
sl0pes and c0uld be tilled by anyb0dy.

 Private Property - these include fertile and cultivated lands. Such lands
are reserved for nobles and datus. Furthermore, privately-owned lands
can be bought, inherited or ascribed to them as gifts or rewards. The rich
and the datus also owned fishponds in rivers within their communities .

Trading - early Filipinos traded with Chinese merchants. Objects of this

trade
include: glass, porcelain, commercial gold, perfume, containers, vases,
needles, silk, rods and umbrellas. They also had a trading relationship with
Indian traders in which they traded local products into body ornaments (i.e.
beads and ornaments), gold, etc. Furthermore, barter system was used
as a popular mode of trade. The following are some of the economic
activities of pre-colonial Filipinos aside from agriculture and livestock
raising:

 Lumber and shipbuilding

 Boat making
 48

 Fishing
 Mining and blacksmithing - minerals obtained from these industries are
used for making body ornaments such as bracelets, necklaces, swords
and other tools.
 Wine making - the likes of tuba (coconut wine) and lambanog (nipa
wine)
 Weaving and embroidery - early Filipinos were fond of using abaca,
cotton and silk thread for weaving textiles.
 Jewelry making, mat and basket making and hunting

Spanish Colonial Period

According to Teodoro Agoncillo, the Spaniards “implemented a colonial policy

designed not only to keep the Filipinos in political subjection, but also to exploit to
the utmost the country’s natural resources.” This was manifested in various
economic activities and policies that the Spaniards implemented in our country.

Based on our history, the early Filipinos had already possessed a stable
economic system even before the Spanish colonizers conquered the
Philippines in the early part of the 14th century. The arrival of European
forces in the Philippines was expected to bring significant improvements
to the Philippines’ economic, social and political spheres. However,
instead of bringing the nation towards progress and modernity, the
colonizers only used the advantages, natural resources and strategic
location of its colony for their own profit.

Land Ownership

 Encomienda – parcel 0f land was given as a reward t0 the King’s s0ldiers

wh0 rendered their military service in c0nquering t0wns and territ0ries.

 Encomenderos - people who were granted a parcel (or parcels)

of land under the encomienda system. Encomenderos were also
given the power to collect taxes on land tillers and tenants.

In reality, the encomienda system served as a basis of Spanish and

selected Filipino elites for acquiring huge estates. Reforms in land
ownership were implemented along with the occurrences of whimsical
and capricious practice of government powers which resulted to
inequality and abuse.

 Encomenderos abused their power and forced the natives to pay tribute
(tribute) either in cash or kind which was beyond the amount required by
law.
 49

The following are the four classifications of land ownership during the Spanish
period.

 Religi0us c0ngregati0ns such as D0minicans and Augustinians 0wned

vast lands. These lands were only used for profit generation. Most of their
land properties were converted into agricultural estates.

 Spaniards wh0 ch0se t0 stay in the Philippines als0 acquired vast am0unt
0f pr0perty states.

 Mestizos and rich principalias 0wned a c0nsiderable size 0f land

als0 used f0r agricultural purp0ses.

 Small-sized lands owned by ordinary Indios - these property estates were

inherited by them fr0m their ancest0rs bef0re the Spanish c0l0nizati0n.

Filipinos also encountered a number of problems in agriculture and land

ownership during this period. Among these are:

 The emergence of small scale agricultural production due to unreas0nably

high am0unt 0f rent 0f agricultural lands.

 The imposition of large amount of taxes paid to the encomenderos

which served as a heavy burden for the tenants.

 Farmers were discouraged to improve their production for they did not
own a large portion of the agricultural land they were working on along
with the heavy imposition of taxes.

 Land grabbing by the Spaniards.

System of Taxation

 Rentas Estancadas - these are taxes levied on the manufacture,

purchase or use of products, services and goods

 Tributo - these are known as direct taxes.

Tobacco Taxation - contributed a lot to government’s revenue due to

the
policy promulgated by Governor-General Jose Basco y Vargas
(tobacco monopoly). The Spanish colonial government exercised
control over tobacco plantation in certain provinces called as
provincias cosecheras mainly located in Gapan and Cagayan.
Furthermore, the government did not only control the production but
 50

also the manufacturing and marketing of tobacco. The government will

buy it at a low cost from the plantation and sell it in a higher price.

Taxes imposed on coconut wine: bandala system and tributo

Galleon Trade

Galleon - a ship composed of 1,500 divisions. The cost of each division

was ranging from two hundred up to two hundred twenty five pesos.
Anyone could participate in this trade provided that he has a boleta
ticket.
The Spanish Governal-General had the most number of boleta tickets.
However, it was also available to the members of the Church and widows
of Spanish citizens. Individuals who were given boletas but had no
enough capital to participate in the trade opted to sell their tickets. Such
activity was illegal.

The Galleon Trade started in 1600s until the 19 century. It limited the
commercial links between Manila and Acapulco to two hundred fifty
thousand pesos per year in exports and five hundred thousand pesos
each year in imports from Mexico. It also imposed restrictions on the
quantity and maximum size of ships to dock in the Manila trade ports.
Only two ships were allowed to trade each year and with a limit of three
hundred tons in weight. The last galleon left Manila in 1811 and the last
ship from Acapulco arrived in 1815.

Obras Pias

An organization which solicited funds from the rich to be used for
charitable activities. However, contrary to the real purpose of the
solicited funds, the large portion of the said funds was used as capital
for individuals who wanted to engage in the galleon trade. The
interest rate that was charged to the loaner varies on the destination
of the trading ship:

Acapulco trade was charged an interest rate of 50%

Trade in China 25%
Trade in India 35%

Sociedad Economica de Amigos del Pais and Real Compania de Filipinas

Sociedad Economica de Amigos

An organization which was established during the time of Governor-

General Jose Basco y Vargas to advance the state of agriculture in
the country and free the Philippines from dependence on Mexico.
 51

It also rewarded farmers who were judged for efficiency and
the use of modern planting techniques of cotton, sugarcane, and
other crops.

It introduced the planting of mulberry trees for the worms that
produce silk threads.

It widened the coverage of tobacco monopoly.

The organization did not last long because of the replacement of

Governor-General Basco.

Real Compania de Filipinas

Purpose of the organization: Aimed to contribute to the

development of the Philippine economy by widening its commercial
relationship with Spain as well as its other colonies. However, it did
not succeed for it had no authority over the galleon trade which
was more attractive to the Spanish colonial officials.

American Colonial Period

Treaty of Paris (1898)

 A treaty that ended the war between Spain and the United States and
transferred the control of the archipelago to the Americans at the price of
$20 million.

 Why did the Americans colonize the Philippines?

