Foreign Relations of the United States, 1964–1968, Volume XXVI, Indonesia; Malaysia-Singapore; Philippines

323. National Intelligence Estimate¹

NIE 56–66

Washington, February 17, 1966.

PROSPECTS FOR THE PHILIPPINES

The Problem

To estimate the prospects for the Philippines for the next two or three years.

Conclusions

A. Though its problems are not critical in the short term, the Philippines confronts many of the same underlying difficulties that beset other states of Southeast Asia—land hunger in the countryside; unemployment in the cities; and a grinding poverty for the overwhelming majority of the people. The situation is aggravated by widespread violence and lawlessness, and by corruption in government. (Paras. 1–12)

B. Hopes for change are now focussed on the incoming President Marcos, a capable and forceful man. Marcos seems aware of the country’s problems, but it is not yet clear how effectively he will cope with them. If he fails to reduce economic discontent and to achieve greater honesty and efficiency in governmental affairs, public disillusionment is likely to grow and political stability could be seriously undermined. (Paras. 13–19)

C. Though lawlessness is pervasive, Communists do not constitute a major subversive threat to the Philippines, and are not likely to do so over the next few years. (Paras. 20–23)

D. Marcos is an anti-Communist and supports the US on most issues respecting the Communist world. He is also a strong nationalist and will seek greater equality for the Philippines in its dealings with the US, particularly on those issues involving US military bases and special US economic privileges. However, Marcos is unlikely to hamper effective US use of its bases so long as he is satisfied that such uses do not run counter to Philippine national interest. He will press the Congress to dispatch a proposed Philippine engineer contingent to South Vietnam and can probably gain its approval, though he may have some trouble in the Senate. (Paras. 24–32)

Discussion

I. Domestic Problems and Prospects

1. Introduction. The Republic of the Philippines has many problems, though few are as immediately critical as those facing other Southeast Asian states. There is no present external threat to its independence. There is no serious internal subversion or insurgency, and the authorities are sensitive to potential dangers of this sort. There is virtually no chance of an attempted coup; democratic elections are the accepted method of achieving political power. No major economic crisis is on the horizon. All of these assets are reinforced by feelings of military, political, and economic security derived from a “special relationship” with the US.

2. For all of its present advantages, however, the Philippines faces, in the long run, many of the same underlying difficulties and limitations that confront its less fortunate neighbors. The key problem is a deep and growing economic cleavage between upper and lower classes, and the failure of successive administrations to carry out programs adequate to remedy this situation. The situation is aggravated by the prevalence of widespread violence and lawlessness in the cities and in the countryside, and longstanding and pervasive corruption in government. Hopes for change are now focussed on Ferdinand Marcos, the newly-elected President. Should he fail to deal adequately with these problems during his four-year administration, Philippine political stability and democratic institutions could be seriously undermined.

3. Problems. Discontent among the peasants, who comprise almost two-thirds of the Philippine population, stems primarily from a feudalistic system of land tenure and unsatisfactory landlord-tenant relations. About 40 percent of the farmers in the Philippines—and a much higher proportion in the densely-settled central lowland of Luzon—are tenants, most of whom customarily pay at least one-half of their crop to wealthy absentee proprietors. The rapid rise in population over the past 60 years has led to increased tenancy and to a reduction in the size of the average owner-operated farm. The peasant lives only a little above a bare subsistence level, and his annual income has not increased over the past decade. The financial insecurity of both tenant and small-holder is aggravated by chronic indebtedness at high interest rates. The farm population is further handicapped by the persistence of one of the world’s lowest levels of agricultural productivity; yields per acre of rice and corn, the principal crops, have not increased significantly over the past century.

4. In the urban areas, the major problem is unemployment. There are an estimated 750,000 unemployed and at least two million underemployed in the country’s work force of 11.5 million. Each year an additional 375,000, including 25,000 college graduates, seek employment, normally exceeding the number of new jobs being created. In the cities, the pressure of a large unproductive manpower pool is manifested in low wages, poor working and living conditions, high crime rates, and other serious social problems. Among the educated unemployed, radical causes tend to flourish.

