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U.S. Department of State

Diplomacy in Action

Philippines (04/08)


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For the most current version of this Note, see Background Notes A-Z.

Flag of Philippines is two equal horizontal bands of blue (top) and red with a white equilateral triangle based on the hoist side; in the center of the triangle is a yellow sun with eight primary rays, and in each corner of the triangle is a small yellow five-pointed star.

PROFILE

OFFICIAL NAME:
Republic of the Philippines

Geography
Area: 300,000 sq. km. (117,187 sq. mi.).
Major cities (2005 estimate): Capital--Manila (pop. 11.29 million in metropolitan area); other cities--Davao City (1.33 million); Cebu City (0.82 million).
Terrain: Islands, 65% mountainous, with narrow coastal lowlands.
Climate: Tropical, astride typhoon belt.

People
Nationality: Noun--Filipino(s). Adjective--Philippine.
Population (January 2008 estimate): 90.5 million.
Annual growth rate (2007 estimate): 1.974%.
Ethnic groups: Malay, Chinese.
Religions (based on 2000 census): Roman Catholic 80.9%, Muslim 5%, Evangelical 2.8%, Iglesia ni Kristo 2.3%, Aglipayan 2%, other Christian 4.5%, other 1.8%, unspecified 0.6%, none 0.1%.
Languages: Filipino (based on Tagalog), official national language; English, language of government and instruction in education.
Education: Years compulsory--6 (note: 6 years of primary education free and compulsory; 4 years of secondary education free but not compulsory). Attendance (2007)--84% in elementary grades, 58% in secondary grades. Literacy--93.4%.
Health: Infant mortality rate (2006)--24 per 1,000. Life expectancy (2005)--67.80 yrs. for males; 72.50 yrs. for females.
Work force (2007): 36.22 million. Services (including commerce and government, 2007)--50%; agriculture--35%; industry--15%.

Government
Type: Republic.
Independence: 1946.
Constitution: February 11, 1987.
Branches: Executive--president and vice president. Legislative--bicameral legislature. Judicial--independent.
Administrative subdivisions: 16 regions and Metro Manila (National Capital Region), 81 provinces, 136 cities.
Political parties: Lakas-Christian Muslim Democrats, Nationalist People's Coalition, Laban ng Demokratikong Pilipino, Liberal Party, Aksiyon Demokratiko, Partido Demokratikong Pilipino-Lakas ng Bayan, and other small parties.
Suffrage: Universal, but not compulsory, at age 18.

Economy
GDP (2007): $144.1 billion.
Annual GDP growth rate (2007): 7.3% at constant prices.
GDP per capita (2007): $1,624.
Natural resources: Copper, nickel, iron, cobalt, silver, gold.
Agriculture: Products--rice, coconut products, sugar, corn, pork, bananas, pineapple products, aquaculture, mangoes, eggs.
Industry: Types--textiles and garments, pharmaceuticals, chemicals, wood products, food processing, electronics assembly, petroleum refining, fishing.
Trade (2007): Exports--$50.3 billion. Imports--$55.3 billion.

PEOPLE
The majority of Philippine people are descendants of Indonesians and Malays who migrated to the islands in successive waves over many centuries and largely displaced the aboriginal inhabitants. The largest ethnic minority now is the mainland Asians (called Chinese), who have played an important role in commerce for many centuries since they first came to the islands to trade. Arabs and Indians also traveled and traded in the Philippines in the first and early second millennium. As a result of intermarriage, many Filipinos have some Asian mainland, Spanish, American, Arab, or Indian ancestry. After the mainland Asians, Americans and Spaniards constitute the next largest minorities in the country.

More than 90% of the people are Christian as a result of the nearly 400 years of Spanish and American rule. The major non-Hispanicized groups are the Muslim population, concentrated in the Sulu Archipelago and in central and western Mindanao, and the mountain aboriginal groups of northern Luzon. Small forest tribes still live in the more remote areas of Mindanao.

About 87 languages and dialects are spoken, most belonging to the Malay-Polynesian linguistic family. Of these, eight are the first languages of more than 85% of the population. The three principal indigenous languages are Cebuano, spoken in the Visayas; Tagalog, predominant in the area around Manila; and Ilocano, spoken in northern Luzon. Since 1939, in an effort to develop national unity, the government has promoted the use of the national language, Pilipino, which is based on Tagalog. Pilipino is taught in all schools and is gaining widespread acceptance across the archipelago. Many use English, Fukienese, or Mandarin as second languages. Nearly all professionals, academics, and government workers speak some English. In January 2003, President Gloria Macapagal-Arroyo ordered the Department of Education to restore English as the medium of instruction in all schools and universities. Only a few Filipino families use Spanish as a second language.

The Philippines has one of the highest literacy rates in the developing world. About 93% of the population 10 years of age and older are literate.

