Finance and small-scale industry lending in the Philippines, 1967-1973

IN THE ABSENCE OF AN EFFECTIVE PROGRAM TO ASSIST SMALL-SCALE FIRMS, THIS TREND WILL CONTINUE. THE RECENT EMPHASIS BY THE PHILIPPINE GOVERNMENT ON DEVELOPMENT OF THE SMALL-SCALE INDUSTRY SECTOR SUGGESTS THAT NECESSARY ASSISTANCE FOR SMALL FIRMS WILL BE FORTHCOMING, BUT IT IS PREMATURE TO ASSESS WHETHER THE PROGRAMS BEING INITIATED WILL BE EFFECTIVE. THE DOMINANCE OF THE EXECUTIVE BRANCH IN GOVERNMENT POLICYMAKING COMPLICATES THE LONGER TERM OUTLOOK, SINCE LEADERSHIP CHANGES TEND TO PRODUCE DISCONTINUITIES IN PROGRAMS. MOST (SOME 52%) OF THE FINANCIAL ASSETS IN THE PHILIPPINES ARE OWNED BY GOVERNMENT INSTITUTIONS. THUS, MUCH RESOURCE ALLOCATION IS LINKED DIRECTLY TO GOVERNMENT POLICIES. MANAGEMENT OF THE GOVERNMENT-OWNED AND OPERATED FINANCIAL INSTITUTIONS DEPENDS ON THE ADMINISTRATION IN POWER. UNLIKE THE U.S. FEDERAL RESERVE SYSTEM, THESE INSTITUTIONS APPEAR TO HAVE RELATIVELY LITTLE INDEPENDENCE. THUS THEIR POLICIES ARE SUBJECT TO QUICK CHANGE TO ACCOMMODATE CHANGING OBJECTIVES OF THE NATIONAL ADMINISTRATION. THIS CAN ALSO PRODUCE POOR PRICE-LEVEL STABILITY. THE ARTIFICIALLY LOW INSTITUTIONAL LENDING RATES PREVAILING IN THE PHILIPPINES HAVE CONTRIBUTED TO OVERLY CAPITAL-INTENSIVE PRODUCTIVE PROCESSES. HOWEVER, ALLOWING INTEREST RATES TO RISE TO FREE-MARKET LEVELS IS NOT LIKELY. HOWEVER, ALLOWING INTEREST RATES TO RISE TO FREE-MARKET LEVELS IS NOT LIKELY TO CHANGE RESOURCE ALLOCATIONS APPRECIABLY. ON THE SUPPLY SIDE, SOME FINANCIAL INTERMEDIARIES AND PRIVATE LENDERS HAVE EFFECTIVELY EVADED INTEREST RATE CEILINGS. FURTHER, WITH PRIVATE SECTOR SAVINGS REBOUNDING FROM 4.6% TO 8.6% OF GNP IN 1973, ADDITIONAL LARGE SAVINGS GAINS ARE NOT VERY LIKELY. ON THE DEMAND SIDE, FUND FLOWS ARE CLOSELY REGULATED BY GOVERNMENT POLICIES. THESE POLICIES CONSIDER RATE OF RETURN AS THE FIFTH IN IMPORTANCE OF FIVE CRITERIA FOR LENDING. THEREFORE, HIGHER INTEREST RATES ARE NOT LIKELY TO SIGNIFICANTLY AFFECT THE ALLOCATION OF FUNDS BY THE GOVERNMENT"S FINANCIAL INSTITUTIONS, BUT ONLY THE MAGNITUDE OF INTERGOVERNMENTAL TRANSFER OF FUNDS. PROGRAMS TO DEVELOP SMALL-SCALE INDUSTRY NEED TO EMPHASIZE IMPROVEMENT IN THE EFFICIENCY OF SMALL FIRMS. THE TYPES OF INDUSTRIES THAT COULD BENEFIT THE NATION"S ECONOMY BY BEING EFFICIENT NEED TO BE IDENTIFIED AND SELECTED FOR