5. These problems have been intensified in recent years by a general upward trend in living costs and lags in wages which have widened earlier inequalities in the distribution of wealth. Although Philippine real national income per capita generally rises slightly each year, the gains tend to accrue to the wealthy, while among the rural and urban poor, real wages and living standards usually decline. In Manila, real wages for skilled and unskilled industrial workers have declined about 20 percent over the past decade, and the luxury consumption of the wealthy contrasts most markedly with the extreme poverty of the general population. Offsetting this picture to some extent is the steady rise of a middle class entrepreneurial group.

6. Philippine governments have been largely ineffective in efforts to ameliorate these basic problems. In the field of land reform, for example, a modest legislative start was made under President Magsaysay (1954–1957), but soon bogged down in administrative indifference. President Macapagal’s land reform program, passed in 1963, was designed to abolish share tenancy in favor of lease-holds, to control agricultural rents, and to raise the wages of agricultural workers. The basic law itself is a good one. But the Congress has subsequently provided only very limited budgetary support for the program, landowners have impeded its implementation, and wage minimums have not been enforced by the government.

7. The Philippine political system does not lend itself to bold initiatives or sustained performance by the government in the fields of economic development and social welfare. There are two major parties—Nacionalistas and Liberals—and both are representative of the same conservative landed and commercial interests. Other elements of the population have few channels through which to influence the workings of the government. Third parties which occasionally emerge to espouse reform have so far lacked the grass-roots organization necessary to achieve electoral strength and a major voice in government.

8. Conservative forces in the Philippines, by tradition and interest, favor a very limited governmental role in economic affairs. In facing problems of economic development, succeeding administrations have adopted a relatively passive role, seeking to create a climate favorable to the growth of domestic—as opposed to foreign—private enterprise. Their concepts have not included major government investment in those items of infrastructure—transport, communications, electric power, water supply, and irrigation facilities—essential to increased agricultural and industrial output. Annual capital outlays by the government have not increased over the past five years, and whatever small direct contribution has been made to economic development has been largely dissipated in individual “pork-barrel” projects.

9. There are other built-in handicaps to any broad-gauge governmental attack on economic problems. Foremost is the insufficiency of government revenues because of a narrow tax base, poor tax administration, and wholesale evasion and smuggling. Smuggling costs the government an estimated $100 to $200 million annually in revenue. Government operations are also severely handicapped by a system of social values which accepts graft, corruption, and nepotism as normal in government. Most politicians and officials act mainly in the pursuit of financial benefits to themselves, their kinsmen, and their associates.

10. In consequence, the burden of economic improvement has fallen on private interests. Private domestic investment in manufacturing, stimulated by favorable foreign exchange and import controls, was the principal force behind the growth of the national economy during the 1950s when real output increased by an average of 6 percent annually. In recent years, growth has slowed to 4 to 5 percent annually, a pace that only narrowly exceeds the rate of population increase. This stands at about 3.5 percent, one of the world’s highest.

11. Prospects for a return to earlier industrial growth rates are poor. Expansion in the 1950s focussed on production of consumer goods for the home market. The costs of the expansion were borne by raw material exporters, who were forced to exchange their hard currency earnings for overvalued pesos, and by domestic consumers paying higher prices. Exchange reforms in 1962 (whereby export earning could be converted into pesos at a free-market rate almost twice the earlier official rate) led to increased import costs for raw materials and capital goods and, indirectly, to a tightening of domestic credit to defend the value of the peso. Moreover, tightened domestic credit, which is still in effect, has come at a time when the most profitable industrial opportunities are in capital-intensive ventures requiring large initial outlays. The government contributes to the credit squeeze by financing its deficits through the same handful of public institutions that normally provide capital to the private sector. The resulting competition for loans has denied credit and expansion opportunities for many enterprises which got their start in a more protected atmosphere.