HISTORY
The history of the Philippines can be divided into four distinct phases: the pre-Spanish period (before 1521); the Spanish period (1521-1898); the American period (1898-1946); and the post-independence period (1946-present).

Pre-Spanish Period
The first people in the Philippines, the Negritos, are believed to have come to the islands 30,000 years ago from Borneo and Sumatra, making their way across then-existing land bridges. Subsequently, Malays came from the south in successive waves, the earliest by land bridges and later in boats by sea. The Malays settled in scattered communities, named barangays after the large outrigger boats in which they arrived, and ruled by chieftains known as datus. Chinese merchants and traders arrived and settled in the ninth century, sometimes traveling on the ships of Arab traders, introducing Islam in the south and extending some influence even into Luzon. The Malays, however, remained the dominant group until the Spanish arrived in the 16th century.

Spanish Period
Portuguese explorer Ferdinand Magellan reached the Philippines and claimed the archipelago for Spain in 1521, but stayed for only a few days. Christianity was established in the Philippines only after the arrival of the succeeding Spanish expeditionary forces (the first led by Legazpi in the 16th century) and the Spanish Jesuits, and in the 17th and 18th centuries by the conquistadores.

Until Mexico proclaimed independence from Spain in 1810 the islands were under the administrative control of Spanish North America, and there was significant migration between North America and the Philippines. This period was the era of conversion to Roman Catholicism. A Spanish colonial social system was developed with a local government centered in Manila and with considerable clerical influence. Spanish influence was strongest in Luzon and the central Philippines but less so in Mindanao, save for certain coastal cities.

The long period of Spanish rule was marked by numerous uprisings. Towards the latter half of the 19th century, European-educated Filipinos or ilustrados (such as the Chinese Filipino national hero Jose Rizal) began to criticize the excesses of Spanish rule and instilled a new sense of national identity. This movement gave inspiration to the final revolt against Spain that began in 1896 under the leadership of Emilio Aguinaldo (another Chinese Filipino) and continued until the Americans defeated the Spanish fleet in Manila Bay on May 1, 1898, during the Spanish-American War. Aguinaldo declared independence from Spain on June 12, 1898.

American Period
Following Admiral George Dewey's defeat of the Spanish fleet in Manila Bay, the U.S. occupied the Philippines. Spain ceded the islands to the United States under the terms of the Treaty of Paris (December 10, 1898) that ended the war.

A war of resistance against U.S. rule, led by revolutionary General Aguinaldo, broke out in 1899. This conflict claimed the lives of tens of thousands of Filipinos and thousands of Americans. Filipinos and an increasing number of American historians refer to these hostilities as the Philippine-American War (1899-1902), and in 1999, the U.S. Library of Congress reclassified its references to use this term. In 1901, Aguinaldo was captured and swore allegiance to the U.S., and resistance gradually died out until the conflict ended with a Peace Proclamation on July 4, 1902. However, armed resistance continued sporadically until 1913, especially among the Muslims in Mindanao and Sulu, with heavy casualties on both sides.

U.S. administration of the Philippines was always declared to be temporary and aimed to develop institutions that would permit and encourage the eventual establishment of a free and democratic government. Therefore, U.S. officials concentrated on the creation of such practical supports for democratic government as public education, public infrastructure, and a sound legal system.

The first legislative assembly was elected in 1907, and a bicameral legislature, largely under Filipino control, was established. A civil service was formed and was gradually taken over by the Filipinos, who had effectively gained control by the end of World War I. The Catholic Church was disestablished, and a considerable amount of church land was purchased and redistributed.

In 1935, under the terms of the Tydings-McDuffie Act, the Philippines became a self-governing commonwealth. Manuel Quezon was elected president of the new government, which was designed to prepare the country for independence after a 10-year transition period. World War II intervened, however, and in May 1942, Corregidor, the last American/Filipino stronghold, fell. U.S. forces in the Philippines surrendered to the Japanese, placing the islands under Japanese control. During the occupation, thousands of Filipinos fought a running guerilla campaign against Japanese forces.

The full-scale war to regain the Philippines began when General Douglas MacArthur landed on Leyte on October 20, 1944. Filipinos and Americans fought together until the Japanese surrendered in September 1945. Much of Manila was destroyed during the final months of the fighting, making it the second most devastated city in World War II after Warsaw. In total, an estimated one million Filipinos lost their lives in the war.

Due to the Japanese occupation, the guerrilla warfare that followed, and the battles leading to liberation, the country suffered great damage and a complete organizational breakdown. Despite the shaken state of the country, the U.S. and the Philippines decided to move forward with plans for independence. On July 4, 1946, the Philippine Islands became the independent Republic of the Philippines, in accordance with the terms of the Tydings-McDuffie Act. In 1962, the official Philippine Independence Day was changed from July 4 to June 12, commemorating the date independence from Spain was declared by Emilio Aguinaldo in 1898.