Americans at that time wanted to have a colony in Asia as a base for its
goal of partaking in the huge market of China. But the Filipino
revolutionaries fought against the American colonialists and the Filipino-
American war took years. In addition, a number of economic structures
were destroyed before the Americans were able to pacify the
revolutionaries. An American economist named Henry Parker Willis
(1904) described the state of the Philippine economy during the first years
of American occupation in his report:

“… the natives are now impoverished even destitute; their

draught animals dead and new ones apparently impossible of

introduction, their crops destroyed by locusts and other pests…In
many places where habitations once stood, even in some cases
where towns existed, not a trace is left except here and there are
 52

group of banana palms, the indication that a dwelling was once

close by dikes and canals intended for the irrigation of rice fields
have fallen into disuse, owning to injury inflicted during military
operations, and irreparable without a capital which is everywhere
lacking. In brief, the impressions derived from a journey to the
Philippine islands are those which are produced from inspection
of devastated, demoralized country just emerged from war, and
entirely without the usual resources of capital, either native or
foreign, upon which to draw. (Tullao: 2004)

Free Trade and Commercial Relations with the United States


Free Trade - a commercial policy which allows the unhampered flow of
goods among trading nations. Through this policy, American products
can enter the Philippines without restrictions—such as tariff (tax imposed
on imported goods) and quota (restriction in the amount of goods which
can be imported)—while the Philippine products should be exported to
America without barriers. However, this policy only favored the
American interest.

Payne-Aldrich Act of 1909 - a law that allowed the importation of

American products into the Philippines without restrictions. This law
relaxed the trading relations between the US and Philippines and upheld
the interest of the Americans because the local products were
subjected to tariffs and quotas.

Underwood-Simmons Act of 1913 - this act removed the quota

(quantitative limitation) on Philippine exports to the United States.
However, some local products were not included in the list of products
that can be freely traded. This measure was done by the Americans
in order to protect their industries from the competition of the
Philippine export goods.

Examples of products that could not be freely traded are the goods
that are manufactured in the Philippines but had used at least 20%
of imported raw materials. In the end, the only things that the
Philippines can export are mostly raw materials; on the other hand,
any American product can enter the country.

 Tydings-McDuffie Act of 1934 - it granted Philippine independence

on
the 4th of July 1946 after a Commonwealth status which lasted for ten
years. Until then, a Commonwealth government, with a constitution and
legally instituted Filipino president (through democratic means), would
have autonomy in all affairs except for foreign policy.
 53

Effects of Free Trade Relations

Establishment and proliferation of trading companies which became

prominent institutions in implementing these commercial and
economic policies (free trade).

Increase in the numbers of business and commercial schools due to

the need of skilled individuals in business.

Establishment of financial institutions which extended credit to import

and export businessmen.

Improvement in the overall economic conditions of the country.

Development in the system of communication that paved the way for

the efficient trading inside and outside the country.

The Philippines became heavily dependent on American products and

technologies.

Free-trade hindered the growth of manufacturing industries in the country.

Japanese Occupation

The Second World War and the Japanese Occupation brought negative
effects in the Philippine economy. During that time, the country’s economy
was experiencing high inflation, rationing of prime commodities, imposition
of heavy taxes, devastation of natural resources, and stagnation of the
economy.

Illegal activities also emerged in the country such as cock-fighting, jai-alai,

boxing, and proliferation of night clubs and beer houses.

The Republic Years

Roxas Administration

Rehabilitation Years. The country’s economy was destroyed because

of
the devastating effects of the Second World War. Infrastructures,
establishments and even natural resources had been severely damaged
by the war. The American government decided to rehabilitate the
Philippines through monetary and material aids.

Bell Trade Act of 1946. It defined the commercial exchange between

the
Philippines and the United States.
 54

Quotas were imposed on Philippine exports such as sugar,

rope, rice, tobacco and coconut oil.

Peso was pegged to dollar.

Americans were given equal rights to exploit our natural resources

and even in the ownership and management of public utilities.

In
exchange for all these things, the American government gave a
$620 million financial assistance for our rehabilitation programs.

RehabilitationandFinanceCorporation(RFC).Established to
manage
the distribution of loans and financial assistance from the United
States for the rehabilitation of our country.

Quirino Administration

Import Substitution. An economic policy that aims to curb the increasing
deficit of the balance of payments. This is because we are running out of
foreign currencies due to importation of products.

It also aims to establish an industrial and manufacturing base

in the Philippines.

With this, the government also controlled the importation of goods.

Import Control Law of 1950. Provides power to Central Bank of the

Philippines to regulate the importation of foreign products and in the
selection of local industries to improve and develop.

Magsaysay Administration

Land Reform Act of 1955. This aims to resolve the growing feud
between farmers and landowners.

National Resettlement and Rehabilitation Administration
(NARRA) –
aims to give land to landless, improve the quality of the farmers’
harvests and extend credit assistance to them.

Farmer’s Cooperative and Marketing Association (FACOMA)

- established to organize the association of farmers into
cooperatives.
 55

Garcia Administration

Filipino First Policy. It restricted imports and foreign exchange.
Furthermore, it provided priority to Filipino industries.

Macapagal Administration

Decontrol and Import Liberalization. Liberalized the importation of
goods
and relaxed foreign exchange policies.

Agricultural Land Reform Code. It removed the system of tenancy

and
replaced it with leasehold system. It also provided for the establishment
of the Land Bank of the Philippines.

Marcos Administration

President Marcos increased the involvement of the government to a

number of key corporations in the Philippines. Thus,Government
Owned
and Controlled Corporations increased during his term.

Crony Capitalism. It refers to the policy of giving favors to friends and

relatives by allowing them to hold a government office.

Aquino Administration

Asset Privatization Program. This program aimed to mandate

selected
GOCC’s to share the majority of their stocks in the private sector .

Presidential Commission on Good Government (PCGG). This was

established to recover the ill-gotten wealth of the Marcoses and their
cronies.

Comprehensive Agrarian Reform Law (RA 6657). This was

enacted in
order to emphasize the economic condition of the farmers.

Value Added Tax. This is aimed to reform tax collection

Ramos Administration

Deregulation and privatization to free the industries from the “apron

strings of the state.”
 56

Dismantling of protective barriers, provision of correct incentives to make

the industries in the country efficient and competitive.

Tiger Economy of Asia

Estrada Administration

Medium Term Development Plan for 1999 – 2004

“Erap para sa mahirap” - one of the flagship projects of Pres. Estrada

which aimed to alleviate the increasing poverty of the Filipinos.

Macapagal-Arroyo Administration

Emphasized the importance of transparency in the government

Strong Republic

Pagkain sa Bawat Mesa

History of the Philippine Financial System

History of the Philippine Financial System

The financial system in the Philippines developed slowly during the Spanish
colonial period. Afterwards, the arrival of American forces brought rapid and
unprecedented changes in the economic sphere of the Philippines. These
developments are manifested by the proliferation of financial developments and
establishment of different financial institutions.

Spanish Period

Obras Pias. It is considered as the earliest local institution established in

the Philippines. It is also a religious foundation that drew capital from
legacies left by wealthy individuals to the Church or to lay orders. It also
served as a financial agent to charities and other related activities. The
existence of this institution lasted until the middle of the 19th century.