12. In agriculture, the picture is even less promising. The average peasant lacks the incentive, knowledge, and funds required to improve his crop yields. Landowners and others with enough capital to improve their land or open up new acreage have generally found real estate, moneylending, and other commercial ventures more profitable, though landowning families increasingly are channeling capital into productive industrial enterprises. Agriculture today provides one-third of Philippine national income, but only 6 to 7 percent of the Philippines’ annual capital investment is devoted to it. Low crop yields and a rapidly increasing population have over the years forced the country into costly subsidies and imports of rice, the principal food staple.

13. Prospects. President Macapagal failed of re-election in November 1965 essentially because he had not brought about the improvements in living standards which he had led the voters to expect. President Marcos has recognized the necessity for prompt action to improve economic conditions. To assist industry, he proposes to ease credit arrangements, to crack down on smuggling of manufactured goods, particularly cigarettes and textiles, and to re-examine the tariff structure. At the same time, he advocates new incentives for foreign investment. He also proposes an extensive program of public works, including power and water supply facilities, and roads. He has established a task force to prepare the necessary legislation for the present session of Congress.

14. Marcos’ proposals indicate that his will be the traditionally conservative approach to economic problems. The emphasis is on improvement within the constraints of existing revenues. There are only vague bows in the direction of tax reform, and he is pledged above all to balance the budget and defend the peso. He is relying on governmental “austerity” and greater bureaucratic efficiency and honesty to cut expenditures, and upon improved collection of taxes, particularly import duties, to increase national revenues. In these ways, Marcos hopes also to reduce the government’s requirements for domestic credit so that private needs can more easily be met.

15. Marcos has expressed some interest in putting more teeth in the existing land reform code and in improving agricultural credit facilities. However, his immediate focus in the agricultural sector appears to be increased production of rice and corn. By reorganizing governmental agencies involved in stimulating the production and marketing of these commodities and by adopting more realistic pricing policies, he seeks to provide some new production incentives. There are also proposals to build irrigation facilities, tapping foreign sources of funds if possible.

16. Marcos’ economic program will face the same opposition that has stymied earlier reform efforts. Marcos, however, has certain assets not available to Macapagal or even to the revered Magsaysay. One is his outstanding legislative experience; he has served in both houses of Congress and has held the powerful office of President of the Senate. Another asset is his connections in both major parties; until becoming the Nacionalista presidential candidate in 1964, he was a lifelong Liberal. His administration has gotten off to a promising start with the election of a Nacionalista as Senate President and a friendly Liberal as House Speaker. Finally, Marcos is considered to be extraordinarily effective in the government process—intelligent, self-confident, and forceful to the point of ruthlessness, yet a “team man” capable of accepting a useful compromise.

17. Nevertheless, Marcos will undertake his program with certain handicaps. His Nacionalista party does not presently hold a majority in either the Senate or the House of Representatives.² And even among Nacionalistas, many old-line politicians are not particularly enthusiastic about Marcos’ proposals. To carry out his program, therefore, he must win over Liberal congressmen plus the reform-minded senators of the small Party for Philippine Progress (PPP). The traditional lack of party discipline makes it likely that at least some Liberals will defect “permanently” to the administration party and that many more will break ranks on specific issues. However, Liberal support is likely to be costly in terms of patronage and favors, and may even require certain legislative sacrifices by Marcos.

18. It is probable that in 1966, in the first flush of his electoral victory, Marcos will succeed in getting important parts of his economic legislation through the Congress and in effecting major administrative reforms. Some proposals may be dropped by Marcos himself in political horse-trading, while others may fail to pass the Congress. Experience indicates that implementation of certain measures, even if passed, would remain in doubt. And even if reasonably successful in implementation, his programs are unlikely to do more over the next few years than halt the current economic slippage and provide a mild stimulus to agricultural and industrial production. In the longer run, achievement of greater honesty and efficiency in the government could have a much more profound impact on the nation. Vigorous efforts to galvanize the Congress and the discredited bureaucracy into effective action would help restore public faith in the democratic process. Success in carrying through present plans might also embolden the dynamic Marcos to attempt more far-reaching and difficult reforms, particularly those tax measures which would increase the funds available to the government for economic development.