Post-Independence Period
The early years of independence were dominated by U.S.-assisted postwar reconstruction. The communist-inspired Huk Rebellion (1945-53) complicated recovery efforts before its successful suppression under the leadership of President Ramon Magsaysay. The succeeding administrations of Presidents Carlos P. Garcia (1957-61) and Diosdado Macapagal (1961-65) sought to expand Philippine ties to its Asian neighbors, implement domestic reform programs, and develop and diversify the economy.

In 1972, President Ferdinand E. Marcos (1965-86) declared martial law, citing growing lawlessness and open rebellion by the communist rebels as his justification. Marcos governed from 1973 until mid-1981 in accordance with the transitory provisions of a new constitution that replaced the commonwealth constitution of 1935. He suppressed democratic institutions and restricted civil liberties during the martial law period, ruling largely by decree and popular referenda. The government began a process of political normalization during 1978-81, culminating in the reelection of President Marcos to a six-year term that would have ended in 1987. The Marcos government's respect for human rights remained low despite the end of martial law on January 17, 1981. His government retained its wide arrest and detention powers, and corruption and cronyism contributed to a serious decline in economic growth and development.

The assassination of opposition leader Benigno (Ninoy) Aquino upon his return to the Philippines in 1983 after a long period of exile coalesced popular dissatisfaction with Marcos and set in motion a succession of events that culminated in a snap presidential election in February 1986. The opposition united under Aquino's widow, Corazon Aquino, and Salvador Laurel, head of the United Nationalist Democratic Organization (UNIDO). The election was marred by widespread electoral fraud on the part of Marcos and his supporters. International observers, including a U.S. delegation led by Senator Richard Lugar (R-Indiana), denounced the official results. Marcos was forced to flee the Philippines in the face of a peaceful civilian-military uprising that ousted him and installed Corazon Aquino as president on February 25, 1986.

Under Aquino's presidency, progress was made in revitalizing democratic institutions and civil liberties. However, the administration was also viewed by many as weak and fractious, and a return to full political stability and economic development was hampered by several attempted coups staged by disaffected members of the Philippine military.

Fidel Ramos was elected president in 1992. Early in his administration, Ramos declared "national reconciliation" his highest priority. He legalized the Communist Party and created the National Unification Commission (NUC) to lay the groundwork for talks with communist insurgents, Muslim separatists, and military rebels. In June 1994, President Ramos signed into law a general conditional amnesty covering all rebel groups, as well as Philippine military and police personnel accused of crimes committed while fighting the insurgents. In October 1995, the government signed an agreement bringing the military insurgency to an end. A peace agreement with one major Muslim insurgent group, the Moro National Liberation Front (MNLF), was signed in 1996, using the existing Autonomous Region in Muslim Mindanao (ARMM) as a vehicle for self-government.

Popular movie actor Joseph Ejercito Estrada's election as president in May 1998 marked the Philippines' third democratic succession since the ouster of Marcos. Estrada was elected with overwhelming mass support on a platform promising poverty alleviation and an anti-crime crackdown.

Gloria Macapagal-Arroyo, elected vice president in 1998, assumed the presidency in January 2001 after widespread demonstrations that followed the breakdown of Estrada's impeachment trial on corruption charges. The Philippine Supreme Court subsequently endorsed unanimously the constitutionality of the transfer of power. National and local elections took place in May 2004. Under the constitution, Arroyo was eligible for another six-year term as president, and she won a hard-fought campaign against her primary challenger, movie actor Fernando Poe, Jr., in elections held May 10, 2004. Noli De Castro was elected vice president.

Impeachment charges were brought against Arroyo in June 2005 for allegedly tampering with the results of the elections after purported tapes of her speaking with an electoral official during the vote count surfaced, but Congress rejected the charges in September 2005. Similar charges were discussed and dismissed by Congress in the summer of 2006.

GOVERNMENT AND POLITICAL CONDITIONS
The Philippines has a representative democracy modeled on the U.S. system. The 1987 constitution, adopted during the Aquino administration, reestablished a presidential system of government with a bicameral legislature and an independent judiciary. The president is limited to one six-year term. Provision also was made in the constitution for autonomous regions in Muslim areas of Mindanao and in the Cordillera region of northern Luzon, where many aboriginal tribes still live.

The 24-member Philippine Senate is elected at large, and all senators serve six-year terms. Half are elected every three years. There are currently 240 members in the House of Representatives, 219 of whom represent single-member districts. The remaining 21 House seats are occupied by sectoral party representatives elected at large, called party list representatives. All representatives serve three-year terms, with a maximum of three consecutive terms. On May 14, 2007, legislative and local elections were held. President Arroyo's coalition won the majority of the seats in the House of Representatives, gubernatorial seats, and city mayoral seats. However, the President's coalition won only three out of 12 vacant seats in the Philippine Senate. Although the election was marred by some violence and irregularities, civil society monitoring groups played a welcome and active role in ensuring a relatively fair and democratic process. The next presidential and congressional elections are scheduled for May 2010.

