Since the end of the Second World War, the Philippine economy has had a mixed history of growth and development. Over the years, the Philippines has gone from being one of the richest countries in Asia (following Japan) to being one of the poorest. Growth immediately after the war was rapid but slowed over time. A severe recession in 1984-85 saw the economy shrink by more than 10%, and perceptions of political instability during the Aquino administration further dampened economic activity. During his administration, President Ramos introduced a broad range of economic reforms and initiatives designed to spur business growth and foreign investment. As a result, the Philippines saw a period of higher growth, but the Asian financial crisis triggered in 1997 slowed economic development in the Philippines once again. President Estrada tried to resist protectionist measures and to continue the reforms begun by the Ramos administration. Important laws to strengthen regulation and supervision of the banking system (General Banking Act) and securities markets (Securities Regulation Code), to liberalize foreign participation in the retail trade sector, and to promote and regulate electronic commerce were enacted during his abbreviated term. President Gloria Macapagal-Arroyo has made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. The widening fiscal deficit remains the most glaring exception to a number of positive developments elsewhere in the economy.

Important sectors of the Philippine economy include agriculture and industry, particularly food processing, textiles and garments, and electronics and automobile parts. Most industries are concentrated in the urban areas around metropolitan Manila. Mining also has great potential in the Philippines, which possesses significant reserves of chromite, nickel, and copper. Significant natural--gas finds off the islands of Palawan have added to the country's substantial geothermal, hydro, and coal energy reserves.

Today's Economy
The Philippines was less severely affected by the Asian financial crisis than its neighbors, aided in part by remittances of more than $7 billion annually from overseas workers. Except for 1998-- when drought and weather-related disturbances pulled down agricultural harvests, combining with the contraction in industrial sector production--real gross domestic product (GDP) has recorded positive growth year-on-year. From a 0.6% decline in 1998, GDP expansion picked up in 1999 (3.4%) and 2000 (4.4%) but slowed to 3.2% in 2001 in the context of a global economic slowdown, export slump, and domestic as well as global political and security concerns. Year-on-year GDP growth accelerated to 4.2% in 2002--exceeding the downward-revised 4.0%-4.5% growth range targeted by the government for that year--reflecting the continued resilience of the service sector, gains in industrial sector output, and recovering exports. Nonetheless, it will take a higher, sustained economic-growth path to make more appreciable progress in poverty alleviation given the Philippines' high annual population growth rate of 2.36%--one of the highest in Asia.

Agriculture generally suffers from low productivity and the lack of economies-of-scale, as well as inadequate infrastructure support. Output fell in 1997 and 1998 due to an El Niño-related drought but increased by 6.0% in 1999 (over 1998's low base). Growth reverted to more normal rates in 2000 (4.0%) and 2001 (3.7%). Agricultural output (affected by another, albeit milder, dry spell) expanded by 3.5% year-on-year in 2002.

The global economic and electronics-demand slowdown combined with softer prices of resource-based commodities to depress export performance in 2001. Full-year export receipts--which last declined in 1985--contracted by 16.2% year-on-year, dragged down by a nearly 24% drop in revenues from shipments of electronic and telecommunications parts and equipment (which comprise about 60% of annual export revenues). Export receipts expanded from April-December 2002, breaking from 14 consecutive months of negative year-on-year growth and nudging up the full-year 2002 export growth rate to positive territory (9.5%). The export expansion reflected improved levels of intra-Asia trade.

Although less severely affected than its neighbors, the Philippines' banking sector was not spared from high interest rates and non-performing loan levels during the Asian financial crisis and its aftermath. Increases in minimum capitalization requirements, increasing loan-loss provisions, and generally healthy capital-adequacy ratios have helped temper systemic risk. Nevertheless, the burden of rising non-performing assets has squeezed profit margins and inhibited bank lending, posing risks to the longer term viability and stability of the banking system.

As of the end of December 2002, the Philippine peso, which closed at P53.03, had weakened by more than 101% vis-a-vis the U.S. dollar since mid-1997 and currently trades at about 53.50-54.00/U.S.dollars. Elsewhere, there have been some recent, positive developments in the Philippine economy. Year-on-year inflation, a perennial problem in the Philippines, is under control. Year-on-year inflation averaged 3.1% during 2002, its lowest since 1987 and well below the government's 4.5%-5.5% targeted average for the 2002 full year. Inflation was tempered in part by generally stable food prices, a less volatile currency, underutilized capacities, still high unemployment, and government efforts to control utility-rate increases. Domestic interest rates have fallen significantly, aided by low inflation and a stable monetary policy. In 2002, the balance of payments broke from 2 consecutive years of deficits and mustered a modest surplus, helped in part by workers' remittances and improving export receipts.