19. On the other hand, if Marcos proves ineffective in gaining congressional approval for most of his economic program or in restraining venality in the bureaucracy, the public esteem which he now enjoys would rapidly evaporate. Reformist parties might succeed in deflecting some of the resulting discontent into legitimate political channels, but there would obviously be opportunities for groups with extremist solutions, including the Communists. The Philippines could probably continue in a condition of inefficiency and immorality in public life for several more years without political upheaval, provided that there are no unusual economic stresses. In the longer run, however, it is likely that far more comprehensive remedies than those so far suggested by Marcos, and a greater degree of direct government investment in the economy, will be necessary to satisfy the aspirations of the mass of Filipinos. Unless the major parties can adjust to these needs, other more radically inclined political parties or organizations are likely to emerge.

II. Internal Security

20. The government has had very little success in coping with widespread violence and lawlessness. There is a general disrespect for law and order, a strong tendency toward violence as a way of settling personal and political disputes, an easy availability of firearms, and inadequate and often dishonest local police and judiciary. Marcos has expressed an intention of reducing lawlessness, and a vigorous attack on these conditions might have some success in certain areas, e.g., Manila. In general, however, these conditions are too pervasive and deep-rooted to permit much improvement in the short term.

21. Despite this general lawlessness, there has been no major subversive threat to the integrity of the state since Magsaysay suppressed the Communist-led Huk rebellion about 10 years ago. However, the Philippine Communist Party (PKP) has managed to survive as a small, loosely-organized, underground movement. It emphasizes nonviolent subversive activities in Manila and other urban areas. There are probably fewer then 1,000 hard-core active Communists compared to about 10,000 in 1950. They have concentrated on infiltrating non-Communist organizations and setting up various front organizations, particularly among youth and students, and have had considerable success in capturing the upper echelons of several labor federations. Through the agency of sympathetic newspapers and journalists, they have supported and exploited ultra-nationalistic candidates and causes to assist their own anti-US objectives. Among the peasants of central Luzon, the Party has helped to organize some small left-wing peasant groups and is actively recruiting members. It is in contact too with the remnants of the Huk guerrilla force—the People’s Liberation Army (HMB)—estimated at 150 active members plus 2,000 supporters concentrated in Pampanga Province, site of Clark Air Base. The HMB is now chiefly engaged in sporadic terrorism and banditry, including the murder of active opponents and informers and other acts designed to intimidate local authorities and the population.

22. The threat of subversion from Indonesia has become of less concern with the recent waning of Communist influence in Djakarta. Some 10,000–12,000 Indonesian migrants—legal and illegal—in the Mindanao-Sulu area provide a potential transmission belt for Djakarta-inspired subversion addressed especially to the Philippine Muslim (Moro) minority there. Until recently, more serious Indonesian influence was exerted through the embassy in Manila and the consulate in Davao, where agents of the Indonesian Government and the Indonesian Communist Party had established close contact with ultranationalist and leftist Philippine elements. Chinese Communist subversive activity among Filipinos is exceedingly meager at this time, but may increase with the slackening of Indonesian Communist efforts. Among the Philippines’ 600,000 ethnic Chinese residents, the number of Communists has been estimated at anywhere from 200 to 2,000. Their primary objective is probably to influence the Chinese community against the Nationalist regime on Taiwan, but they are a potential source of funds for the PKP and a possible link between it and Peking.

23. Neither Chinese, Indonesian, or domestically-inspired Communists constitute a major subversive threat to the Philippines at this time nor are they likely to do so over the next few years. Their activities influence a very small though vocal element of Philippine society. Internal security forces are probably capable, despite the inroads of politics and corruption, of coping with the existing situation. Primary responsibility in this field rests with the Philippine Constabulary, a 16,000-man national police force operated as a component of the armed services. Local police forces are relatively ineffective. The Constabulary is handicapped by inadequate funds, poor training and equipment, low morale, and a widespread reputation for incompetence and corruption. Any significant acceleration in the growth of lawlessness would severely tax its capabilities. The mission of the 14,400-man Philippine Army and the smaller Air Force and Navy includes assistance to the Constabulary in maintaining internal security.