Banco Español Filipino de Isabel II. Refers to the very first bank in the
Philippines. This was engaged in banking and limited foreign trade
financing.

Chartered Bank of India, Australia and China (Hongkong and
Shanghai
Bank). The first two British banks that were set-up in the Philippines
during the opening of the Suez Canal in 1867.
 57

Monte de Piedad y Caja de Ahorras de Manila (1882). Considered

as the
first savings bank in the Philippines.

Banco Peninsula de Ultramirano. First Spanish bank in the

Philippines.


American Period
Branches of American banks were established like the international Bank,
Guaranty Trust and the American Bank later on will merge with each other
and succeeded by the Bank of America and First National City Bank of New
York.
Postal Savings Bank - established in 1906.

Philippine National Bank - established in 1916 and absorbed the

Agricultural Bank. The PNB was given the function to issue paper
money currency, grant commercial loans and longer-term credit to
industry and agriculture. During the outbreak of World War II, there
were a total of seventeen banks in the Philippines. Eleven of which
were domestic and six foreign banks and there were a total of twenty
two provincial branches and fifty four provincial agencies.

Japanese Period

During the Japanese Occupation, foreign-owned banks were put to

liquidation and banking became a Filipino-Japanese owned activity

Nampo Kaihatsu Kando (such as the Southern Development

Bank)
opened a branch in the Philippines and was set up to assume the role of
a central bank.

The Republic Years

The following are the characteristics and activities of a Central Bank:


Publicly Owned. It is fully owned and controlled by the government
and
operates for public purposes. Older central banks evolved from private
institutions, which either developed into publicly controlled banks or have
retained their private character. The Federal Reserve System is a
“system of 12 regional federal reserve banks.” The Federal Reserve
Banks are owned by private commercial banks, which are members of
the Federal Reserve System. In spite of this, the US government exerts
 58

a large influence on the system. The US government appoints the

members of the Board of Governors, the central monetary authority for
the country, and in turn this Board appoints the directors of the Federal
Reserve Banks.

Issues
Currency and Acts as the Ultimate Source of
Money. The central
bank prints the paper money and mints the coinage and provides all the
money that the government requires.

As Government’s Banker, Agent and Financial Adviser. The central

bank may conduct the banking accounts of agencies and
instrumentalities of governments, although in the Philippines the
presence of government banks such as PNB has made this less
pressing. The Central Bank also performs the function of providing
foreign exchange required to meet governmental purchases of imports,
the servicing of foreign debt and the management of foreign exchange
assets and liabilities. As financial adviser of the government, the Central
Bank provides assistance by informing the government on monetary and
price developments—both internal and external—and the implications of
budgetary requirements for public expenditure in relation to their impact
on monetary developments.

Banker’s
Bank. When banks are in need of additional resources to cover
temporary situations, the Central Bank can help them. It provides
services to other banks such as maintaining of accounts for other
commercial banks. Furthermore, the Central Bank assumes the duty as
a bank of settlement or a clearinghouse for other banks.

Lender
of Last Resort. The Central Bank provides loans to banks when
they are short of cash, this is to protect financial institutions from failures
and bank runs—situation wherein an abnormal number of deposits
withdraw their deposits, normally caused by a lack of confidence in the
bank. But the assistance provided by the central bank is not for free, it is
with a cost—interest. In the Philippines, the BSP is also a lender of last
resort to investment houses—performs near-banking functions,
licensed by the BSP to take deposits and invest these for the depositors.

Custodian of the Country’s Reserves of Foreign Currencies.

During the gold standard system in the economy, Central Banks kept
the metallic reserves in order to meet the possibility of converting paper
notes into metallic equivalent on demand. In international trading, the
resident of another country may require another currency acceptable to
them. So, this function of keeping foreign currencies is important in a
central bank of a country. Most foreign Central Banks hold their reserves
in dollars. They also hold some reserves in the form of special drawing
rights (SDRs) from the International Monetary Fund (IMF), but the
 59

SDRs are relatively small for all central banks that are members of IMF,
although they represent resources of last resort for them to use when
they themselves are short of reserves.

Regulation of Monetary and Financial Activities. The Central Bank

supervises banks and other financial institutions to assure their solvency
and to protect the general public. It regulates the condition for the
establishment of new banks, and the prescription of qualifications for
bank officers and directors; the determination of the activities they can
engage in; and the conditions for deposit-taking and loan-giving. In
general these functions are inherent in the role given to the central bank
as the principal institution to promote the smooth functioning of the
monetary and financial basis of the economy.

Central Bank of the Philippines. This financial institution was

established in
1948 in accordance with a legislation intended to set up the general
policies pertaining to the setting up of general banking enterprises in the
country.

Bangko Sentral ng Pilipinas.

The Bangko Sentral ng Pilipinas (BSP) is the central bank of the
Republic of the Philippines. It was established on 3 July 1993
pursuant to the provisions of the 1987 Philippine Constitution
and the New Central Bank Act of 1993. The BSP took over from
the Central Bank of Philippines, which was established on 3
January 1949, as the country’s central monetary authority. The
BSP enjoys fiscal and administrative autonomy from the
National Government in the pursuit of its mandated
responsibilities.

TAXATION

Principles of Taxation

Benefit Principle. Different individuals should be taxed in proportion to

the benefit they receive from government programs. Those who benefit
from the government services should be the one to pay and people
should pay taxes in proportion to the amount of services or benefits
they receive.

One concrete example is the road user’s tax. This is a type of tax
 60

paid for using the road. It is integrated in the price of cars and in
the registration of vehicles.

Ability to Pay Principle. The amount of taxes people pay should be related
to
their income or wealth. The higher the income 0r wealth, the higher the
taxes.

Horizontal Equity. This principle states that those who are essentially
equal
in income or receives equal benefit from the government should be taxed
equally.

Vertical Equity. Tax treatment of people with different levels of income. This has
the idea that people with a greater ability to pay taxes should pay more.

Classifications of Taxes

According to Rate of Increase

Progressive Tax. Imposes a higher percentage rate of taxation on

people with high income than those with low income.

Regressive Tax. The tax rate remains the same or decreases even if the
income increases.

Proportional Tax. Imposes the same percentage rate of taxation n

everyone regardless of the amount of his/her income.

According to Payment

 Direct Tax. Imposed on people who are expected to pay the tax .

Example: Income Tax

Indirect Tax. Imposed on the value of products and services which are
shouldered by the end users.

According to Purpose

Professional Tax. It is levied on specific occupations that are lawfully

pursued like doctors, lawyers, and accountants.

Community Tax. This tax is under the Commonwealth Act No. 465. It
 61

provides an order to every inhabitant of the Philippines (over 18 years

old and who has been regularly employed for at least 30 consecutive
days) must pay an annual residence tax issued by the local
government. The amount of tax still depends on the income of the
individual.

