The Corruption in the Philippines Keeps Getting Worse With Estrada's Tactics and Cronyism

Former U.S. Base, Is Hit By Cronyism and Closings
About 9/20/00 
SUBIC BAY, Philippines -- Kevin Hamdorf knew there was trouble in the neighborhood even before his watchdog was taken hostage.

As one of the pioneers of the Subic Bay Freeport Zone in the early 1990s, he had helped turn this former U.S. military base into an international business hub and a symbol of the New Philippines. Gone were the gunboats, blackouts and bar girls. In came Acer, FedEx, fiber-optic cables and business lunches at the Hollywood Steakhouse. By 1997, economic developers world-wide were trekking to Subic to study the Philippine miracle.

"So much for the miracle," sighs Mr. Hamdorf, hunched over a plate of cold French fries at the half-empty Hollywood Steakhouse. Mr. Hamdorf, a photographer from Australia, used to take pictures for Subic businesses and events. He hasn't had a corporate call in weeks. Acer Group, the Taiwanese computer giant, is cutting jobs and moving business to China, while France's Thomson SA just closed its phone factory. On Aim High Avenue, a circuit-board maker, a convenience store and a pencil plant have all moved out. The new Negritos Cyber Canteen does a brisk business in pork rice but doesn't have a computer.

A Hundred for One Dalmatian

Brownouts, smuggling and crime have returned, residents say. Mr. Hamdorf's house, just outside the Freeport Zone, was robbed twice, despite the presence of Nikko, his Dalmatian watchdog. After the dog was grabbed last month, it took $100 in ransom to get him back.

If there's a ground zero in the sudden crisis of confidence facing the Philippines, it is here in Subic Bay, 55 miles northwest of Manila. Once a symbol of all that could go right with Asian democracy and free markets, the commercial and residential development is now a lesson in cronyism, corruption and the clumsy leadership of Philippine President Joseph "Erap" Estrada.

A former actor in local B-movies, Mr. Estrada is known for his glistening pompadour, his Average Joe image and his vigor -- he takes pride in his many illegitimate children. Since he came to power, the Philippines has become the slowest-growing economy in Asia, after Japan. Its stock market has been among the world's worst performers this year, privatization has stalled, and foreign direct investment is down more than 40% this year from 1999. Islamic rebels and Communist bandits are back in action, along with the cronies of Ferdinand Marcos. The can-do optimism of former President Fidel Ramos has been replaced by daily Erap jokes, like:

How do you tell when Erap sends you a fax?

It has a stamp on it.

Not so long ago, the Philippines was being cheered as the comeback kid of Southeast Asia. While its neighbors collapsed in crisis in 1998, this country forged ahead with only minor damage. Its U.S.-built legal and accounting systems, free press and rapid reforms were proof, many said, that good institutions were more important to Asia's development than individual leadership. Progress will march on, said Gen. Jose Almonte, then national security adviser, in 1996, "even if a chimpanzee becomes president."

The picture began to darken after Mr. Estrada took office in 1998 and brought a different style to economic management. After intervening in a stock-manipulation probe on behalf of a business friend, Mr. Estrada called in to a late-night television talk show in March and told the country's top stock regulator, "May lightning strike you down!" A $1 billion tax case against Lucio Tan, the country's wealthiest man and Mr. Estrada's main campaign backer, was recently dropped because the government missed the filing deadline. This comes at a time when a tax-collection shortfall is widening the budget gap and threatening a bailout program with the International Monetary Fund that was set up before Asia's financial crisis.

"We thought our institutions were so strong that it no longer really mattered who was president," says Bernardo Villegas, dean of economics at the University of Asia and the Pacific in Manila. "Now we realize there's a limit to that."

Nowhere have the limits been tested more than at Subic Bay. On a recent afternoon, as a typhoon howls into the harbor, a group of local business leaders and workers march into a meeting hall to celebrate the second anniversary of the Subic Administration, which oversees the zone. The anniversary used to be in November. But President Estrada changed it to September, to honor the day he ousted the administration chairman, Richard Gordon, who was appointed by President Ramos.

In the summer of 1998, Philippine police, armed with riot gear and automatic rifles, surrounded the administration headquarters to remove Mr. Gordon, who was barricaded inside. A dynamic salesman and self-confessed autocrat, Mr. Gordon was largely responsible for Subic's $2.6 billion in investment and global success, and was slated to remain chairman until 2004. Mr. Estrada, angered that Mr. Gordon didn't support his presidential campaign, appointed his own chairman. Police clashed with more than 100 of Mr. Gordon's supporters and more than 20 people were injured during the three-month standoff before Mr. Gordon agreed to honor a court ruling and step down.

On the podium to celebrate his anniversary this month, Subic's new chairman, Felicito Payumo, sets the new tone. Mr. Gordon's anniversaries featured parades, floats, beer and evening feasts. Today Mr. Payumo -- a former congressman -- hands out boxed lunches to a small group of workers and gives a speech about Subic's new cargo crane and raises for government workers. Their salaries have more than doubled, although the Subic development is losing money for the first time.

Back in his office, Mr. Payumo stresses his achievements at Subic: more than 30 new projects, over 20,000 new jobs, more than $1 billion in exports in 1999 and rising tax collections. But local business executives refute the figures, pointing to the rash of closings and cutbacks, and add that Subic's marketing has all but vanished. Even Mr. Payumo admits some problems. Companies have stopped paying their bills, leaving him with more than $30 million in back rent. "The infrastructure needs a little work," he says, just as the electricity shuts down in his office.