III. Foreign Relations

24. The US. Marcos is an anti-Communist and a firm supporter of the US on most issues respecting the Communist world. He is, however, a strong nationalist who has been publicly critical of the US when he believed that its actions conflicted with Philippine interest. On the other hand, he is less concerned than Macapagal with the Philippine image among other Afro-Asians and is unlikely to indulge in as many gestures to assert “independence” of the US.

25. Marcos has stated that the Philippine-US relationship would be strengthened by a revision of existing treaties in the direction of greater Philippine equality. In this connection, he will probably be more insistent than Macapagal on consultation concerning the US use of Philippine bases in support of the Vietnam war. He will base any such representations on the 1959 Bohlen-Serrano understanding.³ (Most Philippine politicians consider this understanding to be binding although it has not yet been formalized.) Marcos is also likely to press for settlement of other irritants connected with the operation of US bases in the Philippines. Under Macapagal, settlement was reached on such important base issues as land relinquishments, criminal jurisdiction, and military cooperation. Remaining base-related problems include: entry of nuclear-powered ships and related nuclear issues; entry of US and third-country personnel through the bases; labor disputes; and the applicability of Philippine law on the bases. We believe that such problems are unlikely to hamper effective US use of the bases so long as Marcos is satisfied that the proposed uses do not run counter to Philippine national interest.

26. Marcos supports US policy in Vietnam and has given qualified endorsement to Macapagal’s commitment to provide a contingent of about 2,000 Philippine combat engineers to South Vietnam. In general, the Philippine Congress and public also support the US role in Vietnam, and there is widespread approval for the economic and technical assistance which Manila has provided to the Saigon government. However, there is significant opposition to any direct Philippine military participation in the war. There is relatively little feeling that Philippine security interests may be bound up with those of Saigon. There is also a desire to avoid any costly involvement in what appears to be an inconclusive struggle. In the last months of the previous administration, Senate opposition to an appropriation to support the dispatch of the engineer contingent was strong enough to persuade Macapagal not to force the issue. Since the election, congressional opposition may have diminished. Marcos can probably gain congressional approval for the proposed expeditionary force, though he may have some trouble in the Senate. In pressing the Congress for action, Marcos would be motivated more by the need to maintain credit with the US than by any conviction that Philippine troops are needed in Vietnam.

27. The course of the war in Vietnam will also have an impact on US relations with the Philippines. Any conspicuous failure of US policy in handling the Communist threat there would shake the faith of Philippine leaders in US determination to oppose Communist China. US advocacy of a neutralist solution in Laos in 1962 had a depressing effect on Philippine confidence which lasted for some time. On the other hand, the success of US policies in Vietnam would reaffirm Philippine faith in the alliance.

28. Marcos will also be called upon to adopt positions on a variety of bilateral economic issues. While he is not sympathetic to the rabid form of economic nationalism which held sway during the Nacionalista administration of President Garcia (1957–1961), Marcos will almost certainly not attempt to act counter to prevailing Philippine sentiment for reduction of foreign—including US—economic influence. The main areas of commercial tension involve differences over the so-called “parity” issue and over the Retail Trade Nationalization Law.

29. “Parity,” as expressed in the Philippine Constitution and reaffirmed in the Laurel-Langley agreement, gives US investors certain rights equal to those of Philippine nationals. In early 1965, a US spokesman stated that the US does not intend to seek renewal beyond 1974 of parity rights for enterprises exploiting natural resources or operating public utilities. Nevertheless, for Philippine nationalists, “Laurel-Langley” remains a symbol of US economic imperialism and, as frictions arise in its interpretation, Marcos will probably find it expedient to uphold the antiparity position.