The Aquino and Ramos administrations opened up the relatively closed Philippine economy and provided a firmer base for sustainable economic growth. After a slow start, President Estrada and his cabinet continued with, and expanded, liberalization and market-based policies and reforms. Efforts to reform the constitution to encourage foreign investment, particularly foreign ownership of land, were abandoned amidst nationalist opposition. Initial optimism about prospects for economic reform also had dimmed amid concerns of governmental corruption. Scandals involving the Philippine Stock Exchange, and the President's close ties to certain businessmen, shook confidence of investors and the business community and ultimately led to successful efforts to impeach and remove President Estrada.

President Macapagal-Arroyo is working to continue with economic reforms in areas beyond retail trade, electronic commerce, banking reform, and securities regulation. Her administration enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2002 to address remaining legal concerns posed by the OECD Financial Action Task Force (FATF). While the Philippines has avoided FATF countermeasures, effective implementation will be key to the Philippines' removal from the FATF's watch list of "non-cooperating countries and territories." Although encountering implementation hitches, her administration also enacted legislation to rationalize and privatize the electric power sector. In January 2002, President Macapagal-Arroyo signed into law two priority initiatives which seek to reform the government procurement system (the Government Procurement Reform Act) and to help ease the burden of non-performing assets on the financial sector through the establishment of private asset management companies (the Special Purpose Vehicle Act).

Notwithstanding favorable trends, the Philippine economy continues to juggle extremely limited financial resources while attempting to meet the needs of a rapidly expanding population and address intensifying demands for the current administration to deliver on its anti-poverty promises. The current high level of government debt, the substantial share of foreign obligations, the emerging risks posed by contingent liabilities, and the worrisome deterioration in tax collection performance over the past 5 years have increased the country's vulnerability to severe external and domestic shocks. Potential foreign investors, as well as tourists, continue to be concerned about law and order, inadequate infrastructure, and governance issues. While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. In particular, competition from other Southeast Asian countries and from China for investment underlines the need for sustained progress on structural reforms to remove bottlenecks to growth, lower costs of doing business, and promote good public and private sector governance.

Agriculture and Forestry
Arable farmland comprises an estimated 26% of the total land area. Although the Philippines is rich in agricultural potential, inadequate infrastructure, lack of financing, and government policies have limited productivity gains. Philippine farms produce food crops for domestic consumption and cash crops for export. The agricultural sector employs about 40% of the work force but only provides about one-fifth of GDP.

Decades of uncontrolled logging and slash-and-burn agriculture in marginal upland areas have stripped forests, with critical implications for the ecological balance. The government has instituted conservation programs, but deforestation remains a severe problem.

With its 7,107 islands, the Philippines has a very diverse range of fishing areas. Notwithstanding good prospects for the agriculture sub-sector, the fishing industry continues to face a bleak future due to destructive fishing methods, a lack of funds, and absence of government support.

Industry
Industrial production is centered on processing and assembly operations of the following: food, beverages, tobacco, rubber products, textiles, clothing and footwear, pharmaceuticals, paints, plywood and veneer, paper and paper products, small appliances, and electronics. Heavier industries are dominated by the production of cement, glass, industrial chemicals, fertilizers, iron and steel, and refined petroleum products.

The industrial sector is concentrated in the urban areas, especially in the metropolitan Manila region and has only weak linkages to the rural economy. Inadequate infrastructure, transportation and communication have so far inhibited faster industrial growth, although significant strides have been made in addressing the last of these elements.

Mining
The country is well-endowed with mineral and thermal energy resources. A recent discovery of natural gas reserves off Palawan Island has been brought on-line to generate electricity. Philippine copper and chromite deposits are among the largest in the world. Other important minerals include gold, nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. Until 4 years ago, non-metallic minerals accounted for 55% to 60% of total mining production and contributed substantially to the industry's steady output growth between 1993 and 1998 (with the value of production growing 58%). Mineral production declined by 18% between end-1998 and end-2000 to pesos 30.6 billion ($600 million at 2000's average foreign exchange rate) and the share of non-metallic minerals fell to under 45%. Mineral exports have generally slowed since 1996. Led by copper metal, Philippine mineral exports amounted to $512 million in 2002, down 5 % from 2001 levels. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the mining industry's overall decline.