Even the bats have grown surly. Every night the sky over Subic turns black with giant columns of fruit bats, which are forced to fly farther away for food because of increased logging in the base's extensive forested areas.

"It's a little eerie," says Mr. Payumo. "But a lot of things here are better. Have you seen our new logo?"

Down the road, at the foot of a dense jungle where American soldiers once trained for Vietnam, Kenny Wang is fighting his own air war. The managing director for Acer Philippines, Mr. Wang oversees the biggest factory complex in Subic, employing 2,600 workers. The computer plants make more than one-third of Acer's personal computers and about one-third of its notebook devices, accounting for 70% of Subic's total exports. A recent decision by Mr. Estrada to help a businessman friend, however, has choked off Acer's business.

Last year, Mr. Estrada suspended an air-rights pact with Taiwan, citing accusations by Philippine Airlines that its Taiwanese rivals were poaching passengers with cheaper fares. The decision, which ended direct commercial flights between the two countries, largely benefited Mr. Tan, the majority owner of Philippine Airlines. The rest of the Philippines has suffered: Taiwanese tourists no longer flock to Philippine beaches, electronics parts can't make it to Philippine factories, and Philippine nurses and engineers have to take long and expensive routes to get to their contract jobs in Taipei. Both Philippine Airlines and the Estrada government say allegations of favoritism toward Mr. Tan are groundless.

Acer has been among the hardest hit. Most of the parts and motherboards for its personal computers come from Taiwan. Without direct flights, the components take twice as long to arrive, at twice the cost, making the plant uncompetitive. Mr. Wang has moved one PC-manufacturing line to China and two notebook lines to Taipei, cutting more than 1,000 jobs here. While some employees have been absorbed into the notebook division, Acer can't move ahead with its planned expansions. The factory has so much empty space that workers have started playing soccer on the testing floor.

"We want this solved immediately," says a frustrated Mr. Wang, who is eyeing China for expansion. "The environment here has become very political, and it's not good for business."

At happy hour at the Subic Bay Yacht Club, soft piano music drifts across the lounge. Giant picture windows offer a view of the harbor that America's Seventh Fleet once called home and where, today, a cluster of leisure boats bobs in the rain. The $80 million club was part of a grand plan to turn Subic into a tourist haven. Yet now, the bar is empty, there isn't a member in sight, and the guest-services manager is asleep.

"You know what the problem is?" says Jose Mari Vargas, the club's managing director, as he rattles around the empty Skipper's Grill. "Buzz. We need more buzz."

And less terrorism. While President Ramos made peace with Islamic separatists and rural bandits, Mr. Estrada has taken a tough military stand. Last weekend, he launched an all-out war against Muslim guerrillas on the island of Jolo in an effort to rescue 19 hostages, including one American and two French journalists. The military strikes are continuing, and it isn't clear whether the hostages are alive. The rebels had been gathering strength after collecting an estimated $15 million in ransom money paid by Libya, in what was widely seen as an effort to enhance relations with Europe.

The turmoil has battered tourism. Although Subic is flooded on weekends with visitors from Manila, the big-spending foreigners have stayed away. A casino at the nearby Legenda Hotel, once one of the most profitable in Asia, is quiet, and construction ended two years ago on a new hotel down the road.

When it opened three years ago, the yacht club expected 300,000 memberships; it has gotten about half that. The club is trying special "food days," offering cuisine from, say, Mexico, and playing up its policy that members don't need to own a boat. Corporate memberships used to cost more than $30,000; an advertisement in the Subic Chamber of Commerce newsletter offers one for $12,000.

Anna Lyn Dominguez stirs a pot of rice in her cramped, concrete home in Olongapo, the town just outside the gates of Subic. Ms. Dominguez, 27 years old, used to snap together phone circuits at a Thomson plant for $80 a week. The money supported her husband and two children, her parents and her sister. Earlier this year, Thomson moved its plant to China to become more competitive and Mrs. Dominguez lost her job.

"It's getting hard to buy food," she says. Unemployment in Olongapo, once among the lowest in the country, has soared to more than 22%. Small stores are closing and shop owners report a rapid rise in crime.

Political battles have made matters worse. Subic's new boss, Mr. Payumo, hails from Bataan, a poor province on Subic's southern border where he used to be a congressman. Olongapo remains the turf of Mr. Gordon, whose wife is mayor. After taking office, Mr. Payumo filled the Subic jobs center with workers from Bataan, replacing many from Olongapo. Subic companies are forced to hire first from the job center for available positions.

Stuart Allen, director of South Sea Resources, a treasure-hunting and diving company at Subic, wanted to hire a talented Web-site designer from Olongapo when he ran into trouble with Subic authorities. They required him to first consider a long list of candidates from the jobs center, including a Bataan bus driver. Although he eventually got permission to make the hire, the approval took weeks.

Mr. Payumo concedes that he is trying to boost employment for Bataan, but only "to correct the favoritism of Mr. Gordon toward Olongapo." Gazing out his office window, Mr. Payumo points to another corrective measure, a marble statue honoring the 12 Philippine senators who helped drive out the U.S. military. Mr. Gordon's monument was the Volunteer's Wall, listing the names of the more than 20,000 volunteers who helped protect and nurture the Subic development throughout the 1990s.

The new display, called "Inang Laya -- Mother Country," features a robed woman releasing a small bird and 12 handprints set in marble, representing the senators. Mr. Payumo calls it a "symbol of the Philippine spirit and persistence." Locals, however, have their own name: "The Outstretched Palms."

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