Income Tax. It is levied on all citizens and companies that generate

income. The amount levied varies from the income received
annually by the taxpayers.

Property Tax. It is imposed on persons with real properties whether

acquired, inherited, or donated based on their market value.

Example: Real Estate Tax

Excise Tax. It is imposed on all products produced and sold in the

country.

Examples: Sales tax on liquors, cigarettes and electronic

equipments

 Specific Tax. It refers to the value of the tax that is based on the
measure of weight of the product.

 Ad Valorem. It refers to the imposition of tax based on the value of

the product.

 Regulatory Tax. It is imposed on buying and using products to

control their price.

Examples: Tariff

Computing for the Income Tax

 62

Personal and Additional Exemptions:

Single/Widow/Widower/Legally Separated: P20k

Singlebut head of the family: P25k
Married individuals: P32k and P8k for every child not more than 4

The following illustrates the process on how to compute the income tax:

For example, Mr. dela Cruz received an annual income of P140,000. He

is unmarried but he declared himself as the head of the family because
his parents are no longer working. How much tax should he pay?
Gross Compensation P140,000.00
Less exemption as single but head of the family 25,000.00
Taxable Income 115,000.00

According to the Tax Table in BIR Form 1700:

Over P70,000 but not over P140,000:

Tax due:
= 8,500 + 20% of the excess over P70,000
= (115,000 – 70,000 = 45,000 * 20%)
= 8,500 + 9,000
= P17,500

Since Mr. dela Cruz has an additional exemption being the head of the family (P
25,000), his tax due is computed using the taxable income, not the gross
 63

compensation income. To compute for the tax due, refer to the tax table in BIR
Form 1700 which is also shown in the table above.

Value Added Tax (VAT)

VAT is placed on the value that is added at each stage of production. To illustrate,
let us assume that a piece of chicken is sold in the market. The sold chicken has
no VAT at the initial stage of the trade process. If it is processed as chicken
tocino or charboiled chicken, VAT is levied at every step of the production
process. The VALUE ADDED TAX took effect on January 1, 1988 through the
Executive Order No.273 signed by President Corazon Aquino. The following are
the advantages of implementing this tax reform:

It is hard for people or companies to avoid paying tax because the
tax collector simply levies it on the total amount of sales – meaning,
the tax due is included in the good’s market price

The incidence of tax collection is widely spread---this makes it harder for a

single firm to shift the burden of tax to one group or another.

Tax is not visible to the final consumer. It has been added into the
price before the purchase is made.

VAT is being levied on businesses that earn a maximum of two
thousand pesos daily or five hundred thousand pesos yearly.

Here is the process on how to compute for the Value Added Tax:

VAT is computed by deducting the 10% of the total expenditures or input

VAT to the 10% of total income or output VAT in a yearly production.
(VAT= 10% of the total income – 10% of the total expenditures OR
VAT= output VAT – input VAT). Let us illustrate the computation of VAT
using Mr. Santos’ food processing factory:

Mr. Santos’ burger patties

Inc0me 0utput Vat-expenditures Input Vat

P70,000.00 P30,000.00

If Mr. Santos has a receipt of all his expenditures in producing processed foods,
he can deduct the input VAT from the output VAT. Thus:

P70,000 – P30,000 = P40,000

The amount of VAT that Mr. Santos should pay is P40,000. The ten percent VAT
may be produced in two ways: first, the business can shoulder the payment of
the VALUE ADDED TAX or second, he/she may charge it the consumer but
 64

should not be more than ten percent. Businessmen can only charge one to two
percent to the consumers so that the prices of commodities will not be affected.

Household utensils, school supplies, health products, services of barbers and

security guards, contractors, brokers and millers are covered by VAT.

Expanded Value Added Tax (E-VAT)

On May 5, 1994, President Ramos signed into law the Republic Act No. 7716,
otherwise known as the Expanded Value Added Tax (E-VAT). It aims to gain
P18B every year by including products not covered by VAT. However, primary
products and services will not be subjected to E-VAT. Agricultural and aquatic
products in their original state like rice, vegetables, poultry, petroleum,
transportation fares, medical and dental services, water, electricity, tuition fees,
school supplies, low cost and socialized housing, and business that do not earn
more than half a million pesos every year are not included in the expanded VAT.

With the implementation of E-VAT, both the rich and the poor have to pay ten
percent in all products that are included to be taxed on such policy.

The following are the coverage of E-VAT:

Services rendered by restaurants, hotels, resorts, clubs, taxicabs, tourist
buses, and rent-a-car companies
Imported meat
Non-life insurance
Airfreight, shipping and trucking
Telephone, radio and telegram franchise
Property rights
Pest control
Uses of Cable TV, motion picture films and satellite transmissions
Feeds for race horses, fighting cocks, aquarium fish
Professional fees

Just a few years back, President Gloria Macapagal-Arroyo signed R.A. No. 9337
or the New E-VAT Law or the RVAT (Reformed VAT) that will increase the 10%
tax to 12% to increase the government revenues that purports to solve our fiscal
woes. However, some sectors of the society opposed such move because
petroleum and electricity are included in E-VAT. It will add to the burdens of many
Filipinos who live below poverty line.
 65

WK 17 AGRICULTURAL SECTOR

Basic Concepts

Definition

It comes from the Latin phrase “ager cultura” which means cultivation of
fields. Agriculture, art, science, and industry of managing the growth of
plants and animals for human use. In a broad sense, agriculture includes
cultivation of the soil, growing and harvesting crops, breeding and raising
livestock, dairying, and forestry.

Three Major Patterns of Agricultural Development

Traditional Agriculture/Subsistence Farming. Farmers cultivate land

and
plant crops primarily to feed the members of their family. They also use
traditional methods of cultivation, planting and processing.

Three Major Patterns of Agricultural Development

Traditional Agriculture/Subsistence Farming. Farmers cultivate land

and
plant crops primarily to feed the members of their family. They also use
traditional methods of cultivation, planting and processing.

Hunting and gathering

Migratory farming - farmers together with their livestock move
to new areas of cultivation
Slash-and-burn (kaingin)
Fixed cultivation - farmers live off a particular piece of land, using it
mainly to provide for themselves

Modernizing Stage. This is brought by the increased importance of

commercial production in farming. The growth of “marketable surplus”
from the farmer’s output, beyond his subsistence needs, means earning
cash incomes to support the family’s consumption or to improve his
farming.

Modern Agriculture. Agricultural processes are specialized and are

characterized by a large portion of the product being produced for
commercial purposes. The farmer becomes more specialized rather
than working to meet a variety of needs. With specialization comes
applying more individual attention to the requirements of modern
agricultural techniques and methodologies suited to the production.
 66

Importance of Agriculture

Source of Raw Materials. Agriculture serves as supplier of raw

materials needed by the industries in manufacturing of consumer
goods.