30. A more immediate issue between the Philippines and the US arises from the application of the Retail Trade Nationalization Law. This law, originally aimed at Chinese, requires all enterprises engaged in retail trade to be “wholly-owned” by Filipinos and/or US citizens. In recent years, Philippine courts have interpreted “retail trade” as encompassing normal wholesale operations, and “wholly-owned” to mean 100 percent owned by Filipinos or Americans. Few US corporations with publicly held stock can meet this qualification. Some 90 US firms with investments totalling over $250 million are involved and several cases are pending. In light of his strong belief that increased foreign investment is required, Marcos may offer some temporary administrative relief to permit US firms to adjust their operations. However, he will probably not attempt to negate judicial decisions or Congressional enactments.

31. Another potential source of friction is the recurrent issue of Philippine veterans’ claims on the US. In addition, it can be anticipated that further substantial Philippine requests for military assistance will be advanced.

32. Philippine nationalism will continue to grow, further removing the nation from the tutelage of the US. So far, this nationalism has been relatively responsible and has helped to create a somewhat distinctive Philippine foreign policy while maintaining friendship, cooperation, and military and economic links with the US. However, the pace of progress toward full independence has not satisfied all Filipinos. A chauvinistic strain among some elements in government, the press, labor, and students and intellectuals completely rejects American influence and favors economic nationalism and neutralism. In time, as the generation of Filipinos which experienced World War II passes and is replaced by younger men lacking emotional attachments to the US, such sentiments will grow. The majority of present-day Filipinos, however, do not want to discard the security afforded by the traditional association with the US. It is unlikely, therefore, that Philippine nationalism will assume a strident anti-American tone, at least so long as the US continues to consider Philippine sensitivities in bilateral dealings.

33. Other Countries. Marcos is personally hostile toward Sukarno and is less likely than Macapagal to seek close relations with Indonesia. Should an anti-Communist leadership emerge in Djakarta, Marcos would probably welcome friendly relations with it, however, it is doubtful that he would seek to revive the Maphilindo grouping—the informal linkage of Malaysia, the Philippines, and Indonesia—which Indonesia would probably dominate.

34. Marcos sees Philippine regional interests as best served by closer ties with Malaysia and Thailand, its likeminded partners in the now dormant Association of Southeast Asia (ASA). He is likely to establish full diplomatic relations with Malaysia soon and with Singapore shortly thereafter. In part, Marcos’ rapprochement with Malaysia will be designed to gain Malaysian cooperation in suppressing smuggling operations between Sabah and the southern Philippines. It is unlikely that Marcos will drop the Philippine claim to parts of Sabah, but he will be more reasonable in seeking a settlement. Marcos will probably attempt to revive ASA by means of frequent political, economic, and cultural exchanges. SEATO will continue to receive his support, especially since a Filipino general is presently serving as Secretary-General of the organization.

35. The Philippines under Marcos will continue its policy of refusing to establish political relations with Communist China, the USSR, or other Communist countries. Pressures for change on this issue are unlikely to be great. However, the search for new markets for agricultural products may lead the Philippines to establish economic relations with the USSR and at least some Eastern European states within a year or two. Cordial relations with South Korea, Australia, and New Zealand will continue. Marcos strongly supports Nationalist China and will make efforts to remove minor irritants in relations with that government. Relations with Japan are also likely to improve.

1. Source: Department of State, INR/EAP Files: Lot 90 D 165, NIE 56–66. Secret; Controlled Dissem. A table of contents and a map are not printed. A note on the covering sheet indicates the estimate was prepared by the CIA and the intelligence organizations of the Departments of State and Defense and the NSA. The USIB concurred with it on February 17, with the exception of the FBI and AEC representatives who abstained on the grounds that the topic was outside their jurisdiction.
2. The Senate consists of 12 Nacionalistas, 9 Liberals, 2 members of the Party for Philippine Progress (PPP), and 1 Independent. In the 104-member House of Representatives, the Liberals hold a majority of about 20 seats. [Footnote in the source text.]
3. The memorandum of understanding signed by Ambassador Bohlen and Foreign Minister Sorreno on October 12, 1959, provided for prior consultation concerning operational use of bases for “military combat operations.” For a summary of those and related negotiations, see Foreign Relations, 1958–1960, vol. XV, pp. 946–957.