The government continues to face threats from terrorist groups, including three terrorist groups on the U.S. Government's Foreign Terrorist Organization list. The terrorist Abu Sayyaf Group (ASG), which gained international notoriety with its kidnappings of foreign tourists in the southern islands, remains a major problem for the government, along with members of the Indonesian-based Jemaah Islamiyah (JI). Efforts to track down and destroy the ASG and JI have met with some success, especially in Basilan and Jolo, where U.S. troops advised, assisted, and trained Philippine soldiers in counterterrorism. In August 2006, the Armed Forces of the Philippines began a major offensive against ASG and JI on the island of Jolo. This offensive was remarkably successful and resulted in the deaths of Abu Sayyaf leader Khadafy Janjalani and his deputy, Abu Solaiman. The U.S. Government provided rewards to Philippine citizens whose information led to these deaths in the military operations, as well as to many other operations against terrorist leaders.

An international monitoring team continues to watch over a four-year-old cease-fire agreement between the government and the separatist Moro Islamic Liberation Front (MILF). In June 2003, the MILF issued a formal renunciation of terrorism. Talks on a peace accord between the two sides continue, with the Government of Malaysia acting as principal mediator.

Principal Government Officials
President--Gloria Macapagal-Arroyo
Vice President--Noli De Castro
Foreign Secretary--Alberto Romulo
Ambassador to the United States--Ambassador Willie Gaa
Permanent Representative to the UN--Hilario G. Davide

The Republic of the Philippines maintains an embassy in the United States at 1600 Massachusetts Avenue NW, Washington, DC 20036 (tel. 202-467-9300). Consulates general are in New York, Chicago, San Francisco, Los Angeles, Honolulu, and Agana (Guam).

ECONOMY
Since the end of World War II, 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. Years of economic mismanagement and political instability under the Marcos regime eventually harmed economic growth and grossly adversely affected macroeconomic instability. 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 managed to continue some of 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. 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 the confidence of investors and the business community and ultimately led to successful efforts to impeach and remove President Estrada.

Despite occasional challenges to her presidency and resistance to pro-liberalization reforms by vested interests, President Arroyo has made considerable progress in restoring macroeconomic stability with the help of a well-regarded economic team. Nonetheless, long-term economic growth remains threatened by widespread poverty, crumbling infrastructure and education systems, and trade and investment barriers.

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 chromate, 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
GDP grew by 7.3% in 2007, the fastest pace of growth in over three decades, and capped nine consecutive quarters of growth at greater than 5%. Historically, the Philippines has had difficulty sustaining growth at over 5%. GDP increased by 5.4% in 2006, 4.9% in 2005, and 6.4% in 2004. Growth in 2007 was fueled by increased government and private construction expenditures; a robust information communications technology industry; improved post-drought agricultural harvests; and strong private consumption, spurred in part by $14.4 billion in remittances from overseas workers (equivalent to about 10% of GDP). GDP growth is expected to slow in 2008, but still reach between 5% and 6%. Still, it will take a higher, sustained economic growth path to make more appreciable progress in poverty alleviation given the Philippines' annual population growth rate of nearly 2%--one of the highest in Asia. The ratio of the population living below the national poverty line increased from 30% to 33% between 2003 and 2006, which translated to 3.8 million more poor Filipinos. Inequitable income distribution also makes steady progress in poverty alleviation especially challenging.

The services sector now accounts for about 55% of Philippine GDP and grew by 8.7% in 2007. Business process outsourcing (BPO) has been the fastest-growing segment of the Philippine economy, totaling an estimated 10% of the global outsourcing market and generating an estimated $5 billion in revenues during 2007 (equivalent to about 3.5% of Philippine GDP). BPO revenue grew 40% during 2006 and 2007, and is expected to repeat this growth over the next two years. The construction industry grew by almost 20% in real terms during 2007, fueled by a 30% real increase in government construction expenditures and a 10% increase in private construction investment. Tourism and mining continued to emerge as key industries in 2007. Tourism enjoyed a record year in 2007, with over 3 million arrivals from overseas spending more than $5 billion and helping to fuel air transportation growth of 15%. Mining and quarrying grew by 25%.

At $8.6 billion, the overall balance of payments ended 2007 with a record surplus which, among others, reflected higher overseas workers remittances, tourism receipts, BPO-related revenues, portfolio investments, and official development assistance funds. Merchandise exports, relying heavily on electronics shipments for about two-thirds of export revenues, slowed to 6% growth (from 15% growth in 2006). Although there has been some improvement over the years, local value added of electronics exports remains relatively low at about 30%. Net foreign direct investment (FDI) inflow rose from a low base to nearly $3 billion in 2006 and 2007--nearly double the 2005 level--but still lags most regional neighbors. The U.S. remains the Philippines' largest trading partner with over $17 billion in two-way trade, and the largest investor with more than $6.5 billion in total FDI.