Consumer of Industrial Products. It is the agriculture that supplies

the
raw materials that are used in producing finished products. Furthermore,
the income of agriculture from supplying the raw materials is spent in
buying the products of the industries (recall the circular flow of the
economy).

Provides Employment. Many Filipinos depend on agriculture for their

living.

Dollar Earner. Some of our agricultural products are export

commodities, which can compete with other foreign products. We are
exporting tilapia, big shrimp, banana, sugar, abaca, nata de coco and
other cash crops. But the sad reality here is that we are exporting raw
materials but we are importing processed products. For example, we
are exporting our coconut but we are importing bath soap, shampoo,
and lotion made of the coconut we exported.

Land Tenure in the Philippines

Full Owners. Those who own the land which they work on.

Part Owners. Farm operators who own part of the land they work on
while they hold the remaining portion as tenants.

Tenants. Farm operators who rent or lease from others the land they
cultivate.

Cash Tenants. These farmers pay cash as rent for their use of
the land. The rent is usually computed per hectare.

Share-of-Produce Tenants. These tenants give the owner of the land a

share of their harvest as agreed upon beforehand. These tenants
include those who raise livestock or poultry for the landowner on
condition that the latter will get a share of the product.

Fixed-Amount-of-Produce Tenants. These farmers pay rent in the

form
of a fixed quantity of the harvest agreed upon by the owner and the
tenant. The latter is obliged to pay the rent whether the harvest is
bountiful or not.
 67

Cash-and-Fixed-Amount-of-Produce Tenants. These tenants pay

rent for
using the land in a mix of cash payment and a fixed portion of the
harvest as agreed upon.

Cash and Share-Produce Tenants. These are tenants who pay he

owner
of the land a combination of cash and a portion of the harvest agreed
upon by both parties.
Rent-Free Tenants. These are the tenants who till the land with the
consent of the owner without having to pay rent in cash or kind.

Farm Managers These individuals supervise the day-to-day operations of

large farms and receive wages, a salary, or part of the harvest for their
services.

Farm Operators. They operate the farms under the conditions other than
those previously mentioned.

Problems of Agricultural Sector

 Lack of modern equipment and technology. Farmers and fishermen

in the rural areas lack modern equipment and the appropriate technology.

 Insufficient infrastructures. The agricultural products harvested by the

farmers in the provinces are damaged and become rotten before these can
reach their destination because of the dilapidated roads and bridges. Even
the irrigation is not enough to nurture the palays and other agricultural
crops.

 Lack of capital. Subsidies from the government are not enough to develop
the agricultural sector and sometimes the budget for agriculture is not
enough to fulfill the needs of some poor farmers. Sufficient capital is
needed to increase the production and also in buying modern machineries
and equipment for farming and fishing.

 No concrete program for land ownership. Most farmers do not have their
own land. They till the land for the landlord. In most cases, farmers lose the
initiative to improve and increase their production because they are aware
that the landlord profits more. Low prices. The harvested crops of farmers
are sold at very low prices and it is difficult for them to increase the price
and even the crops’ supply.
 Competition from foreign products. As a result of import liberalization, foreign
commodities like chocolates, soap, and ponkan can be found everywhere
and compete with our local products. It is difficult for local products to sell
 68

due to the presence of cheap imported goods.

 Government’s development program. The agricultural sector has changed

considerably. In line with the strategy of attracting foreign investors into the
country, there have been rampant conversions of agricultural lands into
industrial estates, export-processing zones, residential subdivisions and golf
courses. Aside from this, traditional crops like rice and corn are
systematically replaced by so-called “high value crops” (HVCs) such as
cutflowers and fruits in the hope of earning more from export. Under the High
Value Crops Development Act of 1995, farmers are encouraged to plant
HVCs instead of staple food. And in the hope of earning more from the
export of agricultural products, food production for domestic consumption is
set aside.

Related to this is the spread of contract growing arrangements in many

parts of the country. This system involves agreements wherein big
agricultural companies pass on the burden of production to small
farmers. Under the contract, the company determines what crop will be
planted, the volume to be produced and the price of the harvested crop.
The contract states that the company has the right to reject the produce
that will not pass their quality standards. It provides bigger income for
companies while farmers continue to be trapped in debt and poverty.

Possible Solutions to Agricultural Problems

Impose restriction on foreign agricultural commodities that enter the country.

Provide infrastructure projects like warehouses, irrigation system, bridges

and farm to market roads.
Include in the budget allocation and allotment the essential needs of
farmers.

Provide subsidy for small farmers.

Establish cooperatives and rural banks that will give loans to farmers and
fishermen.

Disseminate information on how to use the modern technology on

agriculture.

Lower taxes imposed on imported equipment and machineries of

agriculture.

Set a reasonable price on agricultural products. Implement effectively and

efficiently the agrarian reform law.
 69

LAND REFORM VS. AGRARIAN REFORM

Land Reform. It refers to the full range of measures that may or should be
taken to improve or remedy the defects in the relations among men (i.e.,
between the tiller and owner of land, employee and employer in a farm) with
respect to their rights in land and involves the transformation of agrarian
structure.

Agrarian Reform. According to De Leon, it “comprises not only land reform

but also the reform and development of complementary institutional
frameworks such as the national government created to undertake land
reform, local governments, rural educational and social welfare institutions,
and voluntary associations, particularly farmer’s organizations.”

The following are the six-fold land reform program of the Philippine
government:

To establish owner-cultivatorship and make family-sized farms

the basis of Philippines agriculture.

To achieve dignified existence for small farmers and free them
from harmful institutional restraints and practices.

To establish a social and economic structure in agriculture

conducive to greater productivity and improved farm incomes.

To apply all labor laws without discrimination to both industrial and
agricultural wage earners.

To provide a more systematic land resettlement and land distribution

program.

To make the small farmer a more independent, self-reliant and

responsible citizen, and a source of genuine strength in the society.

Land Reform in Philippine History

Pre-Spanish Period
“This land is Ours and God gave this land to us.”

Before the Spaniards came to the Philippines, Filipinos lived in villages or

barangays ruled by chiefs or datus. The datus comprised the nobility. Then
came the maharlikas (freemen), followed by the aliping mamamahay (serfs)
and aliping saguiguilid (slaves).
 70

However, despite the existence of different classes in the social structure,

practically everyone had access to the fruits of the soil. Money was
unknown, and rice served as the medium of exchange.

Spanish Period

“United we stand, divided we fall.”

The system, however, degenerated into abuse of power made by the

encomienderos. The tribute soon became land rents to a few powerful
landlords. The natives, who once cultivated the lands in freedom, were
transformed into mere share tenants.

First Philippine Republic

“The yoke is finally broken.”

When the First Philippine Republic was established in 1899, Gen. Emilio Aguinaldo
declared in the Malolos Constitution his intention to confiscate large estates,
especially the so-called Friar lands. However, as the Republic was short-lived,
Aguinaldo’s plan was never implemented.

