Friends in Need

A case of crony capitalism

President Ferdinand E. Marcos has ruled the Philippines since 1965, including eight years of martial law that ended only in January. Standing essentially unopposed for re-election in June, he won handily with 88% of the vote. But Marcos may face his greatest threat because of Dewey Dee, a textile magnate who fled the country eight months ago and left behind more than $80 million in debts. The incident threw Philippine financial institutions into turmoil and exposed as seldom before the cronyism and corruption that has characterized the Marcos government's relationship with business.

As the government's small but honest and able corps of economic technocrats went over the books in the wake of Dee's flight, they uncovered one financial horror story after another. The Construction and Development Corp. of the Philippines, which is run by longtime Marcos Pal Rodolfo Cuenca, has borrowed or obtained government loans and guarantees of about $1 billion, a Chrysler-size package put through without any debate or publicity. Cuenca was just a small businessman before Marcos came to power. Several other companies are also in hock to the government for an additional $1.75 billion.

When investigators discovered that the troubled companies could not afford to pay back the borrowed money, the Philippine business community grew increasingly nervous. Finally, Marcos was forced to promote Finance Minister Cesar Virata to the job of Prime Minister and to give him the task of cleaning up the complex financial mess and restoring economic stability.

The Philippines is still reeling from the dual blows of sharply rising oil prices in 1979-80 and plunging prices for its major exports of coconut oil, copper concentrate, sugar and lumber. Growth has been declining. It was 4.7% last year, and it will trail off to 4% this year. Meanwhile, the country's external debt has reached $14 billion and has recently been increasing by $300 million a month.

The quiet and unassuming Virata does not look like an economic miracle man, nor does he fit into the Philippines' macho culture. He has collected many enemies among the political and business circles surrounding Marcos for his past tough economic policies. But Virata had the untouchable, clean image that the President needed.

Virata's actions, however, are causing consternation among private sector bankers and businessmen. He has poured out additional millions in government money to keep the endangered banks, financial houses and corporations afloat. Virata has also set up debt restructuring plans and, in some cases, conversion schemes that have given the government ownership of firms.

Critics charge that this is leading the Philippine economy into a type of state capitalism. But Gerardo Sicat, the former Economic Planning Minister, insists that the money is being doled out to corporations only after they have met stringent conditions, such as getting rid of unprofitable ventures.

The Manila government admits to putting a total of $625 million into the corporate bailout operation, but most analysts believe that it will ultimately require far more. Said Jaime Ongpin, president of the country's oldest mining company, the Benguet Corp., and a leading Marcos critic: "The rescue program has really gotten out of hand." Said another businessman: "They are just postponing the day of reckoning."

Government officials defend the action by saying that massive bankruptcies would have a domino effect on the entire financial system. On television last week, during his scheduled Ask the President program, Marcos attacked Ongpin personally, denying his allegations and coolly noting that Benguet itself received aid from the government in the 1960s, when the company was paid more than the official $35-per-oz. price for gold that it mined. Sniffed Marcos: "I don't know what is eating him. He certainly is acting strangely."

There is no denying, though, that the government's ownership of private industry is growing. It now has 58% of the huge Marinduque Mining and Industrial Corp., as well as large slices of shipping, textiles and construction. The government will soon have majority control of one of the three largest private banks in the Philippines.

Officials claim that the state will sell its interests when stability returns, but critics say that this is nothing less than de facto nationalization. One thing has not changed in Philippine business: Marcos' pals are still running the companies. Crony capitalism is thus turning into crony socialism.

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