The Philippine stock market closed 2007 among the top performers in East Asia. The Philippine peso appreciated about 16% to the U.S. dollar between end-2006 and end-2007, making it East Asia's best performing currency. Gross international reserves closed 2007 up nearly 47% year-on-year to a new record high of $33.7 billion, adequate for nearly 6 months of goods and services imports and equivalent to 3 times foreign debts maturing over the next 12 months.

Efforts in recent years to reduce the public sector deficit and raise new taxes have helped reduce high debt ratios, create additional fiscal space to increase spending on vital social services and infrastructure after years of tight budgets, and improve confidence. December 2004 legislation provided for biennial adjustments to the excise tax rates for tobacco and liquor products until 2011, while a law signed in January 2005 seeks to institute a performance-based rewards and penalty system in the government's revenue collection agencies. Despite public resistance and initial legal challenges, the government began implementing an expanded value-added tax (VAT) law in November 2005, which added an estimated 75 billion pesos ($1.5 billion) to national government revenues during 2006 (equivalent to 1.2% of GDP).

From a record 5.3% of GDP in 2002, the national government has recorded declining fiscal deficits for five consecutive years (to 0.1% of GDP in 2007) and targets balancing the budget in 2008. For a second consecutive year, the national government's deficit-reduction program has helped yield modest surpluses for the consolidated public sector. Although more reforms and greater transparency are needed, tighter financial controls over state-owned companies and initiatives to improve the longer-term viability of state-run pension funds also contributed to recent surpluses of the consolidated public sector (which, in addition to the national government, includes state-owned enterprises, state-run pension funds, local government units, and the Central Bank). Although still high, the debt of the consolidated public sector has declined to under 80% of GDP, from 2003's peak 118%-of-GDP ratio. Major credit rating agencies raised their rating outlook for Philippine sovereign debt from "negative" to "stable" in recognition of fiscal progress, helping to bring down domestic interest rates and tighten spreads on foreign bonds. Looking forward, further reforms are needed to ease fiscal pressures from large losses being sustained by a number of government-owned firms and to control and manage contingent liabilities. Despite recent improvements, challenges still remain to ensuring the long-term viability of state-run pension funds.

The national government's tax-to-GDP ratio remains low relative to historical performance and vis-a-vis regional standards. It had slipped from a peak of 17% in 1997 to 12.5% by 2004 before improving to 13.0% in 2005 and further improving to 14.3% in 2006 (boosted mainly by collections from the expanded VAT law). However, the tax-to-GDP ratio declined to 14% in 2007. Heftier privatization receipts more than made up for the shortfall in targeted tax collections but are not a sustainable revenue source.

The Special Purpose Vehicle (SPV) Act of 2003, which provides time-bound fiscal and regulatory incentives to encourage the sale to private asset management companies, has helped to reduce banks' portfolios of non-performing assets. The ratio of non-performing assets to total commercial banking system assets--which peaked at 18.3% in October 2001--has reverted to single-digit levels since mid-2005 and had declined to 5.2% of assets by end-2007. The share of non-performing loans to commercial banking system loans had declined to 4.5% as of end-2007, from a March 2002 high of 17.6%. Reforms in recent years include the adoption of international accounting and financial reporting standards (starting 2006) and Basel II standards (effective July 2007). Nevertheless, circumstances surrounding bank closures continue to highlight remaining impediments to more effective bank supervision and timely intervention--including stringent bank secrecy laws, obstacles preventing bank regulators from examining banks at will, and inadequate legal protection for Central Bank officials and examiners.

The Central Bank's adoption since January 2002 of an inflation-targeting framework has enhanced transparency in the conduct of monetary policy. The inflation rate averaged 6.2% in 2006, down from 7.6% in 2005, and was expected to fall further to 2.8% in 2007, comfortably below the Central Bank's target of 4%-5%.

The Arroyo administration enacted an anti-money laundering law in September 2001 and followed through with amendments in March 2003 to address remaining legal concerns posed by the Organization for Economic Cooperation and Development (OECD) Financial Action Task Force (FATF). The FATF removed the Philippines from its list of Non-Cooperating Countries and Territories in February 2005, noting the significant progress made to remedy concerns and deficiencies identified by the FATF to improve implementation. The Egmont Group, the international network of financial intelligence units, admitted the Philippines to its membership in June 2005.

Although encountering implementation hitches, the Arroyo administration also enacted legislation in 2001 to rationalize the electric power sector and privatize the government's debt-saddled National Power Corporation (NPC). This effort achieved significant progress in 2007 with the privatization of the state-owned transmission company (Transco) for $3.95 billion after four previous failed attempts. The government has achieved some success in establishing an independent regulatory system for electricity pricing that will benefit NPC finances. In addition to the Special Purpose Vehicle law, President Arroyo also signed into law in 2003 a priority initiative to reform the government procurement system (the Government Procurement Reform Act). During the first quarter of 2004, she signed into law legislation to rationalize and plug leakages in the Philippines' convoluted documentary stamp tax system and encourage secondary trading of financial instruments, as well as legislation (the Securitization Act) towards establishing the necessary infrastructure and market environment for a wide range of asset-backed securities. She also signed legislation to institutionalize Alternative Dispute Resolution for civil cases to help address the problem of overburdened court dockets.