“Long live America!”


The following are some of the significant legislations enacted during
the American period:

Philippine Bill of 1902. This legislation set the ceilings on the
hectarage
that private individuals and corporations may acquire: 16 hectares for
private individuals and 1,024 hectares for corporations.

Land Registration Act of 1902 (Act No. 496). This act provided for a
comprehensive registration of land titles under the Torrens system.

Public Land Act of 1903. This introduced the homestead system in the
Philippines.

Tenancy Act of 1933 (Act No. 4054 and 4113). This act regulated
relationships between landowners and tenants of rice (50-50 sharing)
and sugar cane lands.

The Torrens system, where the Americans instituted the registration

of lands, did not solve the problem completely. Either they were not
aware of the law or if they were, they could not pay the survey cost and
other fees required in applying for a Torrens title.
 71

Commonwealth Period

“Government for the Filipinos.”

President Manuel L. Quezon espoused the "Social Justice" program to

address the increasing social unrest in Central Luzon. The following are
some of the significant legislation enacted during this period:

1935 Constitution. "The promotion of social justice to ensure the well-

being and economic security of all people should be the concern of the
State."
Commonwealth Act No. 178 (An Amendment to Rice Tenancy
Act No.
4045). This was approved on November 13, 1936 which provided for
certain controls in the landlord-tenant relations.

National Rice and Corn Corporation (NARIC). This was established

in
1936 that intended to concretize the price of rice and corn by helping the
poor tenants as well as the mass consumers.

Commonwealth Act No. 461. Signed in 1937, this act specified

reasons
for the dismissal of tenants and only with the approval of the Tenancy
Division of the Department of Justice.

Rural Program Administration. This government agency was created

on
March 2, 1939 which provided for the purchase and lease of haciendas
and their sale and lease to the tenants.

Commonwealth Act No. 441. This act was enacted on June 3, 1939
hich
provided for the creation of the National Settlement Administration
with a
capital stock of twenty million pesos.

Japanese Occupation

“The Era of Hukbalahap.”

The Second World War II started in Europe in 1939 and in the Pacific in
1941. Hukbalahap controlled the entire area of Central Luzon. Landlords
who supported the Japanese lost their lands to peasants while those who
supported the Huks earned fixed rentals in favor of the tenants.
Unfortunately, the end of war also signaled the end of gains acquired by
the peasants.
 72

Upon the arrival of the Japanese in the Philippines in 1942, peasants and
workers organizations grew strength. Many peasants took up arms and
identified themselves with the anti-Japanese group, the HUKBALAHAP
(Hukbo ng Bayan Laban sa Hapon).

The Philippine Republic

“The New Republic.”

After the establishment of the Philippine Independence in 1946, the

problems of land tenure remained. These became worst in certain areas.
Thus, the Congress of the Philippines revised the tenancy law.

President Manuel Roxas (1946-1948) enacted the following laws:

Republic Act No. 34. This law established the 70-30 sharing
arrangements and regulated share-tenancy contracts.

Republic
Act No. 55. This law provided for a more effective
safeguard against arbitrary ejection of tenants.

President Elpidio Quirino (1948-1953) enacted the Executive Order

No.
355 which was issued on October 23, 1950. This law replaced the
National Land Settlement Administration with Land Settlement
Development Corporation (LASEDECO) which held the
responsibilities of the Agricultural Machinery Equipment Corporation
and the Rice and Corn Production Administration .

President Ramon Magsaysay (1953-1957) enacted the following

laws:

Republic Act No. 1160 of 1954. This law abolished the LASEDECO and
established the National Resettlement and Rehabilitation Administration
(NARRA) to resettle dissidents and landless farmers. It was particularly
aimed at rebel eturnees providing home lots and farmlands in Palawan and
Mindanao.

Republic Act No. 1199 or the Agricultural Tenancy Act of

1954. This
law governed the relationship between landowners and tenant
farmers by organizing share-tenancy and leasehold system. The law
provided the security of tenure of tenants. It also created the Court
of Agrarian Relations.

Republic Act No. 1400 or the Land Reform Act of 1955. Under this
 73

law, the
Land Tenure Administration (LTA) was created which was responsible for
the acquisition and distribution of large tenanted rice and corn lands over
200 hectares for individuals and 600 hectares for corporations.

Republic
Act No. 821 or the Creation of Agricultural Credit
Cooperative Financing Administration. This act provided mall
farmers and share tenants loans with low interest rates of six to
eight percent.

President Carlos P. Garcia (1957-1961) only continued the land and
agricultural programs of President Ramon Magsaysay. No new
legislation passed.

President Diosdado Macapagal (1961-1965) enacted the Agricultural

Land Reform Code (R.A. No. 3844) which abolished share tenancy,
institutionalized leasehold, set retention limit at 75 hectares, invested
rights of preemption and redemption for tenant farmers, provided for
an administrative machinery for implementation, institutionalized a
judicial system of agrarian cases, incorporated extension, marketing
and supervised credit system of services of farmer beneficiaries. The
republic act was hailed as one that would emancipate Filipino farmers
from the bondage of tenancy.

President Ferdinand Marcos (1965-1986) declared the Proclamation

No. 1081 (Martial Law in the Philippines) on September 21, 1972. This
ushered the period of the “New Society.” Five days after its
proclamation, the entire country was proclaimed a land reform area
and simultaneously the Agrarian Reform Program was decreed.
President Marcos enacted the following laws:

Republic Act No. 6389 or the Code of Agrarian Reform

and
Republic Act No. 6390 of 1971. This act created the
Department of Agrarian Reform and the Agrarian Reform
Special Account Fund. It also strengthened the position of
farmers and expanded the scope of agrarian reform.

Presidential
Decree No. 2. This was enacted on September 26,
1972 which declared the country under land reform program. It
enjoined all agencies and offices of the government to extend
full cooperation and assistance to the DAR. It also activated
the Agrarian Reform Coordinating Council.

Presidential
Decree No. 27. This was enacted on October 21,
1972 which restricted land reform scope to tenanted rice and
corn lands and set the retention limit at 7 hectares.
 74

Under the presidency of Corazon Aquino (1986-1992), the

Constitution ratified by the Filipino people during the administration of
President Corazon C. Aquino provides under Section 21 under Article
II that “The State shall promote comprehensive rural development and
agrarian reform.”

The Comprehensive Agrarian Reform Program. On June
10,
1988, former President Corazon C. Aquino signed into law
Republic Act No. 6657 or otherwise known as the
Comprehensive Agrarian Reform Law (CARL). The law
became effective on June 15, 1988. Subsequently, four
Presidential issuances were released in July 1987 after 48
nationwide consultations before the actual law was enacted.

President Corazon C. Aquino enacted the following laws:


Executive Order No. 228. This law was ratified on July 16,
1987 which declared full ownership to qualified farmer-
beneficiaries covered by PD 27. It also determined the value
of the remaining unvalued rice and corn lands subject to PD
27 and provided for the manner of payment by the FBs and
mode of compensation to landowners.

on July 22, 1987, the Executive No. 229 provided

Enacted
some mechanisms for the implementation of the
Comprehensive Agrarian Reform Program (CARP).

Proclamation No. 131, which was enacted on July 22,

The
1987, instituted the CARP as a major program of the
government. It provided for a special fund known as the
Agrarian Reform Fund (ARF), with an initial amount of
Php50 billion to cover the estimated cost of the program
from 1987-1992.

Executive Order No. 129 was enacted on July 26, 1987

which
streamlined and expanded the power and operations of the
DAR.

Republic Act No. 6657 or the Comprehensive Agrarian

Reform
Law was signed on June 10, 1988 which instituted a
comprehensive agrarian reform program to promote social
justice and industrialization providing the mechanism for its
 75

implementation and for other purposes. This law is still the

one being implemented at present.

Executive
Order No. 405, which was signed on June 14,
1990, vested in the Land Bank of the Philippines the
responsibility to determine land valuation and compensation
for all lands covered by CARP.

Executive
Order No. 407 accelerated the acquisition and
distribution of agricultural lands, pasture lands, fishponds,
agro-forestry lands and other lands of the public domain

suitable for agriculture.

When President Fidel V. Ramos formally took over in 1992, his

administration came face to face with publics who have lost
confidence in the agrarian reform program. His administration
committed to the vision “Fairer, faster and more meaningful
implementation of the Agrarian Reform Program.” President Fidel V.
Ramos enacted the following agrarian laws:

Republic Act No. 7881 of 1995 which amended certain

provisions
of RA 6657 and exempted fishponds and prawns from the
coverage of CARP.

Republic
Act No. 7905 of 1995 which strengthened the
implementation of the CARP.

Executive Order No. 363 of 1997 which limits the type of lands
that
may be converted by setting conditions under which specific
categories of agricultural land are either absolutely non-negotiable
for conversion or highly restricted for conversion.

Republic Act No. 8435 of 1997 or the Agriculture and
Fisheries
Modernization Act (AFMA) which plugged the legal loopholes
in
land use conversion.

Republic Act 8532 of 1998 or the Agrarian Reform Fund Bill

which
provided an additional Php50 billion for CARP and extended its
implementation for another 10 years.
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“ERAP PARA SA MAHIRAP”. This was the battle cry that endeared
President Joseph Estrada (1998-2000) and made him very popular
during the 1998 presidential election. President Joseph E. Estrada
initiated the enactment of the Executive Order N0. 151 or the
Farmer’s Trust Fund. This law allowed the voluntary consolidation
of
small farm operation into medium and large scale integrated
enterprise that can access long-term capital. During his
administration, President Estrada launched the Magkabalikat Para
sa Kaunlarang Agraryo or MAGKASAKA. The DAR forged into
joint
ventures with private investors into agrarian sector to make FBs
competitive. However, the Estrada Administration was short lived.
The masses who put him into office demanded for his ouster.

The agrarian reform program under President Gloria Macapagal-

Arroyo (2000-present) is anchored on the vision “to make the
countryside economically viable for the Filipino family by
building
partnership and promoting social equity and new economic
opportunities towards lasting peace and sustainable rural
development.” The following are the notable agrarian and land
reform
programs under her administration:

Land Tenure Improvement - DAR will remain vigorous in

implementing land acquisition and distribution component of
CARP. The DAR will improve land tenure system through land
distribution and leasehold.

Provision
of Support Service - CARP is not only involved in the
distribution of lands but also included package of support
services which includes: credit assistance, extension services,
irrigation facilities, roads and bridges, marketing facilities and
training and technical support programs.

Infrastructure Projects - DAR will transform the agrarian reform

communities (ARCs), an area focused and integrated with the
delivery of support services, into rural economic zones that will
help in the creation of job opportunities in the countryside.

KALAHI ARZone - These zones consist of one or more municipalities

with
concentration of ARC population to achieve greater agro-productivity.

Agrarian Justice - To help clear the backlog of agrarian cases,

DAR
 77

will hire more paralegal officers to support undermanned

adjudicatory boards and introduce quota system to compel
adjudicators to work faster on agrarian reform cases. DAR will
respect the rights of both farmers and landowners.

Of all these laws, why do we still have landless farmers and a lot
Of farmers are still demonstrating against the landowners? We
just hope, that in due time, the laws that were passed for many
years will be fairly implemented to give land to the landless
Filipino farmers.

To sum up, note that:

Land reform is a program by which farmers expect improvement and

development not only on production itself but also in their way of life.

“…When the system of land tenure in predominantly agricultural

countries provides the cultivator with a reasonable reward for his
efforts, it stands for economic, social, and political stability in the
countryside and very often, and by the same token, in the country as a
whole.” - Wolf Ladejinsky (land reform expert).


COMPREHENSIVE AGRARIAN REFORM

The Comprehensive Agrarian Reform Program

The land reform law was expanded in 1988 to cover a wider range of lands
during the Corazon Aquino presidency and it was known as the Comprehensive
Agrarian Reform Law (CARL) or the R.A. 6657. It initially envisioned covering
around 8.2million hectares of land, regardless of crops planted and tenure
arrangements, including all public lands considered alienable and disposable. In
many ways, the land reform law was a setback. The land valuation process, for
example, was revised and made more favorable to landowners.

The following are the salient features of CARP:

Addresses the age-old issue of social injustice arising from the inequitable
distribution of ownership of agricultural lands.

 Covers the redistribution of all agricultural lands regardless of tenurial

arrangement or commodity produced.
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Founded on the land-to-the-tiller principle.

Provides for the security of tenure of landless farmers and team workers
over the land they till.

Provides a beneficiary award ceiling of 3 hectares and landowner retention

limit of 5 hectares.

Provides a 30-year repayment period for the farmer-beneficiary at 6% per

annum.

 Provides just compensation for landowners.

Provides a term limit for land distribution.

Provides for the implementation of leasehold pursuant to RA 3844 in

tenanted lands under the retention limit and lands not yet acquired under the
Act.

Provides for the administrative adjudication of cases to facilitate resolution of

such cases that will arise from the implementation of the Act.

 Provides for the delivery of support services to both farmer-beneficiaries and

dispossessed landowners.

Envisions the transformation of landless tillers into responsible and

progressive landowning farmers contributing significantly to national
economic development, and the dispossessed landowners investing their
land compensation proceeds to promote industrialization; and

Creates the Agrarian Reform Fund as the source of funding for CARP.

Key Strategies of Implementation

Pursuance of land acquisition and distribution (LAD) and leasehold.

 Fair and just delivery of agrarian justice to all affected parties.

 Delivery of support services designed to build ARB capabilities for group

action and cooperation, improved agribusiness productivity, access to basic
services and self-reliance.