The U.S. Trade Representative removed the Philippines from its Special 301 Priority Watchlist in 2006, reflecting improvement in its enforcement of intellectual property rights (IPR) protection. However, sustained effort and continuing progress on key IPR issues will be essential to maintain this status.

Despite a number of policy reforms and much improved general macroeconomic outlook, the Philippines continues to face important challenges and must sustain the reform momentum to catch up with its regional neighbors and to translate the current cautious optimism into the long-term confidence required to spur investments, achieve higher growth, generate employment, and alleviate poverty for a rapidly expanding population. Absent new revenue measures, sustained fiscal stability will require more aggressive tax collection efficiency to address the severe under-spending in infrastructure and social services in recent years of tight budgets. Continuing efforts to fast-track power sector privatization remain critical to the long-term stability of public sector finances, ensuring reliable electricity supply, and to bringing down the high cost of power.

Potential foreign investors, as well as tourists, continue to be concerned about law and order, inadequate infrastructure, policy and regulatory instability, and governance issues. While trade liberalization presents significant opportunities, intensifying global competition and the emergence of low-wage export economies also pose challenges. 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, to lower costs of doing business, and to promote good public and private sector governance. The government has been working to reinvigorate its anti-corruption drive, and the Office of the Ombudsman has reported improved conviction rates. Nevertheless, the Philippines will need to do more to improve international perception of its anti-corruption campaign--an effort that will require strong political will and significantly greater financial and human resources.

Agriculture and Forestry
Arable farmland comprises more than 40% 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 more than one-third of the work force but provides less than 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 subsector, the marine fishing industry continues to face a bleak future due to destructive fishing methods, a lack of funds, and inadequate government support.

Agriculture generally suffers from low productivity, low economies of scale, and inadequate infrastructure support. Agricultural 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 3.9% year-on-year in 2002 and 3.2% in 2003. Agricultural output increased by 5.1% in real terms during 2004 but stagnated to 2.24% in 2005 due to drought and intermittent weather disturbances. Despite the adverse effects of successive and very strong typhoons in the last four months of 2006, the overall annual farm output expanded by 3.8% and accelerated further to 5.1% growth during 2007.

Industry
Industrial production is centered on the 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 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 Philippines is one of the world's most highly mineralized countries, with untapped mineral wealth estimated at more than $840 billion. Philippine copper, gold, and chromate deposits are among the largest in the world. Other important minerals include nickel, silver, coal, gypsum, and sulfur. The Philippines also has significant deposits of clay, limestone, marble, silica, and phosphate. The discovery of natural gas reserves off Palawan has been brought on-line to generate electricity.

Despite its rich mineral deposits, the Philippine mining industry is just a fraction of what it was in the 1970s and 1980s when the country ranked among the ten leading gold and copper producers worldwide. Low metal prices, high production costs, and lack of investment in infrastructure have contributed to the industry's overall decline. A December 2004 Supreme Court decision upheld the constitutionality of the 1995 Mining Act, thereby allowing up to 100% foreign-owned companies to invest in large-scale exploration, development, and utilization of minerals, oil, and gas.

FOREIGN RELATIONS
In its foreign policy, the Philippines cultivates constructive relations with its Asian neighbors, with whom it is linked through membership in the Association of Southeast Asian Nations (ASEAN), the ASEAN Regional Forum (ARF), and the Asia-Pacific Economic Cooperation (APEC) forum. The Philippines chaired ASEAN from 2006 to 2007, hosting the ASEAN Heads of State Summit and the ASEAN Regional Forum. The Philippines is a member of the UN and some of its specialized agencies, and served a two-year term as a member of the UN Security Council from January 2004-2006, acting as UNSC President in September 2005. Since 1992, the Philippines has been a member of the Non-Aligned Movement. The government is seeking observer status in the Organization of the Islamic Conference (OIC). The Philippines has played a key role in ASEAN in recent years and also values its relations with the countries of the Middle East, in no small part because hundreds of thousands of Filipinos are employed in that region. The welfare of the some four to five million overseas Filipino contract workers is considered to be a pillar of Philippine foreign policy. Foreign exchange remittances from these workers exceed 11% of the country's gross domestic product.

The fundamental Philippine attachment to democracy and human rights is also reflected in its foreign policy. Philippine soldiers and police have participated in a number of multilateral civilian police and peacekeeping operations, and a Philippine Army general served as the first commander of the UN Peacekeeping Operation in East Timor. The Philippines presently has peacekeepers in Haiti and Liberia. The Philippines also participated in Operation Iraqi Freedom, deploying some 50 troops to Iraq in 2003. (These troops were subsequently withdrawn in 2004 after a Filipino overseas worker was kidnapped.) The Philippine Government also has been active in efforts to reduce tensions among rival claimants to the territories and waters of the resource-rich South China Sea.

U.S.-PHILIPPINE RELATIONS
U.S.-Philippine relations are based on shared history and commitment to democratic principles, as well as on economic ties. The historical and cultural links between the Philippines and the U.S. remain strong. The Philippines modeled its governmental institutions on those of the U.S. and continues to share a commitment to democracy and human rights. At the most fundamental level of bilateral relations, human links continue to form a strong bridge between the two countries. There are an estimated four million Americans of Philippine ancestry in the United States, and more than 250,000 American citizens in the Philippines.

Until November 1992, pursuant to the 1947 Military Bases Agreement, the United States maintained and operated major facilities at Clark Air Base, Subic Bay Naval Complex, and several small subsidiary installations in the Philippines. In August 1991, negotiators from the two countries reached agreement on a draft treaty providing for use of Subic Bay Naval Base by U.S. forces for 10 years. The draft treaty did not include use of Clark Air Base, which had been so heavily damaged by the 1991 eruption of Mount Pinatubo that the U.S. decided to abandon it.

In September 1991, the Philippine Senate rejected the bases treaty, and despite further efforts to salvage the situation, the two sides could not reach an agreement. As a result, the Philippine Government informed the U.S. on December 6, 1991, that it would have one year to complete withdrawal. That withdrawal went smoothly and was completed ahead of schedule, with the last U.S. forces departing on November 24, 1992. On departure, the U.S. Government turned over assets worth more than $1.3 billion to the Philippines, including an airport and ship-repair facility. Agencies formed by the Philippine Government have converted the former military bases for civilian commercial use, with Subic Bay serving as a flagship for that effort.

The post-U.S. bases era has seen U.S.-Philippine relations improved and broadened, with a prominent focus on economic and commercial ties while maintaining the importance of the security dimension. U.S. investment continues to play an important role in the Philippine economy, while a strong security relationship rests on the 1952 U.S.-Philippines Mutual Defense Treaty (MDT). In February 1998, U.S. and Philippine negotiators concluded the Visiting Forces Agreement (VFA), paving the way for increased military cooperation under the MDT. The agreement was approved by the Philippine Senate in May 1999 and entered into force on June 1, 1999. Under the VFA, the U.S. has conducted ship visits to Philippine ports and has resumed large combined military exercises with Philippine forces. Key events in the bilateral relationship include the July 4, 1996 declaration by President Ramos of Philippine-American Friendship Day in commemoration of the 50th anniversary of Philippine independence. Ramos visited the U.S. in April 1998, and then-President Estrada visited in July 2000. President Arroyo met with President Bush in an official working visit in November 2001 and made a state visit in Washington on May 19, 2003. President Bush made a state visit to the Philippines on October 18, 2003, during which he addressed a joint session of the Philippine Congress--the first American President to do so since Dwight D. Eisenhower. There are regular U.S. cabinet-level and congressional visits to the Philippines as well.

President Arroyo has repeatedly stressed the close friendship between the Philippines and the U.S. and her desire to expand bilateral ties further. Both governments seek to revitalize and strengthen their partnership by working toward greater security, prosperity, and service to Filipinos and Americans alike. Inaugurated into office on the same day as President Bush, President Arroyo lent strong support to the global war on terrorism. In October 2003, the U.S. designated the Philippines as a Major Non-NATO Ally. That same month, the Philippines joined the select group of countries to have ratified all 12 UN counterterrorism conventions.

The annual Balikatan (Shoulder-to-Shoulder) bilateral military exercises contribute directly to the Philippine armed forces' efforts to root out Abu Sayyaf and Jemaah Islamiyah terrorists and bring development to formerly terrorist-plagued areas, notably Basilan and Jolo. They include not only combined military training but also civil-military affairs and humanitarian projects. The International Military Education and Training (IMET) program is the largest in the Pacific and the third-largest in the world, and a Mutual Logistics Support Agreement (MLSA) was signed in November 2002. Similarly, law enforcement cooperation has reached new levels: U.S. and Philippine agencies have cooperated to bring charges against numerous terrorists, to implement the countries' extradition treaty, and to train thousands of Filipino law enforcement officers. There is a Senior Law Enforcement Advisor helping the Philippine National Police with its Transformation Program.