 Building/ strengthening development partnerships with key CARP publics.

Area focused development.

Convergence and complementation among CARP implementing agencies.

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 Creation of a policy environment conducive to rural agro-industrialization.

Major Program Services and Key Results

Land Tenure Improvement Services

Acquisition and distribution of agricultural lands to landless farmers and

farm workers.

Implementation of non-land transfer schemes of tenure improvement such

as leaseholds, production and profit-sharing, etc. in non-distributable lands.

Facilitation of just compensation to landowners.

Resolution of second generation problems.

Agrarian Justice Delivery

Provision of agrarian legal assistance to Agrarian Reform Beneficiaries

(ARBs).
Resolution of agrarian law implementation cases.

Resolution of adjudication cases.

Support Services Delivery for Program Beneficiaries Development


Establishment of viable agrarian reform communities (ARCs) and
KALAHI agrarian reform zones (KARZones).

Strengthening of the social infrastructure and ARB capacity building .

Facilitation and enhancement of ARBs’ access to economic and

physical infrastructure support services, including pre- and post-
production extension and marketing services.

Development of ARBs into agribusiness entrepreneurs.

Core Targets

Land acquisition and distribution of about 5.28 million hectares
of agricultural lands (including all ARMM provinces) for DAR and
3.77 million hectares for DENR.

Land tenure security to about 3 million DAR ARBs (2 million land

titleholders; 1 million leaseholders)
 80

Launching of 2,000 Agrarian Reform Communities (ARCs).

Transformation of about 2 million landless farmers from tenant or farm

worker status into responsible landowners and agribusiness
entrepreneurs.

Implementation of the Program

Phase 1. It covered the period from 1988 to 1992. It envisioned

coverage of 2.16million hectares of land under the following programs that
were started under the previous land reform law: Operation Land Transfer,
areas with a voluntary to sell (VOS), government financial institution lands,
and the KKK lands. These lands were to be acquired by 1992.

Phase 2. Covered 1.1million hectares of landed estates, settlements, and

private agricultural lands greater than 50 hectares. They were planned for
acquisition by June 1992, the same period as Phase 1 .

Phase 3. Covered private agricultural lands less than 24 to 50 hectares and

more than 5 to 14 hectares. These were medium-sized lands that were
more difficult to acquire because of landowner opposition. They were
supposed to have been acquired by 1998 .

Most recent information on the accomplishments of these targeted

landacquisition and redistribution is uneven. By 1996, Phase 1, supposedly
completed by 1992, was only 83% attained. Phase 2, by contrast, also
supposedly terminated in 1992, was 64% completed. Phase 3 is the most
difficult, and had resulted only in a 3% accomplishment of the target.

Judging from the status of land distribution, the objectives of the land reform
program are far from accomplished. Looking at the rice and corn lands alone, the
farmer-beneficiaries are in possession only of either an emancipation patent (EP)
or a Certificate of Land Ownership Award (CLOA). Under the previous agrarian
reform programs, the beneficiaries of land settlements were issued homestead
patents and beneficiaries of landed estates were given Deeds of Sale.

Emancipation Patent (EP) is the document given to the tenant upon fulfillment
of all the requirements of the land reform law. It represents the farmer’s full
emancipation from tenancy. As of 1996, according to DAR records, agrarian
reform beneficiaries (ARBs) have been issued EPs. Many of the recipients were
made beneficiaries of lands that had not yet been fully compensated. Some of
the EP holders, who were beneficiaries of Presidential Decree 27, had been
initially issued a certificate of land transfer (CLT). Possession of a CLT indicated
the farmer’s status as an amortizing landowner, meaning that he had started
paying the taxes and amortization on the land covered by the CLT.
 81

Certificate of Land Ownership Award (CLOA) is the equivalent of the CLT. It

is a document indicating the farmer was a beneficiary of the program under the
restrictions and conditions provided for in CARL. As of 1996, 1.6 million farmer –
beneficiaries had been issued CLOAs.

Land Valuation refers to the process of knowing the value of the land and how
compensation of the landowner is to be paid. It is governed by 3 major factors:

Comparable market value of sales of the land;

Crop yields of the land based on some measures of yields in Asian

countries; and

market value based on tax declaration.

Land Value (LV), on the other hand, refers to the weighted average (Ws,
weights or fractions indicating the proportional weight attached to each of the
components) of comparable sales (CS), capitalized net income (CNI) and market
value based on tax declaration (MV).

Land Value = weighted sum of comparable sales + capitalized net income and market
value

In symbols:

LV = (WCS * CS) + (WCNI * CNI) + (WMV * MV)

CNI : average gross production * price of palay – cost of production

Low market valuation permits the landowner to pay low taxes

Land valuation per hectare under the CARL jacked up the price for the farmer
and benefited the landowner. Using the formula in which the component weights
were more evenly distributed (i.e., 0.3 for CS, 0.4 for CNI, and 0.3 for MV), the
price of land per hectare is 14, 201 pesos. But changing the weights so that the
weight for MV becomes 0.1 and that for CNI becomes 0.6, the land value rises by
another 50%. Since the farmers will in effect buy the land and they have to
amortize the value of this land over time, the added cost of the land raises the
amortization rate and of course, including the period of amortization.

This therefore serves to negate the rationale of the land reform program which is
to transfer the lands at values that the farmers can afford to pay .

What Remains to be Done: Thrusts and Priorities under the 2PGMA

Administration
 82

The implementation of CARP during the 2 GMA Administration will be geared to

support the President’s 10-point legacy agenda she spelled out during her
presidential inaugural address and the additional priority concerns she espoused
during her SONA address in July 2004. The foremost two concerns upon which
the CARP shall make great contribution are the continuing provision of social
justice and basic needs to the poor through asset reform and the creation of a
million jobs per year, through the development of 2 million hectares of lands for
agribusiness, among others.

Agrarian Reform Medium-Term Plan Goals and Sectoral Thrusts

Medium-Term Goal

The implementation of CARP under the 2005-2010 MTDP has been

repackaged to contribute significantly to the achievement of the
President’s priority agenda, specifically in job creation and the delivery of
social justice and basic needs for the rural poor.

The plan goal is to “transform the landless farmer and farm workers into a
new class of responsible, progressive, asset-owning farmer-rural
entrepreneurs, creating millions of jobs for the rapidly growing rural labor
force, trail blazing the equitable distribution of income and contributing
significantly to national economic growth.”

Thrusts and Priorities

The MTDP Agrarian Reform sub-sector adopts the following major

thrusts in the pursuance of the plan goal:

Maintain CARP as a flagship program for the delivery of social

justice and basic needs through asset reform

Finish land distribution by 2008

Speed up the resolution of agrarian reform cases
Safeguard and sustain the gains already achieved for CARP
Lobby and mobilize support for attendant measures requiring
legislative-executive actions

Transform the ARCs/ARZs into progressive agribusiness areas to

accelerate rural jobs creation.
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