In FY 2007, the U.S. Government--working closely with the Philippine Government, civil society, the private sector, and other donors--provided $145 million in grant funds to support a more peaceful and prosperous Philippines. About 60% of economic assistance resources are targeted for Mindanao, for programs that promote economic growth, mitigate conflict, and promote peace and security. The U.S. supports programs that promote good governance at the national and local levels, improve electoral systems, promote rule of law, help address constraints to trade and investment, improve revenue collection/administration and fiscal transparency, and enhance the ability of military and civilian law enforcement agencies to maintain peace and security. Many programs across other sectors--including health, education, agricultural productivity, micro-enterprise development, and natural resource management-also support improved governance, human capital development, poverty alleviation, and/or sustainable growth. Health-related assistance programs include reproductive health, maternal and child care, tuberculosis and HIV/AIDS control, and avian flu preparedness. The U.S. also provides humanitarian assistance to internally-displaced persons in conflict-affected areas and to victims of natural disasters (including $5 million in reconstruction assistance for the typhoon-battered Bicol region in FY 2007). In 2006, the Millennium Challenge Corporation (MCC) granted $21 million to the Philippines for a two-year Threshold Program targeted at addressing corruption in revenue administration and improving the capabilities of the Office of the Ombudsman. The success of this Threshold Program contributed to the MCC awarding the Philippines Compact eligibility status in March 2008.

Nearly 400,000 Americans visit the Philippines each year. Providing government services to U.S. and other 'citizens, therefore, constitutes an important aspect of the bilateral relationship. Those services include veterans' affairs, social security, and consular operations. Benefits to Filipinos from the U.S. Department of Veterans Affairs and the Social Security Administration totaled $297,389,415 in 2006. Many people-to-people programs exist between the U.S. and the Philippines, including Fulbright, International Visitors, and Aquino Fellowship exchange programs, as well as the U.S. Peace Corps.

Trade and Investment
Two-way U.S. merchandise trade with the Philippines amounted to $17.3 billion in 2006 (U.S. Department of Commerce data). According to Philippine Government data, 14.3% of the Philippines' imports in 2007 came from the U.S., and about 17.1% of its exports were bound for America. The Philippines ranks as our 29th-largest export market and our 34th-largest supplier. Key exports to the U.S. are semiconductor devices and computer peripherals, automobile parts, electric machinery, textiles and garments, wheat and animal feeds, and coconut oil. In addition to other goods, the Philippines imports raw and semi-processed materials for the manufacture of semiconductors, electronics and electrical machinery, transport equipment, and cereals and cereal preparations.

The U.S. traditionally has been the Philippines' largest foreign investor, with more than $6.5 billion in total foreign direct investment as of end-2006.

Since the late 1980s, the Philippines has committed itself to reforms that encourage foreign investment as a basis for economic development, subject to certain guidelines and restrictions in specified areas. Under President Ramos, the Philippines expanded reforms, opening the power generation and telecommunications sectors to foreign investment, as well as securing ratification of the Uruguay Round agreement and membership in the World Trade Organization. As noted earlier, President Arroyo's administration has generally continued such reforms despite opposition from vested interests and "nationalist" blocs. A major obstacle has been and will continue to be constitutional restrictions on, among others, foreign ownership of land and public utilities, which limits maximum ownership to 40%.

Over the last two decades, the relatively closed Philippine economy has been opened significantly by foreign exchange deregulation, foreign investment and banking liberalization, tariff and market barrier reduction, and foreign entry into the retail trade sector. The Electric Power Industry Reform Act of 2001 opened opportunities for U.S. firms to participate in the power industry in the Philippines. Information and communications technologies, backroom operations such as call centers, and regional facilities or shared-service centers are likewise leading investment opportunities.

Principal U.S. Embassy Officials
Ambassador--Kristie A. Kenney
Deputy Chief of Mission--Paul W. Jones
Political Counselor--Thomas B. Gibbons
Economic Counselor--Larry L. Memmott
Public Affairs Counselor--Lee M. McClenny
Consul General--Richard D. Haynes
Management Counselor--Catherine I. Ebert-Gray
Commercial Counselor--Judy Reinke
USAID Mission Director--Jon Lindborg
Agricultural Counselor--Emiko Purdy
Transportation and Safety Administration--Bert Williams
Defense Attaché Office--Colonel Bruce A. West
Joint U.S. Military Assistance Group--Colonel Mathias R. Velasco
Regional Security Officer--Jacob M. Wohlman
Legal Attaché--Stephen P. Cutler
U.S. Drug Enforcement Administration--Timothy C. Teal
Veterans Affairs--Jonathan Skelly
Social Security Administration--Thomas H. Ashley, Jr.
American Battle Monuments Commission--Larry A. Adkison
U.S. Peace Corps--Karl S. Beck

The U.S. Embassy is located at 1201 Roxas Boulevard, Manila; tel. (63)(2) 301-2000; fax 301-2399; website: http://manila.usembassy.gov/. The American Business Center is located at 25/F, Ayala Life - FGU Center, 6811 Ayala Avenue, Makati City. It houses the Foreign Commercial Service: tel. (63)(2) 888-4088; fax 888-6606; website: http://manila.usembassy.gov/wwwh3012.html; and the Foreign Agricultural Service: tel. (63)(2) 887-1137; fax 887-1268; website: http://manila.usembassy.gov/wwwh3011.html.



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